Jazeera Airways K.S.C.P. (JAZEERA) Earnings Call Transcript & Summary

Hello, everyone. This is Hatem Alaa from EFG Hermes, and welcome to Jazeera Airways Second Quarter '23 Results Call. I'm pleased to have on the call today from Jazeera, Rohit Ramachandran, CEO, Krishnan Balakrishnan and CFO; and Mostafa El-Maghraby, Head of Investor Relations. We'll start by a presentation from management, and then we'll open the floor for Q&A. [Operator Instructions] Rohit, please go ahead.

Good afternoon, everyone, and welcome to Jazeera Airways second earnings call for the financial year 2023 to discuss the results of the second quarter and the first half of the financial year. The second quarter for Jazeera was an active quarter as we continue to carry large numbers of passengers across our growing network. In fact, on practically every single major metric, whether C-factor passenger's carriage, market share, top line, terminal performance of T5 and others, the group posted a very strong performance. We will discuss all of these in detail today as well as our network and fleet expansion and other key matters related to Jazeera. Let's move straight on into Slide 6, where we shall review the operational performance for the second quarter. During this quarter, Jazeera carried more than 1 million passengers compared to a little over 800,000 in the same quarter of last year. That's an increase of 27%. Load factor for the quarter was 74.4% compared to 73% last year, while aircraft utilization registered 13.4 hours, up from 13.1. Yields, as expected, has trended downwards to KWD 44.7, compared to KWD 48 last year as a result of several factors, mainly due to capacity and seasonality as the quarter was relatively slow with a few key events while supply in the market was gradually increasing. I will elaborate more about this matter in later slides. Moving on, we should look at the first half of the year. You can see that passengers carried stood at 2.1 million. That's up 40% from 1.5 million in the first half of last year. Load factor was 78%, while utilization of the aircraft, which is per hour per aircraft, stood at 13.5 hours, up from 12.4 hours. Yield came in at KWD 42.8. In the coming 2 slides, we shall take a look at the financial performance for the second quarter and the first half of the year. Jazeera reported a revenue of KWD 49.5 million in the second quarter, which is 18% higher than the second quarter of last year. We also reported an operating profit of KWD 5.7 million, compared to KWD 4.6 million in the comparable period and a net point -- net profit of KWD 3.9 million, up 12% from KWD 3.5 million last year. For the half year, we see a 26% increase in revenue to KWD 98 million, along with an operating profit of KWD 9.3 million and a net profit of KWD 6.3 million. This is 15% below the first half of last year. As a reminder, in the first half of last year, the results included a one-off gain of KWD 1.7 million from the sale and leaseback of 2 engines. In this slide, you can see a similar trend with ancillary revenue and all the metrics that we have been sharing with you consistently, we show an improvement on all fronts for the first half of the year. Terminal operations remained strong as evident in this slide. Revenue for the first half of the year was KWD 5.8 million, up from KWD 4.7 million driven by more passengers that flow through the terminal and more economic activity across the board within the terminal. EBITDA is up 26% from last year, and net profit increased 32% from KWD 3.3 million this year -- last year compared to KWD 4.3 million this year. As communicated earlier, we have now taken over 2 new gates that facilitate passenger movement significantly. I'm glad to report that the overall passenger experience has improved as we managed to smooth and spread operations over more gates across all relevant KPIs such as mishandled baggage, time required to board, on-time performance and so on, we are seeing a very good improvement. In this coming section, we discussed some of the main insights into our operations during the quarter. In Slide 13, you see the evolution of our market share from the first half of 2019 to the first half of this year. With the resumption of normal flying, I'd like to highlight that growing our market share has been a tremendous accomplishment with competition flocking back to the Kuwaiti market. Keeping in view that in the first half of this year, Kuwait allowed foreign airlines to increase their capacity by over 50% compared to last year. Moving on to Slide 14. We cover some operational highlights during the quarter. As mentioned earlier, we had a very active season in terms of passengers and aircraft movement. Part of that was driven by a very active Haj season as we move close to sixfold our usual number of passengers for Haj. For us, it's a strategic objective to remain focused on the long-term core operational metrics, and that is exactly what we achieved during this quarter by adding new destinations and improving our performance on the existing ones as well as the key event like the Haj season. On a separate note, the team and I are very proud to have issued the first ESG report for Jazeera. It is surprising how many details went into this report and the amount of time, effort and expertise that took, especially for a modest airline like us, that also runs an airport management operation. We are glad to find ourselves genuinely compliant with so many metrics and pledged to work on many others to play our role in the long-term sustainable ecosystem for aviation. Fleet-wise, there are 2 key initiatives. The first is related to our fleet growth. We have successfully added 2 aircraft during the last quarter, which was communicated to you in our Q1 earnings call. We have also secured 5 additional aircraft that will join our fleet in the coming few months. This is very important to highlight, the first reason why this is important is that the market is now becoming more difficult by the day to secure new aircraft due to the slowdown of supply of new aircraft by the manufacturers. And the other important reason to highlight is that we secured these aircraft at far lower rates compared to the market average. And this brings down the average fleet cost for Jazeera for our CEO fleet by more than $80,000 per month per aircraft. That, if you compare with pre-COVID, would be almost a 30% reduction in average fleet cost for our CEOs. The other important initiative is related to the renovation of our fleet, which will gradually start at the end of 2023. We have placed an order for 2,000 new seats that are the lightest aircraft seats available in the world today. They offer a weight saving of 1.2 metric tonnes per aircraft, reduced jet fuel consumption, increased passenger capacity with the addition of one extra row and all this has a direct dollar impact on our cost structure, on our fuel burn as well as the bottom line. Last but by no means least, during the first half, our network expansion continued, and we have now reached 65 destinations. You will see that a lot of these destinations are in and around the region of Kuwait, particularly Iran and soon-to-come Iraq. In Slide 17, in our usual style, I'll try to be as transparent as possible to provide an outlook for the third quarter and the rest of the year. In terms of passengers, we remain confident that we will be able to maintain our growth as previously communicated. Our growth story remains solid in terms of fleet growth in order to widen our reach and offer more services to new passengers to new destinations. Our fleet expansion remains intact, as mentioned before, in order to fuel this ongoing expansion. Yield-wise, we have seen softness in the third quarter, driven by 2 main reasons. One is Kuwait specific as the market has reopened to operators from other countries at an unexpected and there I say, unsustainable rate. I can confirm that some carriers have increased their seats deployed in the Kuwaiti market by more than 120% compared to last year. In fact, some are coming close to 150%. This means that the only way to release this oversupply is through lower prices, and that is having a significant temporary impact on yields during the high season. Accordingly, we expect a significant drop in yields over the summer compared to last year. To counter that, we are driving seat factor very aggressively to retain and grow our market share as well as boost T5 revenue. Many of these competitors, on the other hand, are showing very soft load factors, coupled with low fares that should eventually prove to be commercially unviable. I fully expect a significant rationalization in the capacity of foreign carriers for the IATA winter season commencing by the end of October. In fact, most recently, we already have information of one major European carrier pulling out of the market in Kuwait due to what they perceive as unviable operation. So the market will correct itself. The second reason is a general yield softness across the GCC and some other parts of the world that has been officially documented by statements of many airlines in Asia and some in the U.S. and a few in Europe. Several carriers are confirming the same trend of lower yields compared to last year. The significant overcapacity, which, in my view, is a temporary phenomenon this summer, coupled with the easing of what was called the post-COVID travel boom, which this region benefited from last summer are pressuring yields during this peak travel period during the summer. Cost-wise, we are working aggressively to lower our unit cost base. Our fuel hedge is now returning to work in our favor as the crack spread is now $25 during the coming 3 months and the third quarter. On a longer-term vision, we already discussed lower lease rates for our fleet, will provide significant support to our operating costs in the coming few years. While we remain on track to deliver a still very profitable year and record top line performance, we are taking action, including redeploying capacity to mitigate these temporary challenges and improve margins that have been depressed during this summer. With this, I conclude my section of the presentation and will now leave you in the hands of our CFO, Mr. Krishnan Balakrishnan for the financial review.

Thank you, Rohit. Good afternoon, everyone. If I can take you to the Slide 19, I think all the parameters were already covered by Rohit, so I will skip this one and move on to the next one, where we have the performance. If you see the operating revenue has increased by 18.3%, primarily because we had good load factors and therefore, a higher number of passengers, 27% higher than last year, which was partially offset by a 7% decline in the yield. The terminal revenues, of course, performed much better than previous year, as mentioned by Rohit already. The operating costs were higher than last year by 17%, even though our number of hours and the flights increased by more than 25%. So there was definitely economies of scale that we could see in the cost. If you look at the operating profit, we were higher by 26% as a result. The net profit, though, was only 12% or higher than last year, primarily because in the previous year, we had the onetime gain of KWD 1.7 million, which was booked as a profit. The cash balance has reduced compared to the December numbers, primarily because we paid advances to the manufacturers of the aircraft and engines for our aircraft order and for the engines that we have already ordered. So -- and we also purchased a few items of inventory. So primarily, the cash has moved into our fixed assets. That's why you see the increase also in the fixed assets. That's all in my section. Back to you, Rohit. Thank you.

Thank you very much, Krishnan. Hatem, back to you. I'm open for questions.

[Operator Instructions] we'll take the first question from the line of [ Bismil ].

Hello?

Yes, go ahead, Bismil. Good afternoon.

Thank you so much for the call. I just have a few questions on what you mentioned, your fleet expansion plan. So as of today, how much exactly is the fleet size? I remember you mentioned you added 2 aircraft in April and are planning on adding an additional 3 aircraft by the end of the year. Is that correct?

That is correct. Let me clarify. At the moment, we have 20 of our own leased aircraft. In addition to that, we have 2 wet lease aircraft that are here to support us for the summer operation, and they will leave at the end of the summer by about the 10th of September, they will leave. In the same month of September, we will get one more aircraft, which is due to join our fleet as a permanent member of our fleet. By that time, we'll be 22 aircraft. We also have a further 3 aircraft that will be delivered over the course of the end of the year and early next year.

Okay. And these are all going to be set in this pack, correct?

These are all leased airplanes. So these are on long-term leases. The shortest of which is about 6 years, and the longest of them is 12 years. That's the term of the lease.

Okay. Great.

If you like, I can -- you can coordinate with Investor Relations head, Mostafa, and he will give you an exact listing of our fleet evolution over the next 6 months.

That would be great. I wanted to ask you as well on your -- on what you mentioned regarding the Kuwaiti market being oversupplied by foreign airlines. You mentioned that the capacity has increased by almost 50% compared to last year. How much is that relative to 2019, like pre-COVID before the regulation reduce the traffic in Kuwait International Airport.

Sure. So I mentioned 2 percentages. One is for the first half of this year, where the capacity by foreign airlines into Kuwait has increased by 50%, in some cases, over 50%. And I mentioned for the summer, which is the months of July, August and September, we have many carriers from within the region who have increased an average of more than 100% over the course of the next 3 months. So both these numbers take the capacity to higher than pre-COVID levels. But I believe this is a temporary overreaction. And I do believe that in the months ahead, there will be some rational decisions taken.

Okay. All right, clear. And in terms of -- sorry, just one more question. In terms of the retrofitting of around 2,000 plus seats that -- the order that you mentioned for the lower weight, how much is that relative to the total seats available today in your fleet?

So what we are planning to do is retrofit all our CEO aircraft to bring them up to 174 seats, which is the typical configuration on our Neo aircraft. Generally speaking, this adds 6 seats per aircraft, which, of course, means the potential to fill 6 more seats per aircraft at the same operating cost for the flight. This is particularly important because that would come -- typically have come with a payload penalty cost and a fuel burn cost. But because these seats are 1,200 kilos lighter per aircraft, you will actually benefit from the additional revenue of 6 passengers without the cost of carrying those 6 passengers. The last thing I would like to mention is, this becomes even more relevant as you see Jazeera has been moving towards higher and higher average seat factors, which means earlier when we were in the low 70s on average, it would not have made much of a difference. But today, if you see month to date, for example, the last 1 week, the average seat factor on Jazeera has been just under 90%, which means a large number of flights have been going full, and in such a circumstance, those 6 seats add quite a bit of additional revenue, about 3% of additional revenue.

We'll take the next question from the line of [indiscernible]

Good afternoon, Fahad. Your question?

Fahad? I think you have a problem with your audio. Maybe you want to write your question in the chat. I'll take the next question from Mohamad [indiscernible].

Hello?

Yes, go ahead.

Yes. I have a bit of a comprehensive list of questions actually. So -- but I think it's necessary. So my first question would be about the -- regarding the [ Parliament ] members in Kuwait have raised concerns about the legality of the passenger fees collected by Jazeera Airways, not the -- or the aviation authority, considering that the main source of income has shifted toward the terminal business, if a decision to reduce or eliminate these fees is made, how does Jazeera Airways plan to address the potential impact given that it's primarily an airline rather than a fee collecting business. So how would you deal with that?

Thank you for your question, Mohamad. I think we have 2 separate businesses. One is the airline business and one is the terminal business. Let's keep the airline business to one side right now because your question is regarding the terminal business. The terminal was built, designed, constructed and operated entirely funded by the Jazeera group, of which the terminal business is apart. We spent KWD 14 million in building the terminal. And this is over the last 5 years, periodically invested in the terminal to keep increasing the capacity of the terminal. And I think it's fair to say that the entire aviation ecosystem in Kuwait has benefited from a low-cost passenger terminal of the nature of T5. This entire model of the terminal, of the revenues of the terminal, the operation of the terminal has been ratified by at least 5 to 6 different government bodies before we were even allowed to turn on the lights of this terminal. So as far as we are concerned, every single penny we spend and every single penny we earn is a legitimate part of the business model of the terminal. Nevertheless, I also want to highlight that one cannot exist without the other, which means it's very important for the terminal to do well. And for the terminal to do well, it's very important for the airline to do well. And they both are independently also successful businesses. I hope I've been able to address this question because I...

So, basically, there is no risk of losing these fees you are saying?

As far as I'm concerned, there is none.

Okay. Perfect. So moving to the second question. Jazeera Airways has been under scrutiny from parliament numbers, again, regarding the fuel subsidies being given to them by the government to a private-owned company. In the event that these subsidies again are weighted. What are the financial impact on Jazeera or even it's a low-risk scenario?

So again, Mohamad, I would like to clarify that Jazeera Airways receives no subsidies. What we receive is a volume discount, which is officially published for any airline operating more than 5,000 rotations per year. So currently, the only 2 carriers that fulfill this threshold, the national government-owned carrier and Jazeera Airways. To my knowledge, there is no move that we are aware of to withdraw or amend this in any manner.

Okay. So again, there is no risk you are seeing.

Again, as per my information and my judgment, there is none.

Okay. The third question regarding the ongoing legal case between Jazeera Airways and the Ministry of Defense concerning the Radar balloon. Can you please shed a light on the potential impact on Jazeera's position in this matter as were the information provided locally and what we are hearing that the pilots involved have been convicted of wrongdoing and had received sentences. So the financial impact would hit Jazeera or the pilot themselves?

Okay. I would like to highlight the distinction between the case between the government and the 2 pilots who long ago were no longer in employment of Jazeera or in the State of Kuwait as a matter of fact. And that is the case between the authorities and the individuals concerned. And there is a separate case between the Ministry of Defense, which is a civil matter pertaining to a civil claim with Jazeera Airways. In this case, this is currently in front of the experts committee. The experts committee will give their opinion to the court and in the court will make a judgment. In all events, and I think I had covered this during a previous call, the entire potential amount which is, of course, widely in dispute, and we have put up what I believe to be a very strong argument. Whatever the judgment is the entire amount is well within our insurance limits. In fact, the insurers are the ones who are jointly coordinating with our legal team and representing the matter in front of the court.

So, you are insured in that matter?

Absolutely, 100%. And I think I've covered this in earlier calls as well.

Perfect. My final question, and I'm sorry if I'm wrong. My final question would be, can you please provide more information and details. I think I asked this question to IR before, but to shed more light on that, can you please provide more details and information about the letter circulating in social media that suggested the potential reduction in Jazeera Airways market share from 40% to 25% and benefit to Kuwait Airways to increase it to 75% instead. Additionally, I would like to know the reasons and implications behind decision as well as the potential financial impact, of course?

Once again, this matter originally came up in December of last year. And thereafter, I think I have addressed this in 2 subsequent calls, but I will cover this again. This pertains to 5 routes where there are restricted traffic rights between the State of Kuwait and the other country. The vast majority of routes that we operate are what is generally known as Open Sky, where carriers can operate within reason, any number of frequency or deploy any amount of seats on those routes. However, there are 5 routes, of which I would think everyone agrees the most important of which commercially is India, which was affected by this decision, which, again, we have appealed. This came into effect from the month of June, and we have put together what I believe to be a very strong case. This has been discussed at length with the regulator. And I believe that the legal bureau of the country is also reviewing the matter one more time. We believe there should be a fair and equitable distribution of traffic rights, which is actually a national asset. And if the goal of the country is to support equally all companies, whether they're state-owned or whether they're private sector, and you see this across the board, not just in aviation. You see this in banking. You see this in telecommunications. If the goal of the country is to have a very fair and balanced view of how to support economic entities within the country. That should be also reflected in the way a national asset like traffic rights are distributed. So we have appealed the matter. We believe we have put together a strong case. And I think the matter will be crystal clear in about 2 months' time once it has been reviewed by the regulators and the government authorities. So I can't conclusively say that it's been resolved or that has been resolved in our favor. But I do believe that we have put together a very strong argument.

I'll take a few questions from the chat. There are several questions on the same issue, which is an update on Terminal 6, the new terminal and the potential IPO of T5.

Great. I think those are definitely of interest and the 2 questions are related, so I'll take them together. Let me start with T6. The T6 project now has crystallized into something quite exciting. We also have quite a detailed plan. We have shared with quite a number of government entities, our plan, which includes the elevation, animation. We have appointed for the first phase of studies, ADPi, which is Aéroports de Paris, who's helping us with the project. And this has now been cleared by, I would say, 3 important government entities and is now with another important government entity to review the entire matter. It has taken time much more so than we would have preferred, but that's understandable considering there have been so many changes within the decision-making structure over the last 3 months or so. With respect to the -- before we even talk about a potential IPO, if any, for T5. We need to ensure that the corporate structure is reflective of a slightly more formal demarcation of the different businesses that is currently under study. And I think all of us agree that, that is the next logical step to make sure that there is a distinct corporate entity within which we house the terminal and all the other assets and subsidiaries. You might be interested to know that in addition to the core terminal business, we have also set up 3 other subsidiary businesses. You're all aware of the success of the duty free business. I didn't spend a lot of time talking about it today. But the moment you see the number of passengers increasing to the extent that it has during the first half of the year, you know that it has had a positive impact on even businesses like the duty free business. We've also set up a corporate entity to house our ATO business, which is the approved training organization under which the simulators, the training that we provide even third-party candidates who want to get their entire pilot certification done. That has now been formally set up. And the third, we are currently setting up a security company because we do believe that that's a new exciting area of business that will support not only the terminal, but also other companies in Kuwait that can benefit from a professionally run security company. So I hope with all this, it answers your question. I don't have a definite timeline to share for the split between the businesses as far as a separate corporate entity is concerned, but we are definitely moving in that direction.

A question from Nishit Lakhotia. How much are you currently hedged through derivatives? And where does the impact flow through every quarter when the contract matures or closes. For now, we just see it on comprehensive income.

Thank you, Nishit. Thank you for your question. I will always give Krishnan the right to interrupt me and correct me if I go too far afield. But if I'm not wrong, we are hedged as of today, 50% of our operational uplift and the hedge is an interesting hedge. It's not on any one benchmark, whether it's Brent or WTI or aviation fuel itself. We have hedged on the crack spread between Brent and aviation fuel. And anytime it exceeds USD 15, we are in the money. So at the moment, we are about USD 25 spread between Brent and MOPAG, which is the benchmark for aviation fuel. And so yes, we are in the money. Krishnan can clarify in terms of accounting, whether it sits above the line or below. Krishnan?

So it has been reflected as part of the fuel cost, whatever was the impact on a monthly basis.

As it should because we're not doing this as a business. We are doing this actually to accurately control -- aggressively control our fuel expenses. Any other questions before we close for the day. I'll take one more.

And there are still a few questions in the chat. So I'll take a few ones. So let me know when you want me stop. There's another question on -- from Nishit on depreciation. Why is depreciation on leasehold improvements falling year-on-year despite additions? Is there a change in useful life, H1, '23 leasehold depreciation was the [ KWD 319,000 ] versus KWD 459,000 in the first half.

Again, I'll defer to Krishnan's expertise on this. But to my understanding, this is because of the way the curve sits on IFRS 16 and the way IFRS 16 recognizes the right of use. But Krishnan, you can take this in more detail.

Yes. So there has been no change in useful life. We did a change, but that was last year on the leasehold land, but that is not the cost. This is simply because we write off the leasehold improvements over the lease term of the aircraft wherever we have made modifications. And if the lease term is getting over, obviously, the depreciation is also written off already. So it's a pure organic movement. There has been no change in policy, which is causing the decline.

Thank you, Krishnan. I will take one final question.

Okay. Question from Mohamad El Masri. Is there an update on the Saudi joint venture?

Mohamad, thank you for your question. Yes, there is an update. We have now been advised by the regulator there that we have cleared the prequalification and are now in the final shortlist. And I believe the process is ongoing. We've been asked to submit a few more documents along with our proposal. And we expect an outcome sometime in October. As soon as we have more information, we will share it with you. But we do believe that we are in a good place as far as that's concerned. And we also have a further 3 hubs under development, which I will share with you as we move forward. Thank you very much. It's been a great pleasure spending this afternoon with you. And I'll spend -- I look forward to in 3 months' time, spending a similar productive afternoon with you all. Thank you, Hatem. Thank you, Krishnan. Thank you all.

Thank you, everyone, and this concludes today's call.