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

Hello, everyone. This is Mirna Maher from EFG Hermes, and welcome to Jazeera Airways Fourth Quarter 2023 Results Conference Call. I'm pleased to be joined today by Rohit Ramachandran, Jazeera's CEO; and Krishnan Balakrishnan, CFO. We will first start the call with the presentation from management side, and then we'll open the floor for the Q&A session. Rohit, please go ahead.

Thank you very much, Mirna, and good afternoon, everyone, and welcome to the Jazeera Airways final earnings call for the financial year 2023 and the first in calendar year '24. As is customary, we will discuss in detail the results of the fourth quarter and the cumulative full year's performance. I will provide you all with information along the way as we read through the presentation, and then we will have our Q&A session to address all your inquiries. So let's jump in right away and move to Slide 6. In this slide, we will review the fourth quarter operational performance. During the quarter, Jazeera carried close to 1.1 million passengers with an increase of 17%. This is above the 978,000 that we carried in the same quarter of last year. Load factor for the quarter was 75.8%, which was slightly below the previous year's 78.7%, while aircraft utilization was similar for both quarters. which is the normal level of operations that we have for the fourth quarter despite a larger fleet, which I will cover shortly. Yield which again follows our discussion for the last 3 earnings calls was the main challenge as it dropped more than 20% from the KWD 39.9 in the fourth quarter of 2022 to KWD 31.8 in the fourth quarter of 2023. Part of this is seasonal, as you know, pertaining to the slow traffic of the quarter, but it's mainly driven by the shock to the system created on the back of market oversupply as explained in previous sessions. The impact is indeed across the board not just on Jazeera, and I can firmly say that it had unfavorable consequences on operations for most airlines in Kuwait International Airport. Moving on to the following slide, we see the operational performance for the full year. Jazeera carried a historic 4.7 million passengers up 31% from 2023. Load factor was slightly higher at 78.2%, reflecting an improvement over the previous year's 77%. All year-round utilization increased 4.6% to 13.5 hours versus 12.9 hours, while yields came in at KWD 39.6 million down from KWD 47.9 in the previous year. The drop in yield is due to 2 distinct factors. Part of it was driven by the first quarter of 2022 where the yield was very high and it was still affected by traffic restrictions and contributed to a higher yield in 2022. While 2023 was mainly affected, as mentioned earlier, by the oversupply in the market. A quick note I would like to highlight here is the fact that we are maintaining our operational growth, expansion, cost reduction and investments into the business. Regrettably, the hit came from an external factor which we have been working hard to mitigate with all concerned parties, and I will cover in greater detail towards the end of my presentation. In the coming 2 slides, we will review the financial performance for the fourth quarter as well as the full year. Jazeera reported a revenue of KWD 39.2 million in the fourth quarter compared to KWD 41.3 million in the fourth quarter of '22, despite the higher number of passengers carried and it's driven by the lower yield. Accordingly, we reported an operating profit of KWD 6.3 million in the fourth quarter compared to a profit of KWD 0.9 million last year accompanied with a net loss of KWD 7.1 million. In Slide 9, we see the comprehensive financial results for the full year. Revenue for 2023 came in at KWD 198 million, while operating profit was KWD 11.8 million and net profit was KWD 6.2 million. It's not the best set of results that we were hoping to deliver in a year that was supposed to be one of recovery, normalization and expansion. Unfortunately, a business like ours that is exposed to haphazard external factors, sometimes suffer from spontaneous unplanned changes in regulation. From experience, these impacts from external factors are temporary if the business fundamentals are strong as they are in our case. In this slide, you can see the trend of revenue and all the metrics that we have been sharing with you consistently through the years, and we show improvements on all fronts for the full year of 2023. On the brighter side, Jazeera Terminal T5 operations had another solid set of results showing growth in both top and bottom lines. Financial year '23 revenue came in at KWD 12.6 million, up from KWD 10.2 million in 2022 driven by more passengers carried and associated activity that affected all revenue streams in the terminal. EBITDA for the year is up 28.6% from the previous year at KWD 10.8 million, up from KWD 8.4 million, while net profit increased from KWD 7.8 million to KWD 9.6 million this year. As a follow-up on the T5 expansion that we discussed in our previous earnings call, we are at the very final stages of acquiring the necessary approvals. More on that, as I mentioned, towards the end of the presentation. In Slide #13, you can see that we maintained our market share in -- around the 30% mark during the year. In fact, on the routes that Jazeera operates, Jazeera dramatically improved its market share to 36.2% during the year. Perhaps it's also worth noting how we maintained our market share in Egypt but achieved a lower one in South Asia. Part of this was driven by the change in quota allocation, as you will recall, between Jazeera and Kuwait Airways that you're familiar with. But another way to see this is that the growth from this market in general is restricted by bilateral capacity, curtailing growth in passenger movements. Evidently, we moved the exact same number of passengers to the region with a minor drop in India routes replaced by other destinations in South Asia. We are also working on reversing the situation, and hopefully, we'll have positive news soon. You will note that this presentation actually has 2 distinct flavors. One, which is the past, that is 2023, and a completely different outlook for 2024, as I will convey towards the end of the presentation. In this slide, we cover several key milestones, some of which we were discussing during previous calls. Fleet-wise, we took delivery of 2 A320 CEOs during the third quarter and 2 in the fourth quarter. A total of 4 airplanes in the second half of the year, bringing the total fleet size to 23. From a cost savings perspective, we are working actively on several initiatives. Some are progressing, but faced some delays as we start our licensing and infrastructure facility approvals with the authorities, that is now moving. Once fully completed, we expect a significant, sustainable and permanent reduction in our cost base. Some of these include in-sourcing wheels and brakes as well as a battery facility for our engineering and maintenance. We're in the process of designing and constructing an engineering and maintenance hangar, which once ready in 2025, it will conduct C checks and A checks for Jazeera aircraft. Currently, most A checks, engine changes, fuel nozzle changes, APU changes and other activities are currently conducted in-house while C checks are conducted in an outsourced maintenance facility. Several other initiatives will yield results effective '24 and then '25 onwards such as renegotiation of several service contracts, establishing our own catering facility, our own flight simulator facility, all of which are currently outsourced to third parties, and bringing them in-house will bring in significant unit cost savings. This shows you the evolution of our network over the last 4 years, a huge change indeed. As I mentioned, I see this presentation as a story of 2 parts. We have finished with the first part, which is reviewing as I mentioned earlier, a dismal performance from a profit point of view, but a very interesting year of 2023, where we've made significant investments and extracted efficiencies from the business that will bear fruit this year and beyond. Moving to the outlook. We will provide an update on how we see 2024. I'm firmly closing the door on 2023 and the new year has begun positively for us. We see a gradual strengthening of yield over the last 6 weeks. January has ended very well for us and February and March look promising. The actual results will, of course, be shared during the Q1 call in about 3 months' time. But I can share that it is indeed a new year. The recent formation of a dynamic new government in Kuwait has seen decisive action in several areas and that will benefit Kuwaiti carriers. Approvals are being received faster. Family residency visas have been reopened, visits and business visas have been liberalized and most importantly, they have been restricted to national carriers with indirect carriers not permitted to carry this traffic. In addition, the government-owned carrier across the street will actually be shrinking this year, and they have to return 7 airplanes. Similar issues are also felt by IndiGo which will have about 100 aircraft grounded this year due to engine issues. Most importantly, the government of Kuwait has taken note of the adverse impact from overcapacity in the Kuwait market and will likely calibrate the access of foreign players in line with demand rather than allowing dumping in the past. This is in line with a complete change in the approach of the government over the last weeks. In fact, just a day or so ago, the new government and cabinet have announced an aggressive 100-day action plan, which really believes that the private sector is the way in which Kuwait will achieve its goals, especially for the employment of about 300,000 Kuwaiti citizens who will enter the workforce shortly. In addition, during the last 9 months of yield-related challenges, we have doubled our focus on cost to make sure that we aim to have the lowest unit cost relative to our size. These cost savings that we extract mainly from optimizing engineering contracts as well as overheads end up being a permanent benefit to our P&L. I'll leave it to you all to quantify the potential positive impact of all these developments on the business of Jazeera Airways for 2024. And we will, of course, update you with the outcomes of everything that I've spoken about during our next call in 3 months' time. On that note, I conclude my section and leave you with our CFO, Mr. Krishnan Balakrishnan, to go through the financial section that we -- then we'll follow with our Q&A session. Krishnan, over to you.

Thank you, Rohit, and good afternoon to everyone. . If I can move on to the Slide #20, our parameters of our operations for the quarter and for the financial year. You will see that all the parameters are moving in the positive direction with the exception of the yield, which Rohit has already discussed about. So I'll move on to Slide #21, which shows the fourth quarter performance. If you see the passengers' numbers have increased by 17% and as a result, the revenues went up. However, there was an impact of the load factor being lower and the yield being lower than what we saw in the previous year same quarter as a result of which the operating revenue for the quarter was less by about 5%. Expenses were higher by 12.5%, primarily because the operations also increased to that extent. The terminal revenue was better by 17% compared to the previous year same quarter, primarily because we had more passengers moving through the terminal and the retail earnings also was very good during this quarter. Moving on to the next slide. If you look at the performance for the full year. The capacity increase was about 29% because of which we also saw increase in the passenger numbers. The load factor also was better than the previous year, though the yield was not as good despite that we had an increase in revenue year over year for the year by about 9%. Expenses were higher by about 20%, but primarily because our level of operations also increased to that extent. Operating profit was lower by 56%, primarily due to the yield. In terms of the balance sheet, the cash balance was about KWD 33 million at the end of 2023 as compared to KWD 52 million in the year before. There were a couple of major reasons. One, we paid dividends of about KWD 17.5 million. Plus also we had to invest in the PDP for the aircraft and for the engines that we purchased during the year. Fixed assets increased due to the increase in the aircraft. The ROU assets also went up. And the other increase was, of course, the PDP that we paid for the aircraft and the engines that we bought. In terms of the equity, if you see the interim dividends reduced the equity carrying balance. And despite the increase in profit by KWD 6 million. So primarily, that is the only reason for the change in the equity status. Then we have the Brent chart that is more for information and I hand the baton back to Rohit. Thank you.

Thank you very much, Krishnan. I'm now open for questions, if there are any?

[Operator Instructions] We will take the first question from Nishit Lakhotia.

I have a couple of questions. One, on the strategy overall. I mean, in 4Q we've seen that the airline business has done almost KWD 9 million of loss if we adjust for the profit of the terminal side. So Rohit, you've been mentioning that you'll focus more on the market share or the load factor because you get the terminal business as well when more passengers ride through it. But does it seem like the strategy is leaving a bit too much of a hole on the -- in the books in terms of the loss at the price at which you're selling tickets and the loss. So would you be now looking at maybe maintaining a certain yield, even if the load factor falls further? Or this is how you'll continue in terms of the strategy until you see some rationalization of capacity that might happen eventually in the coming quarters. So what's your strategy perhaps on the first 2 quarters of this year going forward? Second, on the hedge, how much benefit did Jazeera get in terms of numbers this year on your hedging and where it is in terms of -- have you taken any -- what position have you taken on the tax spread? And is it similar to last year? How do we look at it? What's the difference on the spread? Where you will be in the money and something on that? And finally, you told us to do the math on the cost cutting, but it's very tricky where -- can you give us some math on what kind of cost cutting it is in terms of our initiatives that we should see on the overall business? That's it for now. I may come back later.

Thank you, Nishit. Good to hear from you as always. So let me first put on record that -- our strategy has never been and never will be that we accept just passenger numbers flowing through the airline just to feed the terminal. The bread and butter of the group is going to be the airline, has been the airline and the overwhelming focus for us is to make sure that the airline is as highly profitable as it has always been. Of course, the terminal is a very exciting business. It's an important part of our business model. And it plays the role of being a counterbalance that during the period that the airline faced some temporary challenges, the terminal is a very resilient business that supports the group, and that's very obvious in the last, shall we say, 2 or 3 quarters. However, what's very important for us is if we are faced with a situation where market forces have gone awry, and temporarily, there's a huge overcapacity in the market, it's better for us as an airline to make sure that we maintain our market share because either way, you're going to have a revenue reduction. You'll have a revenue reduction by keeping your yield up and losing passengers or you're going to have a revenue reduction by carrying the passengers at a lower price. Faced with these 2 both adverse circumstances, it's better for an airline temporarily to make sure you protect market share and maintain your hold on the business, maintain your relationship with passengers, keep the wheels turning and that's perhaps the statement that you heard me make in the past. Moving forward, our strategy is very much one of maintaining healthy margins for the airline because we believe that if the airline does well, the terminal will automatically do well. And that's what I'm seeing, Nishit, for the last 6 weeks, a complete change in the business environment. And this is even before there has been any explicit shift on the part of the government and especially last 2 weeks, we are also seeing a shift in the direction the government is taking to manage capacity for foreign carriers at Kuwait Airport. There'll be more on that in the days ahead, maximum a couple of weeks ahead. What's important for us to know is there needs to be the rightsizing and there will be the rightsizing of capacity for foreign carriers into Kuwait. That is going to be the single biggest game changer that we are already seeing and we'll see in an accelerated fashion as we go through the first quarter and then the second quarter and of course, the all-important third quarter. But the strategy is unchanged. It is very much one of maintaining healthy margins and profitability for the airline, number one, and the terminal automatically follows. Regarding the hedge, you know, Nishit, we don't give out explicit details of our hedge, our strike price as well as the income that we made on the hedge. Nevertheless, I can tell you that the hedge, which conforms to 50% of our fuel uplift in a year, which is the quantity that was hedged, contributed very nicely in 2023 and will hopefully contribute in a similar fashion in 2024 as well. If I'm not mistaken, Krishnan, it's in the low 7-digit U.S. dollar figure range.

Yes.

I hope that answers your questions, Nishit.

Yes. And on the cost-cutting side, anything that you can give some more...

I don't believe you'll be able to quantify the internal cost cutting that we made. I think my comment was more directed towards the overall business dynamics, when you look at yield, C factor and cost, all 3, the interplay between all 3 and how that would translate to a Q1 outcome. But I mean, the other way out is to just wait for our Q1 results.

We have a couple of questions on the chat. The first one is from Rajat Bagchi. How should we think about the airline business going forward in terms of breakeven means oil prices and sustainable profit from operations?

In a very short answer, Rajat, and I appreciate your question, good to hear from you again, is positive for all 3. And I think I'm more convinced about the deep foundations that we have laid over the past years in Jazeera. I'm more convinced about the investments that we have made about in fleet and the permanent and sustainable unit cost targets that we have set for ourselves, that this business is a sustainable, profitable, solid business. Yes, every business has challenges and you have to be resilient to deal with those challenges. And I think we demonstrated while it's been very painful and nobody likes talking about poor quarterly results, we are in it for the long haul, for the long term. And I think Jazeera's business for 2024 will demonstrate that despite a temporary blip of a quarter or 2 of -- so we say disappointing bottom line numbers. Except for that disappointing bottom line number, every single other metric, even in 2023, was moving in the right direction. And I think 2024 starting with Q1, you will see an improvement.

Thank you. The next question is from Deepak. Was there any one-off losses during the quarter?

No, Deepak. I think it's all operational as far as I recall. Krishnan. Please correct me if I'm wrong.

You're absolutely right, Rohit.

Okay. The next question, also from Rajat. Can you please update us on the terminal expansion? And what's the expected growth in passengers in 2024, 2025?

So you will recall that even with all the constraints that we had at the terminal, Rajat, in 2023, we added 4.7 million passengers. Just to remind everybody, when this terminal was built, it was built with the expectation that Jazeera is at 1.8 million passengers. Even with expansion of the airline, it will go to 2, 2.5 million. We are now with all the improvements that we have made in the existing terminal, the additional gates, the additional check-in counters, it's now reached 4.7 million. The new T5 extension will take that all the way up to 6 million and with some further enhancements perhaps even 6.5 million. And the latest that I understand, we have crossed 3 regulatory approvals, and we still have 2 important regulatory approvals yet to be obtained. . A lot of these delays, honestly speaking, is not unique to Jazeera. There have been a lot of approvals from various government departments that were in limbo over the last, I would say, 12 months of slow activity as far as government approvals were concerned. We see this now has been changed in the last few weeks, and we are getting approvals for various things one after the other. And I expect within Q1, all the necessary approvals will be sought and received.

The next question is from Mohamad El Masri. Can you please elaborate on the increase in operating expense? And how will that be managed going forward to maintain operating margins? Should we consider the yield as the new normal given the increased competition?

Mohamad, our operational expenses that you saw for Q4 are directly in line with will really our operations, which is the number of flights that we fly, the distance that we fly, which is called stage length as well as the number of block hours that the airplane is flying. It's a function of a certain amount of fixed costs and certain amount of variable costs. Variable costs include, of course, fuel, crew allowances, landing and parking, over flying and so on. And of course, you're aware of the fixed costs. In terms of what has increased in operating costs over the previous years, they're largely to do with the countries increasing their landing and parking fees, their ground handling fees, the overflying charges and so on. A lot of these are being actively, we are fighting back. We don't like a single penny to go out of the company more than necessary. But in some cases, it's more or less a monopoly. For example, Doha is an interesting example, where A320 narrow-body turnaround in Doha Airport actually cost more for ground handling than Heathrow in London, and that's because it's a monopoly ground handler in Doha. So we have to actively engage with the ground handler and find ways because we don't have an alternative. And if it doesn't meet our requirement, we may walk away. Other than that, every single quarter, you will find our unit costs for various line items on the cost side dropping, particularly on the engineering and maintenance side. I'm not overly concerned that our operating costs are out of whack. There are improvements that will come with scale, and we are getting our 24th airplane in April, end of April, early May, and that will further optimize our cost structure. Sorry, you also had one more question regarding whether the yields that you saw in 2023, particularly Q4, I assume, is the new normal? I would say no. I would say those yields are exceptionally low and due to the overcapacity. And I think the new normal will be perhaps what you start seeing from Q2 of this year onwards, once capacity into Kuwait Airport is rationalized for foreign carriers.

We have 2 more questions from Mohamad in the chat. Can you please update us on the Jazeera's quota status and implications?

Sorry, can you repeat that, please, Mirna?

Can you please update us on the Jazeera's quota status and implications? I think the cut to Jazeera's quota 40% to 25% on certain routes?

You're talking about the traffic rights to India. Yes. Yes, that was done early of 2023, I think the last week of December 2022. And this is something that we believe was unfair, and this is something that we have appealed. And it's still being discussed and debated. But I add this to the list of the several items that sort of did not move forward because there was no engagement or not enough decision-making by various levels in the government. We believe this will again be reviewed. And I think in the interest of fairness, it will revert to 60-40. I'm not able to commit to exactly when, but I'm very confident that the merit of the argument is on our side, and it will revert at some part during the early part of this year.

The next question is also from Mohamad. Can you please update us on T6 and the Saudi JV?

Right. Nothing further to report on T6, Mohamad. I add that again to the category of pending approvals from the government. But I'm more hopeful today about receiving those last set of approvals than I was, I would say, a quarter ago. Regarding Saudi, it's a very strange situation. We had participated in the tender for the hub carrier in Dammam. And there was a notification from the regulator in Saudi Arabia sometime in December that this entire tender process has been nullified. So they didn't award that to anybody. On the contrary, they said there will be a new tender, which they issued subsequently. We are, again, participating in that tender. We will be -- I think the deadline for that is the middle of this month to submit it. We will be submitting it. We believe we have the best credentials and the best business plan for that. But who knows, I mean, this is a tender process. I'm sure that they have various considerations. In terms of the business plan and what we can do for the Eastern province of Saudi Arabia, we believe that we have the best credentials. But I rate our chances at about 50-50. You know from the many, many conversations that we have had that I'm, shall we say, conservative. I'll try to give a balanced view of our business and the outlook. And I believe it's about 50-50. Having said that, we have another 3 hubs that we are evaluating. And all of them are as exciting or even more exciting than the one that you just queried about which is Dammam.

The next question is from Nishit Lakhotia. What has been the debt movement Q-on-Q, given the increase in cash by KWD 17 million?

Krishnan, do you want to take that?

The -- sorry, Rohit, what was that about?

Nishit has a question regarding the movement of debt and how the cash position...

Yes. Okay. So what happened was we do run some loans in 2023 towards the end of the year of about KWD 26 million. And we also took overdraft of about KWD 5.5 million. And that is what is reflecting in the books at the end of the year. Primarily to fund the CapEx that we incurred, which is about KWD 34 million that we spent on the purchase of aircraft and the engines and delivered in the full...

All the predelivery payments for the aircraft as well as the engines that we've purchased, we purchased from our own cash, which is normally not done. So we've brought in a little bit of balance between cash and a little bit of debt.

The next question is from [indiscernible] Given that many of the government changes have yet to kick in, what are the main reasons for the improvement in yields and operating environment in Jan and Feb?

That's a very, very correct observation. And the answer to that is towards the end of November, early December, while we were planning -- because we plan for the worst, and we want to make sure that assuming there was no improvement in the market scenario, there's no improvement in the environment, assuming there's no improvement in yield, how do we maintain and enhance our margins? And we did some fairly major changes to our network in terms of frequencies, in terms of operating more to profitable routes and reducing some of the operations to routes that became loss-making because the yields went down. They were profitable earlier. But -- for example, Bangladesh, we changed frequencies to Dhaka. We cut operations to Chittagong. We reduced operations to Kathmandu and so on and so forth. On its own, these changes improve the business fundamentals of these routes. And then we saw further improvement in sentiment with people traveling. There was a peak, and that was expected with the Arabic school holidays in Kuwait. But we also see this in other markets. And I think with a combination of more aggressive sales and marketing efforts, with the rightsizing of our network, you will see an improvement organically in yield and seat factor. One of the things I want to highlight, if you've been tracking Jazeera for the last 6 or 7 years, is that every year, you see an improvement in seat factors. Towards 5, 6, 7 years, I would say about 7, 8 years ago, Jazeera would do about 70% seat factor average as a normal. Today, we are doing 80% seat factor as a normal. In the case of January, it's even above that. So it's a higher seat factor, better management, better yield management and fine-tuning of the network. Everything that we will see in addition, as you correctly observed, with the new visas coming in, the residence permits being issued and other government initiatives that are very positive for our industry. That will be over and above everything that you see that is -- that we have done internally as well. I hope that answers your question. And Mirna, I'll take my final question now.

Okay. The final question from [indiscernible]. On the new routes that started during 2023, had they faced a challenge as far as margin and profitability is concerned?

I would say yes and no. I would say all the routes that we operate to faced challenges due to margins and that's purely because of yield and overcapacity. So have routes faced challenges? The answer is yes. But that is not restricted to new routes. I would say the new routes have performed very well and as we expected, according to their business plan. A good example is Moscow. And Moscow has exceeded our expectations and as a very good destination and contributing to our overall profits. And we believe that it's an excellent tourist destination, and that is actually demonstrated by the fact that every month, we see many thousand Kuwaiti as well as other GCC citizens traveling to Moscow on Jazeera. Even government officials travel to Moscow on Jazeera because it's really the only viable option. And Russia has opened e-visas for Kuwaitis and indeed most of the GCC. And we are expecting a similar reciprocal privilege to be granted by the Ministry of Foreign Affairs in Kuwait as well for Russian citizens to visit Kuwait in the light of all these new positive developments to encourage visitors into Kuwait. I thank you all for attending this call. And I'm very optimistic about 2024, and I look forward for the next call, where we will update you on the actual results for the first quarter. Thank you very much for joining us.

Thank you. Thank you, Rohit, and Krishnan, and thank you, everyone, for joining. This concludes today's call.