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

Okay. Good afternoon, ladies and gentlemen, and thank you for joining us today. This is Ali Adel. And on behalf of Arqaam Capital, I would like to welcome you to Jazeera Airways Q1 2024 earnings webcast. With us here today, I have Mr. Barathan Pasupathi, Jazeera's CEO; and Mr. Krishnan Balakrishnan, the CFO. [Operator Instructions] Without any further delay, I will now turn over the call to Mr. Barathan. Please go ahead.

Thank you, and good afternoon to everyone on the call today. I am pleased to join you today as the new CEO of Jazeera Airways. Many of you will have known Rohit well, and I now look forward to building the strong relationships that have been fostered with the investment community at Jazeera. Today, I'm pleased to host the first quarter 2024 investor call, together with Krishnan, our CFO. But before I begin, I'll give you a very brief background of myself. I have served Jazeera as the CFO between 2007 to 2010 and was involved in the initial orders with Airbus as well as the creation of Sahaab Aircraft Leasing that is hugely successful in the formative years and now renamed as Jazeera Airport services. I have returned to Jazeera after spending close to 12 years as CEO of Jetstar Asia, a low-cost carrier based out of Singapore. Jetstar Asia, a Singapore group, was part of the jest and Qantas Group complete a successful broad brand strategy in the usually competitive Asia Pacific market. With that firsthand, the proliferation of low-cost carriers in the Asian specific market where LCC adoption rates now vary between 40% to 60% of the market. By keeping face affordable and accessible LCCs have paid place an important and integral role in help development and contributed to the economic prosperity of jobs growth in each area we operate. Likewise, I'm pleased to be coming to Jazeera in almost 20 years of operation. And the wonderful things it has done in Kuwait and the markets it has served. I'm also thrilled to see the successful verticals and the portfolio that Jazeera has built and is installed just like the unique Terminal 5 in Kuwait. My quest now is to bring the best of both worlds in the new chapter of Jazeera, while staying true to the fundamentals on safety as a first priority, driving lower unit costs in the business, keeping fast affordable and achieving high standards of operational reliability and customer experiences. I think Roy and talented teams have inherited for building a strong foundation and at some stage, I look forward to meeting you in person. And now let us proceed to the Q1 financial results. I am pleased to announce that Jazeera has successfully navigating the continuous headwinds still in Q3 and Q4 of 2023. And it has now achieved a soft lending in Q1 of 2024. In this quarter, Jazeera delivered higher passenger growth and even better operational reliability while maintaining market share in Kuwait. And you will also hear on how the Q1 numbers were impacted by one-off adjustments. And in this case, the sizable devaluation of the into that impacted almost all businesses to key operations in Egypt. Let me now unpack the results.

I think the line of the management has cut. Just a second for gemstone again.

This is another successful quarter of delivering more than 1 million passengers in Terminal 5 in a seasonal weak quarter in the region. And this was also higher than Q4 of 2023. This was achieved despite the lower load factors seen in the quarter with capacity chasing demand in the entire market. The lower load factors seen in the quarter were a result of market capacity growth in Kuwait that surfaced summer of 2023. At the same time, there was an effect of 2/3 of observing Ramadan in Q1. In order to better manage capacity and new performance, Jazeera adjusted and trim capacity settings to market demand and optimize rotations. We also took the opportunity to bring forward maintenance programs to prepare for a very busy sell-off lying schedule to maximize flying this summer, which will be the biggest summer for Jazeera Airways. This agile framework led to 15.1% lower planned utilization in the network. Optimization and plant maintenance shielded yield deviation in Q1 of 2023. You have noted in Q4 of 2023, Jazeera experienced a 20% yield drop. However, in the soft landing that we've seen in Q1, yield only deviated by 9% for the comparable quarter in 2023. In fact, new increases are much higher in Q1 2024 versus Q4 of 2023. 37 gratins versus 32 equity data. as compared to the previous 2 years in 4Q seen the key performance metrics at the end of the presentation. The 1Q financial highlights on Page 7 show relative quarter-quarter comparable period of revenue, operating profit and net profit. Operating profit margins were positive relative to Q4 but lower for the same comparable quarter due mainly to plant optimization of capacity and keeping aircraft with lower utilization with planned increased maintenance event, as explained earlier. Net profit was down only due to the foreign currency revaluation. In this case, the devaluation of Egyptian power can be play. Results that have been positive if not for these one-offs in the business. Moving on to ancillary revenue. Both and revenue and e-commerce revenue shined for the quarter. And this is clearly showing the incremental improvements being seen in the business. In fact, the growth was stronger than Q4 and to some extent, a huge opportunity for us now to diversify and mitigate the normalizing taste trend that has been seen over the full 2023. Now this is one area that Jazeera will accelerate focus and traction this coming year. In the cargo space, we were primarily impacted by some directional limitations and confidence to be is back on track. The new commercial site. Moving on to terminal side performance. This is a significant of a portfolio diversification strategy at Jazeera. Coming into almost 6 years of inception, terminal pipe continues to grow from strength to strength and has recorded another successful and strong quarter, while the airline navigated soft lending and strong headwinds with higher passenger counts, the terminal benefited from this and produced stellar results from Jazeera passenger throughput. With almost 1.2 million passengers in the terminal, Terminal revenues were KWD 3.1 million, EBITDA at KWD 3.1 million. Revenues of KWD 3.1 million, EBITDA at KWD 2.5 million and a net profit of KWD 2.3 million. If you do the math on this, this is a margin of 74% and compares favorably to 1Q '23, the margins were 65%. This incredible performance was delivered with strong 95% retail occupancy and due to fee growth of 6% in sales to the net profit margin of 10%. This further supports [indiscernible] on TPA expansion plans currently in the design stages to sell some 7.5 million passenger capacity by 2026. Jazeera's entrepreneurial venture into the terminal has certainly diversified revenue streams and further diversification won't happen with duty free and other G&A adjacent ventures as well as with the continued projects that will be incubating. If I can turn to the market share investment in distribution that is we've seen in 1Q of 2024, you will see that Jazeera continues an impressive record of supporting the Kuwait hub with a diversified product offering. Both national carriers continue to play an important role in establishing direct connectivity from Kuwait to key markets and new destinations. This is complementary in the Kuwait Air house, and I've seen the same play out in the Asia Pacific market and core stronger for that. From operational statistics, Jazeera has maintained market share during the first quarter in terms of passengers carried and aircraft movements out of Kuwait Airport. In the first quarter, the Kuwait aviation market has seen growth of between 6% to 7%, and this bodes well for both national carriers in Kuwait as policy relaxation on recent employment products and family visits will continue to ban momentum. The population demand profit market mix in Kuwait and the seasonal patterns position well for quality carriers as to the different product offerings as Jazeera showed this successfully. Given the size of some segments of Express in Kuwait, carriers in Kuwait will do well with expansion of more bilateral system, and we believe this will happen in time in GPG talks. On Jazeera's all network, market share, in fact, grew 37.3% as we saw some seasonal capacity adjustments in the market. NDC, the demographics of distribution between 1Q '23 and 1Q'24, you'll see the market mix of Jazeera change over the quarter. You'll see a far greater share of the TCC market and a lower segment share on the Indian subcontinent. Now on operational highlights, let me take you to the network. On the network and especially as you know, we are normalizing or the trend of normalizing yield continues, especially in the show that before and after the peak, Jazeera will continue rebalancing the network to market conditions. We will carry out nimble capacity alignments to match supply and demand imbalances in the market just as we have done in Q4, reversing the trend we have seen in Q3 and Q4 of 2023. This is one new tool in a book that Jazeera will deploy to balance capacity mark-to-market tentatively deal in the fourth summer and especially into Q3 and Q4. As seen, the nimble capacity alignment this quarter has allowed a soft lending compared to capacity market imbalances last year. However, I can also possibly say the reverse is post approved. With this new approach, you will see Jazeera resetting a summer schedule in 2024. We proudly say that this will be the busiest summer schedule for Jazeera and indeed we will be deploying an additional aircraft in the fleet this summer to opportunistically build or targeting growth in the months ahead in our schedule where we have seen stellar performances in 2023. In 2022, we grew the fleet by 4 aircraft last year and also serials 2 units into the summer. This year, we have increased capacity and resort manning to cater to the buy email we expect and will not require any debt use capacity, which should also provide customers with a consistent product offering across the network. On operational performance and OTT. And as we assume, we are pleased with the operational reliability settings in the business and have actually a planned underway preparations on refinement in both the terminal and the ground operations business to record even stronger OTT this coming summer. On fuel prices, we expect fuel prices slightly lower than 1Q of 2023, and our hedge renewal will normalize a few index. In developing further and binary team, we are pleased with the initial traction we're seeing in the Jazeera favorite club that has only launched in December 2023, with the aim of increasing passenger numbers, and we will continue to see high bookings across the network during summer of 2024. On the family lease-up front, the BCBCA Kuwait issued a directive -- yes. In Jazeera Airways, our passengers holding assembly visit diesel. We are now seeing traction on this, and we expect this to continue strongly into summer. On this page, you will see the network across Jazeera that is can operated on and please stay in tune for some exciting new destinations that will be launched in the weeks ahead. The outlook for 2023 and to an outlook for second quarter 2024 and full year 2024. We expect a stronger momentum from family leasers in 2Q and 3Q of 2024. Jet fuel and tracked have marginally subsided to advantage but remain elevated. We have hence renewed hedging contracts against track spreads to eliminate potential risks during the quarter and the full year ahead. We also expect with the agile and nimble rebalancing of capacity to market demand and inputting more in summer this year, passenger growth will be in line with the overall market. In terms of nimble outlook, we expect yields to continue normalizing at current levels with capacity from non-cat carriers. And we will hand carry a nimble rebalancing of capacity markets for set opportunity that we are doing this summer. This summer will be a bit different from summer of 2023. The hard season provides a strong runway into the summer, given the early start of Hutch this year. And we expect a busy summer season effective mid-June to mid-September 2024. Overall, we foresee a very strong and dynamic year compared to 2023. I will now pass you over to Krishnan, our CFO, to continue on the key parameters and financial highlights in the business.

Thank you, Bara, and welcome to Jazeera, and a very warm welcome to all the participants on the call. In this slide, we're looking at all the KPIs, which have been already addressed by Bara in his part of the presentation, so I will not dwell on these. On the financials, the revenue primarily decreased because of the lower yield and feed factor. And we also had the impact of 10 days extra of Ramathan shifting into the first quarter as compared to the previous year. The operating costs were in line with the first quarter of '23 as the total block or remained literally flat, but there was an increase of 8% in the number of sectors. The one-off foreign exchange hit we took of KWD 2.5 million, like Bara mentioned, was primarily due to the EGP devaluation and foreign currencies, which in the normal course, would get earlier, but the major one was the EGP. The cash balance in the business increased to KWD 38 million, KWD 39 almost million from KWD 33 million we had as of December, primarily because we had an increase in the advanced bookings made for the summer and also the utilization of some of the credit facilities from the bank in Kuwait. There were no major changes in the fixed assets or the right of use assets. The order book delivery will start from 2026, where we expect in the first year, fixed aircraft to be delivered. And that remains a good asset to be held in the books. And as the months pass by, we will speak more about this as we will start crystallizing our plans for taking delivery of these aircraft. The next slide primarily gives you a look into what were the key metrics, especially the Brent. And if you also specifically look at the yield, which is the second one on the right there, there has been the dip in third quarter '23 and further down in the fourth quarter. But you can see that it has spiked in the first quarter of '24. As Bara mentioned earlier, we are seeing this trend actually improving. The next of them for information. I will hand it back to Bara. Thank you, Bara.

Thank you, Krishnan, and we'll now be open for the Q&A.

[Operator Instructions] First questions are from Nishit Lakhotia from SICO Bank. I have several questions, so we can take it one by one. So the first question is related to the Q-over-Q improvement in yield is it due to the capacity restructuring on UE carriers? And how do you see this evolve in the coming quarters?

The key improvement in the yield coming from 2 fronts. One, if you recall what we have shared in this presentation, I ask to pay attention towards agile and nimble. We have used in our box a strategy now in the shoulder to pre-summer and post summer to have an agile framework of our network and carry out optimizations to match the demand and supply imbalances in the market. And we have seen that being successfully deployed in quarter 1 relative to quarter 3 and Q4 of 2023. That's one of the reasons. And the second part is also quite interesting. And from the question that is raised, it is true that we are seeing some marginal retraction of capacity. You've seen what has happened pre-summer to first summer. A number of noncoated carriers have actually added a lot of demand into the market chasing seats heating demand. And there's a reaction in the market to some extent in some of the minor markets where you overlap, we are seeing some reflection of capacity. These are 2 early days. We need to see how the remaining quarter plays out. But generally, we are very pleased with the progression as we point of yield from Q4 into Q1 relative to the trend we have seen over the last 2 years.

So his second question is related to the year-over-year decline in marketing costs. So is it sustainable?

Yes. As you can see, Jazeera is coming into almost 20 years a brand and equity building in our markets. And in some of the markets, the distribution mix is quite different. If you look at the organic Jazeera geographic profiling or segmentation, we have several channels. We have the direct channels at Jazeera, which we are building on, and we are positive over the next ensuing summer months and the years ahead, which will even strengthen and elevate and uplift performance. We would like to have a direct relationship with the customers in all these channels. We also have sales and distribution through an agency network, which is predominantly Kuwait and regional base in the GCC. If you look at how we have successfully deployed both channels, you will see that there has to be in the quest on achieving the lowest unit cost in the market or progressing on coupon discretionary marketing spend. And you've seen what we have done, we have done a surgical look across all the marketing spend in the business towards seasonality, and you'll see very active campaigns in Jazeera which will be self-generated on own channels? So coming back to your question, do we see this sustainable, yes, we do. But we will still be engaging on brand and equity building into the market.

So the next question is on the status of the Terminal 5 expansion and by when it will -- the capacity will increase to 60 million passengers.

So we will always be pleased to address the T5 expansion plans. As you know, terminal Slide 5 was built to cater to a partner capacity throughput just below 3 million. And Jazeera has not deployed space and passenger workflows across the terminals to handle close to 4.7 million customers in 2023. Looking ahead, and especially in successfully carrying more than 1.1 million, 1.2 million customers in a year, we have to look for growth. And hence, we have the terminal 5 expansion team already finalizing the design stages of the expanded footprint and that expanded footprint will also allow and give more commercial footprint for Jazeera to continue the margin expansion we've seen on terminal 5 currently, and we are looking to cater to something close to 7.5 million customers before the end of 2026.

And regarding the cost savings, if you achieved any post-meeting from your hedge on tax spend in Q1. And if you can quantify on this.

I will let Krishnan address this question on cost savings on the tax spread and whether you can quantify.

So even though, as you know, we have hedged the crack for the rest of 2024. In quarter 1, we did towards the end of it. We lost a bit marginally on the hedge, but we saved much more on the unhedged portion because the CAT came down. So overall, we did not have a big hit on the hedge. And going forward, we believe as confirmed by several analysts in the commodity and fuel market that this hedge will pay off during the rest of 2024.

If I can add to Krishnan's comments, yes, we have seen some supply demand imbalances on capacity, refining capacity across the globe. However, if you look at international airline jet fuel consumption, we are just about to enter a very peak and heavy volume season. And most of the analysts we have been speaking to, actually quite pleased with the hedge position that Jazeera has taken.

So just his last question is to quantify if there is any impact from disruption in April due to the other conditions?

It was a good question. And disruptions in April actually have resulted from 2 major events. One, yes, we had the weather situation in Dubai. And 2, we had moment 3 double weekend as space closures through the geopolitical situation in this part of the goal. On both situations, Jazeera has contained any fallouts on the business. But one thing we did is we looked after our customers who are impacted not only in the great up, but quite majorly in Dubai. So we have not seen any major financial impacts from the device suing situations or the air-based closures. These are nominal. However, more importantly, we are very pleased with what our team and people have done in terms of looking after our customers.

So moving to the next question from the Mohamad from NBK. You're just asking on the reason for the drop in market share for the Indian subcontinent.

For the question on the market share drop in the Indian continent. If you dial back probably 3 quarters into 2023, I think sometime in Q2 and Q3, Jazeera commented on the bilateral traffic rights, and the evolution of its feature in the Indian subcontinent market from Kuwait. Now there's 2 things that happened here. On the bilateral front, as I said earlier, Kuwait will benefit from a greater G-to-G share of having greater fits between Kuwait and India, and we are engaging government in our negotiations to ensure that Jazeera gets allocated when the extension happens. #2, on big agile and nimble, we also changed the new mix focus in terms of the Indian subcontinent traffic into Kuwait and due to our network and go after more direct point-to-point frequencies from Kuwait. So that blend of balancing a direct point-to-point market and a positive market resulted into a fair share of the shift you have seen from the Indian per continent to the GCC market. And you see that looking forward, you will see Jazeera doing more G2G market penetration as we grow our footprint between the CIS into Kuwait and 2 KSA, and that will also be evident in Q2 in Hudson staff.

Sorry for the line was cut. So back with the questions again. So the question from Mohamad is regarding yields. So I want to know the outlook for yields for the remainder of the year.

If I hear you correctly, it was a question on the thought on the question on the trajectory of the yield for the year going forward. Typically, on the trend on the near line at Jazeera, Q1, Q2 are seasonally a weaker quarter compared to Q3, which is summer. And if you look at the thread that has happened last year, Q1, Q3 was strong in Q4 was the issue at Jazeera. And you have seen our commentary on this call this year is we have taken a valuable learnings from 2023 and deploy that in the network in 2024. So in terms of new development, first and foremost, we're very pleased with the way Q1 has landed. We know that post into April and May is a seasonally weak setting. We are very bullish on summer Q3 going into Q4, and we will navigate Q4. So given the booking seasonality of the Middle Eastern market relative to what I'm used to in the other parts of the board, I think in terms of our focus on yield, we will say that we are pleased with the first quarter development and we will continue the efforts to mildly manage in a very agile way to network, rebalance the network and aim for a high yield threshold than what we have seen in 2023. And that account to be more precise to like the development of Q1. It's still early days, but we are proactively I will repeat this year through actively managing the supply and demand imbalances. We have also seen, if you look at the OAG published capacity in the markets, a restriction of some capacity in the summer months. And so that is then keeping us bullish. Early days, and we'll manage the new forward curves as we go along in the rest of the quarter.

I had a question also on the overall outlook on cost optimization going forward? And what is the guidance for margin and we still see them expanding going forward?

Could you please repeat the question clearly, please?

Sure. So his question is the on cost optimization. So if there's a possibility that margins can still expand going forward?

On cost optimization, as you would have heard in the previous quarters and the quarter before investor call, Jazeera committed on a cost reduction plan. And if you have evaluated our financial numbers, you will see that given the passenger counts we have, 2 things has happened. Jazeera's cost per passenger seat and cost per passenger this quarter is lower. So we are continuing the early steps we have taken to identify optimization and update opportunities to manage costs.