Aviation

THE COMPANY: Established in 2004, Jazeera Airways operates as a low-cost carrier from Kuwait and flies to high-demand business, leisure, family and weekend destinations such as Dubai, Bahrain, Beirut, Alexandria and Cairo. The company first listed on the Kuwait Stock Exchange (KSE) in 2008, and as of early 2015 Jazeera operated a fleet of seven Airbus A320 aircrafts. The company is now catering to almost 20 destinations. Jazeera is one of the key large-capitalisation stocks listed on the KSE and is part of the KSE-15 Index. The firm is also one of the top 25 companies in Kuwait with a market capitalisation of KD218.4m ($752.43m).

The company carried 1.2m passengers in 2014, a marginal increase of almost 2% over 2013. However, between November 2014 and January 2015, the carrier recorded strong growth in flown passengers. According to the company’s January 2015 “Operational Performance Report”, in the first month of 2015, the firm saw a strong year-on-year growth of 32% on high-volume routes that include Istanbul, Beirut and Amman, whereas passenger growth on routes serving Egypt, Dubai, Bahrain, Jeddah and Riyadh increased by 20%.

Until the fourth quarter of 2014, Jazeera operated an aircraft leasing business, Sahaab Leasing, established as a private firm by key shareholders and financiers of Jazeera in October 2008. Sahaab’s business involved acquiring and leasing commercial aircraft for customers and started with Jazeera as it first client. Apart from the seven aircraft operated by Jazeera, Sahaab leased eight aircraft to other commercial operators. In early 2015 Jazeera announced that it will exit the aircraft leasing business when it announced the sale of its entire fleet of 15 Airbus 320s for KD507m ($1.7bn). Proceeds from the transaction, which is expected to be completed by the end of the first half of 2015, will go towards settling outstanding debt, which stood at KD116.6m ($401.7m) as of year-end 2014, resulting in a cash balance above KD80m ($275.62m).

Jazeera has reported stable performance over the years. Revenues from the company’s core operation, the passenger segment, have grown at a compound annual growth rate of 7% over the past five years. The legacy lease rental segment also reported stable revenues, although its contribution to total revenue declined significantly as income from other segments grew. In terms of profitability, the company had been bottom-line positive for 17 consecutive quarters until the fourth quarter of 2014, when it reported a loss of KD10.1m ($34.8m) that was primarily due to the onetime loss related to the sale of aircraft. The pre-fleet sale net profit for the quarter stood at KD3.8m ($13.09m) a rise of 47.4% over the same quarter of 2013.

On the balance sheet front, the company’s asset base is expected to decline significantly after the sale of the aircraft, augmenting its cash balance, which stood at a strong KD64.8m ($223.2m) at year-end 2014. Term loans at the end of 2014, which are now classified as short term, stood at KD116.3m ($400.68m) against a smaller equity of KD67.5m ($232.55m). The decline in oil prices since late 2014 has led to significant fuel cost savings. Moreover, as compared to other airline operators, Jazeera has been one of the biggest beneficiaries of the decline in prices due to its no-fuel hedging policy. Fuel cost savings were clearly evident in the company’s first-quarter 2015 results, which recorded a 44.6% jump in net profit of KD3m ($10.3m).

DEVELOPMENT STRATEGY: Jazeera has adopted a completely renewed strategy for its future growth from a diversified approach of splitting its revenue base into aircraft leasing and commercial airline services to a focused strategy of running only the core airline operation and maintaining a debt-free balance sheet.

Furthermore, with a declining contribution from the leasing business to the net profits, Jazeera is also considering the cost of renewing its fleet of aircraft owned by its leasing arm, which was sizeable and would lead to lower returns. Jazeera also does not plan to adopt an owned aircraft model and has leased its current aircraft requirements, thereby enhancing shareholder value and enabling it to improve its return on equity