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Fri 26 Jul 2013 11:41 AM

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Low cost equals high returns

With passenger numbers rising, profits in triple digits and new aircraft orders on the horizon, Jazeera Airways chairman Marwan Boodai talks about the challenges ahead

Low cost equals high returns
Jazeera Airways — led by chairman Marwan Boodai — has more than tripled its net profit in the first quarter of 2013.

European low-cost carrier Ryanair was recently styled as ‘the world’s favourite airline’ by the International Air Transport Association (IATA). Carrying 80 million passengers, it was more than rivals Easyjet and British Airways combined.

Luckily, Gulf low-cost carrier Jazeera Airways doesn’t have to compete with the frugal Irish carrier, which is adept at both keeping costs down and rubbing its staff and passengers up the wrong way.

While not in the same league as controversial Ryanair boss Michael O’Leary when it comes to generating headlines, Jazeera Airways chairman Marwan Boodai similarly doesn’t like to mince his words and, in true Kuwaiti style, likes to tell it like he sees it.

While Ryanair has been able to set up around 50 bases around Europe, in addition to its main hub in Ireland, the amount of red tape involved in replicating the same network in the Middle East would be too risky and is not worth attempting, Boodai states.

“Having other locations is good but let’s not forget that the challenges and risks entangled in our part of the world in the Middle East is so high that you won’t risk your investors’ money to do that,” Boodai says.

It’s not to say some haven’t tried: UAE low-cost carrier Air Arabia has its main hub in Sharjah and has launched subsidiaries in Egypt and Morocco.

“If you compare to Easyjet or Ryanair, you can easily open up in Europe and get yourself a base in Marseille or other parts of Europe,” Boodai says.

“In the Middle East, we still don’t have the regulatory framework that allows us to freely open up and obtain local AOCs [Air Operators Certificates] on subsidiaries. It becomes so complex, so as a board we have decided to shelter Jazeera Airways completely from any hubbing, or other operations, unless the regulations change.”

Last year, at one point, it looked like Ryanair might be about to dip its toe into the Middle East when the Lebanese government said it was trying to persuade European low-cost carriers to start flying to the country. Nothing transpired, but Boodai wasn’t surprised and again declared that the Ryanair model in the Middle East “won’t work.”

While Boodai may be constricted when it comes to hubs he can develop, even Michael O’Leary would gasp at the impressive results achieved at the Kuwaiti airline. Earlier this year it announced it had more than tripled its net profit in the first quarter of 2013, marking its best first quarter performance on record.

Jazeera Airways’ revenue of KD14.7m ($51.4m) represented a 15.7 percent increase compared to the first quarter of last year, while net profit rose to KD3.6m, up a staggering 229.4 percent. With around 11 million passengers annually, figures show traveller numbers were also up five percent in the first three months of the year compared to the first quarter of 2012 and the load factor reached 70 percent, up 15.2 percent. By the end of the first quarter, the carrier had assets of KD145m ($509m) and had banked cash reserves of KD45m ($157.97m).

“These exceptional results were generated by our airline business, which saw an increase in passenger loads and a full recovery from the three Syrian destinations that were suspended by the last quarter of 2012,” Boodai says. “All these factors combined in our airline business, coupled with the ongoing success of our independent aircraft-leasing business, have resulted in our best first-quarter results in the history of the group.”

Not surprisingly, Boodai is optimistic about 2013. “Originally our strategic master plan was launched in 2012 and we targeted double-digit growth; we achieved that last year and we are going to exceed that this year and in the first quarter we had 230 percent growth... Don’t expect the same for the full year as it was exceptional for the first quarter but we do see a double-digit growth all the way through to the end of the year, as well as for 2014.

“With high consumer demand in Kuwait and higher disposable incomes, we are going to see that demand surging. Up until 2014 we are going for double-digit growth annually.”

A major change the carrier has made in its accounting procedures has also made things a lot smoother. Previously it reported a 21.6 percent rise in net profit for the first half of 2012, but it claimed it would have been up 107 percent if it had not been for foreign-exchange losses incurred during the same period.

Boodai reports that these currency headaches have now been eliminated: “That is no more. The reason is we have changed our financial policy whereby it is a dollar-dominated balance sheet so we don’t get exposed to fluctuations in currency. We don’t make money on foreign exchange but we don’t lose money.”

Jazeera Airways is certainly not losing money and Boodai confirms the carrier is planning to start expanding its fleet and place orders for new aircraft in 2014. To date, the carrier has taken delivery of thirteen Airbus A320s since 2005, as part of an order for fifteen aircraft. The two remaining aircraft are scheduled to be delivered in October 2013 and May 2014 and the airline will then look to purchase more jets in order to push its fleet size above 20 aircraft.

“Jazeera as a group is expanding but not reducing the number of its aircraft. We still need to reach what we call the 20-plus aircraft [fleet], which will give us a good size in the leasing market,” says Boodai. New aircraft orders are “going to be in the second half of 2014,” he confirms.

The airline announced in June it had secured funding worth $90m for future aircraft purchases with the National Bank of Kuwait (NBK) and Germany’s DVB Bank. The loan, which has a twelve-year term, aims to fund the purchase of three new Airbus A320 aircraft, one of which was delivered earlier this month.

Boodai says confidently that the airline will not need more financing for new orders as it has a healthy cash balance on its books.

“This financing tranche will take us up to the last aircraft on order right now... Above that we have cash on our balance sheet of about $130m, that’s more than our paid-up capital so for the time being Jazeera is cash-rich and we don’t see any further financing for the foreseeable future before our next aircraft purchases.”

When it comes to the Kuwait aviation market, the big white elephant in the sector is, of course, Kuwait Airways and the current state of play of the government’s long-awaited privatisation plan.

A few months ago, Boodai told Arabian Business he would “definitely” be interested in investing in the soon-to-be-privatised flag carrier: “Yes I would definitely focus on investing more on aviation in Kuwait, subject to a clean, clear balance sheet,” he said, when asked if he was interested to invest in loss-making Kuwait Airways if it is privatised within the next three years.

“Like any investment you have to look at what the balance sheet is like and then you have to decide if, yes, it is worth [the] investment. If you look at Kuwait Airways’ balance sheet for the last five years when they decided to privatise it, the Kuwait Investment Authority, along with Citibank, they didn’t do the brightest job, they should have sold it years ago.

“Since then, to date, the accumulated losses, which the government has cashed, reached KWD468m [$1.663bn], which is published officially in our gazette,” he said in February.

Government-owned Kuwait Airways has been plagued by strike action by workers looking for better wages and conditions, while its planes have previously been grounded due to safety concerns. It is also locked in bitter discussions with Iraq over aircraft stolen from it during the Gulf War.

Parliament first backed privatising loss-making Kuwait Airways Corp in 2008 but the process has been repeatedly held up by the global economic crisis, political turmoil and a restructuring at the airline.

Fast forward to this summer and Boodai seems a little more restrained on the subject of Kuwait Airways and seems in less hurry to make any major move.

“Kuwait Airways is still in the process of reshaping and the most important thing is that they agree to reduce their costs as it is very vital. The headcount has dropped sharply. They are going to get new aircraft leased starting this year, that is going to help them on the long haul and they are going to replace on whatever they have on the short haul.”

Kuwait Airways is reported to have 25 new aircraft on order and this will help Jazeera too, Boodai says. As the larger Kuwaiti carrier starts more international routes this will mean international rival players, such as Qatar Airways, Etihad Airways and Emirates Airline will not have to take up the slack and Kuwait Airways can focus on the international routes and Jazeera can focus on being the short-haul regional carrier.

“The reshaping by itself will help both carriers. We are going to see more cooperation between Kuwait Airways and Jazeera and possibly interlining and feeding services,” Boodai says.

However, he stops short of saying there will be a formal merger between the two carriers: “It is a bit premature at this stage in time, we are a long way from Kuwait Airways cleaning up and finalising what they have to do in terms of their own homework.

“Once this overhaul is completed, you never know. It depends on how much added value and what the balance sheet looks like. Jazeera is in a very strong position... We have 12,000 shareholders at Jazeera and these shareholders are interested in the aviation market in Kuwait as it has one of the highest returns on investment in Kuwait.

“To expand further into that sector all the shareholders would have the same appetite but it all depends on what kind of target you are looking at and how solid and strong the balance sheet is, and how solid an investment it is.”

Looking around the region, Jazeera is set for more competition in the coming years as Oman has announced it is considering launching up to two new airlines and one leading aviation analyst believes the region’s market could accommodate as many as four more low-cost carriers.

“Frankly I’m surprised it’s taken them [Oman] this long to announce such a move,” says Saj Ahmad, chief analyst at StrategicAero Research. “Oman is a hot destination right now and frankly, I thought they’d be setting up an LCC (low-cost carrier) back in 2009, right after FlyDubai debuted, but they didn’t.”

Ahmad says there is “capacity for at least another two to four LCCs in the GCC. Iraq, Iran, Jordan, Egypt, Bahrain, Qatar, Saudi — each one of those could do with at least one LCC,” be believes.

With cash in the bank, new aircraft joining the fleet and healthy returns on existing routes, we doubt Boodai is losing any sleep over the possible competition. And with profits ramping up at such a rapid rate, it’s hard to disagree with him.

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