Royal Jordanian Equity Report Royal Jordanian

Royal Jordanian
February 2010
Royal Jordanian Equity Report
February 9, 2010
Serene Zawaydeh
Head of Research
Awraq Investments
[email protected]
Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110 Jordan
Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110 Jordan
Royal Jordanian
February 2010
Table of Contents
Executive Summary ....................................................................................................................................... 1
Ownership Structure ..................................................................................................................................... 1
Valuation Results........................................................................................................................................... 2
Liberalization of Air Transport in Jordan ........................................................................................................ 3
Variables Affecting Royal Jordanian’s Operations .......................................................................................... 3
State of the Airline Industry ........................................................................................................................... 4
Airlines’ Profit and Loss ................................................................................................................................. 5
Royal Jordanian’s Operational Indicators ....................................................................................................... 6
Royal Jordanian’s Financials........................................................................................................................... 9
Revenues and Profit .................................................................................................................................. 9
Quarterly Results ....................................................................................................................................... 9
Geographical Distribution of Revenues .................................................................................................... 11
Revenues by Service ................................................................................................................................ 12
Cost of Sales ............................................................................................................................................ 13
Fuel Cost and Revenues ........................................................................................................................... 14
Fuel Hedging............................................................................................................................................ 15
EBITDA and EBITDAR ............................................................................................................................... 15
Balance Sheet .......................................................................................................................................... 16
Liquidity .................................................................................................................................................. 17
Deferred Revenues .................................................................................................................................. 18
Cash and Bank Balances........................................................................................................................... 18
Cash Flow ................................................................................................................................................ 19
Capital Expenditure ................................................................................................................................. 19
Cash Conversion Cycle ............................................................................................................................. 20
Stock Price................................................................................................................................................... 23
Valuation..................................................................................................................................................... 25
Disclaimer ................................................................................................................................................... 28
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Royal Jordanian
Jordanian
February 2010
Table of Figures
Figure 1: Ownership Structure ....................................................................................................................... 1
Figure 2: Royal Jordanian’s Indicators ............................................................................................................ 1
Figure 3: Airlines’ Profit and Loss in 2008....................................................................................................... 5
Figure 4: Royal Jordanian’s Passengers Growth and Yield .............................................................................. 6
Figure 5: Passenger Aircraft
Figure 6: Departures, Flying Hours and Aircraft Km .......................... 6
Figure 7: RPK, ASK, Seat Factor ...................................................................................................................... 7
Figure 8: Airlines’ Load Factor (2008) ............................................................................................................. 8
Figure 9: Royal Jordanian’s Cargo Growth ...................................................................................................... 8
Figure 10: Revenues, Net Profit (Loss), Net Profit Margin and Gross Profit Margin ......................................... 9
Figure 11: Quarterly Revenues, Net Profit and Cost of Operation ................................................................ 11
Figure 12: % Sales by Geographical Distribution........................................................................................... 11
Figure 13: Revenues by Service.................................................................................................................... 12
Figure 14: Operating Expenses .................................................................................................................... 13
Figure 15: Fuel Cost ..................................................................................................................................... 14
Figure 16: Fuel Cost % of Operating Expenses vs Fleet Size (2008) ............................................................... 14
Figure 17: EBITDA and EBITDAR .................................................................................................................. 15
Figure 18: Assets, Liabilities and Equity ........................................................................................................ 16
Figure 19: ROA and ROE .............................................................................................................................. 16
Figure 20: Current Ratio and Quick Ratio ..................................................................................................... 17
Figure 21: Current Ratio of Royal Jordanian versus Other Airlines (2008) ..................................................... 17
Figure 22: Current Assets, Liabilities, and Deferred Revenues ...................................................................... 18
Figure 23: Deferred Revenues vs Cash and Bank Balances ........................................................................... 18
Figure 24: Cash Flow from Operations, Investing and Financing Activities .................................................... 19
Figure 25: Capital Expenditure ..................................................................................................................... 19
Figure 26: Cash Conversion Cycle
Figure 27: Accounts Payable & Receivable ............................... 20
Figure 28: Delivery of Boeing 787 Dreamliner Planes ................................................................................... 21
Figure 29: Operating Leases......................................................................................................................... 21
Figure 30: Minimum Lease Payment under All Finance Leases (2004-2008) ................................................. 22
Figure 31: Interest on Finance Lease and Total Finance Cost ........................................................................ 22
Figure 32: Long Term Loans and Obligations under Finance Leases .............................................................. 22
Figure 33: Royal Jordanian’s Stock Price versus Amman Stock Exchange General Free Float Index ............... 23
Figure 34: Royal Jordanian’s Annual Low and High Stock Price ..................................................................... 23
Figure 35: Bloomberg World Airlines Index vs Royal Jordanian’s Stock Price ................................................ 24
Figure 36: Actual and Projected Earnings Per Share (2004-2019) ................................................................. 26
Figure 37: Sensitivity Analysis ...................................................................................................................... 26
Figure 38: Weighted Valuation .................................................................................................................... 26
Figure 39: Royal Jordanian Registered Aircraft at Jordan’s Civil Aviation Regulatory Commission (CARC) ..... 27
Figure 40: Foreign Registered Aircraft Operated by Royal Jordanian ............................................................ 27
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Royal Jordanian
February 2010
Executive Summary
Royal Jordanian (RJ)) is Jordan’s national carrier. It provides regular and
chartered air transportation of passengers, mail and freight within the
Kingdom and abroad. It also provides aircraft ground handling
services. Operations and flights take off from Queen Alia International
Airport. Its subsidiary, Royal Wings operates chartered flights, and
operates new routes not covered by Royal Jordanian.
Figure 1: Ownership Structure
Samer
Shawarah
1.973%
Abu Dhabi
Invstment
Co.
1.277%
Free Float
22.24%
Government
of Jordan
26%
Nasr
Mahmoud
1.628%
Saad Bunieh
1.869%
Miras for
Investment
2.361%
Social
Security
Corporation
10%
Royal Jordanian’s passengers
rs traffic reached 2.7 million out of 4.79
million passengers in all Jordanian airports, representing 56% market
share in 2008. It faces competition from other airlines in 25 out of 54
destinations, in addition to competition from low cost carriers in the
region.
Mint Trading
Middle East
Limited
19%
Armed Forces
Al Adaa for
Fund for
Shuaa
Investment & Investment
Capital
2.557%
Development
RJ
4.693%
Projects
Employees'
3%
Savings Fund
3.402%
Source: Securities Depository Center
Figure 2: Royal Jordanian’s Indicators
Stock Price (JD)
Number of Shares
Market Cap (JD m)
Ticker
RJAL JR
(Bloomberg)
52Wk L
52WK H
1.37
RJAL.AM
(Reuters)
Close
9--2-2010
1.89
2.46
84.373 million
115.591
207.558
159.465
Target Price JD 1.66
2008 A
2009 E
2010 E
Revenues (JD m)
702.69
598.30
658.13
Earnings (JD m)
(23.36)
30.55
27.64
EPS
(0.277)
0.362
0.32
0.328
P/E
NA
5.61
5.07
Sh. Equity (JD m)
77.92
103.43
108.61
BV per share (JD)
0.923
1.226
1.287
P/BV
1.70
1.656
1.29
Dividend Yield
0%
0%
0%
Source: Royal Jordanian, Bloomberg, Awraq Investments
Close (9-Feb-2010):
Target Price (LTFV):
Serene Zawaydeh
Head of Research
Awraq Investments
[email protected]
JD 1.89
JD 1.66
66
On February 5, 2010, Royal Jordanian’s exclusivity to operate routes to
international destinations out of Amman came to an end. The airline
was granted the exclusivity arrangement on April 1, 2002 by the Civil
Aviation Regulatory Commission (previously
(previ
Civil Aviation Authority).
It was amended and extended to another four years in 2007.
According to this agreement, RJ is committed to operate a daily flight
to Aqaba, which cannot be discontinued either by RJ or any carrier
operating on its behalf. Once
nce the agreement expires, other Jordanian
airlines will be able to fly from Amman to other international
destinations. Competing airlines will only be able to operate on routes
that are not occupied by Royal Jordanian, as it has “grandfather rights”
over these routes.
On April 1, 2007, Royal Jordanian joined the international airline
alliance “oneworld”.
”. This extended RJ’s network coverage to 700 cities
worldwide served by the alliance. RJ entered into marketing alliances
with international airlines through
ough a number of commercial
agreements to operate
te on the basis of code sharing, in which RJ’s code
appears on other airline flights where RJ does not operate directly; as
such it acts as marketing carrier.
Ownership Structure
Royal Jordanian has a paid up capital of JD 84.373 million since 2007.It
was fully owned by the government before being partially privatized in
2007. Following the Initial Public Offering issued in November 2007,
the government maintained a 29% share in the company. Currently
the government has 26% and the Armed Forces Fund for Investment
and Development Projects owns 3% of the company. The Social
Security has a 10% share which cannot be sold. RJ Employees Fund can
own up to 8%, but should not exceed JD 20 million. Mint Trading
Middle East Limited owns 19%. Other shareholders include Shuaa
Capital (4.693%), Abu Dhabi Investment Company (1.277%),
(1.277 while
individual investors have a 5.478% share. Free float stood at 22.24%
22.24
on February 8,, 2010. The IPO stipulates that Jordanian ownership is to
be maintained at 51% of the company. The investment promotion law
restricts the percent of foreign ownership in companies investing in
the airlines industry at a maximum of 49%.
Tel: 962-6-5503800 Fax: 962-6-4403801
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Page |1
Royal Jordanian
Jordanian
February 2010
The IPO offered shares at a price ranging between JD 2.75 and JD 3.4 per share. The IPO price was set at JD
3.08 per share. The shares started trading on December 17, 2007 at JD 3.14 per share.
Valuation Results
The airline industry was hard hit by the economic crisis, which resulted in a drop in passenger numbers. In
this report, we applied the Discounted Cash Flow model for 10 years, in addition to P/E and P/BV peer
valuation. The DCF model is very sensitive to fuel price fluctuations, which represent a major cost for the
airline. The company will be getting 8 Boeing 787 to replace Airbus planes at US$ 165 million each. Four will
be financed through operating lease and four through financial lease. Given this expansion plan, we
assumed that the company will be forced to increase its capital in order to fund the capital lease of 4 planes.
The weighted valuation yielded JD 1.66 per share. This is 12% below the share price on February 9, 2009
which closed at JD 1.89.
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Royal Jordanian
Jordanian
February 2010
Liberalization of Air Transport in Jordan
The civil aviation sector in Jordan has been gradually heading towards liberalization, which should be
completed by end of 20101. After 2010, the sector will become deregulated and all restrictions and
exclusivity agreements will be removed.
An “Open Sky” policy based on reciprocity will be implemented. According to the Civil Aviation Regulatory
Commission, Jordan has Open Sky agreement with USA since 1996. There are open sky agreements with 25
countries including: Lebanon, Yemen, Morocco, Algeria, Tunisia, Hong Kong, Thailand, Syria, UAE, Iraq,
Kuwait, Saudi Arabia, Bahrain, Oman, Azerbaijan, Kenya, Croatia, Belgium, and Palestine. Jordan is
negotiating implementation of open sky agreements with Europe.
Open sky includes free market competition with no restriction on international route rights, number of
designated airlines, capacity, frequencies and type of aircraft. Without open skies, the number of flights
from Jordan to a destination country can be limited, while other destination countries limit the number of
passengers transported by week.
In addition to the open sky agreements, Royal Jordanian’s exclusivity agreement came to an end in February
2010. Other Jordanian airlines will be able to compete with Royal Jordanian on slots available for Jordan for
destination countries. According to the Civil Aviation Regulatory Commission, Royal Jordanian will have
“grandfather rights”. In case it does not operate flights to serve all available slots, another airline will.
Variables Affecting Royal Jordanian’s Operations
The airline sector is a risky business. It is difficult to accurately forecast the performance of airlines, as many
variables are at play. The following factors affect the performance of Royal Jordanian and will shape its
future performance:
Volatility of fuel cost in 2008, which represents a primary cost for airlines.
Increased competition in Jordan after the implementation of the “Open Skies” agreements between
Jordan and other countries by end of 2011.
Competition from low cost carriers such as Air Arabia and Jazeera Airways.
The planned introduction of eight Boeing 787 planes to replace Airbus planes. This represents a
major investment for the company, as each costs US$ 165 million. There might be disruption to
service upon introduction of these planes and there could be unexpected costs.
Passenger traffic and revenues after the introduction of new Boeing 787 planes cannot be definitely
determined.
Competition from 5-star carriers such as Qatar Airways which provides luxurious services.
Scarcity of slots at main international airport. Joining oneworld alliance, however, expanded Royal
Jordanian’s network through Code Sharing with other airlines. Joining international alliances helps
the company reduce the operational costs related to fuel, insurance, ground handling, as well as
reducing the costs of purchasing aircraft, spare parts, and ground equipment.
Royal Jordanian is expected to benefit from the ongoing expansion of Queen Alia International
Airport (QAIA) on the long run. The project aims at enhancing QAIA as a regional hub. The US$ 700
million project, which is scheduled for completion in the first quarter of 2012, will increase the
airport’s capacity to 9 million passengers a year up from 4.5 million passengers in 2008. Capacity
could be increased further to 12 million passengers if required. The increase in passenger numbers
is expected to generate additional revenues for Royal Jordanian, which has around 60% of traffic at
1
http://www.mot.gov.jo/files/Jordan%20strategy%20final%20version.pdf
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Royal Jordanian
Jordanian
February 2010
the airport according to Airport International Group. The airline is also expected to have additional
revenues from ground services.
State of the Airline Industry
2
3
The global financial crisis led to a sizable drop in passenger traffic as well as cargo demand. The Middle
East region, however, recorded positive passenger growth rates in 2009 according to figures published
by IATA.
Airline accidents, diseases, wars and terrorist attacks, and natural disasters affect passenger confidence
and traffic.
Consolidation of the airline industry, with mergers and acquisitions between primary airlines. This is
creating fierce competition between major group alliances.
- Air France and KLM merged creating Air France –KLM.
- Lufthansa acquired Austrian Airlines and BMI, creating Lufthansa Group.
- Spanish Iberia acquired two Spanish low cost carriers.
- British Airways is planning to merge with Spanish Iberia, which could be completed in March 2010.
- American Airlines, British Airways, Iberia, along with Finnair and Royal Jordanian, filed an application
with the U.S. Department of Transportation (DOT) for global Antitrust Immunity (ATI). Antitrust
Immunity allows airlines to coordinate schedules, pricing, yield management, and other functions so
the public benefits from expanded and coordinated route networks and efficiencies.
Increased bankruptcies among airlines, the latest of which is Japan Airlines on January 19, 2010 with
$25.6 billion2 in debt.
Increased security procedures following terrorist attacks, which is driving delays and adding costs. The
passengers will be the ones to eventually pay for the added costs and have to bear the delays.
Airlines are governed by foreign ownership restrictions. For example, in the United States, foreign
carriers are not allowed to own more than 25% of U.S. airlines. 3 This is the case of Jordan as well.
http://www.usatoday.com/travel/flights/item.aspx?type=blog&ak=15707.blog
http://www.wired.com/autopia/2008/06/the-internation/
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Royal Jordanian
Jordanian
February 2010
Airlines’ Profit and Loss
IATA expects the total loss of the airline industry to be around US$ 5.6 billion in
n 2010, while maintaining its
forecast of US$ 11 billion net loss in 2009. According to IATA, between 2000 and 2009, airlines lost US$49.1
billion, which is an average of US$5.0 billion per year. 4
The following figure provides the net profit margin for publicly listed airlines in 2008. 58 airlines out of 109
publicly listed companies (53%) recorded net losses while 51 airlines (47%) recorded profit. Low cos
cost airlines
made profit. The low cost carrier, Air Arabia, had a net profit margin of 24.67%, the highest net profit margin
among a list of 109 publicly listed airlines. Ryanair had a net profit margin of 14.4%; Jazeera Airways (9.13%).
Royal Jordanian’s nett loss stood at 3.3% in 2008.
Figure 3: Airlines’ Profit and Loss in 2008
Profit Margin
30
20
10
-
% (10)
(20)
(30)
(40)
UAL CORP
DELTA AIR LI
GOL-PREF
SKYEUROPE HLDG
EVA AIRWAYS CORP
TAM SA-PREF
AUSTRIAN AIRLINE
CATHAY PAC AIR
AIRTRAN HOLDINGS
KUBAN AI-RTS BRD
ICELANDAIR GROUP
EUROFLY SPA
JET AIRWAYS IND
FINNAIR OYJ
ROYAL JORDANIAN
1TIME HOLDINGS L
KNAFAIM HOLDINGS
IBERIA
SIBERIA AIR-BRD
AEROFLOT-CLS
SOC TUNISIENNE A
MALAYSIAN AIRLIN
COMAIR LTD
SKYWEST INC
AIR PARTNER PLC
VIRGIN BLUE HLDG
EMERALD PACIFIC
AIR NEW ZEALAND
LAN AIRLINES
QANTAS AIRWAYS
REGIONAL EXPRESS
AIR ARABIA
SINGAPORE AIRLIN
(50)
Source: Bloomberg
4
http://www.iata.org/pressroom/pr/2009
http://www.iata.org/pressroom/pr/2009-12-15-01.htm
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Page | 5
Royal Jordanian
Jordanian
February 2010
Royal Jordanian’s Operational Indicators
Royal Jordanians’ passengers grew at a CAGR of 14% between 2003 and 2008. The highest growth rate in
passengers was in 2004, which reached 24% with the addition of 332,049 passengers compared to 2003.
Passengers increased
ased by 18% in 2007 recording 361,860 additions. In 2008, RJ’s passengers reached 2.7
million compared to 2.36 million in 2007.
According to the Civil Aviation Regulatory Commission, Royal Jordanian’ss market share as a percent of total
passengers in Jordanian airports stood at: 54.2% in 2004; 52.5% in 2005; 53% in 2006; 57.2% in 2007, and
56.3% in 2008.. The total number of passengers in Jordanian Airports increased at a CAGR of 10.6% between
2004 and 2008, increasing from 3.2 million in 2004 to reach 4.79 million in 2008.
The Yield per passenger increased from JD 209 in 2004 to JD 260 in 2008.The Yield is calculated by dividing
the total revenues by the number of passengers.
Figure 4: Royal Jordanian’s Passengers Growth and Yield
0
2004
2005
2006
230
2,366,459
2,004,599
1,000
1,821,329
2,000
223
260
300
200
JD
227
209
1,736,637
Passengers
3,000
Yield per Passenger
2,701,000
Passengers
100
-
2007
2008
Source: Royal Jordanian
Royal Jordanian’s Departures increased from 30,244 flights in 2007 to reach 34,285 in 2008. Aircraft
kilometers reached 64 million in 2008 up from 56 million in 2007 and 36 million in 2005. The total flying
hours increased from 88,378
8,378 in 2007 to reach 101,381 in 2008.
Figure 5: Passenger Aircraft
Figure 6: Departures, Flying Hours and Aircraft Km
Departures
Number of Passenger Aircaft at Year End
Flying hours
Aircraft Kilometers
16
1.62
20
22
25
20
15
1
10
1
5
-
0
2004
2005
Source: Royal Jordanian
2006
2007
120,000
100,000
80,000
60,000
40,000
20,000
0
64
52
44
56
36
2004
2005
2006
2007
2008
70
60
50
40
30
20
10
0
Millions (Aircraft Km)
2
22
25
34,285
101,381
2
30
2.58
30,244
88,378
2.55
55
25,661
77,374
2.61
20,777
68,883
2.76
3
19,148
66,004
Million
Aircraft Kilometer / Number of Aircrafts
3
2008
Source: Royal Jordanian
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Page | 6
Royal Jordanian
Jordanian
February 2010
The following exhibit shows a gradual increase in Revenue Passenger Kilometers (RPK) and Available Seat
Kilometers (ASK) and seat factor.
Revenue Passenger Kilometeers measures
asures actual passenger traffic. Royal Jordanian recorded double digit
growth of RPK in 2004 (19% growth)
growth);; and 2006 (10.3% growth); 2007 (17.4% growth); and 2008 (12.8%
growth).
Available Seat Kilometers measures
measur available passenger capacity. ASK increased by 10.5% and 10.4% in
2007 and 2008 respectively.
Passenger Load Factor (seats filled by passengers) is % of ASKs used. It increased from 71% in 2007 to
72% in 2008, compared to 66% in 2006. Royal Jordanian’s load factor declined to 65% in the first half of
2009, compared to 71% for the same period of 2008.
According to IATA5, the industry’s RPK dropped by 3.5% in 2009. However, Middle Eastern carriers recorded
the fastest growth in passenger traffic at the end of the year with a 19.1% increase in December (and 11.2%
growth for the entire year). According to IATA, these gains result from Middle Eastern carriers
carr
taking a larger
share of long-haul
haul connecting traffic over their hubs.
Figure 7: RPK, ASK, Seat Factor
Revenue Passenger Kilometer (000)
Available Seat Kilometer (000)
10,000,000
71%
2004
2005
6,544,573
9,275,978
2003
5,573,799
8,394,764
5,421,246
7,650,243
2002
66%
4,552,972
6,727,862
4,000,000
6,342,345
66%
4,204,865
68%
%
6,000,000
0
69%
5,054,256
7,930,866
8,000,000
2,000,000
71%
2006
2007
72%
7,380,092
10,244,395
Seat Factor %
12,000,000
74%
72%
70%
68%
66%
64%
62%
2008
Source: Royal Jordanian
The following exhibit provides the load factor for publicly listed airlines in 2008. Air Arabia
A
had the second
highest load factor, which stood at 85%. The average load factor is 75.61% for the considered airlines in
2008. Royal Jordanian’s
’s load factor is 3.61 percentage points below the average load factor for the
companies. According to IATA, the industry average
average load factor is 75.6% for 2009.
5
http://www.iata.org/pressroom/facts_figu
http://www.iata.org/pressroom/facts_figures/traffic_results/2010-01-27-01.htm
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Page | 7
Royal Jordanian
Jordanian
February 2010
Figure 8: Airlines’ Load Factor (2008)
80
75
70
65
56
90
85
87
85
84
83
82
82
82
81
81
81
81
81
81
81
81
81
80
80
80
80
80
80
79
79
79
78
78
77
77
76
76
75
75
75
74
74
74
73
73
73
73
73
72
72
71
71
70
69
69
68
67
64
62
Load Factor
60
55
43
50
45
ALLEGIANT TRAVEL
AIR ARABIA
EASYJET PLC
HAWAIIAN HOLDING
1TIME HOLDINGS L
RYANAIR HLDGS
US AIRWAYS GROUP
AIR CANADA-CL A
DELTA AIR LI
AIR NEW ZEALAND
UAL CORP
AIR FRANCE-KLM
CONTINENTAL AI-B
QANTAS AIRWAYS
AMR CORP
VIRGIN BLUE HLDG
JETBLUE AIRWAYS
SINGAPORE AIRLIN
WESTJET AIRLINES
IBERIA
AIRTRAN HOLDINGS
EVA AIRWAYS CORP
BRIT AIRWAYS PLC
DEUTSCHE LUFT-RG
CATHAY PAC AIR
AIR BERLIN PLC
SKYWEST INC
ALASKA AIR GROUP
SKYMARK AIRLINES
COPA HOLDIN-CL A
EXPRESSJET HLDGS
FINNAIR OYJ
AIRASIA BHD
AIR CHINA- A
AUSTRIAN AIRLINE
TURK HAVA YOLLAR
SKYEUROPE HLDG
PINNACLE AIRLINE
REPUBLIC AIRWAYS
SPICEJET LIMITED
AER LINGUS
JAZZ AIR INCOME
SAS AB
ROYAL JORDANIAN
ASIANA AIRLINES
SOUTHWEST AIR
KENYA AIRWAYS
JET AIRWAYS IND
JAPAN AIRLINES
MALAYSIAN AIRLIN
ALL NIPPON AIRWA
CHINA SOUTH A-H
CHINA EAST AIR-H
GULFSTREAM INTER
GREAT LAKES AVIA
40
Source: Bloomberg
Royal Jordanian’s Freight Growth
Cargo revenues and freight for RJ reached its lowest levels in 2007 compared to other years.
year The revenue
per kilogram of cargo declined from JD 0.81 on average in 2004, to reach JD 0.69 on average in 2007. This
indicates a decline in tariffs during this period. There was an increase in average revenue per kilogram of
cargo in 2008 to JD 0.72. This
his was accompanied by an increase in freight revenues from JD 37 million in 2007
to JD 41 million in 2008 up, while total freight increased from 53,665 tons in 2007 to 56,986 tons in 2008.
Figure 9:: Royal Jordanian’s Cargo Growth
Growt
65.989
0.81
60
million
50
59.498
0..77
53
56
56.986
53.665
0.80
0.78
0.76
0.76
46
40
56.790
0.82
43
41
0.72
30
0.74
0.72
37
0.69
0.70
0.68
20
JD (per Kg of Cargo)
70
Cargo Revenues (JD million)
Cargo (million Kg)
Revenue per Kg of Cargo
0.66
10
0.64
-
0.62
2004
2005
2006
2007
2008
Source: Royal Jordanian
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Page | 8
Royal Jordanian
Jordanian
February 2010
Royal Jordanian’s Financials
Revenues and Profit
Royal Jordanian’s revenues increased at a Compound Annual Growth Rate of 21% between 2003 and 2008,
increasing from JD 271 million in 2003 to reach JD 703 million in 2008. Revenues
Revenues recorded double digit
growth every year between 2004 and 2008, except for 2006 which grew by 8%. Revenues increased by 34%
in 2004 compared to 29% in 2008.
2008
The financial crisis had a double effect on Royal Jordanian’s financials. On the one hand, the drop in
economic activity and the decline in passenger traffic led a decline in revenues. On the other hand, the
decline in oil prices led to a decline in fuel expenses. Cost of Revenues declined from JD 509 million in the
first 9 months of 2008, to JD 408 million in the first 9 months of 2009. The gross profit margin improved
from 4% in the first 9 months of 2008 to 9% in the first 9 months of 2009. The
he highest recorded gross profit
margin was 10.2% in 2005.
Royal Jordanian had a net profit of JD 26 mill
million
ion in the first 9 months of 2009, compared to a net loss of JD
2.63 million in the first 9 months of 2008. Net profit margin improved to 3.69% in the first 9 months of 2009,
from
-3.77%
3.77% in the same period of 2008.
2008 Earnings per share dropped from JD 0.241 in 2007 to a loss of JD 0.277
in 2008. The highest net profit margin was recorded in the first 9 months of 2009 which reached 5.7%.
Earnings per share for the trailing 12 months ending September 2009 amounted to JD 0.057.
Figure 10:: Revenues, Net Profit (Loss), Net Profit Margin and Gross Profit Margin
Revenues
Net Income (Loss)
800
12.0%
%
10.20%
9%
7%
6%
600
JD million
Gross Profit Margin
9%
700
500
400
Net Profit Margin
4.2%
5.7%
5.0%
3%
3%
4%
3.7%
4.25%
4.0%
2.0%
1.4%
(100)
-9.75
2003
2004
2005
2006
2007
-23.36
2008
9M 2007
449
16.98
532
-3.3%
399
20
703
6
0.0%
-0.49
49%
545
21
447
15
413
-3.6%
363
271
200
-
8.0%
6.0%
4%
300
100
10.0%
26
-2.63
63
9M 2008
-2.0%
-4.0%
9M 2009
-6.0%
Source: Royal Jordanian
Quarterly Results
Seasonality has a positive role on Royal Jordanian’s revenues with increased activity during the summer. The
quarterly revenues were highest
hest in Q3 2008, with re
revenues
venues reaching JD 218 million. The company also had
the highest cost of operation in this quarter.
quarter Revenues for the third quarter of 2009 amounted to JD 175
million compared to JD 150 million in Q2 2009. The financial crisis had a negativee impact on revenues in the
first quarter of 2009. Revenues for Q1 2009 dropped to JD 124 million, which is the lowest level of quarterly
revenues recorded compared to other quarters in the period between Q3 2007 and Q3 2009. Net profit
improved from JD 16.3 million in Q2 2009 to JD 17.8 million in Q3 2009.
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Page | 9
Royal Jordanian
Jordanian
Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110
February 2010
Page | 10
Royal Jordanian
Jordanian
February 2010
-8.6
Q2 08
Q3 08
Q4 08
Q1 09
(100)
-4.4
171
Q1
Q 08
-20
138
Q4 07
218
0.25
146
3.4
Q3 07
138
153
135
175
17.8
162
143
124
140
176
0.39
139
193
150
16.3
174
163
19
100
200
300
Quarterly Revenues
Quarterly Net Profit (Loss)
Quarterly Cost of Operations
-
JD million
Figure 11:: Quarterly Revenues, Net Profit and Cost of Operation
Q2 09
Q3 09
Source: Royal Jordanian
Geographical Distribution of Revenues
Europe is the highest revenue generating region for Royal Jordanian.. In 2008, Europe generated JD 167.996
million, representingg 31% of total revenues from scheduled services and chartered flights
flights, which reached an
amount of JD 538.656 million. Its contribution of total revenues declined to 26% in the first 9 months of
2009 (JD 92.55 million). America generated 22% of revenues in 2008 (JD 119.789 million) and 21% during the
first 9 months of 2009 (JD
JD 73.661 million).
million) The Levant and Arab Gulf combined generated 33% of revenues in
2008 (JD 175 million) and 38% of revenues in the first 9 months of 2009 (JD 134.8 million). The number of
passengers by region is not available. However, it is expected that the traffic in the Gulf region is high
compared to traffic to Europe and US. However, the price of tickets is lower,
r, which reduces the contribution
of revenues from the gulf region out of total revenues.
Geographic Distribution
Figure 12: % Sales by Geographical
4%
9%
21%
19%
4%
10%
23%
16%
10%
22%
4%
17%
17%
24%
3%
10%
2008
31%
26%
20%
2007
15%
31%
15%
29%
12% 18% 8%
20%
11%
2006
Others
Africa
Asia
America
Arab Gulf
17%
2005
28%
14% 4%
21%
2004
17%
29%
15%
16% 3%
30%
32%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
19%
% Sales from Scheduled Services and Chartered Flights by Region
Europe
Levant
Middle East
9M 20089M 2009
Source: Royal Jordanian
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Page | 11
Royal Jordanian
Jordanian
February 2010
Revenues by Service
Passenger services represent the primary revenue generating segment. It constituted 69% of revenues in the
first 9 months of 2009 and has been hovering above 66%. Total revenues increased by 29% in 2008 and
every service registered positive growth during the year. Revenues from passenger services increased by
24%; revenues from excess baggage increased by 62%; and first class services grew by 38%. The comparison
of revenues for the first 9 months of 2009 and the same period of 2008, shows a decline in revenues growth
rates ranging from 13% for passenger services to 40% for excess baggage.
With the increase in fuel cost, collection of fuel fees increased. Fuel fees constituted only 0.2% of total
revenues in 2004, and increased to 16.8% in 2008 to reach JD 118.3 million as fuel prices reached over US$
140 before dropping at the end of the year with the onset of the financial crisis. In the first 9 months of
2009, revenues from fuel fees declined by 26% to reach JD 67 million compared to JD 91 million in 9M 2008.
The first class service registered an increase of 46% in the first 9 months of 2009 compared to 9M 2008. This
is the only segment which registered a positive growth rate compared to the other services during the
period. Royal Jordanian will continue offering first class service, even though revenues from this segment do
not constitute a significant percent of total revenues. This is what differentiates the airline from low cost
carriers.
Figure 13: Revenues by Service
Revenues (JD 000)
Passengers
% of Total
Cargo
% of Total
Revenues from Fuel Fees
% of Total
First Class Services
% of Total
Chartered Flights
% of Total
Air Mail
% of Total
Excess Baggage
% of Total
Other Revenues
% of Total
Total Revenues
2004
255,382
70%
53,299
14.7%
696
0.2%
541
0.1%
12,334
3.4%
2,643
0.7%
4,306
1.2%
33,639
9.3%
362,840
2005
285,913
69%
45,944
11.1%
22,171
5.4%
676
0.2%
14,758
3.6%
2,364
0.6%
4,413
1.1%
36,927
8.9%
413,166
2006
294,237
66%
43,326
9.7%
55,898
12.5%
792
0.2%
12,632
2.8%
2,851
0.6%
4,891
1.1%
32,422
7.3%
447,049
2007
378,545
69%
36,838
6.8%
78,949
14.5%
882
0.2%
13,175
2.4%
2,468
0.5%
5,073
0.9%
28,979
5.3%
544,909
2008
469,366
67%
41,297
5.9%
118,288
16.8%
1,219
0.2%
16,968
2.4%
2,787
0.4%
8,238
1.2%
44,528
6.3%
702,691
% Growth
(08 vs 07)
24%
12%
50%
38%
29%
13%
62%
54%
29%
9M 2008
356,974
67%
32,081
6.0%
91,128
17.1%
785
0.1%
13,591
2.6%
1,977
0.4%
7,039
1.3%
28,084
5.3%
531,659
9M 2009
311,749
69%
21,745
4.8%
67,090
15.0%
1,145
0.3%
11,129
2.5%
1,542
0.3%
4,209
0.9%
30,118
6.7%
448,727
% Growth
(9M09 vs 9M08)
-13%
-32%
-26%
46%
-18%
-22%
-40%
7%
-16%
Source: Royal Jordanian
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Page | 12
Royal Jordanian
Jordanian
February 2010
Cost of Sales
Operating expenses increased at a CAGR of 19% between
between 2004 and 2008, increasing from JD 329.9 million to
reach JD 672.6 million in 2008. Operating expenses accounted for 96% of revenues in 2008, compared to
91% in 2004.
The cost of flying
lying operations increased from JD 219 million in 2007 (constituting 43% of operating expenses)
to reach JD 351 million (52% of operating expenses). This accompanied the increase in fuel cost from JD 163
million in 2007 to reach JD 282 million in 2008. The company was fully owned by the government till 2007,
and therefore the
he cost of fuel could have been subsidized by the government, in addition to the lower cost
of fuel itself at that time as well as lower activity. Cost of passenger
nger services increased by around 10 million
between 2007 and 2008 to reach JD 57
57.6 million. Thee following figures provide an overview of operating
expenses.
Figure 14: Operating Expenses
2005
143,877
39%
49,013
13%
36,933
10%
19,041
5%
33,420
9%
7,628
2%
36,132
10%
44,969
12%
371,013
90%
2006
186,162
43%
50,972
12%
48,273
11%
19,113
4%
35,004
8%
7,744
2%
40,712
9%
46,132
11%
434,112
97%
2007
219,454
43%
64,615
13%
58,257
11%
14,509
3%
38,954
8%
9,696
2%
47,800
9%
56,307
11%
509,592
94%
2008
351,072
52%
71,408
11%
56,234
8%
16,486
2%
46,756
7%
12,876
2%
57,639
9%
60,098
9%
672,569
96%
Fuel Cost
Repair and Maintenance
Flying Operations Excluding Fuel Cost
Sales, Advertising and Promotion
Passenger Services
Aircrafts Rental Expenses
Stations and Ground Services
Ground Handling Unit
Depreciation of Aircrafts and Engines
Total Operating Expenses
CAGR
(2004-2008)
34%
8%
0%
14%
9%
9%
19%
673
510
434
2007
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962-6-4403801 P. O. Box 925102 Amman 11110
71
69
60
58
56
47
13
16
163
2006
65
56
56
48
58
39
10
15
2005
141
2004
282
371
51
45
46
41
48
35
8
19
330
101
49
43
45
36
37
33
8
19
800
700
600
500
400
300
200
100
0
2004
108,613
33%
52,981
16%
33,360
10%
16,488
5%
34,424
10%
7,625
2%
34,159
10%
42,274
13%
329,924
91%
67
53
42
42
34
33
34
8
16
JD Million
Operating Expenses (JD 000)
Flying Operations (including Fuel Cost)
% of Operating Expenses
Repair and Maintenance
% of Operating Expenses
Aircrafts Rental Expenses
% of Operating Expenses
Depreciation of Aircrafts and Engines
% of Operating Expenses
Stations and Ground Services
% of Operating Expenses
Ground Handling Unit
% of Operating Expenses
Passenger Services
% of Operating Expenses
Sales, Advertising and Promotion
% of Operating Expenses
Total Operating Expenses
Operating Expenses as % of Revenues
2008
Page | 13
Royal Jordanian
Jordanian
February 2010
Source: Royal Jordanian
Fuel Cost and Revenues
Fuel cost accounted for 42% of operating expenses in 2008, up from 32% in 2007 and 20% in 2004. The
increase in fuel fees did not cover the added cost of fuel, and the gap between fuel cost and revenue
increased reaching JD 164 million in 2008, compared to JD 66 million in 2004.
Fuel Cost
Revenues from Fuel Fees
Fuel Cost - Revenues from Fuel Fees
Fuel Cost as % of Operating Expenses
200
32%
32%
2005
163
42%
164
84
40%
20%
79
2004
85
56
101
22
0
79
67
0.70
100
141
27%
20%
66
60%
118
300
282
JD million
Figure 15: Fuel Cost
0%
2006
2007
2008
Source: Royal Jordanian
The following exhibit provides a comparison of fuel fees as % of operating expenses for different publicly
listed airlines versus the fleet size for 2008.. The figure shows that Royal Jordanian lies at the high
h end of the
spectrum and its fuel cost as % of operating
ng expenses is among the highest compared to other airlines.
Figure 16:: Fuel Cost % of Operating Expenses vs Fleet Size (2008)
1,200
Size of Fleet
60
Fuel Percent of Operating Expenses (2008)
(
ALLEGIANT TRAVEL 51.2
1,000
50
1,023
ROYAL JORDANIAN 42.0
JETBLUE AIRWAYS 41.2
SKYWEST INC 37.7
7
800
COPA HOLDIN-CL
HOLDIN A 38.0
Fleet Size
UAL CORP 35.5
DELTA AIR LI 38.0
AMR CORP SOUTHWEST AIR
35.1
35.1
600
ALASKA AIR GROUP 37.3
37
40
HAWAIIAN HOLDING 36.2
US AIRWAYS GROUP 33.3
IBERIA 30.1
1
CONTINENTAL AI-B 31.9
626
30
REPUBLIC AIRWAYS 26.8
AIR BERLIN PLC 25.5
BRIT AIRWAYS PLC 26.1
537
400
RYANAIR HLDGS 36.4
AIR ARABIA 40.5
FINNAIR OYJ 24.3
442
20
409
EXPRESSJET HLDGS 16.4
Fuel % of Operating Expenses
AIRTRAN HOLDINGS 45.5
354 350
200
244 245
221
163
10
PINNACLE AIRLINE 6.1
142 142 136 125
110 119
-
65
0
5
10
15
Source: Bloomberg, Royal Jordanian
Tel: 962-6-5503800
5503800 Fax: 962
962-6-4403801 P. O. Box 925102 Amman 11110
42
38
20
33
25
16
25
Page | 14
Royal Jordanian
Jordanian
February 2010
Fuel Hedging
Fuel hedging is common in the airline industry due to the need to protect against bottom line fluctuations.
fluctuation
In 2008, Royal Jordanian hedged 35% of its fuel consumption in 2008 and 2009 at an average price of US$
105 per barrel, when the price was US$ 100 to 150 per barrel.. Indicators at that time were that the prices
will continue to rise to reach around US$ 170 to US$ 200 per barrel. Price variations in fuel purchases in
2008 were absorbed, and the company
ompany realized a net profit of JD18.7 million before tax. However, due to
the rapid and unexpected decline iin oil prices, reaching as low as US$ 45 a barrel by the end of 2008, Royal
Jordanian’s 2009 outstanding hedging contracts were re-valuated
valuated and unrealized losses of around JD46.7
million were recorded. This was reflected into losses in 2008 results which reached
reached JD 23.4 million. 6
EBITDA and EBITDAR
Airlines report Earnings before Interest, Tax, depreciation, Amortization and Rent (EBTIDAR),
(EBTIDAR) which accounts
for aircraft rental expenses. The airline
a
rental expenses,, which represent operating lease contracts, were
highest in 2007 and reached JD 58.257 million, then declined to JD 56.234 million in 2008. EBITDAR dropped
from JD 104.9 million in 2007 (EBITDAR margin of 19%) to JD 54.9 million in 2008 (EBITDAR margin of 8%).
EBITDA dropped from JD 47 million in 2007 with EBITDA margin of 9%, to reach negative territory in 2008.
The highest EBITDA was in 2005 (JD 48 million) with EBITDA margin of 12%.
Figure 17: EBITDA and EBITDAR
EBITDAR
EBITDA Margin
Aircraft Rental Expense
120
11%
15%
47
48.27
9%
2004
2005
2006
10%
5%
(20)
8%
-1.33
20
33.36
39
48
40
7%
20%
55
56.23
82
12%
%
36.93
60
85
80
19%
58.26
18%
105
20
20%
20%
34
100
25%
73
JD million s
EBITDA
EBITDAR Margin
2007
-0.2%
0%
2008
-5%
Source: Royal Jordanian
6
Royal Jordanian’s Annual Report 2008
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Page | 15
Royal Jordanian
Jordanian
February 2010
Balance Sheet
The company’s assets have been grow
growing steadily. Total Assets increased from JD 374 million in 2008 to JD
386 million at the end of September 2009. Total liabilities increased by 24% in 2007 and 31% in 2008 to
reach JD 296 million at the end of 2008. Liabilities declined to JD 283 million in
n September 2009.
Shareholders’ Equity amounted to JD 109 million in 2007. Equity dropped from JD 107 million at the end of
September 2008 to reach JD 78 million at the end of 2008, since the company recorded a net loss for the
year. The Shareholders’ Equity
ty stood at JD 103 milli
million
on at the end of September 2009, which represented
27% of assets.
Figure 18: Assets, Liabilities and Equity
103
221
276
283
374
383
386
Assets
107
2006
78
2005
109
267
179
250
167
89
100
83
200
179
238
300
330
400
59
JD million
Liabilities
296
Shareholders' Equity
500
Sep-08
Sep-09
2004
2007
2008
Source: Royal Jordanian
The company had a return on average equity of 35% in 2004, which dropped to -25%
in 2008. The return on
average equity improved from 0.7% based on the trailing 12 months earnings ending September 2008, to 5%
for the trailing 12 months ending September 2009.
Figure 19: ROA and ROE
0.2%
0.7%
1.3%
5%
2005
6.8%
2004
2.4%
7%
8.4%
10.0%
6.6%
30.0%
20.0%
Return on Average Equity
21%
40.0%
29%
35%
Return on Average Assets
Sep-08
Sep-09
09
0.0%
-20.0%
-30.0%
2006
2007
-25%
-6.6%
-10.0%
2008
Source: Royal Jordanian
New Loan
In September 2009, Royal Jordanian obtained a US$ 35 million loan from Jordan Kuwait Bank to complete
the construction of its head office in Amman and to finance some of its operations.
operations
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Page | 16
Royal Jordanian
Jordanian
February 2010
Liquidity
Royal Jordanian has a liquidity challenge. The current ratio (Current Assets/ Current Liabilities) is below 1
and the company has negative working capital (Current Assets -Current Liabilities). This means that the
company could face problems in meeting its short term obligations. The company doesn't have enough
short term assets to cover its short term liabilities. The current ratio dropped from 78% at the end of 2004
to 44% in 2008, then slightly increased to 51% at the end of September 2009. At the end of September 2009,
current assets amounted to JD 112 million while current Liabilities reached JD 218 million. Current assets
stood at JD 97 million compared to JD 222 million current liabilities at the end of 2008. The quick ratio is also
below 1. The quick ratio dropped from 75% in 2004 to reach 41% in 2008, and stood at 49% at the end of
September 2009.
Figure 20: Current Ratio and Quick Ratio
Current Ratio
70%
78%
76%
75%
73%
Quick Ratio
73%
64%
57%
69%
44%
62%
50%
54%
41%
30%
2004
2005
2006
2007
2008
51%
49%
Sept 08 Sept 09
Source: Royal Jordanian
Royal Jordanian’s current ratio is low compared to other airlines. The following figure provides the current
ratio for Royal Jordanian versus other publicly listed airlines at the end of 2008. Air Arabia had the highest
current ratio (4.34) in 2008. 24 airlines out of 55 considered had a current ratio above 1; and 49 airlines
(89%) had a current ratio higher than 50%. Only 6 airlines (11%) had a current ratio lower than 50%.
Figure 21: Current Ratio of Royal Jordanian versus Other Airlines (2008)
1.68
1.64
1.60
1.57
1.56
1.53
1.42
1.38
1.38
1.36
1.25
1.25
1.25
1.23
1.19
1.11
1.09
1.04
1.03
1.03
1.00
1.00
0.98
0.97
0.96
0.89
0.89
0.89
0.88
0.87
0.84
0.82
0.81
0.80
0.79
0.76
0.74
0.74
0.67
0.66
0.65
0.64
0.63
0.62
0.58
0.54
0.52
0.44
0.39
0.30
0.24
0.22
0.19
3.16
4.34
Current Ratio
AIR ARABIA
SKYWEST INC
EXPRESSJET HLDGS
ALLEGIANT TRAVEL
TURK HAVA YOLLAR
KENYA AIRWAYS
EASYJET PLC
RYANAIR HLDGS
SINGAPORE AIRLIN
MALAYSIAN AIRLIN
IBERIA
AER LINGUS
WESTJET AIRLINES
JAZZ AIR INCOME
AIR NEW ZEALAND
JAPAN AIRLINES
GREAT LAKES AVIA
ALASKA AIR GROUP
AIRASIA BHD
REPUBLIC AIRWAYS
SOUTHWEST AIR
COPA HOLDIN-CL A
AIR FRANCE-KLM
SKYMARK AIRLINES
SAS AB
CONTINENTAL AI-B
PINNACLE AIRLINE
HAWAIIAN…
BRIT AIRWAYS PLC
JETBLUE AIRWAYS
VIRGIN BLUE HLDG
ALL NIPPON AIRWA
DEUTSCHE LUFT-RG
AIRTRAN HOLDINGS
DELTA AIR LI
CATHAY PAC AIR
US AIRWAYS GROUP
SPICEJET LIMITED
FINNAIR OYJ
QANTAS AIRWAYS
UAL CORP
AIR BERLIN PLC
JET AIRWAYS IND
AUSTRIAN AIRLINE
AMR CORP
AIR CANADA-CL A
1TIME HOLDINGS L
GULFSTREAM INTER
EVA AIRWAYS CORP
ROYAL JORDANIAN
SKYEUROPE HLDG
ASIANA AIRLINES
AIR CHINA- A
CHINA SOUTH A-H
CHINA EAST AIR-H
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Source: Bloomberg
Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110
Page | 17
Royal Jordanian
Jordanian
February 2010
Deferred Revenues
Revenues from sales of tickets are recorded in the company’s income statement when utilized. Tickets
bought in advance are recorded as Deferred Revenues in current liabilities until they are utilized. The
company’s deferred revenues stood at JD 48.701 million in September 2009, compared to JD 41 mil
million in
2008. Deferred
rred revenues are among the reasons which drive negative working capital.
capital In order to neutralize
the effect of deferred revenues, we calculated the current ratio while deducting Deferred Re
Revenues from
Current Liabilities. The current rati
ratio
o after deduction of deferred revenues improved for the period between
2004 and 2006. However, it dropped back to 54% in 2008 and 66% at the end of September 2009.
Figure 22: Current Assets, Liabilities, and Deferred Revenues
Current Assets
Current Liabilities
Current Liabilities - Deferred Revenues
Current Assets/ Current Liabilities excluding Deferred Revenues
104%
218
66%
169
54%
100%
112
110
172
125
97
134
94
85
112
87
91
116
91
78
100
46%
150%
88%
222
181
98%
97
99%
200
184
169
JD million
300
-
50%
0%
2003
2004
2005
2006
2007
2008
9M 2009
Source: Royal Jordanian, Awraq Investments
Cash and Bank Balances
Cash and bank balances were highest at the end of 2007, and amounted to JD 46.57 million,
million accounting for
8.5% of revenues. There was a drop in cash in the last quarter of 2008. It stood at JD
J 45 million at the end of
September 2008, then declined to JD 25 million at the end of 2008 accounting for 3.5% of revenues. Cash
increased to JD 35.808 million at the end of September 2009,
2009, representing 5.8% of revenues.
revenues The company
does not currently keep
ep all deferred revenues in cash. Deferred revenues were 1.65 times cash at the end of
2008 and 1.36 times at the end of September 2009. Deferred revenues almost matched cash and bank
balances in 2007 and 2006, while prior to 2006, cash was higher.
Figure 23: Deferred Revenues vs Cash and Bank Balances
Cash and Bank Balances
60
Deferred Revenues/ Cash
50
136
136%
48.701
35.808
100%
41.090
24.837
99%
150%
101%
46.927
46.570
73%
40.068
40.593
10
68%
24.956
34.048
20
73%
24.371
35.847
40
30
200%
165%
14.750
20.120
JD million
Deferred Revenues
0
50%
0%
2003
2004
2005
2006
2007
2008
Sept 09
Source: Royal Jordanian
Tel: 962-6-5503800
5503800 Fax: 962
962-6-4403801 P. O. Box 925102 Amman 11110
Page | 18
Royal Jordanian
Jordanian
February 2010
Cash Flow
Royal Jordanian has positive cash flow from operations. Operating cash flow was highest in 2007, as it
reached JD 69 million, and accounted for 12.7% of revenues.
revenues. It dropped by 55% in 2008 to reach JD 31
million,, accounting for 4.4% of revenues
revenues.. In the first 9 months of 2009, operating cash flow stood at JD 28
million and accounted for 5.2% of revenues. Cash flow used in financing activities amounted to JD 38 million
mill
in 2008. The company had positive cash flow from financing activities in September 2009 which amounted
to JD 242,000. Cash flow from investing activities was JD 17.01 million for the first 9 months of 2009
compared to 26.67 million for the same period in 2008.
Figure 24: Cash Flow from Operations, Investing and Financing Activities
Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Flow from (used in) Financing Activities
Cash Flow from Operating Activities / Revenues
100
15%
41 9.1%
34 8.6%
31
5.2%
-
2006
-26.67
-9.564
2005
-25.66
-38
2004
-24.50
-14
-20.20
-13
-21.97
-13.20
-26
4.4%
(50)
10%
28
2007
2008
Sept 08
0.242
9.5%
33 9.2% 39
-17.01
50
0.53
JD million
69 12.7%
5%
0%
Sept 09
Source: Royal Jordanian
Capital Expenditure
Capital expenditure amounted to JD 32 million in 2008, compared to JD 28 million in 2007 (based on figures
published in 2008). It amounted to JD 27 million in the first 9 months of 2008, accounting for 5% of
revenues. It dropped to JD 18 million in first 9 months of 2009 (4% of revenues).. The company’s head office
construction is included in CAPEX. The company will be purchasing four Boeing planes based on financial
lease, with CAPEX incurring after
fter 2015.
2015 In 2006, CAPEX included payment prior to delivery of 4 Embraer
planes, and
nd down payments for Boeing 787. The company pays up to 20% of the cost of the aircraft prior to
delivery.
Figure 25: Capital Expenditure
JD million
CAPEX
CAPEX / Revenues
40
30
20
8%
6%
5%
16
19
6%
24
5
5%
28 5%
32
4%
23
6%
27 5%
4% 4%
18
10
2%
0
0%
2003
2004
2005
2006
2007
2008
Sept 08 Sept 09
Source: Royal Jordanian
Tel: 962-6-5503800
5503800 Fax: 962
962-6-4403801 P. O. Box 925102 Amman 11110
Page | 19
Royal Jordanian
Jordanian
February 2010
Cash Conversion Cycle
2009.. The delay for paying suppliers
The cash conversion cycle declined from 22 days in 2004 to 15 days in 2009
declined with accounts
ccounts payable turnover
turno
days dropping from 27 in 2007 to 9 in 2008. Collection from clients
improved, with accounts receivable days
da declining from 29 in 2007 to 21 in 2008
2008. Inventory days declined
from 3.3 in 2007 to 2.6 in 2008.
Figure 26: Cash Conversion Cycle
40
30
22 25
18
20
10
4.3
Accouts Receivable Days
Inventory Days
Accounts Receivable
29 27
24
23
21
15
15
3.9
3.5 5
9
3.3
2.6
2004
2005
Accounts Payable
2006
Source: Royal Jordanian, Awraq Investments
2007
87
100
80
60
40
20
0
JD million
50
Cash Conversion Cycle
Accounts Payable Days
43
37
36
Figure 27:: Accounts Payable & Receivable
2008
63 61 69
43 41 42 46
84
40
81
43
2003 2004 2005 2006 2007 2008
Source: Royal Jordanian
Fleet
Royal Jordanian’s fleet consisted
sisted of 25 planes at the end of 2008. It included 7 long haul planes (3 Airbus 310
and 4 Airbus 340); 15 Medium/ short Haul planes (4 Airbus 320, 4 Airbus 321, 4 Embraer
Embr
195, and 3 Fokker
F-28). The airline has 2 Air Cargo
go Planes (A310). Royal Wings operates
ates one A320 since 2007. In March 2008,
RJ received the first A319 out of four planes. In May 2008, it introduced A321 to replace another one.
During the first half of 2008, the last two - out of seven- Embraer 175s were delivered. (A list of the airline’s
licensed aircraft according to the Civil Aviation Regulatory Commission is available in the Appendix).
The airline plans to operate 7 different sizes of passenger aircraft by 2012 from 3 producers: Airbus, Boeing
Bo
and Embraer. For long haul, the company
company plans to operate 2 Airbus 310, in addition to 6 Boeing 787 planes.
The company plans to have 22 Medium/ Short haul planes: 4 Airbus A321, 6 Airbus A319, 5 Airbus A320, 5
Embraer 195, 2 Embraer 175. The airline plans to continue operating cargo plane Air
Airbus A310 till 2014.
Introduction of Boeing 787 Aircraft
Royal Jordanian has the board’s approval for introducing up to 12 Boeing 787 planes to replace aging Airbus
planes. Delivery of these planes was originally planned to start by end of 2010. However,
Howeve in April 2008,
Royal Jordanian announced that the delivery of the planes will be delayed. According to the new schedule,
Royal Jordanian
an will receive two Boeing 787 Dreamliner planes in June 2013 with the operating lease from
ILFC. The company will receive another
an
two planes in 2015, with operating lease from CIT. In 2016, it will
receive four planes from Boeing, under financial lease arrangement.
The introduction of Boeing 787 requires a major investment on the part of Royal Jordanian. The estimated
cost of each Boeing 787 planes is US$165
US$1 million (JD 117 million),, and the cost might be higher after
production. This brings the total cost of 8 Boeing 787 planes to US$ 1.32 billion (JD 937 million) excluding
financing charges.
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Page | 20
Royal Jordanian
Jordanian
February 2010
Figure 28: Delivery of Boeing 787 Dreamliner Planes
Number
of Planes
Type of Contract
Original
Delivery Date
Delay in Months
Estimated
Delivery Date
Boeing
2
Buy (Capital Lease)
End 2013
27
March 2016
Boeing
2
Buy (Capital Lease)
Beginning 2014
28
May 2016
ILFC
1
Operating Lease
End 2010
30
Jun 2013
ILFC
1
Operating Lease
Beginning 2011
30
Jun 2013
CIT
1
Operating Lease
End 2012
27
March 2015
CIT
1
Operating Lease
Beginning 2013
28
Jun 2015
Manufacturer
Leasing Company
Source: Royal Jordanian Disclosure
losure dated 29-4-2008
29
Operating Leases
Airlines use Operating leases and Finance (or Capital) leases to finance aircraft. Royal Jordanian has
operating lease agreements for four Airbus A-320,
A
four Airbus A-321,
321, four Airbus A
A-340, one Airbus A-319
and three Embraer E-195.
195. The operating lease is similar to “renting”
“
these planess for a limited period. The
airline will be getting 4 Boeing
ng 787 planes based on Operating Leases.
s. Two planes are expected to join the
fleet in 2013 and another two in 2015.
Figure 29: Operating Leases
Total Operating Leases
JD million
80
58.257
60
40
48.273
33.360
36.933
2004
2005
56.234
20
0
2006
2007
2008
Source: Royal Jordanian
Capital Lease (Finance Lease)
Unlike operating leases through which the company “rents” the asset, ffinance
inance leases can end up with
ownership
wnership of the asset. The present value of ffuture
uture lease payments is included in the liabilities and assets
(not the actual finance lease payments). The
he minimum lease payments including interest,
int
increased from JD
43 million in 2007 to reach JD 72.3 million in 2008. The interest component increased from
f
JD 11.3 million in
2007 to JD 14.37 million in 2008. The company will be getting 4 new Boeing 787 planes in 2016 based on
Capital lease.
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Page | 21
Royal Jordanian
Jordanian
February 2010
Figure 30: Minimum Lease Payment under All Finance Leases (2004-2008)
(
Minimum Lease Payment (Including Interest)
80
JD million
60
Interest Component
72.316
42.948
40
28.396
19.353
20
8.873
-1.627
-
-11.322
-0.146
-0.793
793
-14.375
(20)
2004
2005
2006
2007
2008
Source: Royal Jordanian
st amounted to JD 4.13 million in 2008. Interest on finance lease accounted for 52% of
The total finance cost
total finance cost in 2008, up from 20% in 2007. The total finance cost was highest in 2004, as it stood at JD
5.25 million, with interest on finance leases accounting for 61% of this cost
cost. Long term loans and obligations
under finance leases increased from JD 46.735 million in 2007 to reach JD 64.057 million.
Figure 31: Interest
nterest on Finance Lease and Total Finance Cost
4,131
20%
60%
40%
2,140
22%
1,107
3,206
1,406
31%
2,000
52%
4,108
61%
842
4,000
4,464
5,251
JD million
6,000
5,036
Total Finance Cost
Interest on Finance Lease
Interest on Finance Lease / Total Finance Cost
80%
0
20%
0%
2004
2005
2006
2007
2008
Source: Royal Jordanian
Figure 32: Long Term Loans and Obligations under Finance Leases
JD million
Long Term Loans and Obligations Under Finance Leases
80
64.057
60
40
20
46.735
18.601
10.103
0
0.585
0
2004
2005
2006
2007
2008
Source: Royal Jordanian
Tel: 962-6-5503800
5503800 Fax: 962
962-6-4403801 P. O. Box 925102 Amman 11110
Page | 22
Royal Jordanian
Jordanian
February 2010
Stock Price
Royal Jordanian’s share started trading on Amman Stock Exchange on December 17, 2007. The share was
most volatile in 2008, peaking at JD 4.02 on March 16, 2008, yet ending the year at JD 1.57. Since the
beginning of the global financial crisis, the share reached new lows in 2009, reaching JD 1.37 on August 19,
2009. It closed 2009 at JD 2.03. In January 2010, the share price improved and reached JD 2.46, a level not
recorded during 2009. It declined to JD 1.86 on February 3, 2010. Royal Jordanian’s share is highly correlated
to Amman Stock Exchange General Free Float index, with the correlation of 92% for the period between
December 17, 2007 and February 8, 2010.
Figure 33: Royal Jordanian’s Stock Price versus Amman Stock Exchange General Free Float Index
Royal Jordanian Stock Price
Amman Stock Exchange General Index
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
6000
5000
4000
3000
2000
1000
12/17/2007
1/9/2008
2/1/2008
2/24/2008
3/18/2008
4/10/2008
5/3/2008
5/26/2008
6/18/2008
7/11/2008
8/3/2008
8/26/2008
9/18/2008
10/11/2008
11/3/2008
11/26/2008
12/19/2008
1/11/2009
2/3/2009
2/26/2009
3/21/2009
4/13/2009
5/6/2009
5/29/2009
6/21/2009
7/14/2009
8/6/2009
8/29/2009
9/21/2009
10/14/2009
11/6/2009
11/29/2009
12/22/2009
1/14/2010
2/6/2010
0
Source: Bloomberg
Figure 34: Royal Jordanian’s Annual Low and High Stock Price
Royal Jordanian (RJAL JR)
Annual Low and High Stock Price
4.5
4
3.5
3
4.02
3.14
3.00
2.5
2
1.5
1
0.5
0
2.35
1.57
2007
2008
2.46
1.86
1.37
2009
Till Feb 8, 2010
Source: Bloomberg
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Page | 23
Royal Jordanian
Jordanian
February 2010
The following figure tracks Bloomberg World Airlines Index. The index peaked on October 12, 2007, reaching
129 points. It dropped to 40.21 points on February 25, 2009. This clearly shows the effect of the financial
crisis on the airline industry’s stock prices. The index was sliding during 2008 which accompanied the
volatility in fuel prices. The index includes 30 airlines in different continents. These include Air France-KLM,
Deutsche Lufthansa, British Airways, Air China, Southwest Airlines, Delta Airlines, Iberia, Japan Airlines, and
others. The correlation between Royal Jordanian’s stock price and this index is 72% for the period between
December 17, 2007 and February , 2009.
Figure 35: Bloomberg World Airlines Index vs Royal Jordanian’s Stock Price
Bloomberg World Airlines Index
Royal Jordanian Stock Price
140
4.5
120
4.0
3.5
100
2.5
60
2.0
JD
3.0
80
1.5
40
1.0
0.5
0
0.0
12/18/2007
1/10/2008
2/2/2008
2/25/2008
3/19/2008
4/11/2008
5/4/2008
5/27/2008
6/19/2008
7/12/2008
8/4/2008
8/27/2008
9/19/2008
10/12/2008
11/4/2008
11/27/2008
12/20/2008
1/12/2009
2/4/2009
2/27/2009
3/22/2009
4/14/2009
5/7/2009
5/30/2009
6/22/2009
7/15/2009
8/7/2009
8/30/2009
9/22/2009
10/15/2009
11/7/2009
11/30/2009
12/23/2009
1/15/2010
2/7/2010
20
Source: Bloomberg
Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110
Page | 24
Royal Jordanian
Jordanian
February 2010
Valuation
We applied the Discounted Cash Flow Model with 10 year projections in addition to P/E, P/BV valuations.
The peer analysis is usually used in valuating airlines, including EV/EBITDAR. However, we did not include it
in the analysis, as EBITDAR measurement does not replace the actual profitability of the company and there
might be differences in calculations between different airlines. The Discounted Cash Flow model is not
commonly used in valuing companies within the airline industry, given its strong sensitivity to macro
economic and geopolitical factors.
Peer Valuation
In order to choose the peers for Royal Jordanian, we took into consideration the fleet size of the airlines
compared to Royal Jordanian’s. The airline industry is undergoing a major merger activity between primary
companies, which created entities much bigger than Royal Jordanian. Global airlines own several hundred
planes, while Royal Jordanian had 25 planes in 2008. We used the following airlines in the peer valuation: Air
Arabia, Jazeera Airways, Kuwait National Airlines, Finnair, Hawaiian, Copa Holding, and Alaska Air Group. We
included Air Arabia and Jazeera Airways although they are low cost carriers, as they are close competitors
for Royal Jordanian in the region.
The book value for the considered airlines is as of September 2009. The share prices are as of February 7,
2010. The peers have a P/BV multiple of 1.31x. The projected Book Value per share for Royal Jordanian is
JD 1.29 for 2009. This yields JD 1.68 per share for Royal Jordanian based on the P/BV valuation.
The P/E valuation is based on the trailing 12 months earnings per share, and we have excluded the
companies having negative EPS. The average P/E for the peers is 9.72. The projected EPS for Royal Jordanian
is JD 0.362 for 2009. This yields JD 3.52 per share based on the P/E valuation.
Discounted Cash Flow Model
The Discounted Cash Flow model is based on 10 year projections till 2019. We took into consideration the
introduction of 8 new Boeing 787 planes, four of which will be financed through Operating Lease and four
through Capital Lease. The following points were included in the DCF model:
We assumed the introduction of new planes would attract passengers and will positively reflect on
revenues. The revenues are estimated to grow at a CAGR of 9% between 2010 and 2019.
The company should pay 20% of the cost of the planes before delivery. We assumed that the company
would double its capital in 2014 to JD 168 million, by issuing JD 84 million shares at JD 1 per share. This
is in order to finance the capital lease for 4 Boeing 787 planes which are expected to be delivered in
2016. If the company doesn’t increase its capital, it would have to finance this payment though debt,
which would increase the debt ratio and the cost of financing.
Assumed there will be additional CAPEX in 2016, equivalent to 20% of the cost of 4 Boeing planes, based
on a price of US$ 165 million for each plane.
The Cost of Debt is assumed to increase gradually from 5% in 2010 to reach 9% by 2018.
The outstanding debt at the beginning of 2010 is assumed to be around JD 90 million. The company
obtained a loan from Jordan Kuwait Bank in September 2009, in order to fund the construction of its
new head office. Prior to this loan, the company used its operating cash flow to fund the construction
project. Repayment of the loan will be over 5 years starting 2011, as the company has 2 years grace
period.
We took into consideration the repayment of outstanding debt and financial leases for the currently
leased aircraft.
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Page | 25
Royal Jordanian
Jordanian
February 2010
The
he following figure provides Awraq Investments’ projected Earnings per Share for Royal Jordanian.
Jordanian The
estimated earnings per share for 2009
200 are JD 0.36, as the
he company reported net profit of JD 28 million for
the first 11 months of 2009.
Figure 36:: Actual and Projected Earnings Per Share (2004-2019)
(2004
EPS
0.50
0.40
0.30
0.36
0.31
0.25
0.33
0.36
0.40
0.35
0.26
24
0.24
0.20
0.10
0.07
07 0.07 0.07
0.05 0.07
0.12
(0.10)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
(0.20)
(0.30)
(0.28)
(0.40)
Note: 2004-2008
2008 Figures are Actual. 2009-2019
2009
are Awraq Investments Estimates
Source: Royal Jordanian (Actual), Awraq Investments (Projections)
We applied a weight of 25%
% to the Free Cash Flow to Equity, Free Cash Flow to Firm, P/E and P/BV valuation
methods. The following sensitivity analysis provides the overall weighted
eighted valuation result after changing the
Cost of Equity,, WACC and the terminal growth rate. The share price is below JD 2 for all assumptions.
Figure 38: Weighted Valuation
Valuation
Method
Weight
FCFE
25%
FCFF
25%
P/E
25%
P/BV
25%
Valuation
100%
Stock Price RJAL
9-2-2010
(Valuation – Stock Price) %
Valuation
1.03
0.41
3.52
1.68
Weighted
Valuation
0.26
0.10
0.88
0.42
1.66
1.89
-12.2%
Figure 37:: Sensitivity Analysis
Ke
10.0% 11.0%
WACC 7.38% 7.78%
1.5%
1.76
1.72
Terminal
2.0%
1.79
1.75
Growth
2.5%
1.82
1.77
Rate
3.0%
1.86
1.81
12.0%
8.18%
1.69
1.66
1.73
1.76
13.0%
8.58%
1.66
1.68
1.70
1.72
Source: Awraq Investments
Cost of Equity (12%),, WACC of 8.18%, Terminal Growth Rate 2%
Source: Awraq Investments
The share is sensitive to the macro economic and political environments exacerbated by the ongoing global
financial crisis, the effects of which are unfolding in the MENA region. The company will have a major
investment in its fleet and plans to introduce 8 Boeing 787 planes, which will require financing. The
passenger demand is not certain after this investment.
investm
The long term fair value for Royal Jordanian is based on Cost of Equity of 12%; Cost of Debt of 6.6%;
Weighted Average Cost of Capital of 8.18% with 60% debt to assets ratio and 40% equity to assets ratio; and
terminal growth rate of 2%. Our The target price of JD 1.66 is 12.2%
% below the share price of Royal
Jordanian, which closed at JD 1.89
1.8 per share on February 9, 2010.
Tel: 962-6-5503800
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Page | 26
Royal Jordanian
Jordanian
February 2010
Appendix
Figure 39: Royal Jordanian Registered Aircraft at Jordan’s Civil Aviation Regulatory Commission (CARC)
Manufacturer
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Airbus
Embraer
Embraer
Embraer
Embraer
Embraer
Airbus
Airbus
Airbus
Embraer
Embraer
Airbus
Airbus
Airbus
Royal Wings
Manufacturer
Airbus
Source: CARC
Model
A310-304
A310-304
A310-304
A310-304
A310-304
A320-232
A320-232
A340-212
A340-212
A340-212
A340-212
A321-231
A321-231
ERJ 190-200 IGW
ERJ 190-200 IGW
ERJ 190-200 IGW
ERJ 190-200 IGW
ERJ 190-200 IGW
A319-132
A321-231
A321-231
ERJ 170-200 LR
ERJ 170-200 LR
A319-132
A319-132
A319-132
Reg. Date
11/12/2007
13/12/2007
1/12/2004
1/12/2002
4/2/2002
29/11/2005
24/02/2006
16/07/2002
9/8/2002
5/7/2007
3/7/2007
25/04/2006
20/06/2006
30/11/2006
2/2/2007
28/06/2007
21/09/2007
30/11/2007
13/03/2008
9/4/2008
20/05/2008
30/05/2008
27/06/2008
29/10/2008
20/02/2009
13/03/2009
Model
A320-212
Reg. Date
22/02/07
Royal Jordanian’s Leased Aircraft Approved by CARC
Following are foreign registered aircraft operated by Royal Jordanian Airlines under dry lease agreements and
approved by CARC. Safety oversight functions of these aircraft are shared between CARC and the French General
Directorate of Civil Aviation under MOU accepted by both parties. French General Directorate of Civil Aviation is the
responsible for issuing the Certificate of Registration, Certificate of Airworthiness and the Airworthiness Review
Certificate.
Figure 40: Foreign Registered Aircraft Operated by Royal Jordanian
Manufacturer
Airbus
Airbus
Airbus
Airbus
Source: CARC
Model
A320-232
A320-232
A321-211
A321-211
Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110
Page | 27
Royal Jordanian
Jordanian
February 2010
Disclaimer
Awraq Investments and its affiliates obtain information from sources they believe to be reliable, but do not
warrant its accuracy or fitness for a particular purpose, and disclaim for themselves and their information
providers all liability arising from the use.
The Information in this publication is provided in good faith for informational purposes only. The
information provided is not offered as tax, legal, or investment advice, or an offer to buy or sell securities or
otherwise. The information provided in this publication may be displayed and printed for your personal,
non-commercial use only. You may not reproduce, re-transmit, distribute, disseminate, sell, publish,
broadcast, or circulate the information in any form or media to anyone, without the expressed written
consent of Awraq Investments.
Awraq Investments is not liable for any loss resulting from any action taken or reliance made by any person
on any information or material posted by it. You should make your own inquiries and seek independent
advice from relevant industry professionals before acting or relying on any information or material made
available to you in this publication. You rely on this information at your own risk.
Awraq Investments, its subsidiaries, parent, and/or any connected parties, may act or trade and/or enter
into any transaction that maybe inconsistent or disregard any information contained herein.
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Page | 28