Untitled - Jazeera Airways

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Global Research - Kuwait
Global Investment House
Kuwait Economic Overview
Kuwait’s economy is estimated to have registered a real growth rate of 10.2% in 2006,
followed by an estimated 10% growth rate in 2007. Kuwait’s nominal GDP grew by
20.8% to reach KD29.6bn in 2006 and estimated to maintain the same growth pattern in
2007. Nominal GDP registered a CAGR of 22.6% during the five year period 2001-06. Per
capita GDP has improved from KD8,183 (US$29,664) in 2005 to KD9,291 (US$33,679)
in 2006, an increase of 13.5%. The strong performance of the Kuwait economy in recent
years has been primarily due to high oil prices and increased oil production levels. The
average export price of Kuwait crude oil increased from US$58.8/b in 2006 to US$66.4/
b in 2007, a rise of 12.8%.
Oil and gas sector continues to dominate the GDP as its share increased from 52.6%
in 2005 to 55% in 2006. The sector has registered a CAGR of 28.8% during the fiveyear period 2001-06. The output of this sector increased from KD12.87bn in 2005 to
KD16.26bn in 2006, registering a growth of 26.4%. Only a significant decline in oil
prices in coming years, however unexpected, may slow down the economic expansion.
This may be a possibility in the event of slowing down of world demand, easing of
geopolitical tensions and slowdown in economic growth of major economies.
During the course of 2006 and 2007, oil prices remained linked to geopolitical factors and
tensions in the Middle East coupled with uncertainty towards world supply/demand. As
a result, prices remained firm as a host of political, natural and technical factors pushed
prices to unprecedented levels above the US$90/b mark. Oil prices recorded new highs
reaching US$100/b by the end of Nov. 2007. Market data showed Brent crude for Feb.
settlement trading at a record level of US$97.84/b. Such prices were recorded in spite of
OPEC’s efforts to stabilize oil prices in the global market. On the Kuwaiti front, Kuwait
Export Crude (KEC) price registered a new record high during the month of Nov. 2007
to reach US$89.03/b on Nov. 26th, according to Kuwait Petroleum Corporation.
For the fiscal year 2006/07 (Apr’06 to Mar’07), there was an actual surplus of KD5.2bn
i.e. 17.6% of GDP, as against budgeted deficit of KD2.6bn. This was the seventh year in
a row to report actual surplus. Government actual revenues stood at KD15.51bn, thereby
surpassing the budgeted figure by a remarkable 182%. This was on the back of huge
increase in oil revenues, which was KD14.51bn as against budgeted figure of KD7.74bn,
an upside of 187.6%. Oil revenues constituted 93.6% of total revenues in 2006/07. The
assumed oil price in 2006/07 budget was a conservative US$36/b, whereas actual export
price of Kuwait crude averaged US$57.98/b for the same period.
The rising interest rates in recent years have not been able to douse liquidity to a great
extent. Money supply -as measured by M2- followed an increasing trend during the year
2006 to grow at a monthly average of 1.67%. The year 2006 witnessed M2 declining
only for the months of June and July when it declined by 1% and 1.5% respectively. It is
important to note that, on annual basis M2 reported the highest annual growth of 21.7%
for 2006 as compared with 12.1% and 12.3% for 2004 and 2005 respectively. In 2007,
M2 continued its upward trend during the year despite the three marginal troughs reported
during Jan., Aug. and Dec.. By the end of Dec. 2007, money supply expanded rapidly by
19.26% to stand at KD19bn as compared with KD15.92bn recorded in Dec. 2006.
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Jazeera Airways
On the external sector front, Kuwait is an open economy witnessing many ongoing
developments in its trade relations whether on the bilateral front or within GCC frame.
Such developments had lots of positive impact on the performance of its external sector
especially after the accomplishment of the Free Trade Area (FTA) with GCC. Thus, the
trend of higher exports seems to be continuing and supported by higher oil prices and
higher quantity of non-oil exports. By the end of 2006, exports reached their highest
level ever to stand at KD16.17bn, recording a growth of 23.4% as compared to 2005.
Not surprisingly, oil products topped all exports with 95.4% share standing at a new
landmark of KD15.43bn. Non-oil exports have also continued to grow to a new landmark
of KD736mn, or 3.8% growth over 2005. As for imports, 2006 witnessed a marginal
increase of 0.3% to a new landmark of KD4.63bn. The above trade flow has pushed trade
surplus to a new level of KD11.54bn or 35.9% above 2005.
As for the Balance of Payment (BOP), Kuwait reported surplus standing at a new landmark
of KD1.04bn by the end of 2006. That was the third surplus in a row as compared to
KD165mn of surplus reported during 2005. The reason for the surplus could be traced
back to the substantial increase in goods and services trade surplus by more than 41%
climbing to KD11.94bn up from KD8.42bn recorded in 2005. As a consequence of goods
and services surplus growth, current account surplus increased to reach KD14.84bn in
2006, a growth of 48.2% over 2005.
On the economic diversification front, Kuwait as well as other GCC countries faces the
major challenge of diversifying the economy away from the oil sector. In this regard,
sectors such as real estate, financial services, trade, telecom and tourism will rise as
important contributors to the economy. In Kuwait, tourism is one of the sectors having
such potential especially with the new geo-political conditions that have resulted from
the fall of the former Iraqi regime. Since 2002, the hospitality sector has emerged to the
forefront of rapidly expanding segments. There was a flood of hotel guests to Kuwait,
driving up prices to record levels. Further, scrapping visa requirements upon arrival for
34 nationalities is expected to fuel business trips to Kuwait as well as tourism.
The government has also shown its intent on fully supporting tourism in Kuwait,
launching a number of tourist projects that could place Kuwait on the regional tourism
radar, such as the Failaka Island Development Project. Moreover, the government is
also working on developing a 20-years strategic tourism development plan. Such plan
aims to attract a portion of the outbound Gulf tourism, as well as business tourism and
representatives of international companies.
For a detailed discussion on the Kuwait Economy, please refer to our “Kuwait Economic &
Strategic Outlook ”.
Jazeera Airways
February 2008
Middle East Aviation Industry
The Middle East economies, particularly GCC economies have been expanding at
double digit growth rates on the back of high oil prices, which created unprecedented
levels of liquidity in the region. Average real GDP growth for the GCC economies over
the past three years was 5.8%, while average nominal GDP growth was 14%. With no
region wide railways network, the economic boom in the region have fuelled the growth
in air traffic leading to a buzz in the airline business with increasing numbers of new
airline operators, and the expansion of existing operators. At the 2007 Paris Air-show,
the Middle East accounted for almost 50% of the world’s aircraft orders amounting to
US$50bn. Similarly, the latest Dubai Air-show 2007 have witnessed record breaking
aircraft sales orders exceeding US$100bn, which is five-fold increase compared to the
previous Air-show held in 2005.
Industry Performance
The Middle East region has been the most vibrant region in the airline industry recently,
being the fastest growing region in terms of passenger growth, Revenue Passenger
Kilometer (RPK), and Available Seat Kilometer (ASK). The Middle East has been
by far the leader in terms of passenger growth for the past three years, riding on the
back of strong economic growth, fleet expansions, and new routes. According to the
International Air Transport Association (IATA), the Middle East region witnessed a
growth of 18.1% in passenger traffic during 2007 compared to 7.4% growth in global
international traffic.
Chart 02: Passenger growth by region
18.1%
19.0%
13.0%
15.4%
13.1%
9.9%
11.4%
8.6% 8.0% 8.9%
7.0%
5.7% 5.5%
6.3%
7.3%
5.3%
8.4%
6.4%
5.3%
6.0%
7.6%
5.9%
7.4%
al
lo
b
er
m
G
ic
a
e
op
-2.4%
2006
La
t
in
A
Pa
sia
A
A
m
N
2005
Eu
r
ci
fic
a
er
ic
a
fri
c
A
or
th
id
M
-5.0%
dl
eE
as
t
1.0%
2007
Source: IATA
In terms of demand and supply, measured by RPK and ASK, the Middle East region was
also the leader in terms of RPK, and ASK growth, reporting a y-o-y growth of 18.1%
and 14.5% respectively during 2007 as compared to the industry’s RPK and ASK growth
of 7.4%, and 6.2% respectively. Africa also reported above-industry growth, reporting
RPK, and ASK growth of 8% and 7% respectively.
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Chart 03: RPK and ASK growth by region ( 2007 vs. 2006)
20.0%
18.1%
14.5%
15.0%
10.0%
8.0%
7.0%
5.0%
0.0%
Middle East
Africa
7.3%
8.4%
5.7%
Asia/Pacific
6.0%
9.1%
Europe
RPK Growth
7.4%
5.5%
5.2%
4.6%
Latin America North America
6.2%
Industry
ASK Growth
Source: IATA
During 2007, the industry’s average passenger load factors have continued their
improving trends across all regions. The industry’s average passenger load factor stood
at 77% in 2007, increasing by one percentage point from the 2006 level. The Middle East
region registered the highest growth in load factors, increasing by 2.5 percentage points
to reach 75.9% in 2007 compared to 73.4% in 2006, indicating the region’s accelerating
growth trend.
%
Chart 04: Passenger load factor by region
82
80
78
76
74
72
70
68
66
64
62
Africa
Asia/Pacific
Europe
Latin America
Middle East
North America
2005
2006
2007
Industry
Source: IATA
However, though the Middle East region reported the highest improvement in load
factors, it is still lower than the industry’s average load factor of 77% in 2007, and lower
than other developed regions such as North America and Europe which reported load
factors of 80.9% and 77.5% respectively in 2007.
Jazeera Airways
February 2008
Industry Drivers
Central Location…
The Middle East enjoys a unique central location on the world map making it a perfect
connecting point between several destinations in the world. In addition, according to the
Centre for Asia Pacific Aviation, the latest long-range aircraft technologies, with ranges
of up to 8,000 nautical miles, make it possible to fly long-haul non-stop from the Middle
East to anywhere in the world. Besides this long haul traffic advantage, the region also
have a short-haul traffic potential being within a narrow body aircraft range of some of
the key emerging and fastest growing markets in the world, such as China and India.
Chart 05: Middle East location on the world map
Source: Google
Population & Demographics…
Population in the MENA region has been growing at a fast pace during recent years
with an average growth rate of 2.3% beating the world’s average growth rate of 1.3%.
The GCC region in particular has been reporting some of the highest growth rates in the
region in line with their booming economies. The developments in the region’s business
environment have attracted foreign businesses into the region and led to the inflow
of experienced professionals into the region. In addition, the booming real estate and
construction sector attracted a larger number of low wage blue-collar expatriate workforce.
Expatriates in GCC countries account for more than 30% of the total population with the
highest percentage of expatriates witnessed in the UAE and Kuwait where expatriate
workforce formed around 78%, and 67% respectively of the total population. This large
percentage of expatriates have boded well for the “Visit Friends and Relatives” (VFR)
travel. In addition, the region’s population is dominated by the young and mobile with
around 37% of the population in the age group of 15 to 35.
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Jazeera Airways
Chart 06: MENA population growth rates (2006)
UAE
Kuwait
Oman
GCC
Iraq
Jordan
Qatar
Libya
MENA
Syria
Saudi Arabia
Egypt
Morocco
Bahrain
World
Algeria
Lebanon
Tunisia
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
%
Source: US Census Bureau, Global Research.
Tourism and Traffic…
The tourism sector in GCC has been showing healthy performance in recent years.
Although political issues in the Middle East have been constantly perceived as a detriment
to growth, its effect has been minimal as tourism has been increasing at higher rates
lately. According to the World Tourism Organization (WTO), the year 2007 exceeded
the expectations for international tourism with arrivals reaching new record figures close
to 900mn, with the Middle East leading the regional growth ranking (+13%), followed
by Asia and the Pacific (+10%), Africa (+8%), the Americas (+5%) and Europe (+4%).
The Middle East totaled 46mn international tourist arrivals in 2007, with Saudi Arabia
and Egypt among the leading destinations in terms of growth in 2007. According to
WTO, the region continues to be one of the tourism success stories, despite ongoing
tensions and threats. The UNWTO’s Tourism 2020 Vision forecasts East Asia and the
Pacific, Asia, the Middle East and Africa to record growth at rates of over 5% annually,
compared to the world average of 4.1%.
As for the GCC region, tourism is growing at rapid rates whether it’s leisure, cultural,
religious, or business tourism. To accommodate the increasing flow of business as
well as leisure travelers, as many as 80 new hotels are being developed in the GCC.
According to market sources, over 25,000 rooms and suites are estimated be added to the
existing stock by 2008. The boom in tourism was mainly due to increased international
demand and a healthy intra-regional market, coupled with an inflow of investments
that are further developing the tourism sector in the region and adding to its capacity.
Around US$272bn worth of tourism projects are expected to be completed in GCC by
2018 according to Zawya. The UAE alone accounts for around 86% of these projects
(US$233bn), while Oman accounts for 6%, Qatar (3%), Bahrain (2.1%), Saudi Arabia
(1.6%) and Kuwait (1.3%).
Airport Expansions…
Middle East Airports’ showed strong performance in 2006 according to Airport Council
International (ACI) with Dubai, Kuwait and Bahrain reporting double-digit passenger
traffic growth, and Dubai taking the lion’s share of passenger traffic.
Jazeera Airways
February 2008
Chart 07: Middle East Airport Traffic Share (2006)
Other
15%
Dubai
22%
Muscat
4%
Hurgada
4%
Sharm Al-Sheikh
4%
Abu Dhabi
4%
Kuwait
5%
Bahrain
5%
Cairo
8%
Jeddah
10%
Doha
10%
Riyadh
9%
Source: Center for Asia Pacific Aviation & ACI.
To handle the surge in passenger traffic numbers, many countries have announced plans
to expand their airport capacities with an estimated US$60bn planned and ongoing airport
expansion projects in the MENA region, with around 60% (US$37bn) of these projects
concentrated in the Middle East region alone. Major projects currently underway in the
Gulf include the US$8.2bn Dubai World International Airport at Jebel Ali, the US$6.8bn
expansion of Abu Dhabi International Airport, the US$5.5bn New Doha International
Airport in Qatar and the US$11.3bn upgrade of King Abdul Aziz, Madinah and Tabuk
airports in Saudi Arabia. Airport expansions in Bahrain, Kuwait, and Oman amount to
US$4.5bn collectively. In Africa, US$3bn has been earmarked to expand Libya’s Tripoli
International Airport and build five new airports, US$850mn will be spent on airport
projects in Egypt including Cairo International Airport.
mn
Chart 08: Passenger Traffic in Arab Airports
160
140
120
100
80
60
40
20
0
94.3
101.1
105.4
125.3
133.5
144.5
20.0%
15.0%
10.0%
5.0%
2001
2002
2003
2004
Passenger Traffic
2005
2006
0.0%
Growth
Source: Arab Air Carriers Organization (AACO)
Fleet expansions…
According to IATA , new aircraft orders recorded the second highest total in history in
2006, reaching a total of 1,834 orders for Boeing and Airbus compared to total orders
of 2,057 in 2005, representing the highest number of aircraft orders in history. As a
percentage of the total, Middle East aircraft carriers will be adding new aircraft faster
than the rest of the world during the next five years, with a five-year total growth of
37.4% compared to the world’s total of 31%.
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Table 01: Aircraft Deliveries as a % of 2006 Fleet
Total
2007
2008
2009
2010
2011
TBD*
Africa
14.9
4.1
1.4
2.7
1.7
2.9
2.3
Asia
58.8
10.5
10.8
10.1
9.2
17.2
1.0
Australasia
33.0
2.7
8.8
5.3
4.1
12.1
0.0
Europe
25.1
6.3
6.5
5.1
3.5
3.4
0.3
Latin America
28.6
7.2
6.9
3.5
4.1
5.8
1.2
Middle East
37.4
5.4
6.9
5.9
4.8
10.7
3.7
North America
20.0
3.7
4.3
3.6
2.8
5.3
0.3
World
31.0
5.9
6.3
5.3
4.3
7.2
1.9
Source: IATA
* TBD= Delivery date yet to be decided
Liberalization and Deregulation…
In most countries of the region, the airline industry was mainly monopolized by a single
domestic airline usually owned by the government. However, most have realized the
need for change in order to capture the growth opportunities in the region and improve
their competitiveness. In some markets, the process of privatization was rapid. In Jordan,
the government decided to float over 59 million shares of its stake in Royal Jordanian,
the flag carrier, in an initial public offering, which represents up to 71% of the company’s
capital. Similarly, in Egypt, Egypt Air is preparing for a 20% float in the short term. In
other markets such as Saudi Arabia and Kuwait with no privatization plans for their flag
carriers in the short term, their governments have started to liberalize the market through
the relaxation of entry for other private lower cost carriers (LCCs) forcing their flag
airlines to improve their efficiency.
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Jazeera Airways
February 2008
The Low-Cost Model
The LCC model started more than 36 years ago when Southwest Airlines started its
services in the US with the first flight taking off in June 1971. Southwest Airlines is now
one of the most profitable airlines in the world. The company’s success attracted interest
in the LCC concept across the world. LCC now commands approximately 30% market
share of the domestic USA traffic. In Europe, the LCC phenomenon spread much later
with Ryan Air in 1985. The LCC concept continued to spread throughout the world with
West Jet in Canada in 1996, Virgin Blue in Australia in 2000, GOL in Brazil in 2001,
Air Asia in Malaysia in 2001, and recently Air Arabia introduced the LCC concept into
the Middle East in 2003. The Middle East region has been witnessing the entrance of
several LCCs such as Air Arabia in the UAE, Jazeera Airways in Kuwait, Nas Air and
Sama Airlines in Saudi Arabia. In Bahrain, a second national carrier, Bahrain Air, has
recently started its operations as the first privately owned premium low-priced carrier
in 2008. The introduction of new LCCs in the region is expected to expand the market
further and increase traffic since they target a new segment of passengers that was not
used to flying frequently.
Table 02: Middle East LCC operators
Airline
Founded
Fleet size
Hubs
Destinations
Air Arabia
2003
11 (34 on order)
Sharjah / Morocco/ Nepal
37
Jazeera Airways
2004
6 ( 34 on order)
Kuwait / Dubai
23
Nas Air
2007
9
Riyadh/ Jeddah
23
Sama Airlines
2007
7
Dammam
19
Bahrain Air
2007
3
Bahrain
13
Source: Companies data, Global Research
LCC Business Model…
The key to delivering low fares is maintaining low costs. The typical low cost carrier
business model is characterized by the practices that enable LCCs to cut costs vis-àvis conventional carriers. These characteristics are heavily geared towards cutting
unnecessary costs related to labor, aircraft and fuel, infrastructure, distribution and seat
density adjustments. Attaining low cost requires high efficiency in every part of the
business and maintaining simplicity. The typical components of a low coast carrier are:
1. High aircraft utilization. Aircraft is kept flying as much as possible. The first flight
starts early in the morning and the final flight typically ends at midnight. A fast
turnaround is critical to ensure that the time spent on the ground is minimal.
2. No frills. The underlying business for a LCC is to get a person from point A to point
B. Everything else is considered to be luxury item or “frill”, which can be acquired
for a small fee. These include:
•
•
•
•
•
No free food & beverages
Free seating
Ticketless booking
No refund
No loyalty program
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3. Streamline operations. Making the process as simple as possible through:
• Single type of aircraft. Pilots, flight attendants, mechanics and operations personnel
are specialized in a single type of aircraft, which means, that there is no need for
costly re-training of staff.
• Single class seating.
• Standard Operating Procedures (SOPs). SOPs are important to ensure same level of
competence among all the staff.
4. Secondary airports. Low cost carriers normally fly to and from secondary airports
which are cheaper than other major airports and less congested ensuring fast
turnaround.
5. Point to point network. Almost all flights are short-haul.
6. Lean distribution system. Conventional carriers rely on travel agents and sales offices,
while LCCs keep their distribution channel as simple as possible. LCCs cater to their
customers mainly through internet and credit card sales. LCCs avoid reliance on
travel agent which reduces the commissions that would otherwise have been reflected
in the fares. Also, they do not use, nor participate in the world wide reservation
systems and thus save costs.
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February 2008
Middle East Airlines Profiles
Kuwait
Kuwait Airways Corporation (KAC)
The state-owned Kuwait Airways Corporation (KAC) was founded in 1954 using
Kuwait’s International Airport as a main hub. Following the destruction of its premises
and 15 of its aircraft during the Iraqi invasion of Kuwait, the airline was re-launched.
Kuwait Airways fleet now comprises 3 A320-200s, 3 A310-300s, 5 A300-605Rs, 4
A340-300s and 2 Boeing B777s, bringing the fleet total number to 17 aircraft flying to
over 40 destinations. The company has been incurring heavy losses for the past 16 years.
KAC posted a loss of over US$80mn in 2006, for the 15th time in the past 16 years.
Its accumulated losses to date since the 1990 invasion are nearly US$1.8bn. KAC has
encountered many hardships lately, with the resignation of its board and the cancellation
of a US$3bn order for 19 new aircraft, following the parliament’s refusal to fund the
deal. The company’s management have been consistently urging for the privatization
of the company which would allow for greater flexibility to operate in a financially
feasible manner. On the reform front, the airline recently introduced an internet booking
system, which should minimize distribution costs. Also, the Kuwaiti parliament recently
approved the privatization of the company, which would release over 70% of KAC
stocks to the public.
Kuwait National Airlines Company (Wataniya Airways)
The National Airline Company (Al-Watania) is the third airline in Kuwait. The
company is founded by Kuwait Projects Company Holding (KIPCO), the KIPCO Asset
Management Company (KAMCO), Hamad al-Wazzan Group, al-Hassawi Group and
Fouad al-Ghanem Group. In 2006, Kipco Asset Management Company (Kamco) offered
350mn shares in Kuwait National Airlines Company at a price of 103 Fils per share, the
equivalent of 70% of the company’s capital of KD50mn. The company recently signed
an agreement with Kuwait’s Alafco Aviation Lease & Finance Co. in order to lease three
Airbus A320-200 aircraft. Wataniya Airways is expected to start operations in 2009.
UAE
Emirates Airlines
Founded in 1985, Emirates Airline, Dubai’s state-owned airline has a fleet of 50 Airbus
and 46 Boeing aircraft, as of 2007, flying to over 100 destinations. The airline emerged
from a local to a global airline when it made the world’s largest order of 55 Airbus A380
super-jumbo aircraft in 2005 (in addition to two cargo A380 aircraft), which represented
one third of worldwide orders for the aircraft. The airline placed an order for 42 Boeing
777 aircraft in 2005 and added 5 more, due to the delayed delivery of the A380s. Recently,
the airline placed the largest single-day aircraft orders at the latest Dubai Airshow valued
at US$35bn, ordering 120 Airbus A350s, 11 A380s and 12 Boeing 777-300ERs on the
opening day. The airline recorded revenues of AED28.6bn (US$7.8bn) and profits of
February 2008
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13
AED3.1bn (US$844mn), for the fiscal year ending Mar. 2007. The airline set its highest
record of traffic in 2006, transporting 17.5mn passengers. Emirates Airlines has 56
branches in the Middle East, Europe, the US, Africa, Asia and Australia, as of Mar.
2007. The airline forecasts that its fleet will comprise 156 aircraft by 2010, serving 101
destinations and carrying 26mn passengers.
Etihad Airways
Etihad Airways was set up by a Royal decree in July 2003, with Abu Dhabi, the capital
of the UAE, as its hub. Etihad started commercial operations in Nov. 2003. The airline
witnessed impressive growth flying to over 45 destinations within its first 4 years
of operation. Etihad carried 4.6mn passengers in 2007, a growth of 66% over 2006
passengers of 2.8mn. The airline had a fleet of 37 aircraft as of 2007. Recently, Etihad
Airways announced it will start flights to four more cities in India as part of the carrier’s
plans to tap the booming air travel into the South Asian country. By 2010, Etihad plans
a 50-aircraft fleet serving 70 cities from Abu Dhabi.
Air Arabia
Air Arabia was established in 2003 as the region’s first low-cost carrier. It broke even
after one year of operations. The company’s shares were listed on DFM in July, 2007.
Three years after its launch, Air Arabia crossed the 2mn passengers. Operating out of
Sharjah International Airport, the airline’s first flights were to Bahrain, Lebanon, Syria,
Kuwait and Oman. In May 2006, the airline flew for the first time to India, Afghanistan,
Turkey, Nepal as well as Armenia and increased its fleet size by 9 aircraft. Currently, the
company has 11 aircraft (A320) flying to 34 destinations in 16 countries. The company
has 34 aircraft on order with an option for an additional 15 aircraft to be delivered until
2013.
Saudi Arabia
Saudi Arabian Airlines
Saudi Arabian Airlines is the national airline of Saudi Arabia, based in Jeddah. Other
major hubs are Riyadh-King Khalid International Airport, and Dammam-King Fahd
International Airport. The flies to over 90 destinations in the Middle East, Africa, Asia,
Europe and North America. Domestic and international charter flights are operated,
mostly during Ramadan and the Hajj season. Today, Saudi Arabian Airlines has 139
aircraft, including the latest and most advanced wide-bodied jets: B747-400s, B747300s, B747-100s, B777-200s, Airbus A300-600s, MD-11s and MD90s. The airline
placed an order to buy 22 A320s, valued at around US$1.6bn at the Dubai Airshow 2007.
Recently, it announced that the aviation sector of the airline could be privatized within 2
years, floating around 30% to 40% of its shares in its strategic units. The company had
already started with the privatization of the airline’s catering sector. Other strategic units
slated for privatization is cargo followed by the ground service unit and maintenance
unit, with the last unit being the civil aviation service, the core activity of the airline.
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February 2008
Nas Air
Nas Air is a subsidiary of the Saudi National Air Services (NAS) that is based in Riyadh.
It is the first low-cost carrier to fly in Saudi Arabia and started operations in Feb. 2007. It
initially operated 3 A320 aircraft on the Riyadh-Jeddah route, competing with flag carrier
Saudi Arabian Airlines. Currently, Nas Air fleet consists of 9 aircraft including 6 Airbus
A320-200, 2 Boeing 737-500, and 1 Boeing 737-800, flying to over 20 destinations.
National Air Services (NAS) has signed a firm contract to buy 20 Airbus A320 for Nas
Air, following an earlier agreement signed at the 47th International Paris Air Show. The
agreement also includes 18 purchase rights. Nas Air announced plans to sell company’s
shares in an initial public offering at the Saudi stock market in 2008.
Sama Airlines
Sama Airlines is the second low-cost airline based at King Fahad International Airport,
Dammam, Saudi Arabia. It commenced its domestic flights in May 2007. Sama has a
fleet of 7 aircraft, serving 19 cities across the Middle East. In its fleet of 7 aircraft, 6 are
Boeing 737 that are operating on international routes while the seventh aircraft is serving
the public in northern Saudi Arabia daily to destinations that include Dammam, Hail,
Guriyat, Rafha, Arar, Al-Jouf and Tabouk.
Qatar
Qatar Airways
Founded in 1993, Qatar Airways is the flag carrier of Qatar based in Doha. The carrier
is 50% owned by the government, with the balance held by private investors. The carrier
was awarded a five star ranking for service and excellence by Skytrax. In 2007, Qatar
Airways was awarded the best Middle Eastern airline for the second year running, and
the fourth best airline worldwide. The airline has a current fleet of 59 aircrafts flying
to over 80 destinations. At the 2007 Dubai Air Show, Qatar Airways made a landmark
aircraft order with Boeing, announcing plans to purchase a total of 60 Boeing 787-8
Dreamliner and 32 Boeing 777 aircraft. Qatar Airways is expected to expand its fleet to
110 by 2015.
Bahrain
Gulf Air
Gulf Air is the flag carrier of the Kingdom of Bahrain. The airline has a fleet of 34
aircraft flying to over 40 destinations in Africa, Asia, Europe, Middle East and Far East.
Its main base is Bahrain International Airport. After a remarkable return to profitability
in 2004, Gulf Air again returned to the red in 2005 and 2006. The carrier has been facing
increasing competition from new low cost carriers such as Jazeera, Air Arabia, Sama
and Bahrain Air, who have launched services to Bahrain. Recently, Gulf Air finalized
negotiations with Boeing to purchase 24 Boeing 787 Dreamliners in a deal valued at
approximately US$3.9bn. The agreement is for 16 Boeing 787s on direct order with
purchase rights for 8 additional aircraft.
February 2008
Jazeera Airways
15
Bahrain Air
Bahrain Air is the first privately owned premium Low Priced carrier (LPC) , and the
second national carrier of the Kingdom Bahrain. The carrier is marketing itself as a
premium low price carrier, differentiating itself from other low-cost airlines by offering
a Business Class along with an Economy Class. The airline started operations in Feb.
2008 with a fleet of 3 aircraft, covering 13 destinations including Alexandria, Amman,
Beirut, Chittagong, Colombo, Damascus, Doha, Dubai, Khartoum, Kuwait, Mashad and
Sana’a. According to Bahrain Air’s three-year plan, the airline will have 4 aircraft by the
end of 2008 increasing the number of aircraft to 7 in 2009 and 10 by 2010. Bahrain Air
will use a fleet of all modern Airbus A320 aircraft and has ambitious plans to expand its
operation within GCC, Middle East, Africa and the Indian subcontinent regions.
Oman
Oman Air
Launched in 1993, Oman Air is the national airline of Oman operating from Muscat
International Airport. Oman Air reported a US$7.5mn profit in 2006, up almost three
times over 2005 profit. Passenger numbers rose 2% to 1.2mn. Oman Air operates a fleet
of 15 aircraft, covering over 20 destinations. In Apr. 2007, Oman Air announced that it
has placed a firm order for 5 Airbus A330 aircraft for delivery in 2009. At the Dubai Air
Show 2007, the airline finalized the order, which involves 3 A330-300’s and 2 A330200’s.
Egypt
Egypt Air
Established in May 1932, Egypt Air is the Cairo-based national airline of Egypt. As of
July 2007, the carrier had a total fleet of 45 aircraft: 30 Airbus, 8 Boeing, 4 Freighter, and
3 Embraer with scheduled services to over 80 destinations in Europe, Africa, the Middle
East, the Far East, the USA, and Canada. The carrier is fully owned by the Egyptian
government, which has provided the airline with considerable protection, as the state
has curtailed the amount of competition it faces from domestic operators and also has
restricted access to its main base, Cairo. However, the government granted access to
Alexandria International Airport to two of the region’s LCCs, Air Arabia and Jazeera. In
Aug. 2007, EgyptAir signed a firm contract to buy 5 A330-200 wide-body aircraft with
an option for an additional 3. In addition, it received its third Next-Generation Boeing
737-800 in Sept. 2007 out of an order of 12 of Boeing 737-800.
Jordan
Royal Jordanian
Established in 1963, Royal Jordanian (RJ) Jordan’s national carrier launched a five-year
restructuring plan in 2002 to expand and privatize the airline. The company offered 71%
of its capital, for public subscription in Nov. 2007, and listed its shares on the Amman
16
Jazeera Airways
February 2008
Stock Exchange in Dec. 2007. Today, Royal Jordanian has a fleet of 26 aircraft including
A310, A320, A340 and Embraer 195 aircraft flying to over 50 destinations. Recently,
RJ contracted with International Lease Finance Corporation (ILFC) to lease two B787s,
to be delivered by the end of 2010 and the beginning of 2011. During 2008, six modern
and newly manufactured airplanes will join RJ’s fleet: 2 Embraer 175s, 2 Airbus A319s
and 2 Airbus A321s.
Lebanon
Middle East Airlines
Middle East Airlines (MEA) is the national flag carrier of Lebanon. It survived total
destruction of its fleet by Israel and 15 years of civil war. In 1996, Lebanon’s central
bank acquired the airline. Since then, MEA has made losses of more than US$330mn,
despite its restructuring plan. However, the airline made a modest net profit in 2002,
the first in over 25 year, and managed to record a US$20mn profit in 2006, despite the
political situation. MEA operates a fleet comprising of 6 Airbus A320s and 3 leased
A330s, serving 26 destinations. Plans to privatize MEA in 2005 have been delayed.
Syria
Syrian Arab Airlines (Syrianair)
Syrian Arab Airlines (Syrianair) was established by the government of Syria in Oct.1961.
Syrianair is working towards modernizing its fleet which is made up of 8 Boeings
(6 old 727s and 2 newly renovated 747s), 6 Airbus A320, and 4 Russian Tupolevs.
The airline intends to further increase the size of its fleet, with loan facilities by the
European Investment Bank. Syrianair is also expanding its route network, adding flights
to Barcelona, Benghazi, Manchester and Milan. In addition, Syrianair has upgraded
Aleppo International Airport. It is also working on expanding and enhancing other
airports including Latakia, Deir Al-Zor and Quamishly.
Yemen
Yemen Airways
Yemen Airways (Yemenia) was established 1961. The airline is owned jointly by the
government of Yemen (51%) and the government of Saudi Arabia (49%). Yemenia
currently has 3 B737-800, 4 A310s and 2 A330-200s in its long haul fleet, operating
from its base in Sanaa and Aden to destinations in Europe, the Middle East and Asia.
The airline has selected the Airbus A350 for its long haul fleet modernization program
and has signed a preliminary agreement with Airbus for the acquisition of 6 aircraft of
the type, with options for another 4. Deliveries of the A350s for Yemenia will start in
2012. Jazeera Airways
February 2008
Jazeera Airways
17
Jazeera Airways
First private airline in the region…
In 2003, Kuwaiti government announced deregulation in the transport sector and offered
three licenses ( two passenger airlines and one freight airlines). Jazeera was formed
in May 2004 by a group of private investors as a low-cost carrier (LCC) that operates
scheduled passenger and cargo flights. Jazeera is the only airline in the Middle East that
is neither owned nor subsidized by any government. It started operations in Oct 2005
with initial capital of KD10mn (USD35mn), 70% of which was raised though an initial
public offering that was oversubscribed 12 times. On Oct 30th, 2005, Jazeera became
the Middle East’s first private airline after securing its Air Operators Certificate (AOC),
one year after the company’s IPO.
IPO to raise capital to KD20mn…
In Oct 2007, the airline increased its capital to KD20mn through a rights issue to existing
shareholders. Jazeera was the first and only private airline in Kuwait, and the Middle
East. It ended Kuwait’s 50-year old dependency on its single airline, Kuwait Airways.
The company listed its shares on the Kuwait Stock Exchange on Jan 14th , 2008.
Successful take off…
Jazeera started operations in Oct 2005 with two brand new Airbus A320s serving 5 key
routes namely Dubai, Beirut, Damascus, Bahrain and Amman using Kuwait as its initial
hub. Subsequently Egypt, India and Iran opened up with Alexandria, Luxor, Assiut, New
Delhi, Mumbai, Cochin, Marshard, Tehran, and Shiraz. At the end of 2006, Jazeera was
operating a fleet of four Airbus A320 aircraft on scheduled services to 15 destinations.
Expanding fleet to reach 36 aircraft by 2012…
In 2007, Jazeera added 2 other A320 aircrafts, bringing the fleet size to 6 A320 aircraft.
The aircrafts are part of an order with Airbus for 40 brand new A320s placed at the
2007 Le Bourget Paris Air Show. According to the company, Jazeera will be the largest
Airbus A320 operator in the Middle East upon the delivery of all 40 aircraft by 2014.
The company did not lease any aircrafts to date. According to the company, Jazeera will
supplement its acquired aircraft with leased aircrafts starting from 2009.
Chart 09: Jazeera Fleet
40
35
30
25
20
15
10
5
0
2006
2007E
2008E
2009E
Owned aircraft
2010E
2011E
2012E
Leased aircraft
Source: Company, Global Research.
18
Jazeera Airways
February 2008
During its first two years of operations, the company has been expanding its routes
to more Gulf and Middle Eastern destinations, as well as the Indian subcontinent.
Currently, Jazeera is serving 23 destinations. In Feb 2007, Jazeera introduced operations
from a second hub in Dubai, becoming the first low cost carrier to operate from Dubai
International Airport. In the medium to long term, the company’s second regional hub
in Dubai is likely to enhance intra-regional capacity. We believe that this will be a key
development, as it would allow Jazeera to expand its regional profile, and increase its
radius of coverage by penetrating into new markets and linking new to current markets,
which will lead to growth in frequencies and seat factors.
Chart 10: Route map for Jazeera destinations
Source: Jazeera website
February 2008
Jazeera Airways
19
Business Model and Strategy
The company adopts the model of low cost carriers (LCCs) of moving point to point
traffic at the lowest cost possible. Jazeera’s value proposition is to offer individuals in
the region, particularly those who were previously discouraged from frequent regional
travel by the high fares of conventional airlines, the ability to travel more often. However,
Jazeera target all market segments; business, families, leisure, and blue collar workers.
The company has slightly deviated from the typical low cost model of having a single
class seating by introducing a premium class (Jazeera Plus), in order to cater to business,
and high net worth individuals in a country where per capita GDP is among the highest
in the world (US$33,679 in 2006).
Table 03: Jazeera’s LCC Model
Fleet
• Single type of aircraft (A320)
• All aircrafts are fitted with 165 leather
seats each, and are divided into two travel
classes – Jazeera (economy class) and
Jazeera Plus (first class)
Airports
• The main hub of Jazeera is the Kuwait
International Airport. The other focus
airport is the Dubai International Airport
Fare options
• Jazeera offers weekly Specials, or offers
of low cost travel to definite destinations
within a given period of time
• Two major types of tickets are available
– one way and round Trip
Distribution channels
• Jazeera provides the facility to book
tickets online through the official
website
• Travelers can also book through travel
agents to receive a booking reference
number for easy, ticket-free check-in.
Services & facilities
• Food is not complimentary. Snacks and
drinks are available on board for a nominal
price.
• All flights are equipped with the facilities
for in-flight entertainment.
Customer benefits
• Packages for group travel are often
offered by Jazeera. These packages
include ‘Ski Packages’.
• Jazeera also offers the facility to book
rental cars and hotels at a low prices
from their partner websites
Source: Company
The company’s strategy is to stimulate traffic in the region and not to cannibalize or steal
traffic from other airlines. This value proposition has affected, and will continue to affect,
the whole regional airline industry, and is now one of the core factors boosting growth
in passenger traffic going forward. According to the company, Jazeera have stimulated
traffic growth in the cities on its route map. The airline managed to grab a market share
of 39% in the Kuwait aviation sector.
20
Jazeera Airways
February 2008
Chart 11: Jazeera Effect
Traffic Growth
250%
200%
150%
100%
50%
M
um
ba
i
ha
d
r
M
as
h
xo
Lu
oc
hi
K
ai
ub
D
i
el
h
D
am
as
cu
s
D
t
Ba
hr
ai
n
iu
ss
A
m
m
an
A
ria
le
xa
nd
A
A
lle
po
0%
The company’s strategy is focused on gaining more cost efficiencies to maintain
competitive fares. Maintaining low fare structure is the key driver given the price elasticity
of demand and the likely increase in competition, even against conventional airlines on
certain destinations. Regional conventional airlines have recently started to focus on
lowering their fares by achieving economies of scale and gaining cost efficiencies.
Based on IATA surveys, 30% of the decision to choose one flight over another is
determined by price, while the remaining 70% is divided between other considerations
like frequent flyer programs, convenience and a positive flight experience, each
accounting for less than 30% of the decision. In other words, price is the most important
factor in choosing flights for most travelers. Jazeera’s low fare structure has increased
the number of passengers traveling in general, and in turn, increased the size of the
market. It increased passenger traffic at Kuwait International Airport (KIA) by 14% in
the first half of 2007.
The company is also focusing on not only maintaining low price but also offering a
reliable, punctual and safe service. In terms of timeliness, the company’s punctuality rate
with respect to departure and arrival is 93 %, one of the highest in the industry.
Jazeera is also tapping new sources of ancillary revenues through the availability of new
travel insurance and a newly launched in-flight magazine. The company also announced
earlier this year plans to equip its entire fleet with the technology that enables travelers
to use their mobile phones, blackberries and email on board. This service is expected to
come into effect in 2009.
February 2008
Jazeera Airways
21
Performance Analysis & Peer Group Comparison
Expansion plans to increase passenger traffic on Jazeera network…
Jazeera started operations in 2005, and ended the year 2006 with 601 thousand passengers.
The number of passengers is estimated to double reaching 1.1mn in 2007. We expect
passenger traffic to continue its increasing trend on the back of improving industry
fundamentals along with the company’s planned fleet and route expansions. According
to the company’s management , the number of passengers will exceed 8mn by 2012.
000’s
Chart 12: Jazeera passengers
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
2006
2007E
2008E
2009E
2010E
2011E
2012E
Increasing demand to improve load factors …
The company’s ASK, a measure of supply, stood at 1.2bn in 2006, while RPK, a measure
of demand, stood at 0.8bn, leading to load factor or a capacity utilization rate of 67% in
2006 compared to a global load factor of 76% in 2006. Going forward, though ASK is
expected to increase significantly according to Jazeera’s new aircraft delivery schedule.
The increase in RPK is expected to outpace the increase in ASK leading to improving
load factors.
mn
Chart 13: RPK, ASK, and load factors
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
100.0%
80.0%
60.0%
40.0%
20.0%
2006
2007E
2008E
2009E
RPK
ASK
2010E
2011E
2012E
0.0%
Load factor
Aircraft utilization to reach 15 hours going forward…
Aircraft utilization is a measure of asset utilization. It is the amount of time that an
aircraft spends in the air carrying passengers. Low-cost carriers typically fly their aircraft
for more hours and flights each day, scheduling the first departure early in the morning
and the last arrival late at night as opposed to long-haul aircraft scheduling which is more
determined by time-zone constraints. The longer flight times restricts the airline ability
February 2008
Jazeera Airways
23
to increase aircraft utilization by adding one or two more short flights each day. Jazeera
reported aircraft utilization of 11.7 hours per day in 2006. According to the company,
Jazeera will reach 14 to 15 hour aircraft hour utilization, which is among the highest in
the world.
Chart 14: Aircraft Utilization (2006)
Air Asia
Ryan Air
Easy Jet
Jetblue
Southwest
Air Arabia
Jazeera
0
2
4
6
8
10
12
14
16
Aircraft utilization (hours/day)
Source: Latest published companies’ data, Global Research.
Revenues to grow significantly…
Revenues stood at KD21.5mn for 2006. With the company maintaining its low fare
structure, we expect passenger revenue to grow significantly on the back of increasing
passenger traffic and load factors. We forecast revenues to grow at a CAGR of 43.6%
during 2007-2012. Passenger revenue contributed the most to revenues in 2006 forming
91% of the total, while ancillary revenues contributed the remaining 9%. We expect this
ratio to change in the future as the company diversifies its revenue stream and develop
ancillary revenue strategies.
Chart 15: Revenue break-up
300,000
KD 000’s
250,000
200,000
150,000
100,000
50,000
-
2006
2007E
2008E
2009E
Passenger revenue
2010E
2011E
2012E
Ancillary revenue
RASK in range with other global players…
Revenue per ASK (RASK) is a measure of unit revenue. We have benchmarked Jazeera’s
RASK against other established global LCCs. RASK stood at 16.9fils in 2006 which was
close to other LCCs such as Southwest airlines, Jetblue and Ryan Air, and lower than
the calculated average of 19.8fils for other global LCCs. The airlines with distinctly
higher RASKs were Easyjet, Virgin Blue, Gol, and WestJet. Although, we forecast
Jazeera revenues to grow significantly, the airline’s planned capacity expansion will
keep RASKs for Jazeera within a close range going forward.
24
Jazeera Airways
February 2008
Chart 16: Jazeera vs. Global LCCs (RASK)
35
27.7
25
fils
20
16.9
15.3
15
19.8
16.6 16.0 16.3 17.4 17.2
15.7
23.7
22.3
10
16.0
30
25
20
16.8
15.2
35
15
10.1
10
G
o
W l
es
tje
t
a
es
je t
tb
lu
Ea e
sy
Ry jet
an
A
A ir
ir
Vi As
i
rg
in a
Bl
ue
hw
bi
So
ut
ra
ra
A
A
ir
Av
e
20
08
20
07
20
20
ge
E
09
E
20
10
E
20
11
E
20
12
E
E
5
06
5
Jazeera
fils
30
31.1
Peer Group
Source: Latest published companies’ data, Global Research.
Fuel forms 45% of operating costs…
The airline industry in general is characterized by high fixed costs, however for a low
cost carrier, cost efficiencies must be achieved in order to maintain low fares, and yet
improve margins. However, this can not apply to fuel costs which airlines can not control.
Therefore, most airlines follow a hedging strategy in order to guard against volatile
fuel prices. Typically well disciplined airlines have 20 to 30 % minimum hedge cover.
However, according to the company, current oil prices do not necessitate hedges, and
once the trigger levels are reached they will place hedges in the various price segments.
Total operating expenditures for Jazeera stood at KD15.8mn in 2006, and formed 73%
of total revenues. Fuel and maintenance formed 45% of total costs in 2006.
Chart 17: Costs break-up
200,000
Other
180,000
Insurance
160,000
KD 000’s
140,000
Lease rentals
120,000
Overflying, landing
& ground handling
100,000
80,000
Fuel & maintenance
60,000
40,000
Depreciation
20,000
Staff costs
E
12
20
20
11
E
E
10
20
E
09
20
E
08
20
E
07
20
20
06
-
CASK lower than peer…
Cost per ASK (CASK) is a measure of unit cost. Jazeera’s CASK stood at 14.2fils
in 2006 which is lower than the calculated average of 16.6fils for other global LCCs.
Although, economies of scale are expected to drive costs lower, we expect CASK for
Jazeera to remain within the same range in view of high oil prices and increasing labor
costs as Jazeera expands its fleet.
February 2008
Jazeera Airways
25
Chart 20: Net profit & ROAE
30,000
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
KD’000’s
25,000
20,000
15,000
10,000
Net Profit
E
12
20
20
E
10
20
E
09
20
E
08
20
E
07
20
20
06
0
11
E
5,000
ROAE
Interim results (9M-07)
Jazeera reported revenues of KD25mn for 9M-07, growing by 70% over the comparable
period in 2006. Gross margin declined from 32.6% in 9M-06 to 21.5% in 9M-07. Higher
finance costs led to a 61% decline in net profit which stood at KD1mn in 9M-07. Total
assets increased by 20% to reach KD66mn in 9M-07. Debt to equity ratio increased from
3.4x to 3.7x.
Table 04: Financial Summary for the nine months ending Sept-07.
In mn
9M 2006
9M 2007
14.7
25.1
70.2%
Operating costs
9.9
19.7
98.3%
Gross profit
4.8
5.4
12.1%
Finance costs
1.3
2.1
58.1%
Revenue
Net profit
Chg
2.6
1.0
-60.9%
Fixed assets
52.7
59.6
13.2%
Total assets
55.3
66.2
19.6%
Debt
37.7
44.8
18.8%
Equity
11.0
12.1
9.4%
February 2008
Jazeera Airways
27
Outlook & Future Prospects
The Middle East aviation boom is expected to continue in the medium term boosted by
strong economies, the focus on tourism, airport expansions, new capacities, and new
routes. Boeing and Airbus expect the Middle East aviation market to expand by 5.5%
and 6.2% per year on average till 2025. The Middle East growth is also expected to
be influenced by strong emerging markets such as India. Airbus expects Middle East
to India traffic to increase by 6.3% annually on average over the ten year period from
2005-2015. IATA expects the Middle East region to show the highest AAGR ( Average
Annual Growth Rate) from 2007 to 2011 in terms of passenger traffic, growing by 6.8%
compared to an expected 5.1% AAGR for global traffic.
The favorable demographic profile in the Middle East should also boost the aviation
sector penetration in both intra-region and long-distance flights. Increasing migration
of manpower is likely to result in strong growth in air travel. Also, Kuwait’s central
location in the GCC and the growing bilateral and cross border trade ties and tourism
will stimulate the growth in the aviation sector. Currently, Kuwait has open skies air
services agreements with 78 countries.
LCCs are also expected to play a significant role in the expansion of the region’s aviation
market. The LCC industry is growing at rapid rates. LCC airlines accounted for around
28% of total new aircraft orders in 2006. The industry has a high growth potential as it
is still in a nascent stage with a market penetration rate around 1% in the Middle East
compared to a market penetration of around 30% in domestic US market, and intra-EU
routes, and 6% in Asia. Based on current aircraft orders, the Center for Asia Pacific
Aviation forecasts that existing LCCs in the region will expand their seat capacity by
approximately 400% by 2012. With further market liberalization, LCCs penetration
rates should increase significantly.
We believe that Jazeera has a high potential as a low cost carrier, despite increasing
competition from other start-up LCCs in the region as the industry is still in its growth
phase. The carrier’s second hub in Dubai airport, the airport with the highest traffic share
in the region, is also expected to play a significant role in increasing new destinations on
Jazeera’s route network, increasing traffic, and load factors.
28
Jazeera Airways
February 2008
Valuation & Recommendation
Two valuation methods have been used to arrive at the fair value of Jazeera: the Discounted
Cash Flow (DCF) – discounting the company’s Free Cash Flow to Firm (FCFF)- along
with the EV/EBITDAR multiple valution. We have assigned an 80% weight to the DCF
valuation and 20% to the relative valuation.
a) DCF Valuation – The DCF model is based on a 6-year (2008E-FY2013E) explicit
forecast period for the Free Cash Flow to Firm (FCFF). The terminal value is estimated
using the constant growth Gordon Growth Model (GGM). The forecasted cash flow
and the terminal value is then discounted at the company Weighted Average Cost of
Capital (WACC). In our DCF valuation, we have used the following assumptions:
1. Risk Free Rate (RFR) of 5.75%.
2. Equity risk premium of 5.75%.
3. Beta of 1 due to the lack of historic data as the company is recently listed.
4. A terminal growth rate of 3.5%.
5. A target cost of debt of 7%.
Using the above assumptions, we have derived a cost of equity for the company under
the Capital Assets Pricing Model of 11.5%, and a WACC of 9.7%, resulting in fair value
of KD0.591 per share.
Table 05: DCF Calculations
(KD’000)
2008 (E) 2009 (E) 2010 (E) 2011 (E) 2012 (E) 2013 (E)
FCFF
(22,846)
1,612
15,897
(11,537)
754
17,874
Discounted Cash Flow
(20,795)
1,336
11,988
(7,919)
471
10,164
Terminal Value
290,695
Primary Value
(4,754)
Terminal Value (discounted)
165,315
EV
160,561
Debt
(44,766)
Cash & Investments
2,352
Equity Value
118,147
Shares Outstanding (‘000)
200,000
Fair Value Per Share (Fils)
591
Source: Global Research
Sensitivity Analysis
We provide below a sensitivity analysis table, which shows the probable value given
different growth rate assumption and WACC. The shaded area represents the most
probable outcomes.
February 2008
Jazeera Airways
29
Table 08: Weighted Price
Valuation Approach
Fair Value/Share
(KD)
DCF Valuation
0.591
80%
0.473
EV/EBITDAR multiple Valuation
0.427
20%
0.085
Weight
Weighted Value
(KD)
Estimated Fair Price
0.558
Current Market Price (KD)
0.485
Premium / (Discount)
15%
Source: Global Research
The combination of both the methods suggests a fair value of around KD0.558 per share.
The stock currently trades at around KD0.485, which implies that the value arrived by
using above methods is 15% higher than the current market price. Therefore, we initiate
our coverage on Jazeera with a “BUY” recommendation.
February 2008
Jazeera Airways
31
32
17,622.7
22.1
4,655.7
1,303.7
1,565.6
508.5
34,211.1
Current Liabilities
Term loans
Bank overdraft
Trade and other payables
Deferred revenue
Total liabilities and equity
-
Legal reserve
Non-current liabilities
Term loans
Post employment benefits
10,000.0
Equity
Share capital
(1,467.5)
8,532.5
0.3
8,532.8
38.0
581.3
724.1
34,211.1
Current Assets
Inventories, expendable parts and supplies
Trade and other receivables
Cash and bank balances
Total Assets
Retained earnings
Equity attributable to the Parent Company
Minority interest
Total equity
32,867.6
2005
Non-current Assets
Property and equipment
KD ‘000
Balance Sheet
Jazeera Airways
February 2008
55,300.6
4,813.4
925.2
4,072.4
2,379.3
31,947.3
127.2
930.9
11,035.4
0.3
11,035.7
104.5
10,000.0
113.0
980.2
1,537.8
55,300.6
52,669.6
2006
81,290.2
6,329.4
1,665.5
5,226.4
4,069.1
40,548.9
229.0
3,008.0
23,221.8
0.3
23,222.1
213.8
20,000.0
348.4
5,226.4
11,661.2
81,290.2
64,054.2
2007E
107,551.3
8,861.1
1,832.0
7,074.9
5,456.3
56,768.4
251.9
6,888.4
27,306.4
0.3
27,306.7
418.0
20,000.0
471.7
4,716.6
3,965.4
107,551.3
98,397.6
140,218.1
11,159.2
2,015.2
12,501.3
9,773.4
69,505.4
277.1
14,184.1
34,986.2
0.3
34,986.4
802.0
20,000.0
833.4
4,167.1
15,905.5
140,218.1
119,312.1
Jazeera Airways
2008E
2009E
164,247.2
11,580.1
2,116.0
19,762.7
15,664.9
71,884.0
304.8
21,521.0
42,934.4
0.3
42,934.7
1,413.4
20,000.0
1,317.5
3,952.5
24,924.2
164,247.2
134,053.0
2010E
209,549.7
14,394.3
2,221.8
27,499.5
21,474.4
86,094.8
335.3
35,142.9
57,529.3
0.3
57,529.6
2,386.4
20,000.0
1,833.3
5,499.9
19,484.5
209,549.7
182,732.0
2011E
271,835.2
18,316.0
2,332.8
37,527.6
29,122.4
105,844.6
368.9
54,603.3
78,322.6
0.3
78,322.9
3,719.3
20,000.0
2,501.8
7,505.5
30,631.8
271,835.2
231,196.0
2012E
February 2008
P&L Appropriation Account
Retained earnings opening
Profit for the year
Transfer to reserves
Dividends
Retained earnings closing
(1,467.5)
(1,467.5)
792.2
(1,594.7)
(250.7)
(1,467.5)
Other income
General and administrative expenses
Finance costs
Contribution to KFAS
Profit / (loss) for the period
* 12 July 2004 (date of inceptio) to 31 December 2005
1,214.9
(1,629.2)
(414.3)
2005*
Revenues
Operating costs
Gross profit / (loss)
KD ‘000
Income Statement
(1,467.5)
2,502.9
(104.5)
930.9
1,025.0
(2,278.6)
(1,966.2)
(9.4)
2,502.9
21,532.0
(15,799.9)
5,732.1
2006
930.9
2,186.4
(109.3)
3,008.0
2,562.5
(5,379.3)
(2,802.5)
(15.2)
2,186.4
34,842.4
(27,021.6)
7,820.8
2007E
3,008.0
4,084.7
(204.2)
6,888.4
3,843.8
(6,901.3)
(3,770.2)
(20.6)
4,084.7
47,165.9
(36,233.0)
10,932.9
6,888.4
7,679.7
(384.0)
14,184.1
6,726.7
(12,570.9)
(4,879.6)
(36.4)
7,679.7
83,341.7
(64,901.8)
18,439.9
Jazeera Airways
2008E
2009E
14,184.1
12,228.1
(611.4)
(4,279.9)
21,521.0
8,744.7
(18,717.3)
(5,468.4)
(57.5)
12,228.1
131,751.6
(104,024.8)
27,726.8
2010E
21,521.0
19,459.8
(973.0)
(4,865.0)
35,142.9
9,181.9
(24,248.5)
(6,119.5)
(80.1)
19,459.8
183,329.7
(142,603.7)
40,726.0
2011E
35,142.9
26,658.1
(1,332.9)
(5,864.8)
54,603.3
10,100.1
(32,676.4)
(7,449.1)
(109.3)
26,658.1
250,184.0
(193,391.2)
56,792.7
2012E
Jazeera Airways
33
34
Jazeera Airways
February 2008
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash flow from financing activities
Paid-Up Capital
Capital contribution - Minority shareholders
Term loans
Bank overdraft
Time deposits - maturity more than three months
Finance costs
Dividends
Net cash from financing activities
Cash flow from investing activities
Acquisition of property and equipment
Net cash used in investing activities
Profit / (Loss) for the year
Adjustments for:
Depreciation
Finance costs
Write-off of property and equipment
Post employment benefits
Operating profit/(loss) before working capital
changes
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
Increase in deferred revenue
Net cash from operating activities
Cash flow from operating activities
KD ‘000
Cash Flow Statement
7,425.4
(75.0)
(398.9)
2,506.8
1,870.8
11,329.1
(865.8)
(38.0)
(581.3)
1,565.6
508.5
589.0
724.1
724.1
10,000.0
0.3
22,278.4
1,303.7
(250.7)
33,331.7
773.0
724.1
1,497.1
14,482.3
(378.5)
(40.7)
(1,966.2)
12,096.9
(22,653.1)
(22,653.1)
2,849.9
1,966.2
1.2
105.1
328.9
250.7
22.1
(33,196.6)
(33,196.6)
2,502.9
2006
(1,467.5)
2005
10,123.5
1,497.1
11,620.6
10,000.0
10,117.5
740.2
(2,802.5)
18,055.2
(15,000.0)
(15,000.0)
(235.4)
(4,246.1)
1,153.9
1,689.9
7,068.3
8,706.0
3,615.4
2,802.5
101.8
2,186.4
2007E
(7,695.8)
11,620.6
3,924.7
18,751.3
166.5
(3,770.2)
15,147.7
(40,000.0)
(40,000.0)
(123.2)
509.8
1,848.5
1,387.1
17,156.5
13,534.3
5,656.6
3,770.2
22.9
4,084.7
11,940.1
3,924.7
15,864.8
15,035.2
183.2
(4,879.6)
10,338.8
(28,000.0)
(28,000.0)
(361.8)
549.5
5,426.4
4,317.2
29,601.3
19,670.0
7,085.5
4,879.6
25.2
7,679.7
Jazeera Airways
2008E
2009E
9,018.7
15,864.8
24,883.5
2,799.4
100.8
(5,468.4)
(4,279.9)
(6,848.1)
(23,000.0)
(23,000.0)
(484.1)
214.5
7,261.5
5,891.4
38,866.8
25,983.5
8,259.2
5,468.4
27.7
12,228.1
2010E
(5,439.7)
24,883.5
19,443.8
17,025.1
105.8
(6,119.5)
(4,865.0)
6,146.4
(60,000.0)
(60,000.0)
(515.8)
(1,547.3)
7,736.7
5,809.5
48,413.9
36,930.8
11,321.0
6,119.5
30.5
19,459.8
2011E
11,147.3
19,443.8
30,591.1
23,671.5
111.1
(7,449.1)
(5,864.8)
10,468.6
(63,000.0)
(63,000.0)
(668.5)
(2,005.6)
10,028.1
7,648.0
63,678.6
48,676.7
14,535.9
7,449.1
33.5
26,658.1
2012E
Appendix: Key Terms in the Airline Industry
ASK
Available seat kilometers, which is the total number of seats available on scheduled
flights multiplied by the number of kilometers these seats were flown. ASK will
generally be used as the denominator when calculating ‘unit cost’
RPK
Revenue passenger kilometers, which is the number of paying passengers carried on
scheduled flights multiplied by the number of kilometers those seats were flown
Load factor
RPK divided by ASK
Block hours
The time between the departure of an aircraft and its arrival at its destination, as
recorded in the aircraft flight log
Aircraft utilization
The amount of time that an aircraft spends in the air carrying passengers
Cost per ASK
Total operating expenses (excluding finance costs and taxation) divided by ASK.
In the airline industry, this is comparable to ‘unit cost’
Revenue per ASK
Total revenue divided by ASK
Revenue per RPK
Total revenue divided by RPK
Sector length
The length of the journey flown by the aircraft
Sector flown
Number of times a sector is flown
Seat Pitch
The distance between one seat and the same point on another seat directly in front
or behind
First freedom
The freedom to fly across another state without landing
Third freedom
The freedom to put down in another state revenue passengers, mail and freight
taken on in the state of airline registration
Fourth freedom
The freedom to take on in another state revenue passengers, mail and freight
destined for the state of airline registration
Fifth freedom rights The freedom that enables airlines to carry passengers to one country, and then fly
on to another country (rather than back to their country of origin)
Sixth freedom
The privilege for an airline registered in one state to take on revenue passengers,
mail and freight in a second state, transport them via the state of registration, and
put them down in a third state
Seventh freedom
The privilege for an airline registered in one state to take on revenue passengers
and freight to a second state and to put them down in a third state without the
journey originating, stopping or terminating in the state of registration
‘A’ checks
The basic inspection and routine servicing conducted on an aircraft every 250
hours flown to ensure that the aircraft is in an air-worthy state to continue flying
‘C’ checks
The maintenance performed on an aircraft approximately every 11 months
‘D’ checks
The complete overhaul performed on an aircraft approximately every seven years
Light maintenance
Daily routine checks on the aircraft, including daily pre-flight checks and overnight
checks, as well as ‘A’ checks
Heavy maintenance The ‘C’ and ‘D’ checks performed on a aircraft
Aircraft push back
36
The act of pushing an aircraft back from a gate or away from other aircraft at
parking areas, to allow for an aircraft to begin taxiing under its own power
Jazeera Airways
February 2008

Untitled - Jazeera Airways

Transcription

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