May 2011 Industry Research Kuwait Airline Industry Report-Update Report Contents Summary Industry Overview GCC Airline Sector Kuwait Airline Sector - Brief about Kuwaiti Airlines - Kuwait Airways - Jazeera Airways - Wataniya Airways Airlines in Kuwait Kuwait Airways Privatization Wataniya Airways Bankruptcy Position of Jazeera in Kuwaiti Market Conclusion Analysts Badriah F. Abdulsalam b.abdulsalam@capstandards.com +965 22258822 ext.516 Capital Standards (CSR) Al Nassar Tower, 11th Floor, Fahad Al-Salem St., Kuwait City P.O.Box 26620, Safat, 13127 Kuwait Office: +965 2225 8822 Email: services@capstandards.com Website: www.capstandards.com Summary The Middle East s demand for aviation services is constantly growing driven by the region s position as a central hub of oil production, young demography, high disposable income, and limited means of transportation. The high oil prices and increased government spending has provided impetus to the economy and businesses. This has resulted in newer business opportunities in the region, making the GCC an attractive destination for business. The GCC region has had an introduction of many new and emerging airlines, including Wataniya, Jazeera, Air Arabia, and flydubai to meet the increasing demand for travel. The political unrest in the region has negatively affected tourism resulting in pressure on airlines operating performance. Fuel is the principal component of the airline s operating expenses and given the lack of hedging habits in the region, any significant increase in the fuel prices, is expected to impact the profitability and financial flexibility of the airlines. The fuel prices have reached over USD100 per barrel, in the recent past, increasing the airline s expenses significantly and impacting their profits. During the economic crisis, air travel demand was very low, thus airlines had to lower their prices in order to attract travelers, which, as a result, lowered their profitability. Airline companies are still recovering from the losses emanated during the financial crisis. The high demand for airline service in the region originates from lack of railway network, high disposable income and a large population of expats. In the GCC, there are 39 airlines operating, of which, only 3 are publicly listed, 2 of which are in Kuwait. The airline business in the region is exposed to strong price competition, fuel price fluctuation, and cumbersome government regulation, thus negatively affecting their efficiency. Type of Ownership Government 11 Private 23 Public 3 Foreign 2 Total 39 Source: Zawya Kuwait Passenger Airline Industry P a g e 1
Kuwait aviation sector- Overcapacity and delayed privatisation The expats in Kuwait make up around 73% of the population, which highly increases the demand for flights inand-out of Kuwait. Another reason for high demand of airline services in Kuwait is the young population with high disposable income; this young population uses most of their holiday time for travel to neighboring countries. The largest number of travelers was to Dubai holding a percentage of 15.6 during January 2010 to October 2010. The Kuwait International Airport has a new expansion plan to accommodate 25mn passengers annually. The expansion plan might add new regional and international airlines, and is expected to increase competition for the existing airline companies. Kuwait has 3 main airlines; Kuwait Airways, which was the incumbent airline, before opening of the aviation sector for two more airlines. Jazeera Airways is the low cost carrier, while Wataniya Airways was launched as the premium carrier. It is worth noting that Wataniya Airways ceased operations from April 2011 stating financial difficulties and lack of fair trade practices. Kuwait Airways was established in 1942 and is completely owned by the government. It owns 19 aircrafts and flies to 40 destinations worldwide. Unfortunately, Kuwait Airways suffers from old aircrafts and poor punctuality. The Kuwaiti government passed a law in 2007 to privatize Kuwait Airways, yet it has been constantly delayed due to socio and economic constraints. Jazeera Airways is a regional Kuwaiti carrier and has had a big market share among Kuwait travelers. Jazeera is a low cost carrier, which gives it an edge over other service providers in Kuwait. The airline is currently in the process of recovering from the losses incurred during the financial crisis. Since Wataniya Airways has halted its operation, there is reduced seat capacity, and an opportunity for other airlines to increase their seat utilization and revenue generation. Wataniya is the first luxury carrier in Kuwait; it specialized in regional flights around the GCC region. Wataniya Airways launched its business in January 2009 with only 2 flights to Dubai. However, during its operations in the past 2 years, Wataniya Airways managed to expand its destinations to Middle East and Europe. Figure 1: Market Share of Domestic Airlines in 2010 Wataniya Airways 11% Jazeera Airways 13% Kuwait Airways 76% Kuwait Airways Wataniya Airways Jazeera Airways Source: Company Annual Reports and Website Kuwait Passenger Airline Industry P a g e 2
The delayed Kuwait Airways Privatization The privatization process of Kuwait Airways has been talked about since 2007, and still has not started. There are numerous factors that contribute to the delay of the privatization, one of them being that the employees do not want to continue working if it is privatized, as the privatization will result in loss of various benefits. Also, the retired employees are causing a large constraint on the privatization, since their salaries total around KWD25mn of the total salaries of KWD80mn. Kuwait Airways financial performance is very weak and is not in a position to pay such a large amount of money after being privatized. Other factors include administrative and regulatory problems. For example, all government entities get free tickets for their high position employees, so after the privatization they will have to pay for their employees tickets, which will become an expense on these entities. Financial Snapshot Kuwait Airways capital is KWD220mn, with a government debt of KWD300mn, as of FY2010, which reflects the financial constraints the airline is facing. Kuwait Airways managed to increase its revenue at the beginning of 2011 to KWD135.8mn by selling 1.8mn tickets, compared to the same time last year at KWD123.9mn. Although it has increased its revenue, Kuwait airways is still having trouble paying the salaries of its employees. The weak operating performance is reflected by the fact that with revenue of KWD256.9mn from March 2010 to March 2011, the company had expensed KWD311mn during the same period. Wataniya Airways Bankruptcy- Abrupt measures The airlines main reason for bankruptcy was the losses it incurred over the past 2 years, as announced by the management. Their revenue was not meeting its costs. The company s biggest expense which affected its losses was the high price of lease on aircrafts and increasing oil prices. Another contribution to their halt in operations is the current political situation in the MENA region, which affected demand on air travel. In addition, the airline might incur additional losses due to the USD70mn claim by ALAFCO for termination of lease contracts. This claim is expected to further dampen the chances of Wataniya Airways restarting their operations. In April 2011, Wataniya Airways has proposed to increase its capital by KWD15mn for restructuring purposes however the shareholder meeting has still not taken place, and the matter for restarting the operation remains pending. The airline s Chief Executive George Cooper has submitted his resignation after several discussions with the executive management and board to resume the carrier s operations failed. Wataniya Airways started operations in January 2009, and incurred losses of KWD11.4mn during its first year of operations and a loss of KWD15mn in 2010. Improved Position of Jazeera in Kuwaiti Market Overcapacity in Kuwait aviation sector has been a major constraint for the operational efficiency of the airlines. Halting of operations by Wataniya Airways and the delayed privatization of Kuwait Airways, has given a significant advantage to Jazeera Airways to improve its market share. The positioning of Jazeera as the provider of low fare and limited options available for travel provides opportunity to the airline to garner a larger market share. Kuwait Airways continues to suffer from an ageing fleet of aircraft and poor punctuality. Thus increase in demand for Jazeera Airways would have a positive impact on its seat occupancy and revenue generation. Kuwait Passenger Airline Industry P a g e 3
Jazeera Airways Financial Snapshot Jazeera airways reported net loss of KWD2.8mn for the FY2010 compared to a net loss of KWD8.2mn in 2009. The airline s revenue of KWD42.6mn for 2010, a y-o-y drop of 7%, while the operating profits improved significantly to KWD5.2mn compared to a loss of KWD5.4mn in 2009, largely driven by the efforts of cost containment. The airline s strategy for turnaround included acquiring Sahaab, removing excess capacity, dropping loss making routes, and reducing workforce. Jazeera used to lease their aircrafts from Sahaab until 2009, and acquired the company for KWD25mn in January 2010. With the merger, the airline s lease expenses have declined significantly, thus decreasing the operating cost. In 2010 Jazeera carried 1.3mn passengers, which is 15% of Kuwait International Airport s passengers travelling. Jazeera has successfully managed to generate operating profits in Q3 and Q4 2010, after 3 quarters of losses in 2009 and 2010. It is worth noting that debt has increased from KWD13mn in 2009 to KWD71mn in 2010. This drastic increase is due to the acquisition of Sahaab, and hence consolidation of the debt in Jazeera s balance sheets. Majority of the debt (around 80%) is payable between 3 to 5 years and are secured over the aircrafts. Conclusion Overall the revenue of most Kuwaiti Airlines is gradually recovering after the financial crisis. The future of Kuwait Airways and Jazeera Airways looks very promising as the main players in the Kuwait aviation sector. Unfortunately, in the near future, operations could slow down due to the political unrest in the MENA region. If the privatization of Kuwait Airways is finalized, the airline will take a turn for the better, by being less subjected to government regulations. As for Wataniya Airways restarting its operations, the management would have to convince the shareholders to consider the KWD15mn increase in capital. Chances are fairly low for Wataniya to restart its operations given the company s riskiness and sudden bankruptcy. In the meantime, Jazeera Airways should have an increasing market share, which might result in the focus on enhancing the quality of fleet and services. Kuwait Passenger Airline Industry P a g e 4
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