Pegasus Hava Tasimaciligi AS

IST:PGSUS.E

Earnings Call Analysis

Pegasus Airlines Q2 2023: Record Highs and Growth

Pegasus Airlines kicked off Q2 2023 with remarkable growth in the high travel season. The company offered 17% more seats and saw a 21% increase in passengers, leading to a load factor hike to 81.3%. Revenue soared by 30%, driven by a 34% spike in ancillary revenue per passenger. The quarter's costs were well-managed, with fuel costs dipping by 16% but nonfuel costs edging up 3%. This resulted in an all-time high EBITDA of EUR 221 million, marking a 33.6% margin, and a substantial net profit of EUR 91 million compared to the previous year's loss. The airline also fortified its long-term strategy by adding 36 Airbus A321neos to its order, forecasting a full-year ASK growth of 20% and an EBITDA margin around 30%.

An Energetic Quarter with Record-Breaking Performance

This quarter marked a new height in the company's journey with a strong demand for travel supporting key metrics to achieve new company highs. With an impressive 17% increase in offered seats and a 21% surge in passengers carried compared to last year, the quarter saw an 81.3% load factor—a notable 3 percentage points increase. The international segment outshone with a 37% rise in available seat kilometers (ASK), making it the largest international capacity the company has ever operated, even exceeding the peak of the previous year.

Robust Financial Growth Led by Revenue and Passenger Metrics

Financially, the quarter was outstanding with a 30% growth in revenues, reaching EUR 657 million. This growth was fueled by a 24% increase in scheduled passenger revenues and a whopping 61% increase in ancillary revenues. The total scheduled revenue per passenger, including ancillaries, grew by 10% year-on-year to EUR 83.5. The operational success hinges on fleet growth of 6%, aircraft utilization increase of 5%, and the previously mentioned load factor uptick.

Cost Efficiency and Profitability: Signs of Strong Management

While jet fuel prices created a favorable condition, with fuel cost per available seat kilometer (CASK) down by 16%, non-fuel costs per available seat kilometer were up by only 3% year-on-year. Nevertheless, this cost balance translated to a remarkable record high performance and doubling of the EBITDA to EUR 221 million with an EBITDA margin of 33.6%, crossing the EUR 200 million threshold for the first time. It's worth noting that the increase in personnel expenses by 68% was significant but did not dampen the overall strong financial health of the company.

A Cautiously Optimistic Outlook Amidst Changing Market Dynamics

While the company is experiencing a normalized market environment compared to the previous summer's exceptional conditions, the executives anticipate a similar RASK-CASK spread in the third quarter of 2023 as in the third quarter of 2019. They also expect continued pressure on cost, driven by inflation and a recent upswing in jet fuel prices. However, despite these challenges, the company still anticipates maintaining strong performance with a guidance for a 20% ASK growth and an EBITDA margin in the 30% territory for the full year.

Strategic Fleet Expansion Securing Long-Term Growth

The company adopted a strategic expansion to its fleet by ordering an additional 36 Airbus A321neo aircraft, taking the total order size up to 150 aircrafts with deliveries scheduled between 2026 and 2029. This move not only reinforces their business model but also secures a competitive advantage in a market where other Original Equipment Manufacturers (OEMs) struggle to meet capacity demands.

Looking Forward: Fleet and International Growth Initiatives

Focusing ahead, the company is set to increase its fleet size by 9% in 2024, and due to the mix of aircraft and the share of international operations, the ASK growth is expected to exceed this figure. In terms of capital strategy, the company is not planning any changes to its debt structure, focusing solely on financing 16 aircraft deliveries scheduled for 2024. The strategic direction includes bolstering international capacity, which is projected to be approximately 50% above pre-pandemic levels by the end of 2023. Moving beyond, the international business will continue to grow, aiming for a further increase in the international capacity share in the medium term.

Ancillary Revenue Still a Bright Spot for Future

The company prides itself on its ancillary revenue strategy, and moving into the mid-term, it plans to focus on enriching this segment further. The goal is to achieve a slight uptick in ancillary revenue per passenger over the next two to three years, leveraging its growing international scale to enhance overall revenue figures.

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Jason, your chorus call operator. Welcome, and thank you for joining the Pegasus Airlines conference call and live webcast to present and discuss the second quarter 2023 financial results.

[Operator Instructions] The conference is being recorded. [Operator Instructions] Please note the presentation and slides are in manual format. Each participant can access and view individual slides as they wish.

At this time, I would like to turn the conference over to Mrs. Güliz Öztürk, CEO; Mr. Barbaros Kubatoglu, CFO; and Mr. Ömer Ömerbas, IR Manager.

Mrs. Öztürk, you may now proceed.

[Güliz Öztürk, executive]

Thank you, Jason. Welcome, everyone, to our earnings call for the second quarter of the year. Thank you for joining us today. As usual, we will start with the highlights of the quarter and discuss our financial results. We will then answer your questions.

Now for the second quarter, it has been a good start to the high season for us with the propensity to travel being strong and enabling us to produce new company highs at key metrics. We offered 17% more seats in total compared to a year ago. While the growth in total number of passengers reached 21%, resulting with close to 3 percentage points of an increase in our load factor, which is 81.3%. Our ASK growth was higher at 27% year-on-year as our successful execution of the international growth plan continues. In fact, we recorded a 37% increase in international ASK and operated our largest international capacity in a quarter ever, even larger than the capacity at the peak third quarter of 2022.

At the headline financial figures, we recorded a 30% growth in revenues. The market is normalizing back from the post COVID hype that we witnessed this last year, especially with regards to the unit revenue environment. We are also steering the wheel to our normal time commercial strategy, which focuses on expanding the load factors through pricing optimization and growing the ancillary revenues. Our strong execution on the ancillary side continued in the second quarter this year as well, and we generated a 34% year-on-year increase in ancillary per pax.

Overall, the total scheduled revenue per pax, including the ancillary revenue, grew by 10% year-on-year to EUR 83.5 in the second quarter of the year. When it comes to the cost, an efficient cost management is indispensable for our commercial strategy, and we have an industry-leading performance here. As you all well know, lower jet fuel price provided us with a tailwind this year so far. And our fuel CASK fell 16% year-on-year in quarter 2. On the other hand, the nonfuel CASK was 3% higher year-on-year in the second quarter.

In the end, we closed second quarter with a RASK-CASK spread of below EUR 0.01, marking a record high performance. As such, we have more than doubled our EBITDA to EUR 221 million in the second quarter, which represented a 33.6% EBITDA margin. So another milestone is reached as we passed about a EUR 200 million threshold for the first time in the second quarter. The net profit reached EUR 91 million compared to the loss we had a year ago. All in all, it was a strong second quarter, and it was a strong first half. Second half started also with a strong demand with July, bringing in another 18% growth in the number of international passengers. Actually, in July, we supplied our largest ASK ever for a single month.

Having said this, the year-on-year comparisons are getting increasingly difficult in terms of unit revenues because it's a more normalized market environment right now compared to what we have witnessed through the summer season last year. It was a period which was referred to as the revenge of the customer. And we see the same trend globally in the aviation sector.

Today, the disruption issue that hurt the traffic last year is still here to a certain extent this time and the industry is still facing a capacity supply problem, but there's obviously more capacity in the market compared a year ago. So for the third quarter, what we are seeing is that the RASK will be more trending at a comparable level with the same quarter of 2019 rather than the record high third quarter of 2022. And there's also the recent upswing in the jet fuel prices. It's too early to tell the direction of the fuel for the coming months, but we prefer to take a cautious stance. So some cost push that will drive the CASK higher from the second to third quarter is on the table.

In short, given the current circumstances, we expect RASK-CASK spread in the third quarter of 2023 to land somewhere around the levels seen in the third quarter of 2019. For the whole year, we're still on track for 20% ASK growth as provided earlier. We also retreat our estimate for an EBITDA margin at the [ 30% territory ]. So we are confident that we will maintain our leading position in the overall industry at this metric.

I'd say the important and enthusiastic topic to the last word of my part, our fleet orders. In July, we extended our current order with Airbus by 36 aircraft, all Airbus A321neo. Deliveries are scheduled for the 2026-'29 period. Total size of the order is now at 150 aircrafts. This expansion brings more transparency to our long-term growth targets and will further strengthen the execution of our business model. We are very satisfied with the performance of the Airbus A321neo, as we always say. And the more we grow our Airbus 321 fleet, the more we will see the benefits of the economies of scale. Plus, we finalized the order at a time when OEMs are very stretched in supplying the capacity to the market. So we are very happy with this development, and I'm also happy to share this with you.

So now I'm leaving the word to Barbaros to elaborate more on the details of quarter 2. Thank you. Barbaros?

[M. Kubatoglu, executive]

Let's take a quick look at the financial details of the quarter. We recorded a top line figure of EUR 657 million, which represents a 30% increase compared to a year ago. For a breakdown, there was 24% growth in scheduled passenger revenues and 61% growth in ancillary revenues. On the operating side, the drivers were the 6% growth in fleet, 5% increase in aircraft utilization and around 3% increase in load factor, altogether producing a 21% increase in the number of passengers.

Now that we are discussing the operating details, I'd like to spend an extra minute to highlight an important point here or more like a reminder to have you in your evaluations and future projections on Pegasus. We have discussed our fleet strategy with you several times. It's indeed one of the main pillars of our investment story. As you know, we have already completed our A320neo order with Airbus. And the rest of the order book consists of A321neos. So far, we delivered 30 of them, and we have 78 A321neos in the pipeline. A321neos has around 30% more seats than the others. So more A321 means an increasing average seat supply per aircraft.

In Q2 '23, our average seat supply reached to 200-seat threshold for the first time, indicating a 5% increase from the 192 seats compared to a year ago. In theory, even if the load factor stays flat, it still means a high passenger number per cycle. This calculation will be more and more in works going forward as the share of A321neos increasing the fleet. So do not overlook this fact when you are analyzing our traffic releases and financials.

On the cost front, there is an 8% increase in total costs. The lower jet fuel prices work in favor of us and pulled down our fuel expenses by 16% year-over-year, despite the fact that we saw a 22% increase in our [indiscernible]. However, the cost item other than jet fuel faced with inflationary pressure across the board. As you know, this is particularly true for the personnel expenses, which increased by [ 68% ] in the second quarter of the year and offset around half of the savings generated from fuel expenses. We expect the pressure stemming from staff costs to remain as such in the remainder of the year.

As of the first 6 months, our CASK non-fuel was 6% higher year-on-year. And despite the fact that we maintain our estimate for a mid- to high single-digit increase in CASK non-fuel for the whole year compared to 2022. As for EBITDA, there is EUR 221 million figure for Q2, which represented an EBITDA margin of 33.6% for this period. Last year, we had an EBITDA of EUR 104 million in the same quarter with 20.6% margin. At the bottom line, there is EUR 91 million net profit for this quarter compared to EUR 40 million loss we incurred a year ago.

All in all, on our balance sheet, we have EUR 956 million of cash reserves and a positive cash reserve of EUR 443 million. Our total net debt stands at the EUR 2.1 billion level. And as a result, our net debt over EBITDA for the trailing 12-month period stood at 2.16x as of the first half and compared to 2.45x by the end of 2022. Regarding the fuel hedges for '23, we are now 48% hedged at a price range equivalent of $64 to $84 per barrel for Brent. Our hedge level for 2024 also reached to 36% as of today.

That concludes my part of the presentation. We will now start the Q&A session. As usual, we will start by answering the questions that you have sent us. We will then open the call to add additional questions and follow-ups. Thank you.

[Ömer Ömerbas, executive]

Hi, everyone. This is Ömer speaking. I would like to thank you for your participation and for your questions. Let's start with the first one.

Considering the high base of last year, how much erosion should we expect in international pax yield? Güliz?

[Güliz Öztürk, executive]

Okay. Let me remind you a quick feedback that we frequently share with the community, passenger yields, load factor, ancillary per pax per passengers. Our strategy on these areas is interconnected, and we evaluate the outcome as a whole. That's what I mentioned as our normal time commercial strategy. Obviously, the pandemic period was a massive deviation from normal times. So we have to work differently to adapt ourselves. Now the market is normalizing. So this means the key metrics will make more sense when they are compared to the pre-pandemic levels. Last year's yield environment was very strong when we exited the pandemic, and this was particularly true for us as we were ready to meet and manage the fast recovery in traffic.

Recall, that our international passenger yield was up by [ 50%, 60% ] in the third and fourth quarters of 2022 compared to the same quarter of 2019. While our capacity supply was like 30% higher and it was such a unique environment. In the meantime, the airlines in Europe, we're performing a more limited recovery in capacity as well as in yields due to some various reasons. This summer, although there is still some disruption problems that causes stress and pressure on the airline, there is considerably more capacity in the market. Demand is still growing in terms of passenger numbers, but that revenge mode has changed.

All in all, the environment resembles the one that we are more used to operate in and one where we can run our business model as it is. So this is how actually the background. On the cost side, there is the recent upswing, as we said, in jet fuel price and the ongoing inflationary pressure on other cost items. There was 1 question about the staff expenses. We actually expect more than 18% increase in this item in the second half compared to the first 6 months. Nevertheless, we are confident about our ability to run an efficient operation, and we continue to guide you for a mid- to high single-digit increase in CASK nonfuel similar to the previous call.

In short, I'd like to say from a rough CASK spread perspective, we see the 2023 figure realizing at a comparable level to the 2019 figure under the current circumstances.

[Ömer Ömerbas, executive]

Thank you, Güliz. And the second question, could you provide some information regarding the potential impact of the increase and change of structure in the domestic price cap?

[Güliz Öztürk, executive]

Yes, we have a new structure. So according to the new structure, the cap will be calculated as TRY 1,650 until 85% of the seats are sold. And then for the remaining 15% of the capacity, TRY 2,500 will be applied. Previously, it was an all-around flat rate of TRY 1,150. The changes announced very recently, so it will cover only the half of the peak season. Yet a change was really necessary, and it will give us a larger playground in revenue management. The direct impact on the domestic revenues for the second half of the year would be around 3%, 4% of an increase subject to certain assumptions, of course. But the benefit for us reach beyond the additional revenues that we can generate from the tickets we're selling at the cap level because the higher capital will let us run our business model at the way it's supposed to be and let us offer various tariffs to the customers. Otherwise, with the previous capping effects, all tariffs were squeezed to a narrow price range, leaving no room for differentiation.

[Ömer Ömerbas, executive]

Thank you, Güliz. The third question, what is your take on the recent change in legislation that stopped credit card payments by installments for spendings related to traveling abroad? Barbaros?

[M. Kubatoglu, executive]

It's a very small figure on our side. Credit cards were extending from 2 to 4 installments for the ticket purchases and the share of sales on installments in total sales was around less than 2%. And overall, there is an immaterial impact on our international sales.

[Ömer Ömerbas, executive]

Thank you. Next question. Upon news regarding the manufacturer recalling the engines it supplied to A320neos for inspection, can you remind us if you are exposed to the risk of grounding any aircraft due to such reason?

[M. Kubatoglu, executive]

No, we are not facing any such risk. Our engine supplier is CFM, not present with me. The ones that are reports in the market, they are the GTF engines supplied by Pratt & Whitney. We have CFM International LEAP engines [ acute ] on our neo aircraft. So there is no concern for us.

[Ömer Ömerbas, executive]

Thank you, Barbaros. Can you elaborate on the outlook and the direction of your international growth plans for the medium term? Güliz?

[Güliz Öztürk, executive]

I think we delivered a very successful results so far with this strategy, and the impact has been very visible on our figures. At the end of 2017, the share of international capacity in the total capacity was around 64%, and this figure reached to 80% at the end of 2022 last year. There are many contributors to the execution here. First, the fleet strategy, which is well designed to meet our growth targets. Moreover, our fleet plan proved to be a reliable one, considering the big capacity supply problems that a large number of airlines are facing.

We also do a [ tailor-made ] work towards the expansion of the route network on both ends, in other words, the planning beforehand and the commercial efforts after the service launch. The ancillary services are also a crucial part of our international segment. We're designing and optimizing the ancillary services in line with the requirements of our passengers in order to be able to stimulate further demand and increase the penetration on the ancillary products and services. And the results have been very successful as we have followed in our financial results quarter after quarter.

Now we expect to close this year with ASK share of international segment reaching around 82% level. We will be adding a couple of percentage points. By the way, at the end of the year, our international capacity will be around 50% higher than pre-pandemic levels. This is an eye catching growth, considering that in Europe, for instance, the total capacity is estimated to recover back to the pre-pandemic levels only during this summer. Beyond 2023, we will continue to grow our international business. That's the plan we have. We also expect the domestic demand to pick up some pace going forward in the coming years. So I may say there will be a higher share of international capacity in total, maybe a much higher in the medium term.

[Ömer Ömerbas, executive]

Thank you, Güliz. Can you comment on potential ASK increase in average fleet size for 2024? Barbaros?

[M. Kubatoglu, executive]

We are foreseeing an average fleet size -- operating fleet size of 100 aircrafts in 2023, including 2 to 3 [indiscernible] aircraft during the summer period. And given the fleet plan for the upcoming years, there will be around a 9% increase in average fleet size in 2024, a higher number of average seat supply, as I mentioned, thanks to continued increase of A321neos and a slight increase in average stage line stemming from the higher share of international operations in total. And you can expect the ASK growth to outpace the 9% growth in average fleet size next year.

[Ömer Ömerbas, executive]

Barbaros, thank you. So these were the questions that we have received from you. So thank you again. Jason, we can now open the call up to the audio questions, if any. Thank you.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no questions in the queue. I will now turn the conference over to management for any closing remarks. I'm sorry, it looks like we do have a question from Dan [indiscernible].

[Unknown Analyst]

I was just going to ask whether you have any plans with regards to your current capital structure, especially on the side of the debt stack, whether you're looking to refinance or issue any more debt right now?

[M. Kubatoglu, executive]

Thank you. In terms of capital structure, we are not in any plan on our debt structure for the upcoming year and only -- considering only financing upcoming 16 aircraft deliveries for the year of 2024.

[Operator]

And our next question comes from Cenk Orcan from HSBC.

[Cenk Orcan, analyst]

You mentioned the importance of ancillary per pax and not just on the load factor and revenue yields. In that aspect, I'm curious to know your medium-term outlook for ancillary per pax. You have grown this [ magic ] quite successfully. Recently, we expect the uptrend in ancillary per pax, especially now that you mentioned growing share of international capacity in the overall capacity. Thank you.

[M. Kubatoglu, executive]

Thank you, Cenk. On the ancillary side, we can say generally more of [indiscernible] on that side, growing more internationally helps us to increase the largest figures on the ancillary side. And for the upcoming period, we prefer to increase [indiscernible] rather than yield and prioritize the ancillary [indiscernible] more focus on the penetration. And all in all, for the upcoming period, we expect to slight increase in total in blended perspective for the upcoming 2 to 3 years.

[Operator]

There are no more questions in the queue. I'd like to turn it back to management for any closing remarks.

[Güliz Öztürk, executive]

Thanks, Jason, and thank you, everyone, for joining us. I wish you all a good week. Thank you.

[Operator]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.