Hello, everybody. Thanks so much for joining the Flynas Second Quarter Earnings Call. My name is Ricardo Rezende. I'm the Head of Transport Research and CEEMEA for Morgan Stanley. It's a pleasure to have the entire flynas Management Team to talk about the results with us this afternoon. Before we proceed, just got to go through some of the disclaimers on our side.
This webcast is intended for Morgan Stanley's traditional corporate clients, as well as for Morgan Stanley employees. It's not for members of the press. If you're a member of the press, please disconnect now and reach out separately. Please also note that it's not for retail individual wealth management clients. For important disclosures, please see the Morgan Stanley Research Disclosures website at www.morganstanley.com/researchdisclosures. Just another point on my side as well. If you want to submit questions, you do have the question box.
You can submit the questions. We're going to go through them after the management presentation, and with that, I would like to pass the word to the CEO of flynas, Mr. Bandar Almohanna. Bandar, with you.
Thank you. Good afternoon, everyone, and thank you for joining us today. I'm pleased to welcome you to our First E arnings Calls as a public company, a significant milestone in our journey. We are committed to maintaining an open and transparent dialogue with our shareholders, and we look forward to engaging with you regularly going forward.
As many of you know, flynas is a leading low-cost carrier in Saudi Arabia, focused on short to medium-haul routes through an efficient, reliable, and value-driven operating model. Before we turn to recent results, I'd like to briefly recap our full year 2024 performance, which provides helpful context for our growth strategy and future targets. In 2024, we increased our market share to 14.8%, up 1.9% points year-on-year, supported by keen pricing, a growing network, and a competitive product offering. We carried 14.7 million passengers last year, marking a 32% increase from 2023.
This growth was achieved while also improving load factor to 85.6%, up 6.1% points, reflecting a disciplined capacity planning and strong customer uptake. Our fleet reached 59 aircraft by the end of 2024, with an average age of just 3.7 years, one of the youngest in the region. This supports our operational efficiency and helps us manage direct costs more effectively.
As a result of this solid operational performance, revenue for the year of 2024 rose to SAR 7.6 billion, up 19% year-on-year. 2024 EBITDA increased by 31% year-on-year and net profit reached SAR 434 million. We closed the year with a healthy cash balance of SAR 1.7 billion, which reflects the strength of our cash generation and overall financial position. Altogether, this performance highlights the resilience of our business model and positions us well for the next phase of growth.
With that, let's turn to a closer look to our operating segment on the next slide. flynas runs a scalable platform centered around our low-cost carrier operation, which remains the main driver of our growth. Just to remind you, here we are looking at 2024 numbers to provide a full-year view of the business before moving to the current year performance.
In 2024, the low-cost or the LCC segment accounted for nearly 90% of total revenue, supported by scheduled domestic and international routes. This core business continued to benefit from high aircraft utilization, a lean cost structure, and a strong demand from price-sensitive travelers across the region. Seasonal Hajj operations contributed about 8% of revenue in 2024. While this is a smaller part of the business, it adds meaningful uplift during peak travel periods and contributes to the company's profitability.
Our general aviation segment, which includes charter and private aviation services, made up of around 2% of revenue last year. This is a niche business that provides charter and private aviation services to specific corporates and VIPs. Looking ahead, we remain focused on expanding our LCC and Hajj segments, which will continue to be the primary engines of our growth. These segments also support our ability to scale efficiently and respond effectively to seasonal demand patterns. Now, let's take a look at Saudi market opportunity on the next slide.
Before we turn to our financial and operational performance, I'd like to take a moment to highlight the broader market environment. Saudi Arabia remains one of the fastest-growing aviation markets in the world. Demand for air travel continues to rise, supported by demographic growth, economic diversification, and strong policy momentum.
The market has actively recovered from the effects of COVID-19, surpassing 2019 levels in 2023 and continuing to grow. According to IATA, passenger traffic in the Kingdom is expected to more than triple pre-COVID levels by the end of this decade, far ahead of global averages. Yet, low-cost carriers currently represent just 39% of seat capacity in Saudi Arabia, still below more mature markets like India, Spain, and Italy.
This gives us significant room for growth, especially as price-sensitive demand continues to expand. Vision 2030 is also creating strong momentum, from rising tourism and religious travel to increased business activity and major infrastructure projects. With a target of 120 million visitors each year and SAR 375 billion in planned aviation investment, the market is entering a major growth phase.
This backdrop supports our ability to expand the flynas network, scale the fleet, and capture share through a disciplined and sustainable approach. Let's now take a closer look at our strategy, network, and fleet. Our strategic direction as a company hasn't changed. We remain focused on disciplined growth and efficient execution.
We aim to lead the low-cost carrier space in MENA region for short and medium-haul routes by offering affordable and reliable travel backed by a young fleet and a growing network. The way we approach this comes down to three things: first, scaling in a smart and sustainable way, adding new aircraft and destinations where we see strong demand, while keeping a close eye on utilization and load factors. Second, maintaining cost efficiency. The LCC model works best when we stay lean, and we are always looking at ways to run the business more efficiently without compromising on services.
Third, we are well prepared to unlock additional growth driven by the transformation taking place across Saudi Arabia's aviation sector under Vision 2030. As the markets grow, we see real opportunities in areas like religious travel, tourism, and business demand. This focus puts us in a strong position to keep delivering in the short term while building long-term value.
Now, let's move in and take a look at our network. As you can see in this slide, our footprint continues to expand, supported by strong domestic demand and steady momentum in international markets. In the first half of 2025, we added seven new destinations across six new countries, bringing our total network to 146 routes, 74 destinations, and 34 countries. These additions are not just about adding volume. They reflect our strategy of targeted, opportunity-led growth.
We are focusing on underserved and unserved high-potential markets that fit within our Blue Ocean approach. Our network is intentionally diversified and built around a point-to-point model. Also, our network strategy is diversified across multiple bases, currently four and more in the future. That helps us avoid unnecessary complexity and preserve costs efficiently, which is a core to our low-cost positioning. It is a model that fits well with regional travel patterns, and we are seeing it deliver.
Today, over half of our passengers travel within Saudi Arabia, giving us strong scale and connectivity in the domestic market. At the same time, our international footprint continues to grow. And with our current fleet, we can already reach markets that connect us to nearly 6 billion people. That reach highlights our strategic advantage. From the Kingdom, we are connected to some of the world's most dynamic and fast-growing aviation corridors.
We are just getting started. There is still significant room to grow, both in terms of network depth and breadth, especially as we continue to expand the fleet and drive higher aircraft utilization. With that, let's take a look at our fleet plan before we move into the results of the second quarter and first half of 2025. We are continuing to expand our fleet in a measured and balanced way, aligning aircraft additions with demand trends and operational priorities.
By the end of this year, we expect our operating fleet to reach 73 aircraft, a 25% increase from 59 at the end of last year. This includes seven wet lease narrow body aircraft to address a short-term challenge related to temporary aircraft grounding due to the worldwide delayed delivery of spare engines.
This growth reflects the recent delivery of our Airbus A320neo and temporary additions of wet lease aircraft, which are supporting our network expansion as well as seasonal peaks, including Hajj operations, and looking ahead, we plan to grow our fleet to 167 aircraft by 2030, which translates to around 17% annual growth over the next five years.
This plan is fully supported by our existing aircraft order and aligned with our network expansion and traffic targets. Of course, it's not just about growing the fleet. It is about making sure it remains efficient and reliable. Our fleet is one of the youngest in the region, averaging less than four years for narrowbody aircraft, and includes a very high share of fuel-efficient models. This supports lower operating costs and helps reduce our environmental footprint.
We are also investing in a widebody capacity to better serve the growing demand for Hajj and Umrah travel, and to keep our fleet running efficiently as we scale, we have signed long-term engine maintenance agreements with CFM to support our cost reliability. Overall, fleet growth is a key enabler, helping us serve more markets, grow our share, and strengthen our position as Saudi Arabia's leading low-cost carrier. With that, I now hand over to Ramzi Zaroubi, our CFO, to walk you through the financials for the second quarter and first half.
Thank you, Bandar. Good afternoon, everyone. My name is Ramzi Zaroubi, flynas CFO, and I'm very happy to present our first results as a public company. Let us start with a snapshot of our traffic trends in the second quarter. We carried 3.6 million passengers, representing a 3% increase year-on-year, driven by continued expansion of our network.
This came alongside a 4% increase in available seat kilometers, reflecting ongoing fleet growth and new route launches. Importantly, we saw a meaningful ramp-up in our Hajj operations, carrying over 110,000 pilgrims in the quarter, up 41% year-on-year. This contributed to our diversified and seasonal revenue base and our profitability as well.
As of the end of June, our operating fleet reached 71 aircraft, up 11 compared to the same time last year, and our average fleet age remains young, at just below four years. Load factors softened slightly to 79.6%, which reflects the temporary headwinds from the early suspension of Saudi visit visas prior to the start of the Hajj season and regional instability during the quarter. As a result of that, RASK was under pressure, declining 13% year-on-year. Here, I remind you that the RASK is the LCC RASK and does not include the Hajj revenue.
While adjusted CASK improved by 9%, reflecting continued cost discipline, mainly due to lower fuel costs and lower airport and handling unit costs renegotiated in line with growth and scale of flynas operations. Overall, the quarter demonstrates steady growth and improving cost structure. Let us now have a look at our financial highlights before going through our performance in more detail. Revenue for the second quarter totaled SAR 2.1 billion, down 1% year-on-year.
This slight decline was primarily due to temporary headwinds mentioned earlier, partially offset by strong Hajj operations and continued network expansion. Adjusted EBITDA rose 16% year-on-year to SAR 736 million, with margin improving by more than 5% points to reach 34.3%. This excludes gains from sale and lease-back transactions and one-off IPO-related costs.
The growth in EBITDA and margin reflects the solid performance of our core business, supported by improved cost efficiency and a stronger revenue mix, particularly from Hajj season. Adjusted net profit came in at SAR 191 million, down 3% from last year, mainly impacted by higher depreciation costs. We ended the quarter with a cash balance of SAR 4.5 billion, which is more than 2.7 times higher than year-end, driven by operational cash flows, additional funding, and IPO proceeds.
This also helped us improve our position on leverage, with net debt to adjusted EBITDA declining to 1.4 times from 2.2 times at the end of 2024, providing greater flexibility to support our growth plans. Finally, adjusted return on invested capital for the quarter was 10.4%, reflecting the impact of IPO proceeds now included in the balance sheet.
Over time, we expect return on invested capital to improve as we deploy capital into expanding the fleet and scaling operations. Let us now turn to a detailed look at the adjusted results. So here, I'd like to start with a deeper dive with an important point. Our underlying earnings in the second quarter were solid despite the impact of several one-off items.
Let me walk you through the reconciliation to our adjusted earnings. As shown in the left-hand side of the slide, we reported an EBITDA loss of SAR 317 million in the second quarter. This includes non-recurring items, non-operational, which, once adjusted, bring us to an adjusted EBITDA of SAR 736 million. The largest of these was one-off IPO cost, consisting of an ESOP charge of SAR 982 million and IPO expense of SAR 101 million.
Although the total cost was funded by existing pre-IPO shareholders, the correct accounting treatment is to route the cost to the income statement, which was offset in the balance sheet with no effect on retained earnings or net equity or on the underlying performance of flynas, so it was accounted for in the income statement and reversed in the balance sheet.
We also adjusted for the gain from sale and lease-back transactions, which were SAR 30 million in 2025 and SAR 100 million in 2024, as SLB is inherently variable depending on the number of aircraft financed through SLB, so, for example, in year one, you can have two aircraft on SLB, and on another year, you can have eight. Therefore, we adjusted for SLB to present comparable results. The same adjustments apply on the right-hand side, where we show the reconciliation to adjusted net profit.
After adjusting for these items, our second quarter net profit came in at SAR 191 million. With that context in place, let us now turn to a detailed look at the income statement. As shown in the table on the left side of the slide, revenue for the first half of 2025 reached nearly SAR 4 billion, making a 1% year-on-year increase.
The second quarter revenue came in slightly lower than the same period last year, but as mentioned earlier, the comparison was impacted by temporary headwinds we faced in the quarter, which no longer exist. Importantly, the strong performance in the first quarter helped offset this effect, and we delivered positive top-line growth for the half. First-half gross profit rose 6% to SAR 866 million, reflecting continued focus on improving direct operating cost efficiency, which is lower unit cost based on scale of operations.
This brought our gross margin to 21.8%. Also, during the first half, we recorded IPO-related expenses totaling SAR 1 billion, as mentioned in the previous slide, primarily driven by the one-off charge of the employee share option plan of SAR 982 million and IPO fees of SAR 101 million. Both were funded by pre-IPO shareholders, with no effect on retained earnings, net equity, or the underlying performance of the business.
As I mentioned, these items, alongside sale and lease-back gains, are excluded from our adjusted results to give a clearer view of the strength of core operations and our underlying performance. Adjusted EBITDA for the first half of 2025 grew 19% year-on-year to SAR 1.4 billion, with the margin expanding to 34%. Adjusted net profit rose 22% to SAR 339 million, with net margin improving to 8.5%.
In summary, our first-half results demonstrate a stable earnings profile supported by a strong start to the year and strong Hajj performance, and counterbalanced by temporary headwinds in the second quarter, which is totally phased out now. Let's now take a closer look at top-line trends.
Next slide. Let's begin with a look at the key revenue drivers from our LCC segment. Passenger volumes continued to grow in the second quarter, with just over 3.5 million passengers carried, a 3% increase year-on-year. This brought our total for the first half to 7.2 million passengers, broadly in line with the prior year. On the supply side, available seat kilometers rose by 4% in the quarter and 2% over half-year, reflecting fleet growth and network expansion. Load factor came in at 79.6% for the second quarter and 82.1% for the first half, both slightly lower than the same period last year.
Overall, passenger trends remained resilient despite some short-term volatility across regional markets. Let us now turn to the next slide to take a closer look at the revenue mix and unit revenue trends. Looking at our revenue mix on the left, you will see the second quarter was shaped by strong contributions from our Hajj operations, which helped offset some softness in the LCC segment.
Total revenue in the second quarter reached SAR 2.1 billion, down just 1% year-on-year despite a decline in LCC revenue. Hajj and Umrah revenue rose 41% year-on-year, supported by higher Hajj volumes. General Aviation remained steady and continues to play a complementary role in our portfolio. For the first half of the year, revenue increased 1% to reach SAR 4 billion. On the right-hand side, you can see the RASK trends in our LCC segment.
Unit revenue in the second quarter came in at SAR 0.245, down 13% year-on-year, mainly due to Q2 headwinds, which we touched on earlier. On a half-year basis, the RASK decline was more moderate at 5% year-on-year, supported by the strong start of the year. As always, we remain focused on improving load factors, strengthening network profitability as we scale both fleet and network.
Let us now take a closer look at our unit cost trends. As you can see on the chart to the left, in both the second quarter and the first half of 2025, cost of revenue remained broadly flat year-on-year, despite low single-digit growth in supply of seats. Fuel remained the largest single-cost component in the second quarter, accounting for 27% of our total direct cost. Fuel expense declined by 8% year-on-year, supported by lower average fuel prices.
We'll cover that in more detail on the next slide. Handling and airport charges were down 7%, benefiting from the revised fee structure based on scale of operations. Staff costs were slightly lower year-on-year, while rental expenses rose by 24%, reflecting the short-term wet lease aircraft related to Hajj operations. Maintenance costs declined by 38%, mainly due to lower aircraft redelivery cost in 2025.
All in all, our cost base held steady despite the growth in operations, which shows that our focus on efficiency is paying off. As a result of that, we also delivered a solid improvement in unit economics during the second quarter. Adjusted CASK in the second quarter of 2025 declined by 9% year-on-year to SAR 0.238. This is a meaningful achievement, especially as we continue to grow the network while managing inflationary pressures across the industry.
For the first half, adjusted CASK stood at SAR 0.246, a 4% year-on-year improvement, reflecting the same consistent focus on cost control. Let us now take a closer look at fuel price dynamics. As mentioned on the previous slide, our fuel expense was down 8% year-on-year in the second quarter and 10% for the first half of 2025. The main driver was lower oil prices, which have been trending down since early this year, as well as having 90% of our fleet made of NEO variant of the A320 aircraft, with 15% lower fuel consumption.
The chart here shows Brent prices. As you can see, prices declined steadily through the first five months, with a moderate uptick in June due to rising geopolitical tensions in the region. Even with that increase, prices stayed well below our budgeted fuel price of $80 per barrel, which continues to give us some headroom.
The market consensus for Brent Crude is to stabilize at year-end at the lower range of $60-$65 per barrel. We plan to start our hedging program, which we discussed earlier, 50% of our consumption, and take positions at around the consensus prices. All in all, this fuel backdrop has supported our margin performance and helped keep overall cost in check during the first half of the year. Let us now turn to SG&A expenses.
In SG&A expenses, we continue to take a disciplined approach while selectively investing in areas that support our growth strategy. Starting with selling and marketing expenses, these increased by 13% year-on-year in the first half of the year. The rise was mainly driven by seasonal advertising and promotional activity tied to our new international route launches. These are targeted investments directly supporting revenue opportunities during key travel periods.
In contrast, general and administrative costs declined by 10% year-on-year, reflecting lower professional and consultancy fees. Overall, when you combine cost of revenue with SG&A, total recurring expenses were flat year-on-year despite inflation and network expansion. Let us now turn to the next slide and take a look at our leverage and debt structure.
As you can see on this slide, our balance sheet strengthened meaningfully following the IPO. Net debt declined to SAR 3.2 billion, supported by a sharp increase in cash and bank deposits, up 2.6 times to SAR 4.6 billion, largely reflecting IPO proceeds and additional funding. At the same time, we saw an increase in bank debt to support ongoing growth initiatives such as flight simulator and maintenance hangar, along with a modest rise in lease liabilities tied to fleet expansion.
Although Flynas cash and short-term investment as a percentage of annual revenue is in line with peer group, we expect reduction to lower levels in line with our growth plans. As a result, our net debt to adjusted EBITDA improved to 1.4 times, down from 2.2 times in the beginning of the year, which is the lowest level we've seen recently, giving us more financial flexibility moving forward. Let us now take a brief look at our cash flows before turning to guidance and our capital allocation.
In the first half of 2025, Flynas generated SAR 1.2 billion in adjusted net operating cash flow, supported by stronger operating performance and improved working capital. This excludes the ESOP payment due on IPO. Net CapEx increased to SAR 621 million in line with our fleet expansion plans, inclusive of aircraft, spare engines and pre-delivery payments.
On the financing side, net inflows of SAR 3 billion came mostly from the IPO and new debt raised to support growth, partially counterbalanced by repayment of lease liabilities and finance costs. As a result, our ending cash balances rose 2.6 times to SAR 4.5 billion, reflecting our liquidity position. Adjusted return on invested capital remained solid at 10.6% for the first half, although it was mathematically affected by the increase in invested capital following the IPO.
Adjusted free cash flow for the period was SAR 701 million, lower year-on-year due to higher CapEx. With that, I'll hand it back to Bandar for an update on guidance, capital allocation, and closing remarks,
and as you have seen from our data calendar, we are in a strong position to deliver another year of strong growth that's supported by continued network expansion and disciplined cost control.
We are on track to achieve 2025 guidance. Mainly, revenue is projected to rise by 6%- 18%, reflecting both the additional capacity and continued momentum in international markets. Even with this, profitability should remain healthy. We are guiding for an EBITDA margin of 30%- 32% and a net margin of 6%- 6.5%, supported by scale benefit and continued cost discipline. Net debt to EBITDA is expected to normalize at around 2 times by year-end.
We are confident in our ability to meet these targets as we scale efficiently and continue to improve earnings quality. Let me now say a few words about our capital allocation priorities before we wrap up. Our approach here remains disciplined and focused on supporting profitable growth while preserving balance sheet strength. We have three clear priorities.
First, we continue to reinvest in fleet growth, scaling the network to capture demand while maintaining cost efficiency. Second, we are allocating capital to expand ancillary revenue streams through new product partnerships and services that enhance margins and diversify revenue. And third, we maintain healthy leverage and strong liquidity to ensure we can fund growth without compromising financial flexibility. These priorities align with our long-term strategy and are a key to supporting our performance as we scale.
As we wrap up the presentation, I'd like to leave you with three key messages. Our business model is proven and resilient, with a strong track record of growth and profitability backed by operational discipline. We are well capitalized for the next phase of expansion, with IPO proceeds strengthening our balance sheet and enabling continued investment in fleet and network.
We are focused on execution with a clear strategy supported by a strong market momentum and additional tailwinds from Vision 2030. Thank you all. That concludes our presentation, and we would now be happy to take your questions.
Thanks, Bandar. Again, if you want to submit any questions, please do send the questions through the chat box. I've seen that we already received quite a lot of questions. I'll try to consolidate them under the same topic. If I may start with one question, since the IPO, we've had the announcement on Air Arabia launching a new LCC in Dammam. Would you mind just commenting on that, and how do you think that could impact your strategy for the coming years?
Well, we see, frankly, no material impact from this development. Flynas is already the largest airline in Dammam. We operate 35 routes to 11 destinations, which cover the most lucrative and high-demand sector from the city. Dammam represents about 10% of our RASK, making it our smallest base by share, but one with a huge growth potential. We have an excellent and deep relationship with Dammam ecosystem, including a strong partnership with DACO, and we welcome, frankly, efficient and rational competition from the private sector, and we think this is likely will add great value to the market.
Our focus in Dammam and across the network is on profitable and sustainable expansion, not on chasing overly ambitious capacity targets at the expense of return, and as we mentioned a couple of times, the KSA market, aviation market, is large and growing, so competition here is not a zero-sum game.
Arabia license limits them to Dammam for their flight origination and destination, with no access to the direct international religious travel segment and no ability to base aircraft elsewhere in the kingdom. International competition in general is already strong in Dammam due to open sky bilateral, making our efficiency and diversified business model even more important.
Our diversified network and the fleet strategy spanning scheduled LCC, Al-Hajj, Al-Umrah, and private aviation, plus wide body for religious segments, means our overlap with Air Arabia will be minimal. We'll continue to expand in Dammam, where it makes commercial sense, while also executing our strategy of opening a new base in Saudi Arabia and around the kingdom, and the AOC even outside the kingdom to capture broader growth opportunity.
Great. And then when you look at the revenue guidance, and I'm trying to consolidate a few of the questions under the same question, we are already past the first half of the year. And when you look at the guidance, the range for the full year, it implies quite a good acceleration in the second half. So if you could comment on what the underlying assumptions for the revenue guidance for the full year and how do you see the CFM impact on your guidance, what's embedded in there?
Yeah. Yeah. Hi, this is Ramzi. On the revenue guidance for the second half, we will definitely make up for the lost ASKs during the first half with the wet lease aircraft that joined the fleet in June. And with the planned higher aircraft utilization on our own aircraft, we planned-will our ASKs in the second half will be around 30% higher than the first half. So from that, you can deliver your assumptions similar to the passenger growth.
As for the second question on the CFM, the CFM is-I'll just take the opportunity to explain a little bit around the CFM. We have an agreement with CFM that covers all maintenance costs. The problem with the grounding of engines on CFM was basically due to engines requiring shop visits ahead of schedule. But we are totally hedged against this with CFM. CFM, they take over the shop visits. The shop visit costs, we just pay a rate by the hour. And while the engine is in shop visit, CFM provides us with a spare engine.
This happened last year extensively, and CFM supplied Flynas with all what we needed in terms of spare engines, 20, 30 engines, whatever was that, it was provided by CFM. And as we discussed this several times during the IPO and explained that we have no cost exposure on engine-related issues. However, this year in Q2, CFM spare engines started to come late. So CFM, they have a pressure on providing spare engines to all their customers, and we experienced a delay.
So then two very good things happened. First of all, CFM, they had the fix for the engines. So all new engines now coming from CFM or the current engines in the shop, they're coming with a new blade, which hopefully resolves the situation. And second, we brought seven additional wet lease aircraft to mitigate any possible grounding.
So therefore, our focus remains foremost on protecting growth, and to do that, we brought the additional wet lease. We expect from now until year-end, the full problem to be resolved. We will not have this problem next year. And in the interim, we have mitigated this risk. I hope this answered your question.
So we received two follow-ups on that one. If this issue remains for next year, how do you think that profitability could be impacted, and what's the extra cost of the wet leases that you had to do because of the CFM issues?
Yeah. Yeah. We carefully looked at the issue. We had several discussions between us and CFM and our engineering. Our knowledge is that next year, flynas will not have a problem. So the engines are removed from the aircraft at a certain interval.
For us, by this year, our problems are peaked, and the engines are replaced, and we don't foresee having this problem next year.
Yeah. To add also additional information, right now, the engines stay 300 on wing for 3,100 cycles. With the new upgrade, it's going to extend it to more than 5,000 cycles. So there is a major shift and major improvement in the engine performance.
We do have a few more questions on the competition. First question, when you look at the competition from GCC carriers and increased seat capacity by them, how do you think about your entry into new international routes? What's the criteria for choosing a new route? And then the second question, it's more about KSA. When you look into new entrants, Riyadh Air and Arabia, do you think that your slot distribution could be impacted by that or your flying rights?
Yeah, so on the competition question, I mean, GCC carriers, competition has always been there. In fact, we have been the ones growing one of the fastest in the region. In a way, we are the competition, so nothing significantly has changed on that front, and in terms of opportunities, there are significant opportunities to expand the network.
Also, not to forget, reinvestment in the current network, strengthening and consolidating the current network itself, there are significant opportunities. Just on the new opportunities, to take an example, we just announced last week our latest new destination and country, Nairobi, Kenya, starting in October.
As you know, we started Russia from the first of this month, and of course, Syria in June. So lots of opportunities still. We continue to follow the Blue Ocean approach of network expansion, and there are significant opportunities still untapped, whether it is underserved or unserved.
Also, based on the strategy of the civil aviation, the target is really to connect 250 destinations in Saudi Arabia. We are far away from that number. We identified already 165 destinations to be tapped by flynas. We reach about 75 right now, and we still have many opportunities already being identified. So the market is really open, and there is a huge opportunity for all players to add capacity and route to be connected to Saudi Arabia.
Then, following up on the revenue side, there is one question on in the second quarter, ASK grew 4%. Overall revenue is down 1%, which indicates RASK should be down mid-single digit, but the reported RASK is - 3%. Can you explain the reason for this? Is this due to discounting and lower fares?
First of all, if we look at the RASK, it's a low-cost carrier RASK, so you have to take into account that you don't take the Hajj and Umrah revenue is not part of it. This is one. The second is the reduction in RASK in the second quarter. It came, of course, from, as we mentioned, the visa issues and the geopolitical situation. We took advantage also of the lower fuel prices at the time to try to stimulate demand at that time. That's the main reason why the RASK came lower in the second quarter.
Having said that, we have seen in the last week of June a total rebound. Our load factors came back again. We are around 86%. I can say in July and August rebounded totally, and we're very much upbeat on the second half.
Okay, and just to confirm, because we had a question on that as well, when you mentioned the load factor on the final days of June, you mentioned that it bottomed at 36%?
The last week of June was at 86%.
Okay. Great. Question on the guidance for the year. When you look at the net profit margin on the guidance at 6% or 6.5%, and you reported 8.5% for the first half. So there's a question on why do you expect net margins to be much lower if you compare the second half with the first half? What Brent price that you're assuming for the full-year guidance?
Yes. Yes. Of course, we guided at 6%-6.5%. I think we are comfortable with our guidance. We still have a significant four months ahead of us. We believe that we would like to maintain the guidance at 6.5%. In terms of fuel price, we budgeted at Brent $80. So we have a significant headroom. But as I mentioned, we don't take that headroom into consideration as a total reduction because in such a situation, we passed a lot of it back to the passenger in terms of lower RASK and, of course, the expected growth in the second half.
We have a follow-up question on the revenue growth. Based on what did you offer the 6-18% revenue growth? Are you implying second-half growth of 10%-35%? If so, how, given the recent trends in growth and seat factor utilization?
Yeah. Yes. We mentioned earlier on the call that our plan for ASK growth in the second half is around 30%. This is, it's on the back of two things, mainly. We have seven wet lease aircraft with us. That's number one. Second is higher aircraft utilization on our own aircraft. And that will bring the 30%. It might be even better if we can have faster spare engines coming from CFM then some of the grounded aircraft will be also earning revenue as well.
Okay. And to clarify, because we have a few questions on that, the EBITDA margin guidance and the net margin guidance, they're based on the adjusted EBITDA and adjusted net margins or on the reported EBITDA and reported net margin?
Sorry, again?
The guidance is based on the adjusted or the reported?
Yeah. Yeah. It is based on the reported with the SLB gain included in that. Okay. Yeah. Of course, without ESOP, right?
Okay. Then there's a question on interest on lease liabilities and aircraft provisions, sorry. The fleet grew from 60 to 71 end-of-period and from 59 to 63 average period, increases of 18.3% and 7%. This was reflected in our depreciation expense rising 33% year-on-year and 29% for the period. However, interest on lease liabilities and aircraft provisions declined 3% year-on-year and 2% quarter-on-quarter. You mentioned this reflects a slightly more efficient financing structure despite the larger fleet. Could you elaborate on this, and should we expect a significant increase in these costs in the second half of 2025?
Yeah. Yeah. First of all, as you mentioned, in terms of the depreciation, increasing 29% and 33%, this is very much in line with the growth. This is a linear increase in terms of depreciation. In terms of the lease liabilities, lease liabilities are reducing, of course, in terms of the lease payments, and the interest on the lease liabilities are computed based on the inherent lease rates within the lease.
In terms of the interest on maintenance liability or maintenance provisions, maintenance provisions remain held in the balance sheet until the time the payment is made. They're not reduced every month because in terms of the lease liabilities, they're paid on a monthly basis, while the maintenance liability is only paid when there is a maintenance event, and both are the inherent lease rate factor in the lease agreement.
We do have a few questions on Syria. Have you been flying over the Syrian airspace? And another question is, if you're flying or if your plans to fly over Syria, how much can that result in fuel savings?
Yes. So actually, there are many benefits of opening that airspace. And there's a question also about whether we were allowed to fly over Syria last year. No, we were not. So this is recent, and it's a very positive development, not just from a direct cost savings perspective, which we expect to be significant. Not sure if we can give a number right now, but we can come back on that. However, we must say that in addition to the cost savings, it opens up new opportunities for route expansion and markets.
For example, to go to Beirut earlier, it was difficult with the Syria airspace not being available to us, particularly the route to Beirut, for example, is a very, very roundabout flight route without Syria airspace. But now, things like that will be possible. So it's not just the cost savings, but also the new opportunities that it opens up.
There are a few questions on the cost side of things as well, especially on the reduction in CASK. You mentioned the press release that you have negotiated lower rates for handling, landing, and navigation charges. Can you elaborate on that? Also, the maintenance cost has declined. Can you give us more color on how do you see it for the remainder of the year? And lastly, how did you decrease the interest on lease liabilities and aircraft provisions for the second quarter?
Yeah. All right. Yeah. Very good question. In terms of the CASK, I'll give you on the fuel and on handling and maintenance, all your questions. First of all, just our views on the CASK going forward. As I mentioned, we assume that the market consensus is for the fuel to be for Brent to be at $60-$65, lower end of the $60s, and we are taking full benefit of that.
Of course, once it reaches that level, we will start locking our fuel hedging. In terms of the lower unit cost in terms of handling, landing, etc., we have negotiated with all providers, mainly in Saudi Arabia, a lower unit cost based on the increased scale based on volume. That was significant, and you can expect that to continue for the future.
In terms of the CASK, it will be just the additional growth, but the growth at the lower unit cost. In terms of the maintenance, we have a lower maintenance in the first half. The reason was that we had aircraft redeliveries last year and new deliveries, which we don't have this year. I do not expect the same level of cost to be maintained in the second half. The second half will be higher than the first half. I can say that the second half will be around 20% higher than the first half.
In terms of the depreciation cost and the interest, they will continue at the same rate. Just linearly provide, increase it based on growth, and you'll get your numbers for the year end.
T here are a few questions on the passenger numbers. If you look at the passenger traffic, it has been flat year-on-year. Would you mind quantifying how much of the passenger traffic was impacted due to restrictions? The second question on the same line is, the load factors dropped in the second quarter. Do you think that implies that it might be there's not a huge pent-up demand for the seats? And do you think there is enough demand in the second half to drive such strong growth? It was about the load factor in the second half.
Yes, indeed. The suspension of visas and even the geopolitical issues has affected the load factor. The load factor dropped from 84% to around 76% during that period, which affected the average load factor for half one. So we see or we saw a significant or material drop in the number of passengers and the load factor during that period.
And the second question, what was the second question?
On the number of passengers being flat year-on-year, if that does mean there was any issues with that, any restrictions that impacted the number of passengers?
No. No. Definitely, there is no issue about the market. It is just only a temporary issue. That is now, it's behind us. We see, as we mentioned by my colleague, very strong momentum in August, as well as September, and we expect there is a good growth for the second half of this year.
Okay. There's a question about competition. I would like to know your opinion on Riyadh Air's revised strategy, which aims to increase the proportion of owned aircraft and balance sheet between 40%-50% by 2030, reducing dependence on sale and leaseback financing. What are your thoughts on this shift, considering it may elevate near-term leverage pressures? Additionally, how do you anticipate will aircraft ownership costs, cash flow, and EBITDA?
Yeah. Very good question. Excellent question, actually. This is a big topic within flynas, and actually, we broached this topic earlier during the IPO when we mentioned that as part of the business plan, flynas will work to increase the net income margin from 6% to a higher level, and the way to do that is to reduce the depreciation cost, the cost between EBITDA and net income.
And we mentioned that part of the IPO and the use of proceeds for the IPO will be a significant part of it marked for moving away from aircraft sale and leaseback into direct aircraft financing. We see this approach. If we do that, we can finance the aircraft at lower cost. We will depreciate the aircraft over 20 years rather than 12 years.
We will be able to maintain the aircraft based on technical requirement rather than based on contractual requirement. We will not have redelivery cost, etc. We can keep the aircraft with us longer time. So it's a lot of benefits and very, very significant P&L benefit as well. So we have already started. We took three aircraft this year on direct financing and to reduce our cost.
And as I mentioned, to improve the margins, we are going to do much more of this the coming years, 2026, 2027. So that is our plan as well. And I think every rational airline, as they grow and they become profitable and they have the financial muscle to do that, that's the natural thing to start having the aircraft directly on balance sheet.
I see that we are already past the hour. If I may have a final question because we do have this topic popping up in a few different questions. If you wouldn't mind discussing the mechanics of the ESOP charge on the second quarter, if you could please explain that in a bit more detail. Thank you.
Yes. Yes. Simply, the ESOP charge is a reward that was paid and funded by the shareholders pre-IPO. So the shareholders pre-IPO, they decided that part of their shares will be they will sell it, and it will be rather than they get the cash themselves, they will give the cash to the company so that it can reward directors of the company and senior management. So the accounting treatment for the ESOP is under IFRS 2, and under IFRS 2, there is no direct relationship between the shareholders and the directors. So the relationship is a business relationship.
Therefore, the ESOP charge should come through the P&L, while the money that came from the shareholders goes into net equity. So there is a charge in the profit and loss for the year. And this is the full charge. It's one-off. And at the same time, there is a credit in net equity. The charge of the year will move as part of the loss will go into the retained earnings.
And an equivalent amount, SAR 980 million, will come from to offset that in the retained earnings. So if you see, when we say that today, the flynas in H1 made a profit of SAR 370 million, you'll see that the retained earnings increased by SAR 370 million. You don't see the effect in the balance sheet. So it is booked in the P&L, reversed in the balance sheet, net effect zero.
It has no, it's a good thing to do. It's transparency. And it has, as I mentioned, we mentioned, it's funded by the shareholders, has no effect on the net equity, no effect on the balance sheet, no effect on the underlying performance of the company. I hope tha t clears up.
Yes. It was very clear. We are almost 10 minutes after the hour. So I'd like to thank everybody for joining. We have all of the questions that you sent that didn't answer, and we can follow up after this call. I'd like to thank the flynas management for this opportunity. I'd like to pass it over to the management for the final remarks.
Okay. Thank you all.