Shares hit by fierce competition as Mena region unrest grows
Gregor Stuart Hunter
Concern is growing for Air Arabia, as rapidly increasing oil prices and intense competition from low-cost rivals such as flydubai cause profits to sputter.
The Sharjah airline's shares have been buffeted since political unrest broke out in parts of the Mena region, yesterday falling 1.45 per cent to 81.3 fils per share as the most traded stock on the Dubai Financial Market.
Oil prices have also shot up in recent weeks as the Libyan government wobbles, with Brent crude futures for April delivery up 12.68 per cent to $106.88 since the start of the year.
"We see value in Air Arabia's differentiated and low-cost growth story from its base and shareholder links to Sharjah," analysts from Nomura said in a research note. "However, higher jet fuel prices and inevitably lower passenger numbers as a consequence of the region's increasing social unrest may pose more challenges in 2011 than we had previously envisaged," the report added.
The airline yesterday reported net profits last year decreased 31.5 per cent to Dh309 million, also cutting its dividends to 8 fils per share.
What's more, profits declined despite an increase in revenue of 5.5 per cent. Increased passenger yields are not trickling down to the company's bottom line.
"[The revenue gain] hasn't transferred to net income because there have been losses from associates. Operations in Morocco and Egypt had losses, and net interest income declined," said Samir Murad, a logistics analyst at the National Bank of Kuwait.
Although the airline recently opened a facility in Egypt, the recent unrest there is not expected to have a direct impact on Air Arabia.
"The hub in Egypt still has only two planes there," Mr Murad said. "From a size perspective, it's still in its infancy and [the unrest] wouldn't materially impact overall operations."
Despite political upheaval elsewhere in the region, air travel is still growing in the Gulf, with traffic increasing 10.3 per cent last month, according to the UAE General Civil Aviation Authority.