Air Arabia

Source: Naeem Investment

Spotlight

1H09 revenue grew 6% YoY to AED922m (4% below our estimate) while net profit rose 20% YoY to AED193m, 4% below our forecast. Fuel costs were in line with our expectations at 29.5% of revenue, but staff costs spiked to 17.1% of top line. Pax numbers were up 22% YoY and 5% sequentially. The load factor, however, dropped to 80% from 81% in 1Q09; not bad in the current environment. Rev/pax fell 12% YoY and 3% sequentially as competitors sold excess capacity (also reflecting comparison with prior year fuel surcharge). Air Arabia’s 1H09 EBITDAR margin was 35% versus 36% for full year 2008. Air Arabia Maroc is progressing well with an average load factor of 77%. We maintain our BUY call with a target price of AED1.5/share.

Traffic holding up despite lower-than-expected results. Air Arabia grew passenger numbers 22% YoY, adding two new destinations (Goa, India, and Athens, Greece), taking the total to 48 in 1H09. Passenger traffic was up 5% sequentially, owing chiefly to seasonality (1Q is low season) but the relatively tame growth perhaps reflects a slight slacking of demand. Revenue for 1H09 came in 4% below our estimate. Our full-year forecast for passenger growth is 15% (down sharply from 32% for 2008). We maintain our forecast for now. Nevertheless, with layoffs in the UAE still mounting and tourist traffic down, we think that further slowing is possible. Management at end 1Q admitted to weaker load factors in inbound legs, which could also be a signal for worse to come. Encouragingly, however, IATA statistics show that Revenue Passenger Kilometre (RPK) in the Middle East region actually grew 12.9% YoY in June (from 4.7% in March 2009 and 3.9% in December 2008).

We remain buyers. We believe that Air Arabia can come through the crucial summer relatively unscathed with load factors of over 80%, yield declines held in check (allowing for the YoY fuel factor). Its prospects remain strong in our view, and we reiterate our BUY recommendation with a target price of AED1.5/share.


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