Fuel surcharge to the rescue

Air Arabia’s results suffered in 2010 owing to higher fuel prices and its inability to offset un-hedged fuel exposure via surcharges amid a weak price environment. 4Q10 revenue grew 8% YoY (-4% QoQ) to AED545m, 1% below our estimate of AED550m. Nevertheless, 4Q10 bottom line was disappointing, coming in at AED73m, down 36% YoY and 46% QoQ, and missing consensus and our estimate of AED100m by a wide margin. Passengers grew 10% in 2010, exactly in line with our estimate of 4.5m. 2010 load factor was 83%. 2010 rev/pax fell 6% YoY to AED493 (1% above forecasts) and cost/pax grew 6% YoY (+1.7% ex-fuel). 2010 EBITDAR margin shrank 10pps YOY to 28%. 1Q11 will be difficult, but the rest of 2011 should be brighter with fuel surcharges lifting yield and margins, and as passenger volumes recover. We maintain our ACCUMULATE recommendation and our target price at AED1.0/share.

We forecast revenue to grow 22% in 2011. 1Q11 (normally a quiet season anyway) is shaping up badly owing to the impact of regional unrest on traffic (and/or yields) and surging fuel prices (Brent crude having risen 17% since 1 January). Nevertheless, we expect fuel surcharges to be imposed from March, which would enhance yields and margins in the remainder of 2011. Other regional airlines are already imposing surcharges, so the impact on passenger numbers and load factors should be muted. We forecast net earnings to return to growth of 11.6% in 2011.

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