Oil prices prompt Air Arabia backers to bail

Carrier's weaker than expected results also scare investors away

Investors are bailing out of Air Arabia as concerns about higher oil prices were aggravated by Sunday's announcement of weaker results than expected at the Middle East's largest budget airline. The shares dipped to 84 fils each yesterday and are down more than 20 per cent in the past four months. Air Arabia on Sunday announced a 44 per cent decline in profit for the second quarter, compared with the same quarter last year.

The company attributed the drop to higher oil prices, which account for 40 per cent of its operating costs, and pressure on passenger yields. Analysts said until passenger yields improved or oil prices fell, it would be difficult for airlines to post strong earnings. In Air Arabia's case, it is likely to continue gaining market share from the bigger players in the region, which are feeling the same cost pressures, but that does not necessarily translate into higher profits. Kareem Murad, an aviation analyst at Shuaa Capital, said despite high passenger loads overall revenue was disappointing.

"We had estimated revenues of around Dh500 million. They came in 3 per cent below our numbers," Mr Murad said. "They also reported net profit 23 per cent below our estimates. "We had expected to see higher margins, around 13 per cent, but they only reported 10 per cent." Sameh Hassan, the director of research at Rasmala Investment Bank, said Air Arabia would also find itself under considerable pressure from competitors.

"Air Arabia is the leading low-cost carrier in the region, which makes the business model particularly vulnerable given the increase in competition that should disrupt the pricing umbrella they have enjoyed since their inception," Mr Hassan said. "There is no evidence that the competition will subside any time soon and oil has only moved higher since the end of the second quarter." There has been tremendous growth among budget airlines in the Gulf in recent years but it is still not the dominant mode of flying.