Air Arabia profits slashed and greater competiton is coming says analyst

Air Arabia blamed yield pressure and fuel costs   for the change in fortunes when it announced its annual results today.

Its fourth quarter net profits fell 37 per cent to Dh73.2 million, down from Dh115.6 million in the same period last year, calculated from the airline's first three quarter results. The quarterly profits fell below analysts' expectations of Dh97 million, according to a survey by financial publisher Reuters

"The year 2010 continued to witness pressure on yields and higher fuel prices, trends that have impacted the profitability of the sector worldwide," the airline said in a statement.

The airline is growing in popularity. According to its published figures,   Air Arabia served 4.45 million passengers in 2010, an increase of 10 per cent over the year before. The carrier's seat load factor — or passengers carried as a percentage of available seats — also increased last year to 83 per cent from 80 per cent in 2009.

Saj Ahmad, Chief Analyst – FBE Aerospace told Arabian Aerospace  “Air Arabia’s fall in profits signal various things. Firstly it’s that competition in the GCC region, predominantly thanks to the aggressive growth of rival flydubai, consumers now have greater choice than ever to fly in between primary and secondary hubs – Sharjah is no longer the pet favourite. Secondly, it also shows that Air Arabia has perhaps lost sight of its hub being the primary focus of its growth strategy while it expands its business activities in Morocco, Egypt and eventually Jordan.
 
“While the fall in profits does not signal a trend of things to come, it does however mean profitability and yield attrition are inevitable as Air Arabia falls into second place behind flydubai who are on track to take the number one spot by the end of 2011 and also because of other parties joining in the LCC bandwagon in the region. It’s only a matter of time before Qatar and Abu Dhabi join too.”
 
Ahmad was asked about the future for LCCs in the region.

“Overall, I don’t think or see LCCs facing tougher times – yet. For the interim period, say the next four-to-six years, the growth curve has massive upside to it, especially when you consider that over a third of the human population lives just five hours flight time away from any major point in the GCC. That’s why growth, reduced fares, more unbundled services and new market entrants will continue to venture into this arena for a share of the spoils.
 
“By extension, this will mean pressure on prices as everyone chases volumes and also dents profits. Once a proper shake-out occurs, or indeed some form of consolidation, then we’ll see profits rise much faster too. For now, it seems the wave of strength is definitely with flydubai and I wouldn’t at all be surprised to see Air Arabia slash its costs by opting for the A320neo family for service entry by 2016. If that happens, we can expect other players like Jazeera Airways, NAS Air and Bahrain Air to follow suit too,” he said

Air Arabia’s new Jordan hub is expected to open in June this year. It has a hub in Morocco and launched operations in its third hub in Egypt last year.