UAE / Aviation 9.

30 CAIRO / 9 August 2010

Earnings Flash: Air Arabia

In need of a sizzling summer

Market Price (AED) 0.85 Air Arabia reported disappointing 2Q10 results. Well below
Target Price (AED) 1.05 our estimate of AED72m and consensus. Although revenue
was in line with our estimate, higher fuel costs hit margins,
Upside Potential 23.6%
while start-up losses in Egypt also dragged bottom line. 2Q10
Free Float 74% Revenue grew 6% YoY to AED485m, 0.7% above our
Market Cap. (AEDm) 3,967 estimate. 2Q10 passenger traffic grew 11% YoY, and 7.8%
QoQ to 1.11m (-5% vs. estimate of 1.17m). 1H10 load factor
Market Cap. (USDm) 1,080
was 81% slightly above our 80% estimate. 2Q10 COGS rose
Shares outstanding (m) 4,666.7 17% YoY mainly due to increased fuel costs, resulting in 2Q10
Net debt/equity (%) NM Gross Margin narrowing by 2.5pps QoQ and 8.8pps YoY to
7.9% (vs. 10% forecast). Share of start up losses from the
Book value/share (AED) 1.25
Alexandria hub were c. AED27m further hurting bottom line.
Price/book (x) 0.7 2Q10 Net Profit fell 45% YoY to AED49.5m. We expect to
Foreign Ownership Limit 49% revise down our forecasts and Target Price after Thursday’s
conference call.
Reuters code AIRA.DU
Bloomberg code AIRARABI UH
2Q10 Revenue in line. Passenger traffic was up 11% YoY in 2Q10
to 1.11m, 5% below our estimate of 1.17m. However, yields did not
decline as much as feared, resulting in 2Q10 revenue coming in line
AIRA vs. DFMGI Rebased
with forecast. 2Q10 revenue came in at AED485m (+6% YoY), only
Price (AED)
1.3 0.7% above our estimate.
1.2 Load factor stable at 81%. 1H10 Load factor was flat YoY at 81%,
1.1 although above our estimate of 80%. The peak third and fourth
quarters should see load factor improve. However, we have
1
conservatively estimated a full year average load factor of 81%.
0.9
Rev/pax decline not as bad as feared. 1H10 Revenue/passenger
0.8
(rev/pax) fell 4% YoY to c. AED451. Rev/pax was 3.3% above our
0.7
forecast. 2Q10 rev/pax was down c. 4.6% YoY (waiting for revenue
Jul-10
Feb-10

Mar-10

Jun-10
May-10
Aug-09

Aug-10
Oct-09
Sep-09

Dec-09

Apr-10
Jan-10
Nov-09

breakdown).

AIRA DFMGI Rebased

Gross Margin falls sharply on higher fuel prices and lower
yields. Gross margin fell to 7.9% in 2Q10, down from 10.4% in
Source: Bloomberg 1Q10 and 16.7% in 2Q09. Cost of Sales was up 17% YoY, mainly due
Closing price as of 8 August 2010 to increased fuel costs. Rising fuel prices saw Cost/Passenger rise 4%
in 1H10 versus 1H09. Air Arabia management earlier stated that it
had hedged 35% of 2010 fuel needs at USD63/bbl. Cost/Passenger
excluding fuel cost declined 5% YoY, indicating continued tight cost
control. Nevertheless, as a result of the influence of higher fuel
prices, EBITDAR margin also fell from 35% to 25% in 1H10 (this is
still one of the highest EBITDAR margins in the airline industry
globally).

Air Arabia: Results Summary 2Q10

YoY QoQ
In AEDm 2Q10 2Q09 1Q10
change change
Revenue 485.4 458.4 6.0% 482.1 0.7%
COGS 447.0 382.0 17.0% 432.2 3.4%
Net income 49.5 89.7 -45.0% 50.2 -1.4%
Passengers (m) 1.00 1.11 11.0% 1.03 7.8%
Revenue/passenger 437 458 -4.6% NM NM
Source: Company data

Ahmed Adel
+202 3302 3799 Ext. 2203
ahmed.adel@naeemholding.com
1
 Air Arabia

A good summer season needed. We forecast crude to continue to trade in the USD80/bbl range for
the remainder of 2010 and therefore, don’t expect fuel surcharges to enhance yields this year. Air
Arabia is currently in the no-man’s land between its hedged fuel price of USD63/bbl and the fuel
surcharge trigger point, which we think is around USD95/bbl. Air Arabia now depends on a strong pick
up in passenger number and a firming at yields over its peak summer and 4Q seasons for a second half
recovery. We expect management to give some indication of passenger traffic and yields for the 3Q so
far on Thursday’s call. In the meantime, we are reasonably confident that passenger numbers will
strengthen further and yields stabilize in 2H10.

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Disclosure Appendix
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Rating Upside/Downside potential

BUY >20%
ACCUMULATE >10% to 20%
HOLD +10% to -10%
REDUCE <-10% to -20%
SELL < -20%

Rating Distribution

As of 9 August 2010, the ratings distribution for all published ratings is as follows:

BUY 59%
ACCUMULATE 18%
HOLD 23%
REDUCE 0%
SELL 0%

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