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Air Arabia, a ‘Buy’ on Goldman Sachs Resumption of Coverage

DUBAI — Goldman Sachs has resumed coverage of Air Arabia with a “buy” rating and a target price of Dh1.34, saying rising oil prices and strong air traffic growth in the Middle East will boost the low-cost carrier’s (LCC) earnings.

Goldman Sachs said Air Arabia will benefit from growing air traffic in the region, which is expected to remain strong, driven by its strategic location and the anticipated accelerated economic expansion in the Middle East. Goldman Sachs is forecasting traffic growth in the Middle East in the next 20 years to rise at faster clip compared to other regions at 6.8 per cent. It has forecast a growth of 6.1 per cent for the Asia Pacific region, North America by 3.5 per cent, and Europe by 4.5 per cent.

“We believe that the future growth in passenger traffic in the region will be driven by a combination of a strong economic population growth, as well as by low LCC penetration (currently at 7 per cent). Regional economies in the Middle East North Africa and in the Indian subcontinent are also expected to report GDP growths higher than the world average, and this is likely to support increased passenger traffic
 going forward.”

Air Arabia, which has a 24 per cent share of the available LCC fleet, is seen getting a bigger slice of the market, especially with an order of 44 new Airbus aircraft that will be delivered
 up to 2016. The carrier will also benefit from rising oil prices, said Goldman Sachs.“A recovery in oil prices should further support the stock, as the ability to pass on increased fuel costs, and lack of sizeable competition in the short-term, ensure margins are protected.”

Air Arabia has no serious competition yet, with the likes of flydubai, still have a long way to go before catching up with the Sharjah-based carrier, said Goldman Sachs.

“Flydubai is a potential competitor for Air Arabia in the long-term. However, given that the airline was only launched a few months ago, we do not see any meaningful threat to Air Arabia in the next 12 to 18 months.”

Flydubai is owned by the Dubai government. Operations started in June with a current fleet of just two planes, but it has placed orders for
 another 52 planes.

The carrier also has a strong balance sheet to support its fleet expansion, with zero debt, a cash buffer of Dh1.5 billion, and an investment portfolio of Dh1.5 billion. 


rocel@khaleejtimes.com