Photographer: Gabriela Maj/Bloomberg

Qatar Crisis to Boost Lagging Emerging-Market Airline Stock

Updated on
  • Air Arabia may benefit from higher revenues in Saudi Arabia
  • Stock has tumbled most among emerging-market peers in 2017

The troubles of a local rival may bring respite to Air Arabia PJSC, the worst-performing stock among major emerging-market airlines this year.

While the United Arab Emirates’ only listed carrier has tumbled 20 percent in 2017, things look more favorable in the second half of the year, analysts say. The company could attract more travelers on routes that overlap with Qatar Airways, which has been banned from flying into or over countries including Saudi Arabia and the U.A.E after they severed commercial ties with their neighbor last month.

The “Qatar Airways situation will help increase passenger traffic and load factors,” said Amine Wafy, an equities analyst at Renaissance Capital in Dubai. Air Arabia operates at near-full capacity into Saudi Arabia and the company could add more planes than anticipated for those routes, helping offset the lost capacity from flying into Qatari market, he said.

While the Sharjah-based company specializes in short flights and Qatar Airways is a long-haul wide-bodies operator, there is some route duplication. Air Arabia serves 13 cities in Saudi Arabia, including key destinations Jeddah and Dammam, that are among the top 10 busiest routes for its Qatari peer, according to consultancy firm Frost & Sullivan. Since the ban came into effect on June 5, the bigger carrier has had to cancel some 880 flights into the kingdom, data from research firm OAG shows.

Air Arabia has struggled this year to boost its bottom line amid overcapacity and lower fares, weighing on shares. Additionally, low oil prices have acted as an economic headwind in the Middle East, where the commodity is a key export. The stock is the biggest loser of 2017 among 22 airlines based in developing economies with a market value exceeding $1 billion.

In Dubai, where Air Arabia is listed, the main equity benchmark is up 1.9 percent this year through Monday’s close. The airline’s stock is the fifth-worst performer in the index.

READ: Emirates in FlyDubai Tie-Up as Oil Puts Brakes on Gulf Airlines

Things may get worse before they get better. The airline is forecast to report a 25 percent slide in second-quarter profit from the year-earlier period when it releases results next month, according to analysts surveyed by Bloomberg. That compares with a 10 percent drop in the first three months of the year. Still, Air Arabia’s 12-month average price target of 1.20 dirhams implies a 12 percent upside from Monday’s close.

“Air Arabia’s fleet is able to sustain operations to destinations that are not more than five flight hours away at the moment,” said Mark Martin, head of Martin Consulting. “That implies that its network and revenue are far more resilient since its core income comes from the blue-collar and white-collar labor traveler market.”

— With assistance by Tugce Ozsoy, and Ksenia Galouchko

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