x Abu Dhabi, UAEFriday 19 January 2018

Dubai airport plans set to affect Air Arabia

What's Up: Air Arabia's stock rose 2.37 per cent the day after plans were announced for a US$7.8 billion expansion of Dubai International Airport.

A bigger Dubai airport gives Air Arabia room to spread its wings.

The low-cost carrier's stocks rose 2.37 per cent yesterday to 69 fils a share, the day after plans were announced for a US$7.8 billion expansion of Dubai International Airport. Investors speculated that could provide more opportunities for the airline in the future.

However, analysts said a bigger airport could also mean extra competition for the airline, which is based in Sharjah, and some tipped its local rival flydubai as the more likely beneficiary of the plan.

The easing of political tension in parts of the Arab world was a separate cause for optimism for Air Arabia, said Akram Annous, a Middle East and North Africa strategist at Al Mal Capital.

"The instability in the region has weighed on travel to Egypt and North Africa in general … that's been an impact on their business in a measurable time frame," he said.

More worrisome for investors was the cancellation of Air Arabia's hub in Jordan, said Talal Touqan, the head of equity research at Al Ramz Securities.

The airline shelved its plans for a hub in Amman, which would have been the airline's third, Bloomberg News reported last month.

"The oil price is still eroding their profit margins, and their operations in Egypt are still way behind," Mr Touqan said. "It is a low-cost carrier, and its sensitivity to oil prices kills its competitive advantage."

Brent futures rose $2.61 to $116.52 yesterday, having fallen last week after members of the International Energy Agency agreed to release 60 million barrels from their petroleum reserves to counteract lost supply from Libya.

Oil prices are likely to resume their upward trend in the second half of the year, analysts from Goldman Sachs wrote in a research note.

"With world economic growth continuing to drive oil demand growth well in excess of non-Opec production growth, the oil market continues to draw on inventories and Opec spare capacity in order to balance," they wrote.

"In our view, it is only a matter of time before inventories and Opec spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply."