Dubai Emirates airline's bond yield is falling to a record low as the world's biggest international carrier reaps the benefit of a recovery in Middle East passenger traffic and growing appetite for higher-yielding Dubai assets.
The yield on the Dubai-based company's 5.125 per cent dollar notes maturing in June 2016 dropped 73 basis points this year to 4.44 per cent Thursday, the lowest since they were sold in June. The retreat outpaces a 27 basis-point drop in average yields on corporate bonds from the six-nation Gulf Cooperation Council to 4.96 per cent March 7, the HSBC/Nasdaq Dubai GCC Conventional Corporate US Dollar Bond Index shows.
Emirates, which flies to 122 destinations from Los Angeles to Tokyo, is profiting from a rise in travellers through the GCC's trade and finance hub. Dubai airport passenger traffic jumped 14 per cent in January. Europe's second Greek bailout has been a further boon for the emirate, which counts Western Europe as its second-biggest export market and third-largest source of imports, data from the emirate's statistics centre show.
The airline is a "very good option" for investors who want exposure to Dubai and are still uncertain about other government-related entities, Ahmad Al Anani, the Middle East director of Exotix in Dubai, said on Wednesday. "Investors like Emirates because it is a very sound credit and a well-run business. The company is cash rich, well financed and enjoys unlimited support from the sovereign."
Default risk drops
Debt default risk for Dubai has receded this year partly on pledges that the emirate's main companies will manage to refinance debt this year without government help.
Five-year credit default swaps for the city are down 60 basis points this year to 385 on Wednesday, according to data provider CMA, which is owned by CME Group and compiles prices quoted by dealers in the privately negotiated market. The yield on the government's 6.7 per cent debt due October 2015 slid 59 basis points in 2012 to five per cent yesterday, just shy of a seven-month low.
Emirates, with a fleet of 171 mainly Airbus and Boeing planes, signed an $18 billion (Dh66.1 billion) deal with Boeing for its 777 aircraft at November's Dubai Airshow.
"This year the market has been driven by the ‘risk on' trade, based on better US data, the Fed on hold until 2014, no bad news out of Greece and liquidity from the European Long-Term Refinancing Operation," said Mark Watts, head of fixed-income at National Bank of Abu Dhabi's asset management group, which manages Dh4.1 billion.
High-yielding bond funds attracted more than $1 billion for the week ending February 29, the ninth straight week of inflows, as investors, according to US-based research firm EPFR Global. Still, the rising cost of fuel threatens to weigh on earnings of Emirates, which has said it doesn't receive government subsidies. Oil production accounted for two per cent of Dubai's economic output in 2010, statistics centre data show.
Emirates' profit for the six months ended September 30 fell 76 per cent as fuel costs surged by $1 billion, the company, which maintains a no-hedging strategy, reported in November. The price of crude gained 8.7 per cent in February to $107.1 a barrel in New York. The average price of oil jumped 19 per cent last year.
"The lack of a hedging strategy against rising fuel costs" is a concern, said Exotix's Al Anani. "Emirates remains one of the few airlines not hedging against the increase in oil prices although so far it has been successful in passing these costs to its customers through fuel surcharges."
While it is being "penalised by oil price," Emirates — which operates 21 Airbus A380 superjumbos — is "profiting" from growth in passenger traffic, according to Anas Al Maizi, fund manager at Royal Capital in Abu Dhabi. The airline said February 29 it will add a surcharge on all tickets from March 1 to compensate for the fuel price rise.
Passenger traffic with Middle Eastern airlines jumped 14.5 per cent in January, the fastest rate of growth in any region, the International Air Transport Association said last month.
Economic growth
In its home market, Emirates is benefiting from a pickup in tourism to Dubai, which received 9.3 million tourists last year, up ten per cent from 2010, the Department of Tourism and Commerce Marketing said March 7. Hotel revenues jumped 20 per cent, the department said.
Investors have also responded favourably to statements regarding the emirate's debt restructuring, said Royal Capital's Al Maizi. Dubai has "no intention" of seeking support from Abu Dhabi, Mohammad Al Shaibani, director general of the Dubai ruler's court, said last month.
Better corporate earnings and dividend payments led to an 18.8 per cent rally this year in Dubai's benchmark stock index, making it the GCC's best-performing measure.
Economic growth in the emirate is set to climb to as high as five per cent this year after growing more than three per cent in 2011, a government official said in February.
"I think all the good news isn't fully priced in," Al Maizi said.
Bonds: Spurred Appetite
Emirates' bonds have fallen with the increase in risk appetite since the European Central Bank awarded ¤529.5 billion (Dh2.57 trillion) in three-year loans to 800 European banks. The bloc also approved a ¤130 billion bailout for Greece and the US Federal Reserve has pledged to keep interest rates low until 2014, spurring risk appetite.
"Investors are putting their money at work and in the region, Dubai is where you have value," Anas Al Maizi, fund manager at Royal Capital in Abu Dhabi, said. Europe was the destination of 29 per cent of Dubai's exports in the third quarter, Dubai Statistics Centre data show. Exports to Western Europe jumped 113 per cent and imports advanced ten per cent that quarter from a year earlier, according to the data.
