Air Arabia, the Sharjah low-cost carrier with a Dh6.62 billion market cap, signed an agreement with the Lakson Group of Pakistan to launch a new low-cost airline – Fly Jinnah - there. It had earlier announced a joint venture with Armenian National Interests Fund for a new airline from Armenia by the name of 'Fly Arna'.
These are part of a well thought out move to expand. Air Arabia currently operates from five hubs in the UAE, Morocco, and Egypt. The latest initiatives will expand the geographical footprint into nearby areas, and perfectly complements the company's existing strategy. And Air Arabia should easily capture market share in these countries since it possesses a trackrecord of efficient operations.
Pakistan has had the misfortune of an air accident recently while one of its major airlines faced an issue with the credentials of its employees. The entry of Air Arabia through a joint venture will boost the aviation sector. The air transport industry along with the tourism spend are estimated to set up $3.3 billion to the GDP.
Air Arabia is likely to face less competition as passengers are likely to opt for it due to its image of being a professionally managed company. The same is the case in Armenia, which is emerging as a tourist destination. The number of travellers to the country almost tripled to 1.9 million in 2019 during the previous decade.
Air Arabia's management experience will help the Armenian authorities develop air connectivity to power the next leg of growth. This should boost the overall business of Air Arabia, and the airline is expanding just when the airline traffic is bouncing back.
Bounce back
Even otherwise, the Sharjah carrier is expected to see a good bounce back as countries relax flight restrictions. Traffic on the India-UAE route has improved dramatically after establishing a new protocol and forecast to hit pre-Covid numbers by next month.
As a result, in the third quarter of 2021, the airline is expected to almost double revenues to Dh587 million compared with last year. For full-year 2021, Air Arabia is likely to post a Dh2.73 billion revenue and returning to profits.
The good thing about the financials is that it is estimated to generate a free cashflow of Dh816 million, which should alleviate any concerns regarding the strength of its financials. Air Arabia is a good choice for an investor looking to play the normalization of the economy.
The management is likely to reinstate the dividends once the company's operations reach the previous level. 2020 was an exception, but it is worth noting that it had paid dividends in eight of the 10 years leading up to it.
So investors be assured and take the flight.
