Stock DFM Dubai stock market traders
Air Arabia's stock hasn't had much interest come its way... but a vaccine could just be the right tonic for it. Image Credit: Antonin Kelian Kallouche/Gulf News

Reflecting the momentum in global markets after the vaccine announcement, the DFM rallied 4.74 per cent and ADX closed higher by 2.92 per cent this week.

Pfizer’s vaccine trials exceeded expectations and bought the spotlight back on airline companies. In fact, shares of major airlines  have gained substantially in the past couple of days. Investors are expecting the travel business will bounce back faster than forecasted.

DFM-listed Air Arabia is the only major airline company available for investors in the UAE. The Sharjah carrier had asked the government for financial support, but this is not necessarily a bad thing. Many in the US have been forced to issue fresh equity to survive. In Air Arabia’s case, in a worst case scenario, it might be able to raise some financial assistance from the government.

Will need a nudge

The probability of equity dilution seems low and any government assistance should help in refinancing old loans. Moreover, Air Arabia has already recovered almost 40 per cent of its operations, and with the advent of a vaccine recovery might be faster. In fact, Air Arabia shares have barely budged in reaction to this news.

The Dh5.37 billion airline is the first low-cost carrier in the Middle-East and had never announced an annual loss since its inception 2005. Nevertheless, this year is quite unlike any. Air Arabia’s third quarter earnings revealed it had posted a Dh44 million loss when compared with a profit of Dh471.3 million year ago.

Revenue declined by almost 80 per cent to Dh294 million from a year ago.

There are however some silver linings. At first glance, it seems that the no-frills carrier has weathered the storm better than anticipated. The profit and loss statement shows Air Arabia reduced its direct costs by 67 per cent to Dh310 million from Dh954 million a year ago.

Obviously, the company had to retrench a lot of people, which was a necessary thing to do. The financing costs of the airline were stable from a year ago, showing it was able to negotiate better terms from its creditors.

Cash is there

The liquidity scenario also seems quite comfortable with bank balances and cash at Dh3.09 billion when compared with Dh2.80 billion a year ago. Among non-current liabilities, trade and other payables have almost doubled to Dh2.08 billion, which could be due to renegotiation of payment terms.

The statement shows that in spite of a Dh420 million dividend paid, it had a positive cashflow primarily on account of Dh357 million of additional bank borrowings. From an operational perspective, Air Arabia can sustain itself for some more quarters. Given the severity of the situation, that in itself is an achievement.

Air Arabia’s decision to pay dividends to shareholders shows management commitment to shareholders. As they say 'Tough times never last...'. And Air Arabia indeed seems like the tough one.

- Vijay Valecha is Chief Financial Officer at Century Financial.