HC Research cut UAE-based low-cost carrier Air Arabia to "hold" from "buy," citing yield pressures due to excess capacity and competition at a time of rising fuel costs.
Despite robust traffic growth last year, Middle Eastern carriers like Air Arabia, the largest listed Arab airline by market value, struggled to keep their seats filled — a trend expected to continue this year, the brokerage, which also cut its price target on the stock by 12 percent to 1.11 dirhams, said.
In addition, the airline continues to face increased competition on UAE-India routes, roughly a third of its traffic, from Indian airlines as they have been increasingly raising their frequencies over the past year to benefit from the strong traffic growth.
The airline’s early summer fares are at heavy discounts of over 40 percent to Emirates and 27 percent to Indian carriers.
"This implies a strong likelihood of yield pressures extending to the peak summer season where airlines typically make most of their profit," the brokerage said in a note dated March 28.
The brokerage also said it doesn’t see the company’s strong dividend payments continuing as aircraft deliveries begin in the fourth quarter of this year.
"The dividend is holding up the share price at the moment and we see limited catalysts after the stock goes ex-dividend on 1 April."