High Times for Air Arabia

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It has been a busy period for Air Arabia, and the Sharjah-based, government-owned budget airline has been making headlines recently. First, the company announced it would commence regular flights to Karachi and Peshawar, Pakistan, beginning April 13. Then, on March 15, Air Arabia posted its 2006 results, disclosing a remarkable growth in both profits ($27.5m, triple the amount earned in 2005) and revenues ($204.1m, an 82% rise over 2005). Investment bank SHUAA Capital estimates the company's profits could reach as much as $61m in 2007, while revenues could go as high as $681m in 2011.

But it was the company's March 18 initial public offering (IPO) that got the most attention. The company hopes to raise as much as $698.9m during the 10-day operation, which ends March 27, offering 55% of the airline's share capital, equal to 2.57 billion shares. Following the offering, the stock will be available to investors on the Dubai Financial Market, one of 3 stock exchanges in the UAE, where mainly local companies are listed.

The announcement made waves in local financial markets, with investors withdrawing their capital from other publicly listed companies to prepare for the much-anticipated IPO. According to the local press, Air Arabia's IPO is the first share sale by an airline in the Middle East. Current stakeholders in Air Arabia include the Sharjah Department of Civil Aviation, the Sharjah International Airport Authority and Al Maha Holdings.

Air Arabia's history and success are closely tied to those of the strategically located Sharjah International Airport, which the company has turned into a regional hub of sorts - a low-cost equivalent of the Emirates Airlines/Dubai International Airport relationship. Today, Air Arabia accounts for most of the airport's traffic, and the preponderance of the airlines' red aircraft on the tarmac is not set to decline any time soon. The capital influx generated by the IPO will be used to expand the carrier's aircraft fleet from nine to 34 new planes by 2015, through leasing or buying.

Air Arabia's success underlines a major trend in the region: the growth of budget carriers in Gulf Cooperation Council (GCC) states, tapping into the enormous and fast-growing demand for regional travel. Air Arabia, the first regional low-cost carrier, is facing increasing competition on the low-cost segment. In the UAE itself, Ras Al Khaimah Airways is expected to begin operations as soon as April. The company said routes to Iran and India are planned, and it also stated hopes to expand its fleet as early as 2010. Regional competitors, existing or potential, also abound. Kuwaiti company Jazeera Airways recently inaugurated a second hub in Dubai, which allows it to cover new destinations in the Gulf and expand its operations to India. In Saudi Arabia, Sama Air and Nas Air, a subsidiary of the Saudi National Air Services (NAS), are competing for the domestic low-cost market, although Sama Air stated it wishes to open Middle Eastern routes in the future.

Carriers from sub-continental Asia are also increasingly eyeing the GCC region: Indian low-cost carrier Air India Express flies from several cities in the UAE (Al Ain, Sharjah and Abu Dhabi) and the Gulf to India, while Pakistani Air Blue covers several destinations in Pakistan from Dubai.

Several factors explain the fast growth of air transport in the region. The region's ever-increasing reliance on foreign labour, which makes up for most of the workforce in the UAE and Saudi Arabia, has created large communities of expatriates who return home once a year on average. The fact that this group includes a large percentage of low-paid labourers from the Asian sub-continent has contributed greatly to the take-off of low-cost air transport.

Some GCC countries' efforts to promote themselves as tourist destinations are also boosting the demand for air travel to the region. Sharjah hopes to ride on Air Arabia's success to attract more tourists as the region's demand for air transport is increasing faster than the world average. Low-cost carriers, in particular, seem primed for a huge increase in their operations. The market is under-represented by such operators, which represent just 0.1% of the Middle Eastern air transport market, according to research by SHUAA Capital, meaning that the growth potential for Air Arabia and its competitors is tremendous.

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