Air Arabia to finance two A320s in 2011

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Air Arabia is scheduled to take delivery of a total of six Airbus A320s this year but the majority of new aircraft will be leased from lessors.

The low-cost carrier currently operates a 25-aircraft fleet. It took delivery of four new aircraft during 2010 and has a backlog of 44 A320s.

In January, Air Arabia received one new A320. The next delivery is scheduled for June, while another aircraft is planned for August. The remaining three are scheduled by year-end.

"Two of the six aircraft will be on-balance sheet with the remainder leased out," says Morgan Stanley in a research report.

In 2010, Air Arabia's long term debt stood at AED214.3 million ($58.3 million), after capital expenditure totalled AED468.04 million. Net cash flow stood at AED416.7 million. In 2011, Morgan Stanley expects the carrier's capital expenditure to amount to AED847.7 million as in addition to the new aircraft, Air Arabia will open in June a fourth base in Jordan.

Morgan Stanley notes the geopolitical tensions in markets of Air Arabia's secondary hubs Egypt and Morocco as well as above-average capacity growth in the region. Since launching operations at Dubai International Airport in June 2009, Flydubai has grown rapidly. After 21 months, the Dubai government's low-cost airline operates 33 routes with 15 Boeing 737-800s. It says that Flydubai operates similar markets to Air Arabia with almost 43% of its frequencies and capacity allocated to flights within GCC states, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. In addition to the Gulf, Flydubai also serves Iraq, Jordan, Lebanon and Syria in the Middle East to provide a combined total of 63% of the airline's total network. "We expect the growth of Flydubai (it is due to receive 10 737s in 2011) and other competitors to place renewed challenge on Air Arabia's pricing power on routes from Air Arabia's main Sharjah base."

Budget carrier and Saudi-based Nasair is also planning to introduce a number of new flights to Dubai while UAE emirate Ras Al Khaimah re-launched its budget carrier during 2010 with routes into Egypt, UAE, Saudi Arabia, Bangladesh and India. In addition to growth in competitors in the home market, Air Arabia faces competition from new entrants from the East. Indian low-cost IndiGo, which recently placed the world's largest aircraft order, announced in December that it would launch flights to the UAE in August 2011.

Air Arabia said its board approved the distribution of a cash dividend for the year 2010. The payout is equivalent to 8 fils per share but compares with a 10 fils dividend per share a year ago. Air Arabia last month reported a 31.5% drop in full-year net profit to AED309.56 million as rising fuel costs put pressure on margins.