UAE-based budget carrier Air Arabia, the Arab world’s largest listed carrier, announced its intentions to build a new hub in Egypt that would offer connections to Europe, Africa and the Middle East, one month after formalizing a partnership with Egypt’s Travco Group, the Middle East’s largest travel and hospitality group.  “At a time when the global aviation industry is witnessing serious challenges as a consequence of the worldwide financial crisis, we continue to move forward with our strategic expansion strategy, as demonstrated by this important announcement,” said Air Arabia Chairman Sheikh Abdullah Bin Mohammed Al Thani.

Despite the airline industry’s overall close historical correlation with broad market indices, “budget travel” represents an industry subgroup that, from an investment standpoint, can be as good a defensive play as any medical and consumer product company, brewery or tobacco firm.  Air Arabia may be a case in point, having been named the best low-cost carrier globally in a study conducted by Aviation Week magazine earlier this year.  Its gross  (20.31%) and EBITDA (16.94%) margins are leaders in the industry, as is its 3.1 quick ratio.  The company’s net profit for the first half of this year stood at AED 193 million, an increase of 21% from the first six months of last year.  Moreover, during the first half of 2009, the company registered a turnover of AED 922 million, up 6% from the first half of 2008.  Finally, its “average seat load factor,” which measures passengers carried as a percentage of available seats, was 80% for the first half of 2009.

However, those numbers dampened afterwards on the back of excess capacity diluting yields, and it remains to be seen whether or not Air Arabia will stand up to both economic and intra-industry pressure.  According to its CEO, Adel Ali, Middle East airlines are suffering disproportionately from yield dilution than carriers in other regions worldwide, due to excess capacity as a result of strong aircraft ordering, new market entry and the global economic downturn.  “There has been an 18% yield dilution in the Middle East basically because the capacity is more than the demand at the moment because of the recession.  This is more severe than the global average yield dilution of 12%”.  In the Middle East, the demand is growing, but not as fast as the capacity is growing.  Also because demand is growing, it becomes an attractive place for other GCC carriers and international carriers,” he told reporters.

Forecasts of three analysts for Air Arabia’s third-quarter profit ranged from AED 110 million to 129 million in a Reuters survey earlier in October.  And the airline also faces increased competition from local rivals, such as Kuwait’s Jazeera Airways and Dubai-owned flydubai.