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Tue 29 Sep 2015 12:16 PM

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UAE's Air Arabia earnings may be hit by fuel hedging put in place before oil slump

Air Arabia's profits have declined for two of the last three quarters as a result

UAE's Air Arabia earnings may be hit by fuel hedging put in place before oil slump

Low-cost carrier Air Arabia may see a further impact on earnings from fuel hedges put in place prior to the steep drop in oil prices, the chief executive of the United Arab Emirates-based carrier said on Monday.

However, Adel Ali insisted the airline was comfortable with its hedging policy and the hedges it has established for 2016, with lower fuel prices ultimately benefiting the airline.

Fuel hedging is a contract that airlines use to reduce exposure to volatile and potential rises in fuel costs.

If the oil price falls below the hedged level though, the airline is forced into taking an accounting loss against the difference. Brent crude has lost 59 percent of its value since June 2014.

Air Arabia's profits have declined for two of the last three quarters as a result. Its fourth-quarter profit in 2014 slumped 30 percent and its second-quarter earnings this year declined 14 percent.

"The same that's happened in the last three quarters will happen (for the next two quarters)," Ali said on the sidelines of an aviation conference in Dubai, but he said the carrier was comfortable with its decision to hedge its 2016 fuel bill, without elaborating.

"We will not always get it right but it has paid off for us and that will continue."

Passenger growth is expected to continue despite regional turmoil, Ali said.

Passenger numbers from Russia are improving, after suffering due to a weak Russian currency, and passenger traffic from Ukraine and China is also increasing. Additional growth may come from Iran, where the carrier recently started flying to two new cities, taking the total to six.

The UAE government negotiated more frequencies and new destinations in Iran for UAE carriers in recent bilateral agreements which came amid Tehran's talks with world powers to sign a nuclear deal that would see sanctions lifted.

"There was a huge bilateral jump for all the airlines. It will take a bit of time for that growth to take place because we just started," Ali said.

Air Arabia in May this year launched its new airline Air Arabia Jordan after purchasing a 49 percent stake in the country's Petra Airlines and rebranding it. It is now flying to four destinations from Amman.

When asked about new aircraft needs for future growth, Ali said new orders are not on the table, with leasing an option yielding potentially better deals.

"There are plenty of aeroplanes in the industry - it does not hold us back from growth," he said.

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