2Q16 results highlights: i) Net  Income: AED126.4mn, -14% Y-o-Y, +14% Q-o-Q, -9% vs. EFGe; ii) Revenue: AED893.8mn, +4% Y-o-Y, -5% Q-o-Q, -1% vs. EFGe; iii) EBITDA: AED210.6mn, -3% Y-o-Y, -11% Q-o-Q, -17% vs. EFGe   Air Arabia reported surprisingly weak 2Q16 results with headline earnings dropping 14% Y-o-Y (-9% vs. EFGe) mainly on unexpected margin pressures. Excluding Other Income (which includes hedging & FX gains/losses), earnings fell 16% Y-o-Y and were 32% below our estimate. According to the company's disclosure, the results were affected by more Ramadan days falling in the quarter (weak month for travel) and excess market capacity that affected yields.   Revenue was up 4% Y-o-Y and broadly in line (-1%) driven by 12% Y-o-Y growth in passenger numbers that was offset by continued yield pressures as expected (seat factors averaged 78% in the quarter). In 1H16, the airline received three new aircraft.   Headline gross margin surprisingly fell c80bps Y-o-Y to 18.2% (vs. our estimate of 21.3%), which is surprising given lower oil prices (both market and hedge prices). EBITDA margin fell a more severe c1.6pp Y-o-Y to 23.6% (vs. our estimate of 25.1%) with EBITDA coming in flattish (+3% Y-o-Y) and missing our estimate by 17% as SG&A costs jumped 31% Y-o-Y due to a pick-up in G&A costs.   A very disappointing results set with the margin weakness in a low oil price environment rather alarming so we will be waiting for management guidance on the sustainability of these trends.   The company will hold a conference call to discuss the results on 15 August 2016 with the invitation attached. (Company, Hatem Alaa, CFA, Nada Amin)   Air Arabia (DU): USD1.46 as of 11 August, Rating: Buy, FV: USD2.10 per share, MCap: USD1,857mn, AIRARABI UH / AIRA.DU