OXFORD BROOKES UNIVERSITY

BSc (Hons) in Applied Accounting and

Research and Analysis Project

Topic 8
An analysis and evaluation of the business and financial performance
of Emirates Airline from 1 April 2013 to 31 March 2016

ACCA Number: 3171193

Name: Natalie Yeoh Chooi Yue
Submission Period: 33
Word Count: 7,493
Contents
PART 1 - PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH ................ 3
1.1 Project Topic Area ............................................................................................................ 3
1.2 The Organisation .............................................................................................................. 4
1.3 Project Objectives and Research Questions ..................................................................... 5
1.4 Overall Research Approach .............................................................................................. 6
PART 2 - INFORMATION GATHERING & ACCOUNTING/BUSINESS TECHNIQUES . 7
2.1 Sources of Information ..................................................................................................... 7
2.2 Methods to Collect Information........................................................................................ 9
2.3 Limitations of Information Gathering ............................................................................ 10
2.4 Ethical Issues and Resolution ......................................................................................... 11
2.5 Accounting and Business Techniques Used and Their Limitations ............................... 12
2.5.1 Financial Analysis using Ratio Analysis.................................................................. 12
2.5.2 Business Analysis using SWOT Analysis................................................................ 13
PART 3 - RESULTS, ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS ......... 14
3.0 Notes to Analysis ............................................................................................................ 14
3.1 Financial Performance using Ratio Analysis.................................................................. 15
3.1.1 Performance Ratios .................................................................................................. 15
3.1.2 Liquidity Ratios........................................................................................................ 19
3.1.3 Solvency Ratios........................................................................................................ 21
3.1.4 Efficiency Ratios ...................................................................................................... 24
3.1.5 Investor Ratios.......................................................................................................... 27
3.2 Business Performance using SWOT Analysis................................................................ 29
3.2.1 Strengths ................................................................................................................... 29
3.2.2 Weaknesses .............................................................................................................. 30
3.2.3 Opportunities ............................................................................................................ 31
3.2.4 Threats ...................................................................................................................... 31
3.3 Conclusion ...................................................................................................................... 33
3.3.1 Emirates Airline Financial Performance .................................................................. 33
3.3.2 Emirates Airline Business Performance................................................................... 34
3.4 Recommendation ............................................................................................................ 35

2
PART 1 - PROJECT OBJECTIVES AND OVERALL RESEARCH
APPROACH
1.1 Project Topic Area
From the list of project topics approved by Oxford Brookes University, I selected topic eight
'An Analysis and Evaluation of the Business and Financial Performance of an Organisatio n
over a Three Year Period' as my Research and Analysis Project (RAP) for the following reasons:

Personal Interests and Competence

As I find research and analytical work to be enjoyable yet challenging, I believed topic eight
suited my interest and abilities best among the topics available based on my exposure to ratio
and business analysis in my studies which I found intriguing and would like to pursue further.

Fundamental Skill
Being an accounting student who will join the finance industry in future, I believe that the
ability to analyse organisations business and financial performance would be a critical skill.
Selection of topic eight enabled me to hone this skill which is frequently used by numerous
stakeholders.

Data Availability
The depth and quality of my research would be affected by the availability and accessibility of
information. I believed topic eight enables me to conduct the project with greater ease in
comparison to the other topics which may require non-public information.

Practical Application
As topic eight incorporates materials from ACCAs F7 Financial Reporting and P3 Business
Analysis papers, I am able to implement the analytical tools learnt from my studies into the
research. This provides me the opportunity to practice putting business models and theories into
real life scenarios.

3
1.2 The Organisation

The Emirates Airline (Emirates) is a susbsidiary of the Emirates Group which is wholly owned
by the Investment Corporation of Dubai, under the private ownership of Dubais governme nt.
It is the international airline of UAE, offering sevices to 153 destinations by 31st March 2016
over 6 continents (Emirates, 2016).

Winning Worlds Best Airline at the 2016 Skytrax World Airline Awards for its 4th time in
the awards history (Zhang, 2016a), Emirates captivated my interest to gain deeper insight into
the contributing factors that resulted in its repeated global recognition. Hence, it is the
organisation of my RAP.

In addition to being the worlds largest international airline operating the largest fleet of Airbus
A380 and Boieng jumbo jets (Zhang, 2016a), Emirates was awarded the Worlds Best Inflight
Entertainment Award for 12th consecutive years, improved its performance in First, Business
and Economy Class categories, and finished within top ten of Worlds Best Cabin Staff
(Skytrax, 2016b).

Emirates appeared to have taken proactive steps in its recent three financial periods in
reclaiming its Airline of the Year title last held in 2013 (Zhang, 2016a) despite operating in the
challenging aviation industry and facing major rivals such as Singapore Airlines (SIA).

Therefore it is through this RAP that deeper insights are gained on Emirates underlying
financial performance to assess its strength and stability in generating future favorable business
aspirations .

4
1.3 Project Objectives and Research Questions

Project objectives:
To analyze and evaluate the financial performance of Emirates Airline from 1st April
2013 to 31st March 2016 using financial ratios analysis.

To analyse and evaluate the business performance of Emirates Airline from 1st April
2013 to 31st March 2016 using SWOT analysis.

To achieve the above objectives, several research questions arosed:

How did Emirates financially perform in 1st April 2013 to 31st March 2016?
How has Emirates Airline financially performed in relation to one of its main competitor,
Singapore Airlines?
What are the primary internal strengths and weaknesses of Emirates?
What key opportunities and threats are present in Emirates external environment?

5
1.4 Overall Research Approach

The End In Mind

The RAP was conducted with the final outcome borne in mind from start, through the process,
to submission date. This was the first and most critical step in the approach as it dictated overall
planning and process.

Understanding Expectations
The OBU Information Pack contained key guidelines and provided an idea of Oxford Brookes
University expectations from its RAP students. Discussion with my mentor in the first meeting
clarified queries I had regarding the process and expected outcome.

Selection of Topic, Industry, Organisation and Competitor

A selection was made from the list of topics and industry provided by Oxford Brookes
University. After conducting an initial research, I selected my organisation and a suitable
competitor for comparison.

Breaking down the Topic

The RAP topic represented a thesis statement that determined the focus and scope of the paper
(Thompson, n.d.). As it permitted a wide range of flexible content, it was broken into Specific,
Measurable, Achievable, Relevant and Time-bounded objectives (Flores, 2015) that were
milestones in achieving the primary project objective.

Reading and Information Gathering

In understanding the fundamental factors affecting the airline industry, extensive reading from
multiple sources was conducted covering annual reports to news reports.

Analysis and Interpretation of Data

Both financial and non-financial information on the airline industry, Emirates and SIA were
analysed to identify trends, reasons of movements and implications. The analysis was executed
through financial ratios, SWOT and benchmarking. I had conducted ratio analysis prior to
SWOT to gain deeper appreciaten on Emirates strengths and weaknesses.

Conclusion and Recommendation

A conclusion was derived after summarizing results of the analytical work performed. The
conclusion was formed objectively with having the research questions answered and project
objectives fulfilled.

6
PART 2 - INFORMATION GATHERING & ACCOUNTING/BUSINESS
TECHNIQUES
2.1 Sources of Information

Information may be classified into two major categories, that is Primary data and Secondary
data (Brigham Young University, 2016).

Primary data are data gathered firsthand from focus groups using the most appropriate
procedures which are designed to address the specific research problem. These data collected
are then stored and accumulated in addition to other already existing information that can be
readily accessed and reused for future researches. It is at this later stage where the data is then
classified as Secondary data (Hox, 2005).

For the purpose of this RAP, information was gathered from Secondary sources that are already
available.The sources of information used are as follows:

The Organisation and Its Competitors Annual Report

The Emirates Group and Qatar Airways annual reports for the most recent three financ ia l
periods provided the fundamental information required to conduct both business and financ ia l
performance evaluation. This is due to the fact that the annual report incorporated the core
details about the organisation such as its mission, vision and key events that occured relating to
the company. The companys financial statements were also contained within the annual reports
which were utilised as a major part of the RAP.

The Organisation and Its Competitors Website

In addition to the Annual Reports, Emirates and Qatar Airwayss company website provided an
interactive, real-time insight into the respective company as the company website was one of
the organisations key medium for direct communication with potential customers.

ACCAs Official Website

The OBU Information Pack containing key guidelines for the overall conduct of the RAP was
made available in ACCAs official website.

ACCAs Student Accountant Online

ACCAs Student Accountant featured numerous technical articles which reinforced my
understanding of accounting and business models that was applied in the RAP. It also featured
articles written specifically for OBU candidates.

Academic Textbooks
Study texts published by BPP, particularly for the F7 Financial Reporting and P3 Business
Analysis paper acted as key references for an appropriate application of technical models and
interpretation of the financial data collected.

7
Search Engines, Electronic News, Articles and Journals
Google Chrome was my main source in gathering information for the RAP as it provided instant
access to a diverse range of websites containing countless articles and journals about the overall
airline industry and specifically on Emirates and SIA.

8
2.2 Methods to Collect Information

Information may be collected via two main methods:

1. Primary Research (Field Research)

This method gathers brand new information that has never previously been collected
before. It normally involves direct contact with people via surveys, questionnaires or
interviews.

2. Secondary Research (Desk Research)

This method utilises existing data that has been organised and stored. It is mainly
conducted through the review of documents that are available online as well as printed
materials.

(BBC, n.d.)

Time spent, cost and manpower required to carry out any field research are extensive. As it was
unfeasible to execute field research with the limited resources available and due to time
constrain, desk research was used to collect the necessary information for this RAP.

Desk research will be conducted via extensive reading and review of the documents that were
attained from the various sources listed in section 2.1 of the RAP.

All of the stated sources of information were accessed via Sunway Univeristy Tun Hussein Onn
Library E-database and Google Chrome search engine.

9
2.3 Limitations of Information Gathering

Time Constricted
Although large volumes of information were available on the internet and in printed form,
information gathering was restricted by a scheduled deadline in order to complete the RAP on
time for submission within a limited time frame. This limitation resulted in not having every
piece of information published that relates to the airline industry, Emirates and SIA being
scanned and reviewed.

Irrelevant Information
There were many written materials about the airline industry, Emirates and SIA. However, these
materials provide general information or were written for other purposes which may then not
be relevant or contain useful information for the purpose of this RAP. Information that were
applicable to this RAP were of narrower scope and presents the risk of being insufficient to
conduct an in depth analysis and evaluation.

Reliability of Secondary Information

As this RAP was mainly based on information gathered from Secondary sources, these
information were inherently subjected to the influence of the original researcher. In order to
produce quality research, only credible sources are used such as government bodies and news
publications.

Indirect Comparative Information

External benchmarking was incorporated in this RAP to compare Emiratess performance in
relation to a suitable competitor, Singapore Airlines. Searching for a suitable competitor with
comparable information such as the respective companys consolidated financial statements
presented itself as one of the main challenge in conducting the RAP.

Despite the above limitations, the information gathering process was conducted with the
objective of collecting as much information possible which is of appropriate and reliable quality
within the set time frame.

10
2.4 Ethical Issues and Resolution

In the process of the RAP, several threats to my personal ethics had arisen. As an ACCA student,
I am bound to comply by the spirit and rules of ACCAs Code Of Ethics and Conduct. The
Code sets out five fundamental ethical principles which are Integrity, Objectivity, Professiona l
Competence and Due Care, Confidentiality and Professional Behaviour (ACCA, 2016).

Unauthentic work
I applied the fundamental principle of Integrity by conducting my own research and producing
an original work without cheating, colluding or buying the service of another individual to
undertake the RAP on my behalf and then dishonestly claiming their work to be mine.

Plagiarism
Risk of plagiarism was a key ethical issue in the RAP.Plagiarism is defined as The practice of
taking someone elses work or ideas and passing them off as ones own (Oxford Univers ity
Press, 2016). In effort to maintain Professional Behaviour and not violate any copyright laws,
I cited and referenced the sources of information gathered using the well recognised Harvard
Referencing style.

Biased Judgement
In the analytical and evaluation part of the RAP, there was an ethical risk of forming biased
judgements. I remained Objective by not placing myself under any circumstances that would
subject me to the undue influence of others. I had also based my research on a wide range of
sources to avoid producing a narrow minded, biased opinion.

Violation of Private and Confidential Information

As I had utilised Secondary data, the fundamental principle of Confidentiality was not
threatened as I did not obtain any information that required authorised disclosure.

11
2.5 Accounting and Business Techniques Used and Their Limitations

As per the project objectives of this RAP, a financial analysis and business analysis were
conducted. These were carried out using Ratio Analysis and SWOT analysis respectively.

2.5.1 Financial Analysis using Ratio Analysis

Financial analysis may be defined as the process of highlighting the financial strengths and
flaws of a business by studying both the balance sheet and income statement elements.
(Business Analyst Learnings, 2016).

Ratio analysis was used in this RAP to analyse the financial performance of Emirates. The
financial ratios calculated using elements from Emirates consolidated financial statements
were then also applied to its competitor, Singapore Airlines and the results of both companies
were then compared and interpreted to form a conclusion. Financial ratios may generally be
classified into several key areas which are of significant interest to an organisatio ns
stakeholders being profitability, liquidity, gearing and investment (Retallack, 2015).

While ratio analysis was used, it was important to bear in mind the limitations of this tool to
avoid misinterpretation of results. Below are some of such limitations (Pant, 2015):

Determined by the quality of the Financial Statements

As the ratios were derived from the financial statements, any faults in the statements were
passed on into the analysis. For example, window dressing or seasonal fluctuations distorting
the true representation of the financial statements would alter the results of the ratio analysis.

Indirect comparison
Different accounting policies, valuation methods and assumptions used by different companies
caused difficulties in making direct, accurate comparisons between the respective financ ia l
statements and the ratios employed.

Interpretations of Ratios
Although ratios may highlight the relationship between components in the formula, it does not
provide an absolute interpretation of the computed figure. The nature of the economic
environment and individual company characteristics were needed to be taken into account when
anaysing the results.

Historic, Quantitative Analysis

Ratio analysis only analyses the historic and quantitative aspects of a companys performance.
This was of limited use as a companys future performance and qualitative factors present in
the internal and external environment are of greater importance.

12
2.5.2 Business Analysis using SWOT Analysis
In order to survive and thrive, businesses must adapt their internal operations to the external
environment. This is done by conducting an environmental analysis which identifies
opportunities and threats in a business environment in terms of a company's strengths and
weaknesses (Nordmeyer, n.d.).

SWOT analysis was used in this RAP to analyse the business performance of Emirates. This
popular business tool is simple to use in understanding the strengths, weaknesses, opportunities
and threats of a project or business activity (CIMA, 2007).

As with all other business techniques, the SWOT analysis has inherent limitaions which were
needed to be taken into account. The limitations are listed as follows (Firth, n.d.):

Oversimplification
Although SWOT is reknown for its simplicity, this attractive characteristic is also a limita tio n
of the tool. The simplified overview restricts users from obtaining a more detailed, in depth
analysis which would provide a more comprehensive assessment on the companys
performance.

Identification of Key Factors

SWOT assits in categorization of key factors into fours quardrants but does not identify the key
factors itself. Users of SWOT have to perform their own research in understanding the industry
and company and based on their respective opinions, identify influential factors affecting the
company.

Subjective Classification
There are no clear guidlines in the classification of the key factors identified. As per
identification, classification into the respective quardrants in the tool is a subjective matter
based on the users interpretation. An influencing factor identified may also be classified into
more than one quardrant by being both a Strength and a Weakness at the same time depending
on how the company utilises it and the surrounding context.

Prioritization difficulties
As the tool identifies key factors influencing the company rather than listing every potential
item of each quardrant, prioritization is needed. Once again this is subject to the users
interpretation on the weightage of the impact on the organisation of each factor identified.

General strategy
SWOT anaylsis only provides a general strategy which is to mitigate weaknesses or turn them
into strengths, use strengths to capitalise opportunities and overcome threats. It does not form
the specific strategies for individual companies to implemented.

13
PART 3 - RESULTS, ANALYSIS, CONCLUSIONS AND
RECOMMENDATIONS
3.0 Notes to Analysis

1. Emirates Airline (Emirates) was analysed by assessing its internal historic performance and
externally benchmarking it against a competitor, Singapore Airlines (SIA).

2. As both Emirates and SIA were constantly among the worlds top 5 major, internatio na l
carriers since 2013 with same financial year end on 31st March, SIA was a suitable comparison.

3. Group figures from annual reports were used. I had manually consolidated the separate
financial statements of Emirates Groups commonly managed entities (Emirates and Dnata)
and eliminated intercompany transactions.

4. The computed Emirate Group figures were converted into Singapore dollars for a single
currency base (2016, 1AED = 0.38 Singapore Dollar).

5. As Emirates contributed over 80% and 90% of group profit for the year and total assets,
explanations on Emirates Group figure are in respect of Emirates Airline; As SIA contributed
over 70% and 90% of group operating profit and total assets respectively, explanations on SIA
Group figures are in respect of Singapore Airlines.

6. As Emirates Group is unlisted, wholly owned by Dubais government, only one investor ratio
was calculated due to limited information. In replacement, further analysis into Emirates
operations via efficiency ratios were employed.

14
3.1 Financial Performance using Ratio Analysis

3.1.1 Performance Ratios

(A) Revenue Growth

Figure 1

FY 2014 - FY2015
Emirates:
Emirates revenue performance had demonstrated a positive 7.4% growth which had
contributed to over 90% of the increase in its group revenue and other operating income from
$33.4billon to $36.5billion.

The improved performance had grown on the back of higher revenues generated from its central
activity i.e. transport revenue that formed 95.4% of FY2015 revenue mix, as well as in all of its
other revenue mix components.

Transport revenue had grown despite weaker yields from adverse currency movements
(Emirates, 2015) as higher revenue passenger kilometer and revenue tonne kilometer were
transported (Appendix1.G). The heavier traffic transported despite Emirates 80days runway
closure at Dubai International Airport (Kannan, 2014) and suspended operations to Guinea due
to the Ebola virus outbreak in West Africa (Withnall, 2014) indicated that market demand for
Emirates services remained strong and unwaivering.

SIA:
Emirates had outperformed SIA Groups 2.1% revenue growth. Upon eliminating $357millio n
revenue of SIAs new subsidiary, Tiger Airways acquired (CAPA, 2016b) in October 2014,
15
SIAs revenue actually declined 0.2% (Appendix1.E), worsening SIAs performance in relation
to Emirates.

A marginal 0.4% increase in SIAs main income, passenger revenue was negated by falling
trends in all of its other revenue streams, resulting in the decline. SIAs soft yield was hampered
by adverse currencies and promotions offered (Singapore Airlines, 2015) in battle for market
share amidst intense rivalry (CAPA, 2014) and to reinstate consumers confidence that were
shaken by political and economical instabilities (Singapore Airlines, 2015).

FY2015-FY2016
Emirates:
Reduction in Emirates transport revenue that formed 95.3% of the revenue mix had resulted in
group revenue and other operating income to fall from $36.5billion to $35.3billion. The impact
was however cushioned by sustained growth in all of its other remaining components.

Transport revenue had declined as higher RPKM and RTKM were insufficient to compensate
weaker yields that encountered oncoming unfavorable exchange movements as USD
strengthened against Emirates revenue-generating markets such as Russia, India and Europe
(Saleem, 2015). Furthermore, Emirates had transferred fuel cost savings to customers through
lowered air fares (Gazzar, 2015) in encouragement of flight uptakes.

SIA:
SIA had withstood the challenging environment better than Emirates with a smaller revenue
decline which stemmed from its only positive revenue source in FY2015 i.e. passenger revenue
converting into a decline, resulting in all of its income streams to be in the negative.

Transport revenue forming 97.3% of revenue mix declined as yields faced growing pressure
from air fare wars as competition intensified and aggressive promotion strategies were deployed
(Associated Press, 2015) which had stimulated RPKM and RTKM increase. However, growth
in RPKM was signifiacntly lower than FY2015 as the tragedy of Malaysia Airlines missing
MH370 in March 2014 and MH17 shot down in July 2014 (Yan & Cripps, 2014) had impacted
the global aviation industry.

16
(B) Operating and Net Profit Margins

Figure 2

FY 2014 - FY2015
Emirates:
Profitability improved with group operating profit increased 34.6% from $1.9billion to
$2.6billion and operating margin increased 1.4 percentage points as a repercussion of the strong
9.4% revenue growth outpacing 7.1% operating cost increase.

All of Emirates operating costs had grown except jet fuel as Emirates expanded operations and
incurred a foreign exchange loss (Emirates, 2015). The increase was however mitigated by
economies of scale as capacity expanded and reduction in Emirates primary expenditure, jet
fuel as it benefited from a substantial 44% drop in Brent price of crude oil, a representative of
global oil price between June and December 2014 (Kilian, 2015).

Although the increase in gross profit was mitigated by higher finance cost incurred, group profit
for the year increased 32.2% from $1.6billion to $2.2billion and net profit margin increased 1
percentage point.

SIA:
Similar to Emirates, SIAs profit grew but with a lower operating margin percentage point
increase of 0.9 as revenue growth outpaced operating cost increase.Upon excluding Tiger
Airways, operating profits growth was actually attributable to 0.2% revenue decrease exceeded
by 1.3% operating costs decrease (Appendix1.E).

17
Operating cost was inflated by a fuel hedge loss (Singapore Airlines, 2015) and the
strengthening USD (Harjani, 2015). However, SIA had successfully reduced staff cost and as
did Emirates, benefited from a decline in its largest expense, jet fuel due to global oil price drop.

However, operating profit growth was completely eroded by higher finance cost and share of
associates loss resulting in a 4.2% reduction in profits for the year from $424million to
$407million and a 0.2 net margin percentage points decrease.

FY2015-FY2016
Emirates:
Profits rose even higher by 36.1% from $2.6billion to $3.6billion and operating margin
increased 2.9 points despite reduced revenue as operating costs had fallen at a higher rate of
7.5%.

Increased operating cost in FY2015 had turned into a decline as the primary expenditure fell
substantially by 31.2% along with jet fuel prices of an average $78/barrel that fell even lower
than 2014s $116.6/barrel (IATA, 2015).This hindered the rise in Emirates other expenses such
as employee costs that rose from recruitments and bonuses paid (Ginley, 2015).

The immense gross profit growth translated to the bottom figure, further enhanced by higher
interest income and reduced finance costs resulting in group profit for the year to substantia lly
grow by 48.5% from $2.2billion to $3.2billion and net profit margin to increase 3.2 percentage
points.

SIA:
Similar to Emirates, SIAs operating profit growth was credited to revenue reduction exceeded
by operating cost decrease of 4% resulting in a 1.8 operating margin percentage point increase.

As did Emirates, SIAs ultimate operating cost fell at a steep 18.9% along with the tumble in
global oil prices. This favourable macroeconomic influence was however negated by a higher
fuel hedge loss (Kotoky, 2016), increased staff cost due to a larger workforce and the Singapore
dollar at its weakest against USD in five years (The Straits Time, 2015).

Operating profits growth materialized into the end figure as finance charges underwent minima l
growth and share of associates losses reduced substantially resulting in a massive 109.4%
growth in profit for the year and a 3 net margin percentage point increase.

18
3.1.2 Liquidity Ratios
(A) Current Ratio

Figure 3

FY 2014 - FY2015
Emirates:
Increase in cash assets was mitigated by reduced receivables resulting in the 1.4% current assets
growth to not keep in pace with the 6.3% current liabilities increase which stemmed from higher
payables and borrowing that grew in support of aircraft expansion (Emirates, 2015), resulting
in the decline and weakening Emirates liquidity position.

SIA:
The strong 23.2% growth in current liabilities that stemmed from an increase in all of SIAs
current liabilities except creditors and tax payable was compounded by a 0.8% reduction in
current assets which arose as majority of SIAs current assets had shrunk and negated a cash
and cash equivalent increase from notes issue and sale and leaseback transactions (Singapore
Airlines, 2015), resulting in SIAs steeper current ratio decline and weakened financial health.

FY2015-FY2016
Emirates:
The current assets growth of 13.3% on increased receivables and a surge in cash assets from
net cash operations and PPE sales proceeds overtook current liabilities 11.7% increase on
higher borrowings as long term borrowings matured (Emirates, 2016) which was mitigated by
fewer payables, had resulted in the recovery of FY2015s current ratio decline and strengthe ned
Emirates ability to finance debts as they fall due.

SIA:

19
Unlike Emirates, SIA had not recovered its FY2015s decline. Instead, current ratios continued
to fall, weakening its short term financing position and increasing liquidity risk as current assets
declined 6.6% from a substantial reduction in cash and cash equivalents that was invested in
capital expenditure (Singapore Airlines, 2016) and fewer receivables held despite current
liabilities declined 3% from fewer payables owed and borrowings falling to less than half of
FY2015size.

20
3.1.3 Solvency Ratios
(A) Long Term Debt to Capital

Figure 4

FY 2014 - FY2015
Emirates:
Borrowings and lease liabilities increased as finance was raised to acquire aircrafts such as a
US$913million Sukuk bond raised to finance 4 Airbus A380 (UK Export Finance, 2015) and
15 aircrafts acquired on finance lease and a term loan (Emirates, 2015).

This resulted in non-current liabilities slightly exceeding equity which had grown from
improved profits, resulting in the marginal gearing and financial risk increase.

SIA:
Gearing increased at a higher rate than Emirates as a double effect of reduced equity from fair
value losses on cash flow hedges and dividend payments, combined with increased non-current
liabilities due to higher provisions and debts from a $500million notes issue and acquisiton of
Tiger Airways (Singapore Airlines, 2015).

Despite the higher acquisition of debt, SIAs gearing levels were substantially lower presenting
minimal financial risk.

FY2015-FY2016
Emirates:
Gearing fell, cancelling FY2015s rise and ended lower than FY2014s level as equity had
grown from the substantial profit increase while non-current liabilities marginally declined as
long term bonds were repaid but partially offset by new finances (Emirates, 2016) such as a

21
japanese operating lease with a call option (Bonnassies, 2015), a japanese operating lease
(Bullen, 2016), and a hybrid operating lease (Whyte, 2015) that were used to acquire fleets.

This improved Emirates financial stability by lowering solvency risk.

SIA:
Mirroring Emirates, gearing fell with equity increased from stong profits coupled with reduced
long term liabilites and provisions attributable to retail bonds repayments and lower derivative
liabilities (Singapore Airlines, 2016) resulting in improved financial health.

Overall, dependency on debt remained moderately low presenting little solvency risk.

(B) Interest Cover

Figure 5

FY 2014 - FY2015
Emirates:
Interest cover increased as strong profit before interest and tax growth of 29.7% enabled
Emirates to sufficiently cover and service its financial obligations despite higher aircraft
financing cost of 16.8% which had arisen from the larger leverage acquired to expand its fleet.

SIA:
In reverse of Emirates, SIAs interest cover decreased as it incurred a substantially higher
finance cost increase due to higher notes payable from the $500million notes issue (3.1.3(A))
which overtook PBIT growth, indicating SIA was taking on more debts than its profit
generating ability, resulting in higher solvency risk. Regardless of its decline, SIAs ratio
remained substantially higher than Emirates giving stakeholders greater comfort in its solvency.

22
FY2015-FY2016
Emirates:
Interest cover rose even higher from a stronger PBIT increase compounded by reduced finance
costs as lower level of bonds required servicing due to the repayment (3.1.3(A)). This provided
Emirates a better coverage to finance its debts, reducing financial risk and strenghte ning
Emirates financial position.

SIA:
The dramatic improvement in interest cover arose from a 107.7% increase in PBIT growth
exceeding the 1.4% finance cost increase which arose from higher bank loans but was mitigated
from lower notes payable due to the retail bonds repayments (3.1.3(A)), resulting in SIAs
financial health to be on solid grounds.

23
3.1.4 Efficiency Ratios
(A) Passenger Seat Factor

Figure 6

FY 2014 - FY2015
Emirates:
Fleet efficiency marginally improved despite Emirates expanded capacity through launch of
flights to 5 new destinations, higher frequencies on existing routes, increased usage of wide-
bodied aircrafts and growth in the net number of added and retired fleets by 14 units.

This arose as growth in RPKM due to strong demand had minutely outpaced the increased
ASKM, facilitating higher efficiency and lower unit cost as fixed costs were shared by a larger
customer base, improving profitability.

SIA:
Modelling Emirates trend, SIAs fleet efficiency had also marginally enhanced from increased
RSKM exceeding the expansion in ASKM.

However, its seat factor remained marginally lower indicating Emirates was more efficient in
utilisating its fleet to generate higher revenue and profits.

FY2015-FY2016
Emirates:
Fleet efficiency declined despite sustained RPKM growth as strong ASKM expansion from the
80 day Dubai International Airport runway closure in FY2015 (3.1.1(A)) and 20 net additiona l

24
fleets had undermined existing fleets efficiency. Given time, the newly expanded capacity may
be met by demand and higher efficiency may emerse in future.

SIA:
Opposite of Emirates, SIA continued to improve its fleet efficiency. This was on the back of
good capacity matching demand as SIA minimally increased ASKM resulting in existing fleets
to be used more efficiently in support of the continued growth in demand and RPKM increase.

(B) Revenue per Employee Growth

Figure 7

FY 2014 - FY2015
Emirates:
Productivity declined despite the strong revenue growth as Emirates workforce had
significantly expanded from recruitment as more employees were needed to operate the
expanded capacity (3.1.4(A)).

The recruitment had undermined and masked the efficiency of Emirates existing employees
which could be analysed more accurately if detailed operational data was accessible.

SIA:
In contrast, SIAs employee productivity improved as the higher revenue in FY2015 was
generated by its existing workforce as the average number of employees only increased
marginally, indicating improved efficiency.

FY2015-FY2016
Emirates:

25
Productivity plunged due to a double hit from fallen revenue and an even higher increase in the
average number of employees than FY2015s as Emirates carried an extensive recruitment in
preparation for upcoming capacity expansion plans (Maceda, 2015).

As in FY2015, the expanded workforce had disproportionated the underlying productivity of

existing staff compounded by uncontrollable currencies distorting revenue, resulting in poor
efficiency rates.

SIA:
Imitating Emirates, productivity declined with lower revenue generated by a 1.6% larger
workforce.

The adverse currencies eroding revenue and recruitment distorting the workforce size
throughout the year had resulted in the lower effciency rate. As SIAs recruitment was of a
smaller scale than Emirates (Appendix1.G), its productivity underwent a smaller decline.

26
3.1.5 Investor Ratios
(A) Dividend Payout Ratio

Figure 8

FY 2014 - FY2015
Emirates:
Although profit attributable to owner grew 34%, dividends paid was substantially higher at 150%
resulting in the massive payout increase .

The enormous dividends paid signalled to investor that Emirates was profitable with bright
future prospects whereas the payout appeared reasonable, in line with the strong revenue growth,
improved profits and larger cash assets in FY2015.

SIA:
Payout ratio remained fairly constant with 5% DPS increase marginally outpacing 3% BEPS
growth.

Increased dividends resonated the similar positive message to investors and had mirrored SIAs
marginal revenue increase whereas higher profits and larger cash assets in FY2015 made the
payout feasible.

FY2015-FY2016
Emirates:
Despite FY2015s massive payout, the growth was unsustained as dividends paid fell, in line
with the fallen revenue and was possibly Emirates decision to reinvest a larger portion of
profits for upcoming expansions (CAPA, 2016a) that may result in higher future returns.

27
Moreover, profits attributable to owners for the year underwent forceful growth, further
shrinking the proportion paid.

SIA:
Payout ratio declined despite higher dividends paid as BEPS underwent forceful growth which
widened the gap between profits available for distribution and the proportion paid.

Despite the decline, SIAs payout ratio remained reasonably high and stable, assuring investors
in the stability of its financial health and as a reliable income source. Hence, SIA would be a
preferred choice of investment by income-seeking shareholders in comparison to Emirates.

28
3.2 Business Performance using SWOT Analysis
Figure 9:

3.2.1 Strengths
Strong Market Presence and Reputable Brand
According to Forbes, an organisations brand reputational value may determine profits
generated (Brigham & Linssen, 2010). Hence, Emirates award winning brand is a
unique resource that provides a competitive advantage over competitors (Kaplan, 2012).
Emirates brand differentiates it from rivals, allows premium prices to be charged and
higher margins to be earned (Economist, 2008). Furthermore, it allows Emirates to
retain existing and attract new stakeholders.

In 2016, Emirates remained as the Most Valuable Brand in the Middle East (Brand
Finance, 2016b) and retained both titles as Worlds Strongest and Most Valuable Airline
brand, valuing US$7.7billion (Brand Finance, 2016a).

Emirates invested massive sums into growing its brand to enhance and reinforce its
position as a leader in the aviation industry, such as US$20million See you in Dubai

29
 (Sahoo & Gazzar, 2014) global campaign; $20million television campaign with actress
Jennifer Aniston (O'Reilly, 2015) and $100million FIFA (Bachman, 2014) sponsorships.

Large Fleet, Global Network and Premium Services

Emirates is the worlds largest international airline (CAPA, 2015a),operating the
worlds largest modern, jumbo jet fleet of Airbus A380 and Boeing 777 (GulfPrope rty,
n.d.) across a global network at quality standards.

Emirates spacious, young fleet aged average 74months, almost half of the industry
average 140 months per 58th WATS report (Emirates, 2014) provides an ambience of
quality and comfort for customers in line with its brand, are less accident-prone hence
protecting Emirates safety record which is of paramount importance, are fuel effic ie nt
resulting in lower cost, and are environmentally conscious. Operations across multip le
markets meet customers demand for connectivity, reduces reliance risks and adverse
currencies.

Beyond basic transportation, Emirates quality service such as its award winning
Worlds Best Airline Inflight Entertainment ICE (Zhang, 2016b) that makes journeys
pleasurable and its 10th-placed Worlds Best Cabin Staff (Skytrax, 2016a) attending
to passengers needs gains an edge over rivals and reinforce customer loyalty

3.2.2 Weaknesses
Allegations of Unfair Competition
Emirates along with Qatar and Etihad Airways were accused by the 3 largest US airlines
namely American, United and Delta Air of gaining $42billion government subsidies
resulting in unfair competition on international routes to US (Hollinger, 2015).

This damages Emirates brand resulting in loss of consumers confidence as well as loss
of suppliers and partners who disassociate themselves from Emirates in fear of harming
their own brand. Furthermore, the claim for a reassessment of the US-UAE open skies
agreement (Zhang, 2015) may result in protectionism, causing difficulties for Emirates
existing operations in US and restricting expansion.

Reduced Financial Flexibility

Emirates gearing ranged from 56.7% to 60% (3.1.3(A)) throughout FY2014-FY2016,
representing a higher debt dependancy in its capital structure in comparison to other
equity financed companies.

The higher reliance on debt resulted in Emirates financial position to be less stable as
it presented the inherent risk of failure to meet repayment resulting in creditors
liquidating the company. Moreover, Emirates cash flows are pressured and strained to
meet principal and interests obligations on time resulting in less flexibility in its working
capital to respond quickly to market changes. As Emirates gearing increases, interest

30
 rates become more expensive and its ability to raise capital diminishes due to poorer
credibility.

3.2.3 Opportunities
Growth in Global Tourism Industry
According to UNWTO, the volume of international tourist arrivals grew 4% from
January to September 2016 in comparison to the same period of 2015. UNWTO
Secretary-General said although the global tourism industry was risk-sensitive, it
remained positive with the industry stubbornly growing at a fast rate (UNWTO, 2016).

The optimistic outlook in the global tourism industry presents a large opportunity for
Emirates to improve its existing market share and expand operations into new areas,
resulting in a higher load factor as demand for its services increase parallel to the
growing interest in travel.

Dubai Expo 2020

Emirates is the Official Premier Airline Partner of the Expo 2020 Dubai, predicted to
be the most visited global event in 2020 (Emirates247, 2016) with an expected 25millio n
visitors, 70% international, transported by Emirates (BIE, 2016).

The partnership grants Emirates exclusive rights and benefits including branding and
marketing of the Expo logo, involvement in expo related events, and a pavilion at the
Expo (GulfNews, 2016). All of these provide Emirates a major marketing platform to
reach millions of customers world-wide. Furthermore, post-expo opportunities are being
explored (Emirates247, 2016), potentially sustaining Emirates expected growth from
the expo.

3.2.4 Threats
Stiff Competition
Despite low threat of substitutes and low threat of new entrants due to high barriers of
entry into the aviation industry such as large initial capital and licenses, Emirates faces
strong and intensifying competition from its existing Middle Eastern rivals as well as
other major international airlines such as SIA (CAPA, 2015b).

The aggressive promotional tactics launched by competitors such as incentives for

agents (BusinessStandard, 2014) and slashed prices squeezing companies with high
operating costs out of the market threatens Emirates revenue and profits. Additiona lly,
expanding routes by competitors intensifies rivalry over market share.

Regulations, Oil Prices, Currencies, Interest Rates

As illustrated in the above financial ratio analysis, Emirates profitability is substantia lly
affected by uncontrollable macroecnomic factors such as politics and economics.

31
New safety regulations introduced requiring compliance costs (Federal Aviatio n
Administration, 2015); Rise in oil price increasing Emirates primary cost (Schmidt,
2016); Unfavorable foreign currencies inflating operating costs (Poniman, 2015); and
higher interest rates (Higgins, 2009) increasing cost of capital threatens Emirates with
eroded margins.

32
3.3 Conclusion

3.3.1 Emirates Airline Financial Performance

Performance
In FY2014-FY2015, both Emirates and SIA demonstrated revenue growth with Emirates
having a stronger rate; In FY2015-FY2016, both companies revenue fell with SIA better
withstanding adversity by its smaller decline. Overall, Emirates revenue generating ability was
stronger with a net increase in FY2014-FY2016 whereas SIAs remained fairly constant.

In FY2014-FY2015, both Emirates and SIA enjoyed improved profitability with Emirate
having a higher percentage point increase in both operating and net margins; In FY2015-
FY2016, both companies profits rosed even higher and Emirates maintained its lead over SIA.
Overall, Emirates was more profitable than SIA.

Liquidity
In FY2014-FY2015, both Emirates and SIAs current ratio declined with SIA falling at a steeper
rate; In FY2015-FY2016, Emirates recovered its current ratio whereas SIA sustained its decline.
These movements indicated SIAs liquidity was worsening than Emirates. However, Emirates
overall lower ratio indicated higher liquidity risk, but below alarming levels.

Solvency
In FY2014-FY2015, both Emirates and SIAs gearing increased with SIA at a higher rate; In
FY2015-FY2016, Emirates had a steeper fall and had ended lower than its FY2014 position.
These indicated SIAs solvency position was worsening than Emirates. However, Emirates
overall higher gearing levels indicated higher financial risk, but below alarming levels.

In FY2014-FY2015, Emirates interest cover increased whereas SIAs marginally declined; In

FY2015-FY2016, Emirates interest cover further increased whereas SIA turned its previous
year decline into a significant growth. These indicate both companies were generating suffic ie nt
profits to service debts and remained solvent.

Efficiency
In FY2014-FY2015, Emirates fleet utilisation improved and was more efficient than SIA with
higher passenger seat factor, resulting in lower unit cost and better margins; In FY2015-FY2016,
Emirates fleet efficiency declined and was lower than SIA, attributable to strong capacity
expansion. Given time for market uptake of expanded capacity, Emirates efficiency may
improve in future.

Throughout FY2014 -FY2016, Emirates revenue per employee declined and were lower than
SIA; Emirates poor productivity stemmed from large recruitments. Given time for market
uptake of expanded capacity, Emirates productivity may improve in future.

Investor Relations
In FY2014-FY2015, Emirates dividend payout ratio increased at a higher rate than SIA; In
FY2015-FY2016, Emirates ratio fell steeper than SIA; Overall, Emirates lower payout would

33
be preferred by capital-seeking shareholders whereas SIAs higher dividend policy would be
preferred by income-seeking shareholders.

3.3.2 Emirates Airline Business Performance

Stengths
Emirates strong market presence and reputable brand permits higher air fares, attracts
customers, premium partners and quality workforce while reinforcing loyalty. In addition,
Emirates massive fleet, global network and premium service not only meets but exceeds
customers needs in line with its brand and commands a higher purchasing power over some
suppliers.

Weaknesses
Allegations of unfair competition by the 3 largest US airlines weakens Emirates brand and
hinders expansion into US. Furthermore, Emirates leveraged capital structure reduces its
financial flexibility in reinvesting cash into operations and raising future finance.

Opportunities
The expected growth in global tourism industry provides opportunity for Emirates to expand
existing and capture new market share, improve efficiency and grow profits. Moreover, Dubai
Expo 2020 provides Emirates a mega marketing platform and brings promising post-expo
benefits.

Threats
Emirates faces intensifying competition from both domestic and international rivals that
threaten market share and yields as price wars breakout. Additionally, new safety regulatio ns,
potential oil price increase, adverse currencies, and higher interest rates risk inflating costs.

34
3.4 Recommendation
As Emirates revenue growth was pressured by adverse currencies, it should improve its
hedging methods to better mitigate currency risk. Furthermore, it should review and conduct a
cost benefit analysis regarding the decision to lower air fares to ensure that lower yields were
sufficiently compensated by higher volumes, resulting in an overall revenue increase.

Emirates decision to not hedge jet fuel prices proved fruitful as it resulted in higher profits than
SIA who made fuel hedge losses. Hence, SIA may benefit by following this strategy of Emirates.
Although presently beneficial, Emirates should monitor oil prices closely and consider some
hedging strategies as the present declining oil price trend may eventually rise, increasing costs
and jeapardizing profits.

In the midst of high profits from falling oil prices, Emirates should consider strengthening its
liquidity and solvency position by increasing its investment in short term assets and repaying
debts to provide a cushion for better financial flexibility in raising capital when needed in future
and to reduce the strain on cash flow so that more cash may be reinvested rather than used for
servicing obligations.

Emirates poor fleet utilization and low employee productivity had stemmed from the increased
fleet size and major recruitments. Hence, Emirates revenue generating assets need to be
monitored tightly to ensure that there is an uptake of the new capacity which would only then
prove the investment in expansion to be worthwhile. While doing so, Emirates should ensure
that existing assets are also being used efficiently.

Based on the SWOT analysis, Emirates should attempt to overcome one of its key weaknesses
being the allegation of having an unfair advantage. It should do so by being as transparent as
possible, answering any suspicions raised and giving its full cooperation to the investiga tive
authorities. In addition, Emirates should assess the magnitude of the adverse impact and address
any loss of consumers confidence.

Furthermore, Emirates should and is well able to capitalise on the upcoming global toursim
growth and Expo 2020 Dubai with its award winning brand and its large, globally-conne cted
fleet. It should consider opening routes and increasing frequencies to destinations with the
highest expected tourism growth rate as well as partnering with other holiday related providers.

Lastly, it is critical for Emirates to address the threats from rivals. Emirates should do so by
regularly benchmarking and reassessing its position in the aviation industry as well as
responding appropriately to competitors strategies. Emirates also needs to ensure it complies
with new regulations or risk penalties, and consider financial derivatives to hedge fluctua ting
oil prices, currencies and interest rates.

By considering and implementing the above recommendations, Emirates may enjoy improved
performance with a strengthened financial position, resulting it to be once again named as the
Worlds Best Airline.

35