Sample On Topic 8 Emirates Part 1 - 3 [PDF]

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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

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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 ACCA’s 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.

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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 Dubai’s governme nt. It is the international airline of UAE, offering sevices to 153 destinations by 31st March 2016 over 6 continents (Emirates, 2016). Winning ‘World’s 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 world’s largest international airline operating the largest fleet of Airbus A380 and Boieng jumbo jets (Zhang, 2016a), Emirates was awarded the ‘World’s Best Inflight Entertainment Award’ for 12th consecutive years, improved its performance in First, Business and Economy Class categories, and finished within top ten of ‘World’s 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 .

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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?

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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.

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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 Competitor’s Annual Report The Emirates Group and Qatar Airway’s 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 company’s financial statements were also contained within the annual reports which were utilised as a major part of the RAP. The Organisation and Its Competitor’s Website In addition to the Annual Reports, Emirates and Qatar Airways’s company website provided an interactive, real-time insight into the respective company as the company website was one of the organisation’s key medium for direct communication with potential customers. ACCA’s Official Website The OBU Information Pack containing key guidelines for the overall conduct of the RAP was made available in ACCA’s official website. ACCA’s Student Accountant Online ACCA’s 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.

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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.

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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.

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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 Emirates’s performance in relation to a suitable competitor, Singapore Airlines. Searching for a suitable competitor with comparable information such as the respective company’s 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.

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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 ACCA’s 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 else’s work or ideas and passing them off as one’s 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.

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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 Emirate’s consolidated financial statements were then also applied to its competitor, Singapore Airline’s 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 n’s 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 company’s performance. This was of limited use as a company’s future performance and qualitative factors present in the internal and external environment are of greater importance.

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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 company’s 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 identification, classification into the respective quardrants in the based on the users interpretation. An influencing factor identified more than one quardrant by being both a Strength and a Weakness on how the company utilises it and the surrounding context.

factors identified. As per tool is a subjective matter may also be classified into at the same time depending

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 user’s 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.

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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 world’s 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 Group’s 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 Dubai’s government, only one investor ratio was calculated due to limited information. In replacement, further analysis into Emirates’ operations via efficiency ratios were employed.

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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 Group’s 2.1% revenue growth. Upon eliminating $357millio n revenue of SIA’s new subsidiary, Tiger Airways acquired (CAPA, 2016b) in October 2014, 15

SIA’s revenue actually declined 0.2% (Appendix1.E), worsening SIA’s performance in relation to Emirates. A marginal 0.4% increase in SIA’s main income, passenger revenue was negated by falling trends in all of its other revenue streams, resulting in the decline. SIA’s 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.

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(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, SIA’s 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).

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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 2014’s $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, SIA’s 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, SIA’s 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.

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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 SIA’s current liabilities except creditors and tax payable was compounded by a 0.8% reduction in current assets which arose as majority of SIA’s 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 SIA’s 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 FY2015’s current ratio decline and strengthe ned Emirates’ ability to finance debts as they fall due. SIA: 19

Unlike Emirates, SIA had not recovered its FY2015’s 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 FY2015’size.

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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, SIA’s gearing levels were substantially lower presenting minimal financial risk. FY2015-FY2016 Emirates: Gearing fell, cancelling FY2015’s rise and ended lower than FY2014’s 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, SIA’s 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, SIA’s 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 SIA’s financial health to be on solid grounds.

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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 widebodied 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, SIA’s 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

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fleets had undermined existing fleet’s 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, SIA’s 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 FY2015’s 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 SIA’s recruitment was of a smaller scale than Emirates (Appendix1.G), its productivity underwent a smaller decline.

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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 SIA’s marginal revenue increase whereas higher profits and larger cash assets in FY2015 made the payout feasible. FY2015-FY2016 Emirates: Despite FY2015’s 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, SIA’s 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.

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3.2 Business Performance using SWOT Analysis Figure 9:

3.2.1 Strengths

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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 World’s 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’

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(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 world’s largest international airline (CAPA, 2015a),operating the world’s 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 ‘World’s Best Airline Inflight Entertainment’ ICE (Zhang, 2016b) that makes journeys pleasurable and its 10th-placed ‘World’s Best Cabin Staff’ (Skytrax, 2016a) attending to passengers’ needs gains an edge over rivals and reinforce customer loyalty

3.2.2

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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.

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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

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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.

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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

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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.

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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.

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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 SIA’s 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 FY2015FY2016, 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 SIA’s 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 SIA’s 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 SIA’s 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 SIA’s 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 SIA’s 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 SIA’s 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.

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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 World’s Best Airline.

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