- Investment analysis of the Emirate Airline
- The University
- [Instructor’s Name here]
- Table of Contents
- Financial highlights analyses, 2010-2014 .. 02
- Horizontal analyses 02
- Vertical analyses 04
- SWOT analysis .. 04
- Cash flow analyses, 2010-2014 . 06
- Cash flow statements analyses 06
- Profitability position 08
- Liquidity position 08
The four-year revenue growth of Emirates Airlines was 90.4 percent, or an average annual growth of 22.5 percent. This growth performance is moderately high and impressive for a company in the airline industry, an industry reputed for its low growth prospects.
The operating profit, however, showed very poor growth performance at 19.5 percent, or an average annual rate of 4.9 percent. Operating margin showed a negative growth of 36.6 percent. Profit attributable to the owner decreased 8.0 percent or an average annual deterioration of 2.0 percent. Profit margin showed a serious deterioration of 51.9 percent.
The return on shareholder’s funds decreased 37.0 percent, or an average annual deterioration of 9.3 percent. Total assets, however, showed an encouraging performance with an increase of 82.9 percent, or an average annual increase of 20.7 percent. Cash assets also increased significantly to 57.6 percent, or an annual average improvement of 14.4 percent. The net debt equity ratio also increased to 32.4 percent, or an average annual increase of 8.1 percent.
EBITDAR increased 62.0 percent, or an average annual increase of 15.5 percent. Its margin, however, deteriorated to 15.1 percent.
Revenue and other operating income
The fiscal year 2010-11 showed a favorable increase in the revenue and other operating income with an increase of 25.2 percent (AED10.9 billion). While it continued to increase in 2011-12, year-on-year change slowed down to 14.5 percent (AED7.9 billion), which caused a cascading liquidity and profitability problem that year. Profits in 2012-13 increased near the 2010-11 level to AED10.8 billion or 17.4 percent. Revenue and other operating income continued to 2013-14 at a much slower rate of 13.0 percent (AED9.5 billion, resulting to a total increase of 90.2 percent, or an average annual growth of 22.5 percent.
The fiscal year 2010-11 already showed a low operating margin of 10.0 percent; although the year-on-year changed appeared impressive at 52.6 percent (AED1.9 billion). The challenging year 2011-12 showed a severe drop in the operating margin to 2.9 percent as the operating profit decreased by 66.7 percent (-AED3.6 billion). The following year showed a renewed vigor in its operating profit with a rate of 56.6 percent (AED1.0 billion) change. The operating margin remained very low at 3.9 percent; although representing an increase by 34.5 percent. At the close of the fiscal year 2013-14, operating profit increased 50.1 percent (AED1.4 billion), and an operating margin of 5.2 percent, more than half of its 2010-11 level.
Profit attributable to the owner
The fiscal year 2010-11 showed an increase in the profit attributable to the owner of 51.9 percent (AED1.8 billion) with a profit margin of 9.9 percent. The following year showed a significant profit deterioration of 72.0 percent (-AED3.9 billion) with a profit margin of very low 2.4 percent. Things turned around slowly in the fiscal year 2012-13 as the rates improved to 42.5 percent (AED781 million) with a recovering profit margin of 3.1 percent. In fiscal year 2013-14, owner’s profit increased by another 42.5 percent (AED971 million) with a profit margin growing slightly to 3.9 percent. Overall growth in the owner’s profit was a low negative though (8.0 percent; average annual rate of -2.0 percent).
Return on shareholder’s funds
The fiscal year 2010-11 ended with an increased return on shareholder’s fund of 28.3 percent (from the previous year’s 21.6 percent), which is moderately high for an airline business. It represented an annual increase of 31.0 percent. The following year, however, cut this figure almost four times to 7.2 percent, an annual negative change of 74.6 percent. The fiscal year 2012-13 showed an improved return of 10.4 percent almost half that in 2009-10, a very significant increase of 44.4 percent. The fiscal year 2013-14 continued the return recovery to 13.6 percent, which is almost double that of the 2010-11 return, and representing a significant increase of 30.8 percent. Overall, the return on shareholder’s funds still stood in the negative 37.0 percent, or an annual average decrease of 9.3 percent. However, if the increasing trend continues, the return level may eventually recover in full in the next three to five years.
The fiscal year 2010-11 recorded AED65.1 billion in total assets, an increase of 17.2 percent (AED9.5 billion) from the previous year. Despite the liquidity and profitability problems in 2011-12, total assets continued to grow by 14.3 percent (AED12.0 billion). In 2012-13, total assets reached AED94.8 billion, or an increase of 23.0 percent, higher than in 2010-11 rates. By 2013-14, total assets breached the 100-billion-level as it reached AED101.6 billion, a mild increase of only 7.2 percent. Overall, total assets increased 82.9 percent, or an average annual growth of 20.7 percent.
The fiscal year 2010-11 showed cash assets of AED14.0 billion, an increase of 32.9 percent from previous year. It continued to grow albeit in a slower rate of 11.6 percent (AED15.6 billion, followed by a much stronger increase of 57.6 percent (AED9.0 billion) in the fiscal year 2012-13. The fiscal year 2013-14, however, noted a decrease in cash assets by -32.6 percent (-AED8.0 billion). Overall, cash assets, however, increased 57.6 percent, or an average annual increase of 14.4 percent.
Net debt equity ratio
The fiscal year 2010-11 closed with a net debt equity ratio of already in the high 127.1 percent, although it constituted a decrease of 19.48 percent from the previous year. It increased to another 27.5 percent in 2011-12, or a ratio of 162.1 percent. In the fiscal year 2012-13, it continued to increase reaching 186.4 percent, a mild increase of 15.0 percent. By the close of 2013-14, the net debt equity ratio already doubled the Company’s equity at 209.9 percent, an increase of 12.6 percent. Overall, the net debt equity ratio increased 32.4 percent, or an average annual increase of 8.1 percent.
The fiscal year 2010-11 recorded an EBITDAR of AED13.4 billion, an increase of 26.3 percent (AED2.8 billion) from the previous year, with a margin of 24.7 percent, not far from the previous year’s 24.5 percent. The cash crunch in the fiscal year 2011-12 decreased it to AED10.7 billion, or -20.1 percent (-AED2.7 billion). EBITDAR margin also dropped to 17.2 percent, or by 30.4 percent. The situation improved in the fiscal year 2012-13 as EBITDAR reached 13.9 billion, an increase of 29.4 percent (AED3.2 billion), and a margin of 19.0 percent. Although a bit slower, EBITDAR continued to increase in the fiscal year 2013-14 to AED17.2 or 24.0 percent with a margin of 20.8 percent. Overall, EBITDAR increased 62.0 percent, or an average annual increase of 15.5 percent. The EBITDAR margin, however, decreased by 15.1 percent during the period.
Fiscal year 2013 – 2014
Revenue and other operating income for the fiscal year 2013-14 reached AED82.6 billion, an increase of AED9.5 billion or 13.0 percent.
Operating profit reached AED4.3 billion or an increase of AED1.4 billion (50.1 percent). Operating margin continued its slow rise at 5.2 percent, although still far afar from its 2010-11 margin. It constituted an increase of 1.30 percentage basis points, or a margin growth of 33.3 percent.
Profit attributable to the owner also increased to AED3.3 billion, or by AED971 million (42.5 percent). Profit margin was 3.90 percent, up by 0.80 percentage basis point, or a margin growth of 25.8 percent.
The return on shareholder’s funds slightly increased to 13.6 percent, by 3.20 percentage basis points or 30.8 percent. Total assets reached its first 100-billion level at AED101.6 billion, or an increase of AED6.8 billion (7.2 percent) with cash assets of AED16.6 billion, or a decrease of AED8.1 billion (-32.6 percent). Net debt equity ratio showed a doubling of the net debt level against equity at 209.9 percent, an increase of 23.5 percentage basis points or 12.6 percent.
EBITDAR reached AED17.2 billion, or an increase of AED3.3 billion or 24.0 percent. EBITDAR margin was 20.8 percent, or a margin increase of 1.80 percentage basis points, or a margin growth of 9.5 percent.
Fiscal year 2012 – 2013
Revenue and other operating income for the fiscal year 2012-13 reached AED73.1 billion, an increase of AED10.8 billion or 17.4 percent. The increase constituted a welcomed relief after the negative growth in 2011-12.
Operating profit recovered significantly to AED2.8 billion, or an increase of AED1.0 billion or 56.6 percent. Operating margin, however, improved only very slightly at 3.9 percent, or a margin increase of 1.0 percentage basis point, or a margin growth of 34.5 percent from previous year.
Profit attributable to the owner also increased to AED2.3 billion, or by AED781 million (52.0 percent). Profit margin was 3.1 percent, or a margin decrease of 0.70 percentage basis point, or a margin growth of 29.2 percent.
The return on shareholder’s funds recovered to a low double-digit level of 10.4 percent, and increase of 3.2 percentage basis points or 44.4 percent. Total assets reached AED94.8 billion, up AED17.7 billion or 23.0 percent with cash assets increased to AED24.6 billion, or by AED9.0 billion (57.6 percent). However, the net debt equity ratio continued to balloon to 186.4 percent, up 24.3 percentage basis points or 15.0 percent.
EBITDAR increased to AED13.9 billion or an improvement of AED3.2 billion (29.4 percent). EBITDAR margin was 19.0 percent, or an increase of 1.80 percentage basis points, or a margin growth of 10.5 percent.
Fiscal year 2011 – 2012
Revenue and other operating income for the fiscal year 2011-12 continued to increase, reaching AED62.3 billion, or a growth of AED7.9 billion and albeit slower at 14.5 percent.
The operating profit, however, dipped three times to AED1.8 billion, or a decrease of AED3.6 billion (-66.7 percent). This development resulted to a significant decrease in its operating margin to 2.9 percent, or a margin deterioration of 7.10 percentage basis points, or a negative growth of 71.0 percent.
Profit attributable to the owner also decreased to AED1.5 billion, or by AED3.88 billion (72.0 percent). Profit margin was also 2.4 percent, or a margin decrease of 7.50 percentage basis points, or a growth of -75.8 percent.
The return on shareholder’s funds dropped significantly to a very low 7.2 percent, or a decrease of 21.1 percentage basis points, or -74.6 percent. Nonetheless, total assets continued to grow slightly by AED12.0 billion or 18.4 percent, with cash assets also slightly up by AED1.6 billion or 11.6 percent. Meanwhile, net debt equity ratio increased significantly to 162.1 percent, or by 35.0 percentage basis points (or 27.5 percent).
EBITDAR dropped to AED10.7 billion, a decrease of AED2.7 billion or 20.1 percent. EBITDAR margin was 17.2 percent, or a margin decrease of 7.50 percentage basis points, or a growth of -30.4 percent.
Fiscal year 2010 – 2011
Revenue and other operations income increased to AED54.4 billion for the fiscal year 2010-11 from AED43.5 billion in 2009-10, or an increase of AED10.9 billion (25.2 percent). Operating profit increased AED1.9 billion (or 52.6 percent) to AED5.4 billion. Its operating margin, however, stood at low 10.0 percent, although 1.80 percentage basis points higher than that in 2009-10. It constitutes margin growth of 22.0 percent.
Profit attributable to the owner also increased to AED5.4 billion, or by AED1.8 billion (51.9 percent. Profit margin was 9.9 percent, also 1.80 percentage basis points higher, or a margin growth of 22.2 percent.
The return on shareholder’s funds was moderately high at 28.3 percent, an increase of 6.7 percentage basis points, or 31.0 percent. The total assets increased slightly at 17.2 percent (AED9.5 billion) to AED65.1 billion with cash assets of AED14.0 billion, or an increase of AED3.4 billion (32.9 percent), which indicates high liquidity. The net debt equity ratio improved to 127.1 percent, or a decrease of 19.8 percent.
EBITDAR increased to AED13.4 billion, or of AED2.8 billion (26.3 percent). EBITDAR margin was moderately good at 24.7 percent, or 0.20 percentage basis point higher, or a margin growth of 0.8 percent.
Except for the fiscal year 2011-12, Emirates Airlines showed impressive performance in its capability to increase its operating profit by at least 50.1 percent year-on-year basis. It indicates significant efficiency in its operations, cost control, and pricing flexibility. Moreover, most of these profits had been easily translatable into the owner’s profit, which is encouraging for investors to watch. This is particularly impressive considering that during the same period, the Company only managed an increase in its revenue and operating incomes of less than 20.0 percent, except in 2010-11.
The Company assets also showed an increasing trend of no less than 17.2 percent annually, resulting to a four-year increase by 82.9 percent, or an annual average increase of 20.7 percent. This indicates a strength build-up that could be exploited for higher revenue generation.
The very significant decrease in the operating profit in 2011-12 pointed to an event that the Company was quite vulnerable, and its damage has affected seriously its profitability, something it is still trying to recover from in the last two years. That disastrous event reflected the inability of the top management to avoid, or at least cushion enough for, at least, a no-change in profit year-on-year to occur instead of more than 60 percent dip in profits.
Another weakness for Emirates Airlines is its high net debt equity ratio, which increased every year from 127.1 percent in 2010-11 to 209.9 percent in 2013-14. This high leveraged situation makes net profitability incapable of reaching high double digits, pulling down profits to perpetual low levels. This weakness makes the Company unattractive to investors who wants decent rate of returns for their investment.
A more serious weakness was the level of operating expense, which almost constituted 11 times the operating profit annually. This high operating costs needs significant resolution to strengthen the Company’s profitability performance.
There is limited opportunity for Emirates Airlines, except for its potential to cut down its net debt equity ratio if it manages to consistently grow its operating profits year-on-year, which can generate enough extra cash to pay debts down to less than 100 percent net debt equity ratio. These debts had the effect of clipping its capability to take advantage of external opportunities either for integration or expansion when deemed necessary or advantageous.
Financial threats are everywhere for Emirates Airlines due to the tight profitability situation it is running the business. A single airplane crash can bring the finances down to negative profitability and the debts balloon uncontrollably. Technically, the Company is bankrupt on paper with net debt already double its equity position in 2013-14. A well-financed airline company may consider it as a highly viable takeover target.
Cash analyses 2010 – 2014
Cash flow statements analyses
Fiscal year 2013 – 2014
Profit before income tax continued to increase in 2013-14, this year by 40.1 percent from 2012-13. Net cash generated reached AED12.6 billion, or a small decrease of 1.3 percent. Operating cash flow ratio continued to rise at 12.2, indicating a much stronger capacity to generate cash.
Capacity-building efforts continued, this time with the largest investment in three years to property, plant, and equipment of AED14.0 billion. Additional cash of AED9.3 billion was made to the short term bank deposits, softening its net investment cash used to AED4.3 billion, or an improvement of 28.3 percent. Free cash flow at last turned positive at AED8.3 billion, or an improvement of 473.5 percent.
For the first time since 2009-10, no new securities debt was made, resulting again to a net financing cash usage of AED7.1 billion, or a decrease of 573.1 percent.
Nonetheless, net cash and cash equivalents increased to AED1.3 billion, or 227.6 percent. Year-end cash and cash equivalent slightly increased to AED7.8 billion, or 19.6 percent.
Fiscal year 2012 – 2013
Profit before income tax for fiscal year 2012-13 slowly recovered from 2011-12, increasing 47.8 percent. Net operating cash generated increased AED4.7 billion, or 58.1 percent. Operating cash flow ratio continued to rise at 10.8, indicating a strengthening cash generating capability of the Company.
Capacity-building efforts continued with a new investment of AED5.8 billion in property, plants, and equipment. Another withdrawal of AED10.0 billion from the short term bank deposits brought up once again the net investing cash used into negative AED15.1 billion, or an increase of 38.7 percent. Free cash flow turned negative once again to AED2.2 billion, or a decrease of 18.5 percent.
Once again, the negative free cash flow necessitated a new securities loan of AED6.4 billion, and to also finance existing debt payables and servicing costs. Excess debt cash resulted into a net financing cash of AED1.2 billion, or an increase of 716.9 percent (AED1.4 billion).
Net cash and cash equivalents used continued at AED1.0 billion, albeit slower than in 2011-12 by 62.1 percent. Year-end cash and cash equivalent reached AED6.5 billion, or a decrease of 13.4 percent.
Fiscal year 2011 – 2012
The fiscal year 2011-12 was a difficult year with profit before income tax went down from AED5.5 billion in 2010-11 to AED1.7billion, or a decrease of 69.8 percent. Increases in depreciation and amortization and in the change in provisions, payables, deferred credits and revenue helped cushion the cash impact of the profit dip to a decrease in the net operating cash of only AED2.9 billion, or -26.3 percent. Operating cash flow ratio continued to increase to 6.2.
Net investing cash usage continued to increase by 32.8 percent as the Company continued its additions to property, plant, and equipment assets of AED6.8 billion and cash withdrawals from short term bank deposits of AED4.3 billion. Consequently, free cash flow suffered to negative at AED2.8 billion, or a decrease of 197.6 percent.
The negative free cash flow necessitated an additional securities debt of AED3.8 billion, resulting to a net investing cash usage of AED201 million, or an increase of 96.0 percent.
Consequently, net cash and cash equivalents turned negative at AED2.6 billion, or a decrease of 407.2 percent. Year-end cash and cash equivalents dropped 26.1 percent to AED7.5 billion.
Fiscal year 2010 – 2011
In fiscal year 2010-11, operating cash flow increased AED2.7 billion, or an increase of 32.1 percent. This is due to a 51.3 increase in profit before income tax and a higher depreciation and amortization adjustment, despite an increase in the gain on the sale of property, plant and equipment of 76.0 percent. Net operating cash increased AED2.7 billion, or 32.1 percent. Operating cash flow ratio is 4.8, showing a very healthy cash generating capability.
Net investing cash used also increased 782.5 percent, primarily due to additional net investments in property, plant and equipment (no comment disclosure on details) of AED3.1 billion and a net negative movement in short term bank deposits of AED2.6 billion. Consequently, free cash flow decreased more than half from AED7.8 billion to AED2.8 billion, or -63.6 percent.
Net financing cash used increased AED2.1 billion, or 69.2 percent. This increase resulted from a 16 times increase in debt securities payments and from a 141.4 percent increase in dividend payments. The management decision to increase dividend payment was surprising considering the fact that it had to take additional securities debt of AED979 million to partly payoff the dividends worth AED2.3 billion.
Consequently, cash and cash equivalents decreased to AED866 million, or by -81.8 percent. Year-end cash and cash equivalents, however, increased a little by 9.3 percent.
The cash-generating capability of Emirates Airlines continued to be growing annually as evidenced from its increasing operating cash flow ratio from 4.8 in 2010-11 to 12.2 in 2013-14. This strength has been fueled by its strong before-tax profit growth of at least 40 percent per annum (except for the downturn in 2010-11), the increasing adjustments for depreciation and amortization, and the moderately strong cash generated from changes in provisions, payables, deferred credits and revenue.
The intensive capacity building implemented in the last three years since 2010-11 that cost around AED6.0 billion annually seemed to be ending in 2013-14 with a final investment of AED14.0 billion in property, plants and equipment, and further evidenced in the abrupt discontinuation of its annual securities debt sourcing in 2013-14. The total new investments in property, plants, and equipment since 2010-11 reached AED33.0 billion. Its AED11.1 billion financing program had been the only major source of its profitability threats in the cash management side.
With that picture in mind, the management appeared to have positioned the Company in a high-capacity mode that can strongly propel its cash-generating capability upward in the succeeding years. While the Company is not yet profitable in terms of net cash profit in 2013-14, its capacity is ready to meet the cash-building challenge in the succeeding years.
The fiscal year 2014-15 is expected to be a beginning of strongly profitable years, provided no new investment of more than AED2.0 billion annually in property, plants, and equipment occurs and no additional debt is taken in, which can further erode profitability with increased debt payment and servicing costs annually.
The wisest move that the management may take is to focus on generating more cash to pay off outstanding debts before taking additional loans or implement anew another capacity building program. Otherwise, profitability will continue to be low and unattractive to investors.
The most serious source of liquidity threat in the last four years was the 69.8 percent drop in the profit before income tax in 2010-11, which had a cascading effect in the cash position of the Company in that year, compounded by an additional investment of AED6.5 billion in new property, plants, and equipment. Only the series of additional securities debts helped the Company survive the cash crunch in that year and the following year as it embarked in its AED33.0 billion capacity building program.
The recovery of the pretax profit in the succeeding years strongly improved the liquidity position of the Company. The operating cash flow ratio had been growing annually reaching its highest of 12.2 in 2013-14. This figure indicates that the Company generated 12.2 more cash from operations than it spent. Moreover, the operating cash flow ratio’s increasing trend is encouraging, providing the probability that the Company may be able to sustain this trend in the next five years.
That level of performance ensures a high-liquidity status in the absence of additional investment in the property, plants, and equipment and of additional long-term debts. Although debts increase temporarily liquidity level, they appeared unnecessary in the next few years unless the Company implements another round of capacity-building initiatives. Large short-term debts thereafter will also strongly increase pressure on liquidity.
As of year-ending 2013-14, the liquidity position of Emirates Airlines is stable and expected to improve in the following years in the absence of large investing expenditures.
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