Emirates Airlines’ Current Financial Situation Analysis

Introduction

Financial reports are formal records that are used by business organizations to display the progress of their financial activities. The reports contain important financial information organized in a structured manner and in formats that are easily understood by stakeholders. Although they contain financial statements that are characterized by mathematical numbers, they also contain discussions and analyses from management teams.

Emirates Airlines is the most well established airlines in the Middle East and it is estimated that it makes about 3,400 flights every week. It is owned based in Dubai and it is part of The Emirates Group. It operates in 6 continents, but its main departure location is Dubai International Airport. In 2012, the airline was ranked the fourth-largest with regard to international customers. Also, it was the third-largest airline with regard to kilometers flown.

This paper aims to provide an executive summary and operations of the giant airline organization. In order to understand the various aspects of the firm, the paper will provide and analyze the company’s financial reports, i.e. income statement, balance sheet, and cash flow statement. Based on the financial statements, the paper will perform ratio analysis to understand various financial parameters of the firm. Finally, a conclusion will be provided based on the main parts to be covered in the paper.

Executive summary

Emirates Airlines is one of most established airline carriers across the world. The firm is based in Dubai and is owned by the government. It started its commercial flight operations in 1985 with two leased aircraft. Prudent management of the airline has enabled it to become a major international airline operations organization in the world. The airline aims to offer excellent services to customers in the aviation industry and satisfy customers through innovating and refining approaches to service delivery. Emirates Airlines aspires to be the best performing component of the Emirates Group and contribute greatly to the success stories of Dubai incorporated as well as make Dubai the best aviation hub in the 21^st century. The aspirations of the airline would be achieved through focusing on quality, not quantity with regard to services in the aviation industry. The objective of the airline is to make the organization an international airline that customers would be happy to be associated with and be a carrier of choice within and outside the Middle East. The government play crucial roles in injecting funds into the airline and directing it to follow specified regulations in the aviation industry. Emirates Airlines has been able to gain significant market shares in 6 continents by signing agreements with the respective countries. Also, the airline invests in business alliances with other organizations in different countries across the world. In addition, the firm uses excellent branding approaches that are aimed to create long-lasting customer experiences. In terms of corporate management, the organization has excellent fleet efficiency, environmental management, employment, and financial structures. These attributes make the organization a perfect company for many potential employees in the airline transportation industry. However, the business model of the airline carrier has attracted much criticism from major international carriers on the premises that the model allows the firm to bypass established airline centers like the London-Heathrow and Frankfurt.

Company operations

The operations of the firm are in the aviation industry. Although the year 2013 was marked by high fuel prices and various economic constraints that impacted businesses globally, Emirates Airlines posted impressive profits. Since the time when the firm was established in 1985, it has been posting good results, but for a few years when it recorded a drop in profits due to factors that were later dealt with by the management. For example, the firm recorded a drop in net profits in the years 2012, 2009, 2002, and 2000.

The operations of the airline carrier are characterized by innovative structures of divisions, fleet and services. It has two divisions. First, the Emirates SkyCargo division was launched in 1985. The division is concerned with carrying cargo and passengers to 10 major international destinations that are outside Emirates network. Second, the Emirates Executive division was started in 2013 to cater for corporate and private charters. The division has unique facilities like private suites and washing areas, among others. Emirates Airlines operates a number of aircrafts that are tested to promote safety of passengers. Aircrafts are replaced whey they break down. Also, the firm adopts new aircrafts that are designed using new technologies that enhance airline transport. Cabin services of the organization are made up of the following: first class, business class and economy class. The classes have different customer charges and they aim to attract and accommodate customers of various financial capabilities. In addition, the airline has excellent personal entertainment systems for the three classes.

The company operations are to achieve the following:

1. A continuous growth of financial income for the airline.
2. Grow the value of the airline’s assets.
3. Maintain cash inflows and the value of the airline.

Income statement

An income statement is used to report an organization’s income, expenses and profits. Profits indicate that a firm is doing financially well while losses would imply that a company is realizing less income than what it spends. Based on the figures presented in income statements, the management of Emirates Airlines makes important changes that aimed to increase income realized by the organization. The income statement for the 2012-13 and 2011-12 financial years is shown in the following table:

Figure 1. An income statement of Emirates Airlines for the financial years 2012 to 2013 and 2011 to 2012.

The income shows that Emirates Airlines is on a growth trend. The organization made an impressive jump of 17.4% in terms of operating income for the two financial periods of time. In the same period of time, the organization realized an increase of 10 points in its operating profit margin. Also, the return on shareholder’s investment grew by 3.2 points. In addition, there was a 52 % increase in the owner’s profits. The income statement proves that the airline is making good returns on the investments committed to running the business. If the income could have been less than the operating expenses, then the firm could have made a loss in its investments.

Balance sheet

A balance sheet is utilized to show the value of a company’s assets and liabilities. Also, the statement of financial position reveals a firm’s equity ownership. Successful companies always aim to control their liabilities because they could affect their assets negatively. However, if a company has a healthy record of assets, then it implies that it makes good investments on its business returns. The balance sheet for Emirates Airlines is shown in the following table:

Figure 2. A balance sheet of Emirates Airlines comparing the years 2012 and 2013.

The financial status of the organization is maintained well because the figures of current and non-current assets as those of current and non-current liabilities are good. In other words, the company has more assets than liabilities. This implies that it could obtain extra funds required to support a project in the future from the sale of its assets. Firms that have assets of low value are forced to borrow funds for investments from external sources. Another interesting observation about the assets of the airline is that their value has increased from 2012 to 2013.

Cash flow statement

A statement of cash flows shows the dynamics of cash flows with regard to operations, investments and financial activities. Managers use cash flow statements to make crucial business decisions that would result in improved performances of business organizations. Workers could also rely on the reports to make collective bargaining. In addition, potential investors analyze cash flow statements to determine the viability of committing their investment funds in a certain firm. The cash flow statement of Emirates Airlines is shown in the following table:

Figure 3. A cash flow statement of Emirates airlines for two financial years (2011 to 2012 and 2012 to 2013).

The cash flow statement of Emirates Airlines shows cash dynamics within the organization. The statement shows impressive gains from net cash realized from operating activities. This implies that good returns were obtained from operations undertaken by the firm. Investments are important vehicles in growing revenues of firms. The organization realized an increase in net cash made on investments from 201 AED m to 1,240 AED m. The value of the investment returns corresponds to an increase of the investments from 10,566 AED m to 15,061 AED m. However, the cash and equivalents at the end of the year 2013 were less than those at the end of 2012. This could imply that the value of the company was in other forms other than cash. This is an important observation because good management of firms ensures that the value of liquid cash is less than that stored in the form of assets.

Ratio analysis

Ratio analysis is an important tool used in financial analysis to learn about essential financial attributes about organizations. The following 10 ratios will be considered with regard to the financial records of Emirates Airlines:

1. Current ratio refers to value of dividing current assets by current assets
   1. Current ratio = current assets/ current liabilities = 34,947/31,319 = 1.16
2. Quick ratio is the ability of a firm to pay for services or goods using liquid assets =cash/ current liabilities = 6520/31,319 = 0.21. High values of quick ratios imply that business organizations are prepared to cater for short-term obligations.
3. Debt ratio determines that amount of debt that a company has in relation to its assets = (long-term credit + assets) / (long-term credit + leases + value of equity) = (3455 + 5689) / (3455+309+1004) = 1.917
4. Debt-equity ratio = (long-term credit + value of leased facilities) / value of equity = (3455 + 309) /1004 = 36.19
5. Cash ratio = (cash at hand + value of securities) / current assets = (6520 + 20049) / 34947 = 0.76.
6. Assets turnover ratio = value of the total income/ total assets of a firm = 73,113/94803 = 0.771.
7. Gross profit margin is the difference between expenses and income before putting into consideration other factors of production. The gross profit margin of Emirates Airlines was 3.9.
8. Net profit margin = (profit after expenses/ total sales) x 100 = (819/ 73113) x 100 = 1.12%.
9. Return on assets ratio = profit after expenses/ value of assets) x 100 = (819/ 94803) x 100 = 0.86%.
10. Return on equity = (profit after expenses/ total value of equity) x 100 = (819/ 23082) x 100 = 3.54%.

Conclusion

Emirates Airlines is one of the most profitable airline firms across the world. The airline is controlled by the Dubai government and it has been recording consistent growth trends since it was founded in 1985. It relies on innovative approaches to gain significant market shares in many countries within and outside the Middle East. The financial records of the organization reveal that it is doing very well in terms of financial performance. For instance, in 2013, the airline made an impressive increase of 17.4% in profits. In conclusion, ratio analyses of the firm’s financial records indicate that it is a financially healthy business organization with a bright future.