Financial Objectives of Emirates Airline - Case Study Example

Accounting Table of Contents Introduction 3 Vision and Values 4 General Objectives of Emirates Airline 4 Financial Objectives of Emirates Airline 5 Strategies Undertaken By Emirates Airline to Meet General and Financial Objectives 6 Describing, Discussing and Analyzing the Basis of the Content of the Financial Statements of Emirates Airline 7 Measuring the Financial Performance of Emirates Airline 10 Assessing the Abilities and Chances of Emirates Airline to Survive in the Current Recession 15 Conclusion 18 References 20 Introduction Emirates Airline based in Dubai is a renowned company in the global airline industry, including Gulf region and other geographical locations of the world. The company was founded in the year 1985 by the United Arab Emirates government. Since the formation of Emirates Airline in 1985, the company has been able to achieve unprecedented growth and expansion. The company has been recognized to play a dominant role across 80 different countries and 140 destinations due to its exceptional and highly efficient airline services. The organization is a major subsidiary of The Emirates Group employing more than 38,000 of highly skilled and committed workforce (The Emirates, 2014). The company is currently rendering its services across all the continents of the world, including Europe, the Middle East, Africa, South Asia, North America, South America and Asia pacific equipped with modern fleet of around 220 aircrafts. Currently, the Emirates Group and its subsidiary Emirates Airline are known for its influential travel and tourism with the highest standards of quality in every aspect of operation. The constant growth and expansion of the company has contributed towards its success factor. The airline business of the Emirates Group consists of three different units including international cargo division, destination management and leisure division and airline IT developer. At the same time, the group has been involved in entering several strategic alliances in order to provide greater value to its shareholders and other stakeholders. The activities of the company are firmly embedded in achieving long-term sustainable profitability. The leaders within the company are identified to be highly ambitious and are constantly involved in making calculated decisions while embracing ground breaking ideas directed towards the creation of a great company. The company also lays significant importance on business ethics and is highly committed towards performing its activities that promote the welfare of the communities and the environment as well as its stakeholders. In addition, the company is determined towards the use of the latest technologies, so that its customers are able to reap the highest possible benefits for their value (Emirates, 2014a). Against this backdrop, the purpose of this essay is to critically analyse the financial objective of the company and discuss the various factors relevant to shareholders on the basis of the content of the financial statements of Emirates Airline. On further note, the essay intends to measure the financial performance of the origination and discuss the methods of raising and deploying financial resources in times of uncertainty. Vision and Values The vision statement of the company is to expand business operations with better sustainability. The company envisions creating of organizational culture that set it apart from other competitors within the industry. Besides, it also intends to increase its revenue earning capacity with increased global reach. In order to meet the vision, the company emphasizes the three fundamental aspects including service quality, reliability of service and world-class network (The Emirates, 2014). General Objectives of Emirates Airline The overall business strategies of Emirates Airline are to enter into new and prospering foreign market, so that it can reap the benefit arising from the host market and contribute towards increasing its revenue earning capacity. Another major objective of the company is to make a significant contribution to the national economy by promoting travel and tourism within the country, particularly in Dubai. At the same time, the company also intends to acquire large customer base comprising the business class and elite class customers. In order to achieve the objective of attaining large customer base, the company is widely involved in the delivery of best possible experience. The company also looks forward to incorporate latest technologies and products that facilitate it to meet the expectations of its diverse customers in a creative manner. The company also aims at promoting its brand image and visibility across the globe and it contributes towards promoting safe and healthy environment. The brand value of the company was reckoned as US$5.5 billion for the year 2014. The company in this regard, has undertaken several strategies to build top global lifestyle brand. By the year 2020, the company intends to carry more than 70 million passengers across 180 plus destination with the use of ultra-modern fleet (The Emirates, 2014). Financial Objectives of Emirates Airline Emirates Airline intends to improve its financial position by increasing its revenue to a considerable extent. The company in the recent past years has faced with significant financial challenges, particularly due to the sluggish economic growth experienced by different countries across the world (Jammoul, 2014). Notwithstanding, the company has established a clear set of financial objective. Responsibly, the financial objective of the company is to maintain its ability to continue as a going concern to sustain an appropriate level of capital structure as well as provide a fair return to the investors and the shareholders of the company. Considering the long term nature of the investments, the company is firmly committed towards delivering shareholders with the optimum level of satisfaction by meeting their objectives in an efficient manner. The company also seeks to attain right balance between accomplishing the general business goals and providing a substantial return to shareholders for their investment and confidence on it. The commercial team of the company aims at securing highest possible revenue during the off-seasons while maximizing the revenue during the peak season. The company during the fiscal year 2013-2014 has generated total revenue of 1.8 billion, representing an increase of 25% over the previous fiscal year 2012-2013. Thus, the company is committed to continue and maintain the momentum of increasing revenue in the present year (2014-2015) as well (Emirates, 2014a). Strategies Undertaken By Emirates Airline to Meet General and Financial Objectives The company over the years has attained unprecedented growth and expansion accompanied with increasing year on year revenue. The leaders within the company have been able to influence the global airline industry through their impressive decision making capabilities. The company in order to cater the needs of its stakeholders has been involved in making considerable investment in infrastructure development. The investment decisions of the company have been coupled with the desire to establish itself as the world’s best airline company. At the same time, the company has been constantly involved in expanding its global network to provide its shareholder with an adequate return on their investment. It has also entered into the strategic alliance and partnerships with few of the major airline companies in the world such as Qantas to reap the benefit of the local environment and sustain its business in an efficient manner. The company has also entered into an agreement with celebrities and sports personalities such as Pelé and Cristiano Ronaldo to promote the brand in the global platform. In addition, it has organized campaigns across the different location of the world directed towards increasing its visibility and brand image. The company also uses social media networks as a primary source to promote its brand image and attract investors necessary for product, services and infrastructure development. The company has framed several strategies for attaining a better competitive position on a global context. Accordingly, the company has ordered 90 Airbus A380 aircrafts while Air France has ordered only 12. This represents that the company is responding to the market opportunity quickly and aggressively than its major competitors such as KLM and Lufthansa. Subsequently, the company has shown its firm determination to provide its shareholders with increased return on their investment by accessing greater market and routes. The company has also taken low pricing strategy as compared to other players within the industry for increasing customer base. In addition, it can be argued that the company is performing outstandingly with respect to the domain of technology. Notably, the company is inclined towards implementing latest technologies that would facilitate it to achieve customer loyalty and to increase revenue. It can be comprehended that the company is making best possible effort to promote the interest of its stakeholders. Evidently, the strategies of the company can be identified to increase the prosperity and the profitability of the company in the long run, which would lead the shareholders to avail the benefits in the form of increased return on their investment (Emirates, 2014a; Jammoul, 2014). Describing, Discussing and Analyzing the Basis of the Content of the Financial Statements of Emirates Airline The company during the fiscal year 2013-2014 has witnessed unprecedented growth and expansion both in terms of its operation and revenue. Nevertheless, the impact of increased fuel price and uncertainties associated with the sluggish economic growth were quite apparent in its operations, but it has managed to overcome the underlying challenges in an effective manner. During the fiscal year 2013-2014, the total profit available for owner was AED 3.3 billion. Notably, the profit attributable to owner soared by 42.5%, than the corresponding period of last fiscal year 2012-2013. The cost associated with the operation of the airline business also grew at a slower pace than the revenue generated by it. The total revenue of the company for the fiscal year identified to be AED 80,717, which was 71,159 million during the fiscal year 2013-2014. At the same time, operating cost of the company declined from AED1, 954 million in the fiscal year 2012-2013 to AED 1,919 in the fiscal year 2013-2014. Correspondingly, the company witnessed an increased operating profit of AED 78,376 during the fiscal year 2013-2014 (Emirates, 2014a). The income statement of the company for the fiscal years 2013 -2014 and 2012-2013 is illustrated below: The company across all its regions of operations witnessed a considerable increase in the revenue. The revenue generated from different regions is presented below: The total equity of the company during the fiscal year 2013-2014 also increased to AED 25.5 billion, which reflected a rise of 10.6% over the previous fiscal year 2012-2013. The company also distributed an increased dividend to its shareholders for the fiscal year 2013-2014, which is ascertained to be AED 726 million, while the same for the fiscal year 2012-2013 was reported to be AED 40 million. The dividend declared by the company was in line with the growth strategy of the company. 25% of the profit attributable to the owner was declared as a dividend for the fiscal year 2013-2014, which can be seen to be plummeted from 32% in the previous fiscal year (2012-2013). At the same time, it can be identified that the company is rigorously involved in making heavy investment in the revenue generating areas. The company along with the rise in equity also witnessed an increase in the current and non-current liabilities during the fiscal year 2013-2014. Accordingly, the current liabilities of the company during the fiscal year 2012-2014 stood to be AED 31.3 billion, which rose by AED 1.1 billion to AED 32.4 billion. The major contributing factor behind the increasing current liabilities of the company has been attributed to its increasing trade and other payables. Notably, the trade and other payables during the fiscal year 2012-2013 were ascertained to be AED25, 03, which augmented to 27,079 during the fiscal year 2013-2014. In a similar context, the non- current liabilities of the company for the fiscal year increased by AED 3.2 billion in the fiscal year 2013-2014. The increase in the non-current liabilities of the company has been determined to be influenced primarily due to the augmented borrowings and lease liabilities. In this regard, the borrowings and lease liability of the company during the fiscal year 2012-2013 was AED 35,483 million, which climbed to AED 38,500 million during the fiscal year 2013-2014. At the same time, significant changes in the provision held by the company was also witnessed. The provision held by the company for the fiscal year 20012-2013 was AED1, 930 million, which soared to 2,643 million during the fiscal year 2013-2014 (Emirates, 2014a). Accordingly, the changes in the equity and liabilities of the company during the fiscal year 2013-2014 over the previous year 2012-2013 is depicted below. Measuring the Financial Performance of Emirates Airline 1. Measures of Liquidity 2013-2014 (Amounts in AED million) Current Assets Current Liabilities Current Ratio 101,604 76,133 1.334559258 Liquidity ratios are applied to measure the ability of the company to generate cash in order to meet its obligations. The above table revealed the company’s current ratio to be 1.33, which indicates that the company has favourable current ration. Accordingly, it can be comprehended that company has sufficient current assets to meet its current liabilities. At the same time, it has been reckoned that the company will be able to maintain adequate balance between its current ratio and current liabilities in the next fiscal year as well particularly due to the fact that the company’s financial performance over the last years has shown positive growth with minimum deviation from the expected one (Emirates, 2014a). In addition, the above table demonstrates the net working capital to sales ratio. Accordingly, the calculation of the net working capital to sales ratio for the company stood to be 0.31. This represents that the company has adequate liquid assets to meet its short-term obligations as well as the amount invested by the company has the ability to deliver increased return on the same. More specifically, figure obtained from the calculation of the net working capital to sales ratio signifies that the company has been efficiently using its assets towards productive activities. Correspondingly, it can be strongly asserted that the investors are willing to invest in the company or the shareholders of the company has less risk with respect to the return expected from their investments. 2. Profitability Ratios 2013-2014 (Amounts in AED million) Operating Income Sales Operating Profit Margin 78,376 80,717 0.970997435 Net Income Sales Net Profit Margin 3,417 80,717 0.04233309 The above table represents the profitability ratios of Emirates Airline for the year ended on March 31, 2014. The profitability ratios are usually applied to compare income and sales of a company to derive understanding regarding the activities contributing towards the generation of income. The above table determines the operating profit margin of the company, which indicates to be 0.97. The increase in the operating profit of the company is determined to be associated with reduced costs of operations. Correspondingly, the operating cost for the fiscal year 2012-2013 was reckoned AED 1,954 million, which reduced to AED 1,919 million during the fiscal year 2013-2014. Besides, the increase in the total revenue of the company for the fiscal year 2013-2014 over the corresponding last fiscal year i.e. 2012-2013 is another major attributes contributing towards an augmented level of operating profit margin (Emirates, 2014a). Moreover, it can be determined from the above presented calculation of net profit margin that company during the fiscal year 2013-2014 has witnessed net profit margin of 0.42. Accordingly, the rise in the net profit margin of the company can also be associated with the reduced finance costs and income tax expenses. Nevertheless, the income from financial activities for the company during the fiscal year 2013-2014 is identified to be plummeted (Emirates, 2014a). 3. Activity Ratios 2013-2014 (Amounts in AED million) Sales Total Assets Total Asset Turnover 80,717 101,604 0.794427385 Sales Fixed Assets Fixed Asset Turnover 80,717 74,250 1.087097643 Net Income Total Assets Return on Assets 3,417 101,604 0.033630566 The above presented table reveals the activity ratios for Emirates pertaining to fiscal year 2013-2014. The activity ratios are applied to measure the efficiency of using assets held by the company as well as to analyse the degree of benefits delivered by each asset. Accordingly, total asset turnover for Emirates Airline for the fiscal year ended on March 31, 2014 reckoned to be 0.79. At the same time, fixed asset turnover and return on assets for the company during the fiscal year 2013-2014 stood to be 1.08 and 0.33 respectively. In this regard, it can be comprehended that investments made by the company on acquisition of assets including both fixed and current have contributed towards substantial increase in the revenue of the company. Moreover, it has been determined that the company’s investments on property, plant and equipment during the fiscal year increased considerably as compared to the corresponding last fiscal year. The investments of the company on property, plant and equipment during the fiscal year 2012-2013 was AED 57,039 million, which soared to 71,582 during the fiscal year 2013-2014. Correspondingly, the decisions of the leaders within the company to invest on property, plant and equipment can be identified to render fruitful outcome for the company in the form of increased revenue. On the other hand, the investments made by the company in terms of current assets have also rendered it with fair return on its investments. This signifies that the management and the leaders in the company are extensively involved in making calculated investments decisions necessary for growth and prosperity of the company as well as preserving the shareholders interest (Emirates, 2014a). 4. Leverage Ratios 2013-2014 (Amounts in AED million) Total Debt Total Assets Total Debt to Asset Ratio 76,133 101,604 0.749311051 Long-Term Debt Total Asset Long-Term Debt to Assets Ratio 43,705 101,604 0.430150388 Long-Term Debt Total Shareholders’ Equity Capitalization Ratio 43,705 25,471 0.631794264 The leverage ratios are applied to determine the components of capital structure of Emirates Airline. It has been ascertained from the above table, the total debt to asset ratio of the company for the fiscal year ended on March 31, 2014 stood to be 0.74. This signifies that the company has relied less on debt financing and hence, the total debt to asset ratio calculated above indicates that there is a lower amount of leverage for Emirates Airline. At the same time, it is determined that the risks associated with its ability to settle debt is nominal (Emirates, 2014a). Furthermore, the long-term debt to assets ratio for the company has been calculated to be 0.43. This signifies that the company has AED 0.43 in long term debt for each AED it has in assets. Correspondingly, it is determined that assets of the company are financed less through long-term debts and hence, risks associated with the repayment of the long-term obligation are less (Emirates, 2014a). In addition, the capitalization ratio for Emirates Airline for the fiscal year ended on March 31, 2014 reckoned to be 0.63. It is determined that the capitalization ratio for the company is above 50%, which is relatively high. This implies that the capital structure of the company is financed more by raising long-term debts than equity. Thus, it can be affirmed that there lays certain degree of risks for shareholders pertaining to their investments in the company. 5. Shareholder Ratios 2013-2014 (Amounts in AED million) Net Income Available for Shareholders Number of Shares Outstanding Earnings per Share 3,254 25,471 0.127753131 Net Income Shareholders Equity Return on Equity 3,417 25,471 0.134152566 Dividend paid to Shareholders Number of Shares Outstanding Dividend per Share 826 25,471 0.032429037 Dividends Earnings Dividend Pay-out Ratio 826 3,254 0.253841426 The shareholders ratios are applied to measure the financial performance of Emirates Airline, which is essential information for investors and shareholders willing to make investment in the company. Accordingly, it is reckoned that earning per share of the company during the fiscal year 2013-2014 was 0.12. This implies that the shareholders of the company were entitled to receive AED 0.12 for their investment of AED 1 on each equity share after the settlement of all obligations owed by the company. Similarly, the ROE for the fiscal year ended on March 31, 2014 was calculated to be 0.13. The dividend per share for Emirates Airline during the fiscal year was estimated to be 0.32. This indicates that the shareholders were eligible to receive AED 0.32 cash dividend on their AED investment on share. The dividend pay-out ratio for the company during the same fiscal year was reckoned to be 0.25. This signifies that the shareholders of the company were entitled to gain AED 0.25 as cash dividend for their investments after deducting capital retention. It is determined that the company duly caters the interests and objectives of its shareholders. The primary reason behind the ability of the company to meet the needs of shareholders is firmly associated with the increasing revenue of the company across all regions of its operations including East Asia and Australasia, Europe, Americas, Gulf and Middle East, West Asia and Indian Ocean and Africa. The company performance across all these regions of its operations was remarkable, which contributed towards increasing its revenue further resulting in an increased amount available for the shareholders of the company (Emirates, 2014a). Assessing the Abilities and Chances of Emirates Airline to Survive in the Current Recession It has been determined that company uses a combination of debt and equity to meet its capital requirements. It has been identified that the company raises funds through allocation of equity shares, bonds and loans from banks as well as other financial institutions. In this regard, Emirates Airline uses large amount of debts in its capital structure and thus, higher financial risks can be apportioned with respect to the investments made by the shareholders. It is evident that reliance of Emirates Airline on debt financing is increasing. Accordingly, the total long term debts for the company was AED 43,705 million during the fiscal year 2012-2013, which soared to AED 43,705 million during the fiscal year 2013-2014. This reflects that the company’s heavy dependence on debt financing as well as exposure to credit risks. During the fiscal year 2013-2014, the term loans of the company amounted to AED 925 million while the company during the same fiscal year repaid AED 152 million, which implies that the company still has huge debt amount. Correspondingly, it can be asserted that the accumulating long-term debts may reduce the flexibility of the company to acquire additional funds during the recession. Nevertheless, the financing through equity has also increased. Notably, the company has equity capital amounting to AED 23,032 million during the corresponding last fiscal year 2012-2013, which increased to AED 25,471 million during the fiscal year 2013-2014. Notwithstanding, the capital structure of the company can be termed as dynamic consisting of long-term and short-term debt, and inside and outside equity. However, it is crucial for the company to diversify the earnings in order to evade higher financial risk. It is worth mentioning that long-term debts decrease with the ability of managers and with the increasing equity shares. Thus, it is essential for the managers and the leaders within the company to involve in effective decisions making, so that company’s dependence on long term debt is reduced as well as proper balance between the risks and return is maintained (Emirates, 2014a). Furthermore, in order to evaluate the capital structure of Emirates Airline and judge the chances of Emirates Airline to survive in the current recession, it would be vital to consider The Modigliani-Miller theorem. The theorem is regarded as major development in the area of modern corporate finance. According to this theorem, in the nonexistence of taxes, bankruptcy costs, and irregular information and in the growing market, a company’s value is unaltered by the way it is financed, irrespective of whether its capital is funded by equities or debt, or a mixture of these, or the dividend policy. There are two major tenets of this theory that are notable. First, it advocates that if there are no taxes, in such circumstances increasing leverage does not have any benefits with respect to the value creation. In the similar context, the second aspects argue that the interest tax shield increases with the introduction and/or increase in leverage (Frank & Goyal, 2005). In this regard, Emirates Airline has not been in a comfort of being free of long-term debt in a sense that the increase dependence on the long-term debt has limited the flexibility of the company to raise funds in the recession. Hence, in order to survive in the recession, the financial managers of the company are required to seek debt-equity ratios that enhance the financial flexibility as well as credit ratings of the company. Evidence suggests that many firms evade issuing equity shares or common stock while more often these companies prefer debt financing over equity financing, which is consistent with the pecking order theory. Accordingly, irregularity in information and signalling as per the theory is considered to have no significant impact on the companies’ capital structure decisions (Frank & Goyal, 2005). Based on the Modigliani-Miller theorem and pecking order theory in line with the capital structure of Emirates Airlines, it can be asserted that company although have increased debt obligations but at the same time, the revenue of the company is increasing year-on-year. Thus, grounded on the assumptions stressed in the pecking order theory, it can be claimed that the company has greater chances of surviving during the recession. Conclusion Emirates Airline is one of the leading airline companies in the global airline industry. The company has been recognized to operate in diverse market including 80 different countries and 140 destinations. Emirates Airline is a major subsidiary of The Emirates Group and is ascertained to employ more than 38,000 talented staff. Furthermore, the company is identified to mark its presence across all the continents of the world, including East Asia and Australasia, Europe, Americas, Gulf and Middle East, West Asia and Indian Ocean and Africa equipped with around 220 highly modernized aircrafts. The financial objective of the company is to maintain optimum level of capital structure as well as balance risk and return effectively. The company is firmly committed towards delivering shareholders with the optimum level of satisfaction by formulating strategies that would increase its financial performance. The company during the fiscal year 2013-2014 has observed unprecedented growth and expansion both in terms of its operation and revenue. Nevertheless, the impact of increased fuel price and uncertainties associated with the sluggish economic growth has been identified to affect the financial performance of the company. Measuring the financial performance of Emirates Airline revealed certain interesting facts about the company’s ability to meet the debt obligation as well as its capital structure. Accordingly, it has been determined that the company’s revenue earning ability has been increasing while significant reduction in operational cost was achieved by the company during the fiscal year 2013-2014. At the same time, it has been reckoned that the company uses both debt and equity finacing as a source for meeting its capital requirements. Nevertheless, the company’s relience on debt finacing is ascertained to be increasing, which may limit the flexibility of the company to raise funds during the recession. In this regard, the application of the Modigliani-Miller theorem revealed that the nonexistence of taxes, irregularity in information and bankruptcy costs as well as the market prospect of a company is unaltered by the way it is financed. At the same time, it has been comprehended from the evaluation of pecking order theory that irregularity in information and signalling has no significant influence on the companies’ capital structure decisions. Thus, grounded on the assumptions laid in these two capital structure theories, it can be affirmed that Emirates Airline has increased chances of surviving in the recession. Accordingly, shareholders and investors willing to invest in the company are more likely to attain fair return on their investment. References Emirates, 2014a. Going Further. The Emirates Group Annual Report. [Online] Available at: http://content.emirates.com/downloads/ek/pdfs/report/annual_report_2014.pdf [Accessed September 09, 2014]. Emirates, 2014. The Emirates Story. Emirates Airline-Building a Global network. [Online] Available at: http://www.emirates.com/in/english/about/the_emirates_story.aspx [Accessed September 09, 2014]. Frank, M. Z. & Goyal, V. K., 2005. Tradeoff and Pecking Order Theories of Debt. Working Paper, pp. 2-62. Jammoul, A., 2014. The Strategies Diagnosis: Emirates Airlines. University of Nice Sophia Antipolis, pp. 1-8. Read More