Advanced Financial Management - Air Arabia and Emirates Airways - Essay Example

Ratio Analysis: Air Arabia & Emirates Airways Student’s Name Student’s Affiliation Introduction The focus of this paper is on ratio comparison analysis for two major airlines based in Dubai: Emirates and Air Arabia. The paper puts up a discussion that ascertains the comparison of these two airlines in regards to their immediate 2013 annual reports only. Significantly, a fairly represented graphical analysis is offered to aid with easier comprehension of the ratios. It is important to understand that both of these airlines operate under the aviation industry within the United Arabs Emirates but they are operated under different decrees. Notably, the paper provides a conclusion and recommendation section that ascertains the best company between the two that an investor can put their investments in and also, provides a recommendation to the management team on the fundamental manner under which the liquidity position of Emirates can be undertaken to avoid possible future issues related to capital imbalances. Emirates Airways: Background Founded in 1985, Emirates Airways is one of the largest airlines based within Dubai, United Arab Emirates and it is an immediate subsidiary of The Emirates Group that is fully owned and controlled by the government of Dubai (Emirates Airways, 2014). It is the major airline within the Middle East section given that it operates more than 3,400 flights in any given week of a financial year (Emirates Airways, 2014). The airline’s base is positioned at Dubai International Airport where it provide daily flights to more than 140 cities located within 80 countries across the globe. The company’s headquarters is at Garhoud, Dubai; UAE. The firm’s current chairman is Ahmed bin Saeed Al Maktoum while the Chief Executive officer’s position is held by Tim Clark (Emirates Airways, 2014). As of today, the airline operates the world’s largest fleet of A380s that totals to about 31 and a significant number of Boeings 777, which are also used within the Emirates Cargo Division (Emirates Airways, 2014). Air Arabia: Background Air Arabia, established in 2003, is headquartered in Sharjah Freight Center within Sharjah International Airport; in the town of Sharjah, United Arab Emirates (Air Arabia, 2014). It s considered to be a low-cost airline company that provides flight services to about 51 destinations across the globe. These destinations are mainly located within the Middle East, North Africa, Europe and Central Asia (Air Arabia, 2014). These destinations are based on about 21 countries. It is engaged in a strong partnership with Arab Air Carriers Organization. Some of its immediate subsidiaries include; Air Arabia Egypt and Air Arabia Maroc. The airline is based on a fleet size of about 35 aircrafts, which are of Airbus A320-200 models (Air Arabia, 2014). The firm is governed by a distinctive Board of Directors that is chaired by Sheikh Abdullah Bin Mohammad Al Thani and a chief executive officer; Adel Abdullah Ali (Air Arabia, 2014). Ratio Analysis i) Short-term Solvency or Liquidity ratios Current ratio= current assets/current liabilities Emirates Air Arabia 2013 Current Ratio 34,947/31,319=1.12 1,980,079/ 1,709,618= 1.16 From the computation above, it can be clearly seen that Emirates has a ratio value of 1.12 while Air Arabia’s ratio is positioned at 1.16, which is slightly higher. It is important to note that the standard current ratio is 2:1, which postulates that for every single liability held by any given company there must be two assets to offset its effects in cases of liquidation (Benninga and Oded, 1997). This means that although Air Arabia’s ratio seems to slightly higher still it is fairly below the required standard ratio. Notably, the unfavorable ratios depicted by these two airlines are an indication that they cannot meet their short-term commitments when they fall due (Benninga and Oded, 1997). The resultant unfavorable ratios for these two airlines can be attributed to increased short-term liabilities like short-term borrowings at the expense of the underlying short-term assets. For instance, for Emirates Airways, the value of short-term borrowings increases significantly from AED 4,037M to AED 5,042M in the period between 2012 and 2013 respectively. On the other hand, for Air Arabia, the short-term borrowings increase from null to AED 291,946,000. Despite the significant increase in the current liabilities, there is insignificant increase in the current assets of these two airlines. ii) Long-term Solvency or Financial Leverage Ratios Debt-to-Equity ratio = Total Debt/Total Equity Emirates Air Arabia 2013 Debt-to-Equity Ratio (35,483+5,042)/ 23,032= 1.76 291,946/5,576,183= 0.05 From the calculations above, it can be noted that as at 2013, Emirates’ debt-to-equity ratio is placed at 1.76 while for Air Arabia; the ratio is placed at 0.05. The higher ratio for Emirates Airways indicates a favorable and healthy balance between finances from owners of the firm and creditors like bank. In fact, Emirates, unlike its counterpart; Air Arabia, has made stringent efforts to ensure that debt financing is limited in order to guarantee of future control of the firm’s immediate operations. On the other hand, the unfavorable and unhealthy Air Arabia’s ratio is an indication of poor management of both finances from shareholders and such creditors like banks. It is important for a firm to attain a distinctive and favorable debt-to-equity ratio for purposes of ensuring that they eliminate extra burden resulting from repaying of principal and their respective interest costs (Covas & Haan, 2006). Significantly, a poorly managed debt-to-equity ratio might cause an imbalance that poses a possible risk to shareholders in regards to losing control aspect to creditors (Covas & Haan, 2006). iii) Asset Management, or Turnover Ratios Receivables turnover= Sales/Accounts receivable Emirates Air Arabia 2013 Receivables turnover 71,159/8,744=8.12 3,183,283/32,579=97.7 As it can be observed from the above graph, the receivables turnover ratio of Air Arabia is highly placed in comparison to that of Emirates Airways. Air Arabia’s ratio value stands at 81.2 while that of Air Arabia is fairly placed at 97.7 at the end of 2013 financial year. Unlike Emirates Airways, Air Arabia’s highly placed ratio postulates that it possesses a higher velocity in regards to its debt collection (Helfert, 2002). Significantly, it means that the airline is able to collect its outstanding cash balances from its customers in the course of the 2013 financial period. Subsequently, it postulates the airline’s top-notch financial and operational performances hence depicting insignificant levels of challenges for the airline to collect ticket sales made on credit (Helfert, 2002). However, the higher debt in respect to Air Arabia’s operations might postulate that it is making effort not to engage in possible sales credit given that it is a low-cost airline and also, it has not expanded its operations as fast as Emirates Airways. iv) Profitability Ratios Profit Margin= Net income/Sales Emirates Air Arabia 2013 Profit Margin 2,408/71,159*100%=3.38% 435,201/3,183,283*100%= 13.67% From the above computations, it can be noticed that Air Arabia’s profit margin is highly positioned in comparison to its competitor; Emirates Airways. Air Arabia’s ratio value is placed at 13.67% while that of Emirates Airways is placed at 3.38% within the financial year ending 2013. This is an indication that unlike Emirates Airways, Air Arabia is able to secure lots of earnings for itself for every AED of sales it has been able to post within the year. Significantly, the rather highly placed ratio of Air Arabia postulates that it is more profitable and also, it enjoys a better control over its immediate costs in comparison to its competitor; Emirates Airways (Fisher, Heinkel and Zechner,1989). Subsequently, the higher profitability enjoyed by Air Arabia can be attributed to its current low-cost operations and also, the formidable and friendly ticket prices offered to passengers that trigger higher sales revenues (Fisher, Heinkel and Zechner,1989). Conclusion and Recommendation From the above analysis, it is safe to conclude that unlike Emirates Airways, Air Arabia enjoys a favorable liquidity ratio that postulates its capacity to pay-off short-term commitments as and when they fall due to the creditors. Significantly, this company enjoys a favorable profitability and asset management ratios indicating its capacity to control over its immediate costs as well as adopting effective credit policies that discourage credit ticket sales respectively. However, the firm does not seem to attain a balance in its debt-to-equity ratio in comparison to its immediate competitor hence it is recommended that the management emulate strategies that takes into consideration the elimination of debt funds at the expense of owners’ equities. The funds can be sought from existing shareholders in form of placing additional shares at a discounted rate rather than go for debt financing that has the effect of diluting control of the firm altogether. Given this statistics, from an investor point of view, it is safe to make investments with Air Arabia since there are great chances for the potential investor to enjoy dividends due to higher profitability margins. On the other hand, Emirates Airways enjoys a stronger financial leverage ratio given that it enjoys substantial levels of funding from both the private and public sector. References Air Arabia. (2014). 2013 annual report. Retrieved on September 17, 2014 from http://www.airarabia.com/sites/airarabia/files/Annual_Report_2013_En.pdf Benninga, S, and Oded S. (1997). Corporate finance: A Valuation Approach, McGraw-Hill, New York. Covas, F & Haan, W, J. (2006). The role of debt and equity finance over the business cycle, Bank of Canada Working Paper, (2006), Retrieved on September 18, 2014 from http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-45.pdf Emirates Airways. (2013). 2013 annual report. Retrieved on September 17, 2014from http://content.emirates.com/downloads/ek/pdfs/report/annual_report_2013.pdf Emirates Airways. (2014). The Emirates story. Retrieved on September 17, 2014 from http://www.emirates.com/ke/english/about/the_emirates_story.aspx Fisher, E, Heinkel, R and Zechner, J. (1989). Dynamic capital structure choice: Theory and tests, Journal of Finance, 44, 19–40 Helfert, E. A. (2002). Techniques of financial analysis: A guide to value creation (11th ed.), New York, McGraw-Hill/Irwin. Read More