Factors Affecting Profitability and Efficiency of Emirates

Airline

Prepared by:
Nur Husnina Mohd Arifin
Sa’idatul Fitri Suhaili
Wafa Wahidah Hj Mas Reduan
Tarneem Hossam

Date: October 2017

Contents

1. Introduction ........................................................................................................................ 1
2. Literature Review ............................................................................................................... 2
3. Research Methodology ....................................................................................................... 4
3.1 Research Scope and Limitations. ................................................................................ 4
3.2 Research Objective ...................................................................................................... 5
3.3 Research Questions ..................................................................................................... 5
3.4 Research Design .......................................................................................................... 5
4. Empirical Analysis ............................................................................................................. 6
4.1. Profitability ratios. .......................................................................................................... 6
4.2. Efficiency Ratio .............................................................................................................. 9
5. Conclusions and Recommendations ................................................................................. 13
6. References ........................................................................................................................ 14
 1. Introduction

Financial statements show the company’s performance over a period through the balance
sheet, income statement, cash flows and changes in equity for a particular firm. These
statements provide the necessary information in order to calculate ratios that makes it easier
to compare the company’s current performance with its past performance. It can also
compare the company’s performance with other companies in the same industry. Moreover,
profit maximization is the goal for every company while driving the maximum of their
assets in order to generate these profits. Thus, financial analysis is needed to see and judge
the performance of the company over the years.

This report will focus on the analysis of the profitability and efficiency ratios. According to
Oxford Dictionary of Business (2003), profitability is the capacity of the company or an
organization to generate income or profit. Profits of a company can be compared using the
profitability ratios such as operating profit margin, net profit margin and more which shows
the profit that is generated by the company based on their sales.

Again, according to the Oxford Dictionary of Business (2003), efficiency is a measure of

the ability of a manufacturer to produce the maximum output of acceptable quality with the
minimum input. However, in this case efficiency ratios shows how a company can use their
assets in order to generate sales from it. Efficiency ratios can be calculated using the asset
turnover, inventory turnover and more. Thus, also make it one of the most important
financial ratios.

Therefore, this report aims to analyse the profitability and efficiency of a company in the
UAE specifically Emirates Airlines. The reason why Emirates Airlines is chosen as a model
for their profitability and efficiency analysis is because Emirates Airline is recognised as
one of the largest international airlines to date. It is based in Dubai, United Arab Emirates
and is established in 1985 and is the subsidiary of the Emirates group.

This report will also provide commentary on the trends that is analysed according to the
profitability and efficiency ratios of the Emirates Airline and will aim to investigate on the
reasons why these drastic changes happened where possible during the 10 years period.

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 2. Literature Review

2.1 Key Financial Ratios to analyse airline companies

Maverick (2015) states that the key financial metrics commonly considered by market
analysts or investors are the quick ratio, return on assets (ROA), and the debt-to-
capitalization ratio. In this case, this research will not focus on other types of ratio besides
profitability ratio and efficiency ratio or most commonly known as asset management ratio.
The return on assets (ROA) is used to measure the airline company’s profitability by
calculating how much the company can earn for every dollar invested on assets. It is
calculated by the ratio of net income to total assets, or dividing net income by total assets and
expressed it as a percentage.
As stated above, return on assets (ROA) is chosen to be one of the key indicating ratio of
airline companies (Maverick, 2015). This is because every airlines’ main function is to
provide service of transport, whereby using an aircraft as the means of running their business.
Maverick (2015) mentioned that return on assets (ROA) is considerably an appropriate
measure to evaluate airline companies’ profitability due to that an airline company’s primary
assets are their planes which function to generate the overwhelming bulk of their revenues.
Maverick (2015) evaluated that due to the airline companies’ main income comes from
planes transportation and that they own very substantial assets, therefore a comparatively low
ROA represents substantial absolute profits.
Furthermore, Maverick (2015) concluded that operating margin and the earnings before
interest, taxes, depreciation and amortization (EBITDA) margin can be used as other means
of calculating profitability of airline companies.
2.2 Performance Analysis on Financial Health of Emirates Airlines
Krishnamurthy & Abdelrahman (2016) assessed the financial health of Emirates Airlines by
using financial ratios analysis in order to compute the financial strength of Emirates Airlines.
Krishnamurthy & Abdelrahman (2016) determined the financial condition of Emirates
Airlines by briefly looking at the profitability, liquidity and leverage ratios.
Krishnamurthy & Abdelrahman (2016) and Hazarika & Boukareva (2016) used the
profitability ratios to indicate Emirates Airlines’ ability to generate income in comparison to
the expenses occurred, in which, by having a higher value than the industry average or the
company’s competitor is an indicator that the company is performing well. Based on the
studies by Krishnamurthy & Abdelrahman (2016), Emirates Airlines have been doing well in
their profitability ratio in the past three years between the year 2012 to 2014. It was stated in

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their studies that during 2014, the changes in Emirates Airlines’ profitability ratio was
increasing at higher rate than the changes in the previous year.
However, Hazarika & Boukareva (2016) compared the profitability ratio between Emirates
Airlines and Air Arabia for the period 2010 to 2014, and they concluded that Emirates
Airlines are not performing very well in comparison to Air Arabia. During 2014, Air Arabia
can produce an operating margin of 15.2% whilst Emirates Airlines can only produce
operating margin of 5.2%. This means that Air Arabia’s operating margin is three times the
operating margin of Emirates Airlines. On the other hand, the study also calculated that the
Air Arabia’s return on asset (ROA) stands at 5.54% whereas the ROA of Emirates Airlines
was only 3.2%. In addition, CSI Market (2014a) states that the industry average during the
first quadrant of 2014 for operating margin was 7.56%. In this case, Emirates Airlines’
operating margin falls below the industry average rate. As for the return on asset (ROA), the
industry average rate was at the rate of 11.32% (CSI Market, 2014b), where the ROA of
Emirates Airlines was only 3.2% during the year 2014. This proved that Emirates Airlines
was not performing good enough.
2.3 Impact of Emirates Airlines Investment on Fixed Asset Towards Profitability
and Efficiency Ratio
In 2011, Emirates Airlines placed the largest single order in Boeing’s history, which worth
$18 billion in list price (Emirates, 2015). Mehra (2015) states that Emirates broad strategy is
to control cost and increase operational efficiency by purchasing new long haul and fuel-
efficient aircrafts. This can help to reduce the operating cost of Emirates Airlines as it is a
good investment to the company. CAPA (2014) also mentioned that Emirates’ purchase of
modern aircrafts causes the maintenance cost to be low as compared to most airlines.
Emirates aircrafts are also fuel efficient, with large number of seats and modern engines in
comparison to its competitors worldwide. Furthermore, CAPA (2014) states that Emirates
Airlines makes similar number of daily flights as most large airline companies such as
International Airline Group (IAG) and Virgin Australia Airline; however, Emirates have 27%
more seats for every departure in comparison to other airlines. Hence, this can help to
increase Emirates Airlines’ sales or revenues.
2.4 Other Factors Affecting Profitability and Efficiency Ratio of Emirates Airlines
Global economic crisis 2007 are said to have impacted lots of companies, including
companies in the airlines industry.
In the IATA annual report (2010), it states that in the early 2009 marked the low point for
international air travel markets. In early 2008, the economy was at the peak stage, then it
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went through recession and a drastic downturn to trough in early 2009. Th economy for
travelling fell by 9% and the decline is softened by a shift to cheaper seats. (IATA, 2010)
Studies by Goyal and Negi (2014) states that the global economic recession has caused the
aviation sector to be affected heavily. The aviation industry serves as the key employment
generator which provides about 35 million jobs worldwide. Furthermore, the airline industry
is one of the fastest growing companies that contributes heavily to the Gross Domestic
Product (GDP) to the world economy. (Goyal and Negi, 2014) However, the economic
recession has caused millions of job losses and it had struct employment in the airlines
industries. It has also caused investments in the airlines industry to drop drastically. (Goyal
and Negi, 2014) The reduction of employment in aviation sector is one of the ways for the
companies to survive in order to counterbalance the poor market besides the reduction in
ticket price to increase consumers.
The results of the global economic crisis during 2007 to 2008 have left certain effects such as
fall in demand for air travelling as people were attempting to cheaper alternatives and less
people would travel by air, increase in operating cost especially the fuel cost from AED11
million to AED14 million, and the fall on profitability growth due to the increase in operating
cost is at a higher rate.

3. Research Methodology

3.1 Research Scope and Limitations.

3.1.1 This research is limited to the scope as follows:

a) This research focuses on the company within the United Arab Emirates (UAE)
only, specifically in the commercial airline industry, and the company selected is
the Emirates Airlines from the Emirates Group.
b) This research focuses on two types of ratios only, which are the profitability and
efficiency ratios.
c) The research made on Emirates Airline Company is scoped to 10 years only; in
which, between the years 2007 to 2016.

3.1.2 The limitations of this research are:

a) The data sources collected are taken from annual reports published by the company
only.

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 b) Some data are not available in the annual report or elsewhere. Hence, availability
of data is limited.

3.2 Research Objective

The purpose of this research is to review the profitability and efficiency ratio of Emirates
Airline over the past 10 years between the years 2007 to 2016. This review will be
analysed and interpreted to see the pattern and trend analysis for the performance of the
company. Further study of the trend analysis is to be investigated.

3.3 Research Questions

a) What are the factors that affects the profitability and efficiency ratio?
b) How do the profitability and efficiency ratio indicate a company’s financial
performance?
c) In what way the profitability and efficiency ratio are related to each other?

3.4 Research Design

3.4.1 Research Method

This research uses experimental research method due to that the objective of this
research is to figure out the meaning behind the figures of the data in order to make a
clear-cut interpretation.
3.4.2 Source of Data
The source of data is collected from secondary sources, which is the annual report of
the company itself that is derived from the company’s official website.
The data reviewed are mainly from the company’s consolidated statement of financial
position and consolidated statement of income. Some data are also derived from the
Emirates ten years overview in the Emirates annual report in 2016.
3.4.3 Data Processing and Analysis
The data collected are to be analysed by using quantitative analysis approach.
Quantitative approach is best applied in this research due to that the data analysed is
used to draw a result that is meaningful by interpreting the figures.
The data is collected and taken as per needed in observation of the profitability and
efficiency ratios.

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 In this research, the profitability ratios to be used are operating margin, net profit
margin, return on shareholders’ equity, and return on asset. On the other hand, the
efficiency ratios will be calculated by using the ratio of inventory turnover, inventory
day’s turnover, asset turnover, fixed asset turnover, receivable turnover, and
receivable day’s turnover, or commonly known as average collection period.

4. Empirical Analysis

The analysis is based on the calculated profitability ratios obtained from the annual report
of Emirates Airline and where possible the ratios are calculated manually with the figures
obtained from the financial statements of Emirates Airline from the year 2007-2016.

4.1. Profitability ratios.

Ratio % 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Net Profit 10.6 12.9 1.6 8.1 9.9 2.4 3.1 3.9 5.1 8.4

Profit Margin
14% 12.90%

12% 10.60%
9.90%
10% 8.40%
8.10%
8%
6% 5.10%
3.90%
4% 3.10%
2.40%
1.60%
2%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

Ratio % 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Operating Profit 11.4 11.5 5.3 8.2 10 2.9 3.9 5.2 6.6 9.8

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 Operating Margin
14%
11.40% 11.50%
12%
10% 9.80%
10% 8.20%
8% 6.60%
5.30% 5.20%
6%
3.90%
4% 2.90%

2%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

Ratio % 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Return on
8.16 10.79 1.45 6.37 8.26 1.95 2.41 3.20 4.09 5.98
Assets (ROA)

Return on Assets
12% 10.80%

10%
8.16% 8.26%
8%
6.37% 5.98%
6%
4.09%
4% 3.20%
2.41%
1.95%
1.45%
2%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Years

Ratio % 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Return on
23.51 29.80 4.41 20.25 25.83 7.00 9.91 12.78 16.10 21.99
Equity (ROE)

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 Return on Equity
35%
29.80%
30% 25.80%
23.50%
25% 21.90%
20.20%
20% 16.10%
15% 12.70%
9.91%
10% 7%
4.41%
5%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

As observed by the profitability ratios obtained and calculated (operating margin, profit
margin, ROA and ROE) of Emirates Airlines, there has been drastic changes in the period
of 10 years. From the year 2008-2009, there has been a sharp decline in all the ratios, this
is due to the global recession which has affected the world. The airlines industry is
sensitive to any changes that has been happening to the economy. Although fuel prices
dropped but the demand has also dropped which has impact the revenue of the airline.
During the year, the state of the industry is at its lowest and it is predicted by the
International Air Transport Association (IATA)’s CEO, there would be a worldwide loss
of US$4.7billion, which is approximately AED 17.3billion and putting the industry to
debt US$170 billion, approximately AED 624 billion. (Emirates Annual Report, 2009).

In 2009, the profitability ratios went upwards as many steps are taken in order to combat
the losses that has taken its toll on the airline. Instead of going down, passengers in the
Middle East has seen grown from the previous year which is an increase of 8.5%. Instead
of trying to make cuts in employees, the employees were given the option to take unpaid
leave and more than 4000 people have taken up this opportunity. By this approximately
AED 41million was saved. Jet fuel prices has also been the factor for the increase in
profitability ratio as it comprises 29.9% of the operating costs. The average jet fuel price
per gallon has decreased by 30.8% (Emirates Annual Report, 2010).

This growth continued in the year 2011 despite the global flight disruption due to eruption
of volcano, closing of airports in Western Europe due to heavy snows, tsunamis in Japan
and many more. Emirate airline managed to overcome these challenges and managed to
record a growth in its profitability. This is due to the rise in passenger and cargo business,

8
 but the average jet fuel price has increase in the last quarter of the financial year and
taken an impact in the profitability of Emirates Airline in 2011 (Emirates Annual Report,
2011).

However, again the profitability ratios took a sharp decline in the year 2012. Despite the
increase in revenue from the previous financial year, the operating cost has taken its toll
on Emirate’s profitability, the significant increase in jet fuel cost, volatile exchange rates
due to global economic situation and the political unrest in the Middle East and African
regions (Emirates Annual Report, 2012).

Despite the sharp decline in profitability in the previous year, there is a steady increase of
profitability from 2013 until 2016. This is due to decrease in the jet fuel cost contributing
in the operating cost but increase in passenger growth. Although the revenue has steadily
increase, it cannot be denied that it is overall growth of revenue was adversely affected by
the 80-day runway closure of two runways for maintenance in DXB and the significant
weakening of major currencies against the US dollars. The outbreak of Ebola may have
also an impact the revenue growth (Emirates Annual Report, 2015, 2016).

4.2. Efficiency Ratio

Ratio 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Inventory
17.97 6.68 5.44 54.45 8.14 10.35 21.9 16.76 11.83 14.28
turnover

Inventory Turnover
60 54.4

50
No. of times

40

30
21.9
17.97 16.8
20 14.3
10.4 11.8
6.68 8.14
10 5.44

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

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Ratio (days) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Days in
20.3 54.64 67.1 6.70 44.84 35.27 16.67 21.78 30.85 25.56
Inventory

Days in Inventory
80 67.1
60 54.6
No. of days

44.8
40 35.3
30.9
21.8 25.6
20.3 16.7
20
6.7
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

There have been fluctuations in the inventory turnover and days in inventory of Emirates
Airlines especially in 2010. The higher the inventory turnover, the inventory days is lower.
The inventory for Emirates Airlines includes engineering, in-flight consumables, consumer
goods and others. Emirates Airlines are in the service industry thus their inventory does not
show any important information regarding on how many seats are sold for the year.

Ratio 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Asset Turnover 0.769 0.834 0.912 0.782 0.833 0.808 0.771 0.813 0.798 0.713

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 Asset Turnover
1 0.912
0.834 0.833 0.808 0.813 0.798
0.769 0.782 0.771
0.8 0.713
No. of times

0.6

0.4

0.2

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Year

Ratio 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fixed Asset
2.053 2.732 2.437 2.223 2.359 2.037 1.807 1.891 1.828 1.763
Turnover

3.000
Fixed Asset Turnover
2.732
2.437 2.359
2.500 2.223
2.053 2.037
1.807 1.891 1.828
No. of times

2.000 1.763

1.500

1.000

0.500

0.000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

There has not been any drastic or significant change in the asset turnover over the past 10
years of Emirates Airline. The almost constant asset turnover and fixed asset turnover ratio
over the years indicates that the Emirates Airline are doing a great job in utilizing its assets
and their ongoing investments especially in new aircraft, airline related infrastructure projects
and business acquisitions in gaining revenues. New and used aircrafts are the biggest
contribution to its fixed assets. In the year 2013, they delivered more than 20 aircraft and thus
the assets increase than the previous years.

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Ratio 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Account receivable
5.38 5.41 6.09 6.20 8.37 7.67 8.36 9.09 10.34 9.12
turnover

Account Receivables Turnover

12
10.34
10 9.09 9.12
8.37 8.36
7.67
No. of times

8
6.09 6.2
6 5.38 5.41

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

Ratio (days) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Average collection
67.8 67.5 59.9 58.9 43.6 47.6 43.7 40.2 35.3 40.0
period

Average Collection Period

80 67.8 67.5
70 59.9 58.9
60 47.6
No. of days

43.6 43.7 40.2 40

50
35.3
40
30
20
10
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

There have not been any major changes in the account receivables turnover. It gradually
increases from 2007 with a slight fall back in 2012 until it reaches the peak at 2015. But

12
there is a slight decrease in 2016. Meanwhile, the average collection period has seen a
slow decline over the recent years which means the debtors are paying their amount due
at an even faster rate than before.

5. Conclusions and Recommendations

To sum up, Emirates Airlines has witnessed significant fluctuation over the past 10 years.
Although it was greatly affected by the 2008 recession, it succeeded in pulling itself back
up shortly in 2009 and continued with this upward trend all the way until 2011. Even in
2012, when the trend started to change by the remarkable drop in 2012, it was able to
keep the profits back up from 2013 up till 2016. On the contrary, we can clearly see the
efficiency ratios were stable over the past 10 years due to the hard efforts of Emirates
Airlines in investing in aircraft projects.

Overall, Emirates Airline has control over its operation for the last 10 years as it
managed to keep the operation in control despite the changes in the industry judging by
its almost stable efficiency ratios and its ability to still rake in profits to the company.

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