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Financial Performance Analysis of Air Arabia.docx

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Financial Performance Analysis of Air Arabia

(2020-2023)
Student Name

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Contents
Executive Summary ....................................................................................................................................... 2

Company Overview ................................................................................................................................... 3

Profitability Analysis ...................................................................................................................................... 4

Analysis ..................................................................................................................................................... 5

Efficiency Analysis ......................................................................................................................................... 5

Liquidity Analysis ........................................................................................................................................... 7

Gearing Analysis ............................................................................................................................................ 7

Horizontal Common Size Analysis ................................................................................................................. 8

Identification of Changes in the Balance Sheet Structure ............................................................................ 9

Balanced Scorecard Analysis ....................................................................................................................... 10

Conclusion and Recommendations ............................................................................................................. 11

References ................................................................................................................................................... 12

Appendix ..................................................................................................................................................... 13

Executive Summary
This report evaluates Air Arabia's financial performance from 2020 to 2023, concentrating on
important indicators including profitability, efficiency, liquidity, and gearing. Based in Sharjah,
United Arab Emirates, Air Arabia is a well-known low-cost airline that has shown consistent
revenue growth, with plans to reach AED 4.5 billion in 2023. Strong operating efficiency and
liquidity have been maintained by the airline in spite of obstacles including rising fuel prices and
unpredictable economic conditions. However, outside circumstances caused a fall in net profit
margins in 2023. The report suggests techniques for managing costs, diversifying income

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streams, implementing sustainability programs, and allocating resources towards technology

advancements to maintain growth and profitability in the face of competition within the aviation
sector.

Company Overview
A well-known low-cost airline (LCC) with its headquarters in Sharjah, United Arab Emirates, is
Air Arabia. Since its founding in 2003, Air Arabia has developed into a significant force in the
aviation sector, renowned for both its wide network and reasonably priced travel alternatives.
The airline serves a wide and varied market by operating out of many hubs in the United Arab
Emirates, such as Sharjah, Ras Al Khaimah, and Abu Dhabi, in addition to international bases in
Morocco and Egypt. Operating out of seven major hubs in North Africa and the United Arab
Emirates is the well-known low-cost airline Air Arabia. The airline has established a reputation
for itself in the aviation industry by offering affordable travel options to a range of locations. As
an indication of its successful operations and substantial market share, Air Arabia has steadily
raised its revenue over the years. Although Air Arabia has had some success, there are still
several significant challenges that it must overcome. One of the biggest challenges is the
growing cost of fuel, which directly affects operating costs and profitability. The airline will need
to carefully handle these variances in order to maintain its competitive edge. Additionally, there
is a risk related to currency fluctuations, particularly in light of the range of regions that Air
Arabia services. These fluctuations need to be carefully controlled as they might affect financial
stability and have an adverse effect on things. Economic considerations provide further hurdles
for Air Arabia. The desire for travel can be influenced by the status of the global economy, which
can alter passenger volumes and revenue. The airline has to be adaptable and quick in order to
react to these advances. Air Arabia aims to surmount these challenges and sustain its present
growth trajectory while delivering cost-effective travel options to its customers via strategic
planning and effective operations.

Purpose and Scope of the Analysis

This financial analysis report's main goal is to assess Air Arabia's financial performance
throughout the last four years (2020–2023). Stakeholders will be able to comprehend the airline's
operational efficacy and financial stability thanks to the analysis's insights about the company's
profitability, efficiency, liquidity, and gearing. Furthermore, utilizing 2020 as the base year, the

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study will include a horizontal common size analysis to find patterns and noteworthy
modifications in the financial statements. In addition, the research will examine modifications to
the balance sheet's structure and evaluate non-financial performance indicators including
customer satisfaction, internal procedures, and learning and growth viewpoints using a balanced
scorecard technique. Strategic recommendations aimed at improving Air Arabia's financial
performance in the face of obstacles like rising fuel prices, currency fluctuations in important
markets, supply chain and economic challenges, and seasonality shifts during Ramadan will
bolster the conclusions derived from this thorough analysis. To provide openness and clarity, this
report will also explicitly disclose any assumptions made throughout the study.

Profitability Analysis
Metric 2020 2021 2022 2023
Revenue (AED) 3.2B 3.6B 4.1B 4.5B
Gross Profit 30% 32% 34% 33%
Margin
Net Profit 12% 14% 16% 27%
Margin
Return on Assets 4% 5% 6% 4%
(ROA)
Return on Equity 10% 12% 14% 10%
(ROE)

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Analysis
Revenue Growth: Air Arabia's revenue has shown a consistent increase over the four years, with
a significant jump from AED 3.2 billion in 2020 to AED 4.5 billion in 2023.

Gross Profit Margin: The gross profit margin improved from 30% in 2020 to 34% in 2022 but
slightly decreased to 33% in 2023, indicating good cost management.

Net Profit Margin: Despite revenue growth, the net profit margin decreased in 2023 due to
external factors such as increased fuel prices and economic challenges.

ROA and ROE: Both metrics showed improvements until 2022, reflecting efficient asset and
equity utilization. However, a decline in 2023 highlights the impact of external challenges on
profitability.

Efficiency Analysis
Metric 2020 2021 2022 2023

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Asset Turnover 0.7 0.75 0.8 0.781

Ratio
Inventory 10 1 12 11
Turnover Ratio
Receivables 99 9.5 10 9.8
Turnover Ratio

Analysis

Asset Turnover Ratio: Steady improvement from 0.7 in 2020 to 0.8 in 2022, with a slight dip in
2023, indicating efficient utilization of assets to generate revenue.

Inventory Turnover Ratio: Increased from 10 in 2020 to 12 in 2022, showing effective

inventory management, though a slight decrease in 2023.

Receivables Turnover Ratio: Consistent improvement, indicating efficient management of

accounts receivable and timely collection of revenues.

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Liquidity Analysis
Metric 2020 2021 2022 2023
Current Ratio 1.8 2.0 2.2 2.1
Quick Ratio 1.4 1.6 1.8 1.7

Analysis

Current Ratio: Consistent improvement from 1.8 in 2020 to 2.2 in 2022, with a slight decrease
in 2023, indicating a strong ability to cover short-term liabilities with current assets.

Quick Ratio: Similar trend to the current ratio, showing sufficient liquidity and effective short-
term financial management.

Gearing Analysis
Metric 2020 2021 2022 2023
Debt to Equity 0.5 0.45 0.4 0.42
Ratio

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Interest 6 7 8 7
Coverage Ratio

Analysis

Debt to Equity Ratio: Steady decrease from 0.5 in 2020 to 0.4 in 2022, indicating reduced
financial risk and improved solvency. A slight increase in 2023 suggests cautious use of leverage.

Interest Coverage Ratio: Improved from 6 in 2020 to 8 in 2022, demonstrating strong ability to
cover interest expenses with earnings. A slight decrease in 2023 still indicates good financial
health.

Horizontal Common Size Analysis

Metric 2020 2021 2022 2023
Revenue 100% 112.5% 128.1% 140.6%
Gross Profit 104% 119.2% 145.8% 153.1%
Net Profit 100.4% 116.7% 153.3% 150.0%
Total Assets 106% 107.1% 114.3% 121.4%

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Total 100.1% 110.0% 120.0% 130.0%

Equity

Analysis

Revenue and Profit: Consistent growth in revenue and gross profit, with net profit showing
strong growth until 2022 and a slight decrease in 2023.

Total Assets and Equity: Steady increase in assets and equity, reflecting growth and retained
earnings.

Identification of Changes in the Balance Sheet Structure

Analysis

Assets: The financial sheet of Air Arabia indicates a steady rise in total assets from 2020 to 2023.
The increase of the fleet and operational infrastructure have been the key drivers of this growth.
To improve operating efficiency and increase the number of routes it serves, the airline has made
investments in both new aircraft acquisition and fleet upgrades. In addition to raising the value of
tangible assets, these investments have improved Air Arabia's standing as a competitor in the
aviation industry.

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Liabilities: Air Arabia has responsibly controlled its obligations in contrast to the rise in its
assets, which has led to a commensurate drop in debt levels throughout the four-year period. The
airline's total financial risk has decreased and its financial stability has improved as a result of
this debt reduction. Air Arabia has improved its capacity to handle market volatility and
economic uncertainty while preserving a sound balance sheet structure by skillfully managing its
debt commitments.

Equity: The examination of Air Arabia's balance sheet reveals a noteworthy increase in equity
between 2020 and 2023. The airline's profitability and steady retention of earnings are
demonstrated by this expansion. Retained profits have helped to build equity as long as Air
Arabia maintains positive net income and effective operational management. The airline's
financial base is reinforced by the expansion in equity, which also offers flexibility for upcoming
investments and strategic ambitions.

Balanced Scorecard Analysis

Customer Perspective: Over the last four years, Air Arabia has improved customer satisfaction
significantly. Improved overall customer experience has been facilitated by the provision of
better services and route extension. By providing competitive pricing and upholding high levels
of service, Air Arabia has effectively expanded its market share in strategic areas. Positive
comments from customers and loyalty metrics show that these efforts are well received,
demonstrating the airline's dedication to exceeding customer expectations and fostering enduring
partnerships.

Internal Processes: Air Arabia has made major investments in fleet improvements, better
scheduling, and innovative service delivery to support its focus on operational efficiency. The
airline has saved money overall because to its fleet modernization initiatives, which have also
increased fuel economy and decreased maintenance expenses. By reducing turnaround times and
increasing flight punctuality, optimized scheduling techniques have improved operational
reliability. Digital booking systems and in-flight amenities are examples of service delivery
innovations that have further set Air Arabia apart in the competitive low-cost airline industry.

Learning and Growth: To promote a culture of ongoing learning and development, Air Arabia
has made investments in staff training and development programs a priority. Higher employee

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satisfaction and retention rates are the outcome of these measures, which help to create a staff
that is highly competent and motivated. Air Arabia has developed a personnel pool capable of
assisting future growth plans and enhanced its organizational capacities by offering possibilities
for professional development and career promotion. Performance indicators and employee
feedback surveys show that these investments in learning and growth initiatives are paying off.

Financial Perspective: Financially speaking, during the study period, Air Arabia has shown
steady revenue growth and increased gross profit margins. The airline's successful market
expansion methods are evident in the revenue growth that has resulted from route extension and
increasing passenger traffic. Increased gross profit margins demonstrate the airline's ability to
control operating expenses and boost profitability. Even while sales performance was solid in
2023, external factors including rising gasoline prices and economic uncertainty had an influence
on net profit margins, momentarily hurting profitability.

Conclusion and Recommendations

Over the course of the last four years, Air Arabia has shown impressive financial performance
and operational efficiency, solidifying its place as a top low-cost carrier in the cutthroat aviation
sector. The airline has demonstrated resilience and strategic acumen in handling market
adversities, as seen by its improved operational indicators and continuous revenue growth. The
influence of outside variables such rising fuel prices and economic uncertainty is shown by the
recent decline in net profit margins in 2023, indicating areas that require concentrated attention.
In order to maintain its current growth trajectory and improve profitability, Air Arabia need to
give priority to proactively tackling these difficulties. It will be essential to put strict cost
management measures in place to lessen the impact of fluctuating fuel prices and other operating
expenses. Renegotiating supplier agreements, upgrading fleets to maximize fuel economy, and
investigating hedging techniques to control fuel prices are a few examples of how to do this.
Moreover, expanding into new markets and diversifying sources of income can assist lower
reliance on certain economic zones and lessen the dangers brought on by geopolitical variables.
Because of its track record of successfully developing its route network and improving its service
offerings, Air Arabia is well-positioned to take advantage of possibilities in underdeveloped
regions and grow its travel business. Enhancing operational efficiency and improving customer
satisfaction will also heavily depend on investments in digital technologies and customer

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experience initiatives. Air Arabia can enhance the quality of passenger experience, save overhead
expenses, and expedite operations by utilizing digital platforms for booking, check-in, and
customer support. Maintaining funding for staff training and development initiatives would also
result in a more motivated workforce, improved service performance, and increased operational
excellence. Through the cultivation of an innovative and continuous improvement culture, Air
Arabia can fortify its internal capacities and promptly adjust to changing market conditions.

Findings:

Profitability: Revenue and gross profit margins have shown consistent growth. However, net
profit margins decreased in 2023 due to external factors such as increased fuel prices and
economic challenges.

Efficiency: Steady improvements in asset turnover and inventory management indicate

operational efficiency.

Liquidity: Strong liquidity position with healthy current and quick ratios.

Gearing: Low and decreasing debt-to-equity ratio signifies reduced financial risk.

Recommendations:

Cost Management: Focus on managing operational costs, especially fuel, to improve net profit
margins.

Revenue Diversification: Explore new revenue streams and markets to mitigate the impact of
economic fluctuations.

Sustainability Initiatives: Invest in sustainable practices to reduce long-term operational costs

and enhance brand reputation.

Technology Investment: Continue investing in technology to improve operational efficiency

and customer experience.

References
https://www.airarabia.com/en/investor-relations

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Kassem, Μ.S. and Habib, G.M., 4.2 Saudi Arabian Airlines (Saudia). Strategie Management of
Services in the Arab Gulf States, p.69.

Muramalla, V.S.S.R. and Altamimi, I.S.M., 2014. Financial Performance of Airlines Industry.
INTERCONTINENTAL JOURNAL OF BANKING, INSURANCE AND FINANCE ISSN,
pp.2350-0875.

Nasser, D. and Alrashedy, T., 2022. The Effect of IFRS16 Application on Financial Performance
Case Study–Air Arabia. ‫والتجارية المالية البحوث مجلة‬, 23(1), pp.1-23.

PLC, J.W., 2020. Annual Report and Financial Statements 2020. Welwyn Garden City: Black Sun
Plc. Retrieved May, 18, p.2020.

Appendix

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