Profitability
Profitability as a whole fell for Emirates between 2016-2017 but the main profitability ratio that was affected was the Return on Investment. It had been increasing in previous years but when it came to 2017, it saw a significant fall of 18.45%. This was because the effect of the new aircrafts which had been bought had not kicked in yet. This means the future looks healthy for Emirates. Another ratio which saw a fall was in this period was the operating profit margin which fell by 7.07% as shown in Figure 1. This was due to the increasing operating expenses paired with the investment into the aircrafts.
Liquidity
Emirates maintains a current ratio below 1 which suggests the company at no point can afford to pay off their current liabilities with their current assets thus Emirates is a very liquid company and not financially fit. The current ratio fell from 0.816 to 0.725 between 2016-2017 due to a fall in current assets, profits and cash flow margin which fell from 8.76% to 1.73%. Even though the ratio fell, it would not cause major problems for Emirates. Many factors such as decreased cash and cash equivalents and increase in financial activities spending contributed to the low liquidity.
Long Term Financial Structure
Figure 2 shows, even though gearing is still very high (over 100%), it is decreasing overtime. This is normal however in a regulated entity as they would still be able to withhold a large amount of debt. One reason why the gearing may be falling is because of the threat posed to Emirates’ position in the market from competitors such as Qatar and Etihad. Having a lower gearing means they are less susceptible to economic downturns because companies that have lower leverage have lower amounts of debt. Having a low gearing means they have more equity to rely upon.
The Sheikh of Dubai solely owns all the shares for Emirates so it is not possible to calculate share price analysis and discuss an investor’s perspective.
SWOT Analysis
Strengths
Dubai is a prime location in the world in that any destination in the world can be reached with a single flight, but also provides a tremendous transition point for long-haul travellers. Emirates being independent have opposed to mergers and acquisitions of airlines which gives them the freedom to make their own decisions without pressure from 3rd parties. Emirates has an extensive route network across six continents served by a continuously growing fleet of modern aircraft that offer many international passengers a high quality and convenient transport solution. Emirates have recently invested in 35 new aircraft whilst dumping 27 older ones. These aircrafts comprise of 10% more space and a 2% improvement in their environmental performance. These stats show they are giving more comfort to travellers whilst also showing care for the environment and attracting customers who care about the environment in the process.
Weaknesses
Recent publishing’s have shown Emirates has been having increasing costs and declining revenues and operating profit. Even though they are showing a lot of ambition with this project, they are seen to have an unsustainable future growth plan and an example of this is the purchase of 35 new aircrafts. They are likely to have borrowed a large amount of money to develop and purchase the new aircrafts so have a lot of debt; hence the high gearing ratio. High tickets price also gives way to competitors such as Qatar Airways. Increasing fuel prices are also an issue for Emirates.
Opportunities
The new Al Maktoum International Airport should be the main entity Emirates should be excited about; the airport is undergoing a massive $32 billion expansion which will then accommodate for all of Emirates’ operations in 2020. Emirates hope to double their current capacity of 50 million passengers to almost 130 million passengers. Another opportunity that will be made available in 2020 is the Dubai World Expo which will be a major business opportunity. Emirates is the official airlines partner and will gain great business from the 25 million passengers expected to visit Dubai.
Threats
With more airlines growing in stature, competition for Emirates is rising; airlines such as Etihad and Qatar Airways are providing a formidable rivalry. Aside from these big airlines, Emirates is being increasingly threatened with the emergence of long-haul low-cost airlines such as Norwegian Air and AsiaX. Accusations of subsidy benefits are affecting Emirates’ performance. Rivals in America and Europe such as Delta and American airlines are indicting that Emirates are receiving subsidies from the UAE as it is a government owned airline. This issue is restricting expansion in the US alongside the recent travel ban imposed by Trump. Conflict in the Middle East is diverting planes from these regions thus increasing flight duration and costs. Recent terror attacks in the Europe is also hindering business as it has an impact on tourism and subsequently Emirates.
Limitations of Financial Reporting
Financial Reporting is limited when companies are able to easily manipulate figures to shine themselves in a better light. In the case of Emirates, the profit levels may have been manipulated as various factors such as useful life of aircrafts and residual life are easy figures to alter. Emirates set these figures which are mere estimations. This is so that depreciation can be underestimated so there will be no impairment cost as the NBV will be more than the recoverable amount. Another way they are able to manipulate figures is by not recording intangible assets as assets- instead, they are charged as an expense. By doing so, companies are able to manipulate their spending and thus underestimating the value of the company. Also, different companies record their assets and other entries differently so makes it very difficult to compare them.
Another limitation of financial reporting is the fact that the value of assets changes over time. However, this is not shown in the financial statements because transactions are initially recorded at their cost. It is not always such a bad thing because the value of items such as fixed assets does not change, but items such as marketable securities are distorted to reflect changes in the market. Therefore, the financial statement could be misleading as the present values may not be what they were when they were initially recorded. Also, the statement presents the position of a company at a specific date; there is no ability to predict what would happen in the future. Financial reports do not account for inflation. This means when the inflation rate is relatively high, the amounts stated on the balance sheet will appear lower.