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FINANCIAL PERFORMANCE OF AIRLINES INDUSTRY: A COMPARATIVE STUDY OF
EMIRATES AND AIRARABIA.
Dr. VENKATA SAI SRINIVASA RAO MURAMALLA1
IBRAHIM SALEH M ALTAMIMI2
1
Assistant Professor, College of Business Administration, Hotat Bani Tamim, Salman Bin Abdulaziz
University, Kingdom of Saudi Arabia.
2
Student of Level 8, BSBA in Accounting, College of Business Administration, Hotat Bani Tamim,
Salman Bin Abdulaziz University, Kingdom of Saudi Arabia.
ABSTRACT
Nearly three billion people and forty seven million metric tons of cargo were transported safely by air
in 2012. That activity supported some 57 million jobs and $2.2 trillion in economic activity which is
about 3.5% of global GDP. More than half the world’s tourists travel by air. In 2012, the industry
made an aggregate profit of $7.6 billion on revenues of $638 billion, that’s a 1.2% net profit margin.
Passenger traffic (expressed in revenue passenger kilometers) grew 5.3% in 2012. Although the
growth rate is in line with industry trends, it should be noted that the rate of expansion slowed for the
second consecutive year. Air travel nevertheless has been unusually robust in the face of difficult
economic conditions. In the past 20 years, air travel growth has averaged 1.8 times that of global GDP
growth. But in 2012, air travel grew 2.5 times as fast as global GDP. In 2012, the number of
international passengers traveling in premium-class seats rose 4.8%, which was slightly down on the
2011 growth of 5.5%. Economy travel, however, saw greater expansion, of 5.8%, modestly reversing
the 2011 trend that saw premium travel grow 0.4 percentage points faster than economy travel. In
contrast to passenger travel, air freight volumes were again weak relative to global economic
conditions. Growth in world trade has slowed sharply, but it still expanded 2.9% in 2012. Air freight,
measured in global freight weights in kilometers, nonetheless shrank 1.5% as it lost share to other
modes of transport. In view of all these trends, the present study is an attempt of understanding the
financial performance of two airlines selected for the study and a comparison among them during the
past two years back to 2012.
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Keywords: Assets, Liabilities, Passenger Traffic, Air Freight, Low-cost Carrier.
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*The study is in partial fulfillment for the submission of Graduation Project at Level 8 leads to the
award of BSBA in Accounting (Bachelor of Science in Business Administration) from Salman Bin
Abdulaziz University, Kingdom of Saudi Arabia.
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I. INTRODUCTION
An airline is a company that provides air transport services for traveling passengers and freight.
Airline services can be categorized as being intercontinental, intra-continental, domestic, regional, or
international, and may be operated as scheduled services or charters. Airlines assign prices to their
services in an attempt to maximize profitability. The pricing of airline tickets has become increasingly
complicated over the years and is now largely determined by computerized yield management
systems. Most airlines use differentiated pricing, a form of price discrimination, to sell air services at
varying prices simultaneously to different segments. Factors influencing the price include the days
remaining until departure, the booked load factor, the forecast of total demand by price point,
competitive pricing in force, and variations by day of week of departure and by time of day. Carriers
often accomplish this by dividing each cabin of the aircraft (first, business and economy) into a
number of travel classes for pricing purposes. Computers also allow airlines to predict, with some
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accuracy, how many passengers will actually fly after making a reservation to fly. This allows airlines
to overbook their flights enough to fill the aircraft while accounting for "no-shows," but not enough
(in most cases) to force paying passengers off the aircraft for lack of seats, simulative pricing for low
demand flights coupled with overbooking on high demand flights can help reduce this figure. This is
especially crucial during tough economic times as airlines undertake massive cuts to ticket prices to
retain demand.
Nearly 3 billion people and 47 million metric tons of cargo were transported safely by air in 2012.
That activity supported some 57 million jobs and $2.2 trillion in economic activity which is about
3.5% of global GDP. More than half the world’s tourists travel by air. In 2012, the industry made an
aggregate profit of $7.6 billion. On revenues of $638 billion, that’s a 1.2% net profit margin.
Passenger traffic (expressed in revenue passenger kilometers) grew 5.3% in 2012. Although the
growth rate is in line with industry trends, it should be noted that the rate of expansion slowed for the
second consecutive year. Air travel nevertheless has been unusually robust in the face of difficult
economic conditions. In the past 20 years, air travel growth has averaged 1.8 times that of global GDP
growth. But in 2012, air travel grew 2.5 times as fast as global GDP. In 2012, the number of
international passengers traveling in premium-class seats rose 4.8%, which was slightly down on the
2011 growth of 5.5%. Economy travel, however, saw greater expansion, of 5.8%, modestly reversing
the 2011 trend that saw premium travel grow 0.4 percentage points faster than economy travel.
Despite the slowdown in growth, the proportion of passengers in premium seats held steady at 8%,
which meant that premium travel maintained its 27% share of air travel revenue. The slowdown in the
growth of the premium travel segment over the past year resulted from a slowdown in businessrelated travel. World trade growth slowed from 6.3% in 2011 to 2.9% in 2012, and business
confidence trended down. Ordinarily, these factors would have adversely affected business travel, but
the strong growth in emerging markets generated an expansion of premium travel. The two big
premium travel markets, the North Atlantic and within Europe, shrank in 2012, reflecting the
weakness in the key developed economies of those regions. The fastest-growing premium travel
markets were within and connected to Africa, South America, the Middle East, and Asia. This reflects
the strength of the economic expansion in these regions and the structural development of new South–
South trade lanes, as business travel and cargo follow the direct investment flows that have taken
place in recent years. In contrast to passenger travel, air freight volumes were again weak relative to
global economic conditions. Growth in world trade has slowed sharply, but it still expanded 2.9% in
2012. Air freight, measured in global freight tonne kilometers, nonetheless shrank 1.5% as it lost
share to other modes of transport.
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With this introduction, section II comprises of operating costs and profitability issues of airlines
services, section III contains the methodology and analysis part of the study and Section IV has
conclusion.
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II. OPERATING COSTS & PROFITABILITY OF AIRLINES SERVICES
Air transport connects businesses to global markets and enables worldwide access to time-sensitive
products, from medicines to fresh produce to emergency aid. Full-service airlines have a high level of
fixed and operating costs to establish and maintain air services: labor, fuel, airplanes, engines, spares
and parts, IT services and networks, airport equipment, airport handling services, sales distribution,
catering, training, aviation insurance and other costs. Thus all but a small percentage of the income
from ticket sales is paid out to a wide variety of external providers or internal cost centers. Moreover,
the industry is structured so that airlines often act as tax collectors. Airline fuel is untaxed because of
a series of treaties existing between countries. However, ticket prices include a number of fees, taxes
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and surcharges beyond the control of airlines. The widespread entrance of a new breed of low cost
airlines beginning at the turn of the century has accelerated the demand that full service carriers
control costs. Where an airline has established an engineering base at an airport, then there may be
considerable economic advantages in using that same airport as a preferred focus (or "hub") for its
scheduled flights. As an analysis of industry trend, the pattern of ownership has been privatized in the
recent years, that is, the ownership has gradually changed from governments to private and individual
sectors or organizations. This occurs as regulators permit greater freedom and non-government
ownership, in steps that are usually decades apart. This pattern is not seen for all airlines in all
regions. The overall trend of demand has been consistently increasing in this sense. In the 1950s and
1960s, annual growth rates of 15% or more were common. Annual growth of 5-6% persisted through
the 1980s and 1990s. Growth rates are not consistent in all regions, but countries with a de-regulated
airline industry have more competition and greater pricing freedom. This results in lower fares and
sometimes dramatic spurts in traffic growth.
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The U.S., Australia, Canada, Japan, Brazil, India and other markets exhibit this trend. The industry
has been observed to be cyclical in its financial performance. Four or five years of poor earnings
proceed five or six years of improvement. But profitability even in the good years is generally low, in
the range of 2-3% net profit after interest and tax. In times of profit, airlines lease new generations of
airplanes and upgrade services in response to higher demand. Since 1980, the industry has not earned
back the cost of capital during the best of times. Conversely, in bad times losses can be dramatically
worse. Warren Buffett once said that despite all the money that has been invested in all airlines, the
net profit is less than zero. He believes it is one of the hardest businesses to manage. As in many
mature industries, consolidation is a trend. Airline groupings may consist of limited bilateral
partnerships, long-term, multi-faceted alliances between carriers, equity arrangements, mergers, or
takeovers. Since governments often restrict ownership and merger between companies in different
countries, most consolidation takes place within a country.
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Profitability
It was not surprising that airline profits fell in 2012. Over the past 20 years, whenever global
economic growth (aggregated using market exchange rates) has fallen to 2% the airline industry has
gone from profit to loss. Global GDP growth in 2012 slowed to 2.1%, and the average price of jet fuel
rose to a high of $129.5 a barrel. Profits declined, but a net profit of $7.6 billion was a good
performance given the economic conditions. The industry’s $7.6 billion of net profit was less than the
$8.8 billion achieved in 2011 and represents a net post tax margin of just 1.2%. That’s after paying for
debt interest. The industry’s return on capital was 4%, still way below the 7% and 8% investors would
normally consider the minimum for an industry with aviation’s risk profile. Nevertheless, the industry
was profitable when economic conditions suggested a loss. This is a measure of the industry’s
improvements in efficiency and industry structure. There is a long way to go before investors receive
an adequate return, but progress has been made.
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III. METHODOLOGY AND ANALYSIS
In view of several developments and trends as observed in the earlier sections, the essentiality of the
study demands how to compare the financial performance of airlines, in particular reference to
selected airlines such as airarabia and emirates.
Therefore, following are the objectives of the study:
1. To understand the trends of world aviation industry and its costs and profitability concerns,
2. To analyze the indicators of financial performance such as balance sheet, income statements
and cash flow statements of the selected companies and make a comparison among them,
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3. To provide a conclusion wherein the alternatives for better financial performance of the
selected companies can be overviewed.
For the purpose of the study, three main indicators of financial performance of a company are selected
such as balance sheet, income statement and cash flow statements. Balance sheet is helpful to analyze
the assets, liabilities and shareholders’ equity status of both the companies. Income statement of the
companies is useful to identify the sources of income and gross profits of the companies. Cash flow
statements are helpful in analyzing how the income affects cash and cash equivalents. The data
gathered and put in organized manner to understand the nature of airlines industry and its financial
performance for the two consecutive years back to 2012. In particular, the data relating to the
balance sheets, income statements and cash flow statements are collected from the websites of the
companies selected for the study.
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Analysis of the Study
Emirates Airlines is a fully-owned government company in Dubai, and has achieved constant positive
growth since its inception in 1985. The airline has recorded an annual profit in every year since its
operation. Over 1,200 Emirates flights depart Dubai each week on their way to destinations on six
continents. In fact, Emirates flights account for nearly 40 per cent of all flight movements in and out
of Dubai International Airport. In the financial year 2011 – 12, Emirates carried 34 million passengers
and 1.8 million tonnes of cargo. However, Airarabia (UAE) took off to the skies in October 2003 as
the Middle East and North Africa’s first low cost carrier (LCC). Since establishment, it revolutionized
the way aviation was perceived in the Middle East and North Africa by introducing a successful low
cost business model that accommodates the local preferences of the region. The airline was able to redefine the concept of air travel in this part of the world through offering superb value for money travel
along with comfortable and reliable operations. The growth pattern from the carrier’s main hub has
been expanded to over 59 airports with special focus to the Russian Federation and Central Asian
region.
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The following is the comparative analysis of financial performance of the selected companies in
particular reference to their financial positions, income statements and cash flow statements for the
two consecutive years of 2011 and 2012. As shown in Table – 1, comparatively Emirates (15.56%)
has greater change in development of its assets and liabilities over the airarabia (11.75%). As such
the audited reports of both the companies have shown more than 10 percent of growth over the
previous year.
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Table 1: Financial position of selected companies as on 31st March 2012.
airarabia
Emirates
Details in Total
2012 AED
2011 AED
2012 AED
2011 AED
(mn)
(mn)
(mn)
(mn)
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ASSETS
Non-Current Assets
Current Assets
Total
EQUITY AND LIABILITIES
Equity (capital and reserves)
Non – current liabilities
Current liabilities
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6172.83
1872.11
8044.94
5241.69
1872.52
7114.21
51896.00
25190.00
77086.00
43223.00
21867.00
65090.00
5440.64
1352.73
1251.56
5249.43
976.86
887.91
21466.00
29855.00
25765.00
20813.00
22987.00
21290.00
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Total Liabilities
Total
CHANGE OVER PREVIOUS YEAR
Source: Annual Reports of the companies.
2604.29
8044.94
11.75 %
1864.77
7114.21
--
55620.00
77086.00
15.56 %
44277.00
65090.00
--
From the consolidated income statements (see Table 2) of both the companies, it is identified that
Emirates has recorded a negative growth rate of profit (-66.69%) in 2012 over the previous year,
whereas completely positive direction of high growth rate is observed for airarabia (61.45%) during
the same period of time. The negative growth rate of Emirates is only observed in terms of its profits
over the previous year. However, Emirates have accumulated 12.93% of revenues year after year,
whereas 17.25% increase in revenues is observed for airarabia. Even, the operating costs and other
expenses of Emirates are recorded an increase of around 19.32% over the previous year, whereas it is
observed that only 12.25% of expenses are increased for airarabia over the previous year.
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Table 2: Consolidated income statement of selected companies for the year ended 31st march 2012.
airarabia
Emirates
Details in Total
2012 AED
2011 AED
2012 AED
2011 AED
(mn)
(mn)
(mn)
(mn)
Revenue
2942.42
2434.66
62287.00
54231.00
Change in %
17.25
-12.93
-Operating Costs & Other Expenses
2418.41
2112.00
60474.00
48788.00
Change in %
12.25
-19.32
-Total Profit
524.01
322.66
1813.00
5443.00
CHANGE OVER PREVIOUS YEAR
61.45
-- 66.69
-Source: Annual Reports of the companies.
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However, as shown in Table 3, the nature of usage of funds by both companies indicates the
implication of development and expansion of their operations. Both the companies has more than 25
percent of short term debt and airarabia has little advantage of investing more in the next coming
years in comparison to Emirates. Even, Emirates investment activities are almost doubled in 2012.
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Table 3: Consolidated statement of cash-flows of selected companies for the year ended 31 March
2012.
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Net Cash generated from operating
activities
Net Cash used in investing activities
Net Cash used in financing activities
Net (decrease) or increase in cash and cash
equivalents
Cash and cash equivalents at the beginning
of the year
Cash and cash equivalents at the end of the
year
% change over the previous year
airarabia
2012 AED
2011 AED
(mn)
(mn)
882.59
201.92
Emirates
2012 AED
2011 AED
(mn)
(mn)
8107.00
11004.00
512.79
425.68
(55.88)
394.10
475.19
(667.37)
10566.00
201.00
(2660.00)
5092.00
5046.00
866.00
171.16
838.52
10187.00
9322.00
115.28
171.15
7527.00
10188.00
32.64%
--
26.11%
--
Source: Annual Reports of the companies
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IV. Conclusion
At present, all over the world, airline companies are facing a big challenge to cover the running costs
and to gain profits at the same time. Also, with the huge competition between travel agencies,
traditional airlines and low cost carriers, it became essential to adopt smart solutions to reduce
operating costs of the airlines. Just two airlines, Emirates and airarabia are taken for the study. One
must temper our optimism with an appropriate dose of caution. It’s a tough environment in which to
run an airline. Competition is intense and yields are deteriorating. Cargo volumes haven’t grown
since 2010 and cargo revenues are back at 2007 levels. In forecasts even, the passenger business is
expanding more robustly. Some airlines will out-perform estimates and others will under-perform.
Further, passenger demand is robust and passenger numbers are expected to reach 3.1 billion in 2013
and estimated to rise by 6% to 3.3 billion in 2014. While revenues peaked in 2011 at $67 billion, for
2013 and 2014 they are basically unchanged from 2007 levels. However, the present study has been in
concentration of analyzing the financial performance of selected airlines, there is a lot of scope in
further research to identify the challenges and opportunities in aviation industry business all over the
world.
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