Welcome Aboard
Emirates Airlines
Fareeda Gaffoor, Janita Kanjibhai, Jennifer Koenig, Devanshi Patel, Sara L. Yue
“When Paul Astin, a British executive of a big construction
company here on the Persian Gulf, travels by air, he no longer
drives to the airport. His favorite airlines, Emirates Airlines, sends
a car to pick him up, as it does with all its business and first-class
passengers in London, Paris, Hong Kong, and 12 other cities. In
business class he has a choice of 48 movie cassettes he can load
when he wants, and a couple of dozen music and talk programs.
Even in economy, passengers may choose from 17 movies and 18
video games available on personal screens. Mr. Astin dines on
meals set on pink linen and sips fine wines.”
New York Times - January 5, 2003
Agenda
‫ غ‬Middle East Region Overview
‫ غ‬United Arab Emirates
 Political
 Social
 Economic
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Airline Industry
Company Overview
Emirates Airline Valuation
Project – New York/ Dubai Route
Conclusions
Q&A
Middle East Overview
‫ غ‬Characterized by countries whose economies are overdependent on oil
‫ غ‬Differ on size, wealth, and political agendas
‫ غ‬UAE, Saudi Arabia and Qatar enjoy higher GDP per capita
compared to other countries (Iraq, Iran, Syria) due to more
political stability
United Arab Emirates
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British - Trucial States (150 yrs)
Perpetual Treaty of Maritime Truce (1850s)
Federation state formed on December 2, 1971
Seven Emirates: Abu Dhabi, Dubai, Ajman, Fujairah,
Sharjah, Ras Al-Khaimah, and Umm Al-Qaiwain
Political Structure
‫ غ‬Federal Supreme Court, Supreme Council, Cabinet of
Ministers, Parliamentary Body, Federal National Council and
an independent judiciary
‫ غ‬President: Sheikh Zayed bin Sultan Al Nuhayyan, ruler of Abu
Dhabi
‫ غ‬Vice President & Prime Minister: Sheikh Maktoum bin Rashid
Al Maktoum, ruler of Dubai
‫ غ‬No political parties
‫ غ‬Ruling families
“It’s all in the family”
Social Structure
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Population: 3,480,000 people
Religion: Muslim (96%)
Spoken Language: Arabic
Labor force: 1.6 million people
 78% in services, 15% in industry and 7% in agriculture
Economic Structure
‫ غ‬2001 GDP: $67.6 bn or $21,000 bn per capita
‫ غ‬70% of government revenue from oil production
‫ غ‬Free zones
‫ غ‬Dirham pegged against dollar
‫ غ‬Uneven oil distribution among 7 emirates
‫ غ‬Markets
 Dubai Financial Market (DFM)
 Abu Dhabi Securities Market (ADSM)
= 3.67
US & UAE Relations
‫ غ‬Established formal diplomatic relations since 1974
‫ غ‬Goal: security assistance and the shared commitment to
security and stability of the Gulf region
‫ غ‬Link of petroleum
‫ غ‬Gulf War
‫ غ‬September 11th: UAE severed its ties to the Taliban
Current Situation
‫ غ‬UAE lends help to the US
 Access to its airfields
‫ غ‬President Zayed attempt for peace in the Middle East
 Urge Arab world to ask Hussein to step down
 Telephone conversation between Zayed and Bush
‫ غ‬Altered attitude since US air strikes on Iraq
Airline Industry
‫ غ‬History
‫ غ‬Conflicts:
 Economy
 Terrorism
 War in Iraq
 SARS
Costs
‫ غ‬Labor
‫ غ‬Aircraft maintenance
‫ غ‬Debt servicing
‫ غ‬Fuel
‫ غ‬Aircraft delays
Industry Ratios
‫ غ‬Load Factor :
passenger-kilometers expressed as a
percentage of seat-kilometers
‫ غ‬Revenue Passenger Kilometers :
the number of revenue passengers
carried on each flight stage by the
flight stage distance
‫ غ‬Available Seat Miles :
the number of passenger seats
available for sale on each flight stage
by the stage distance
Competitors
Company Overview
‫ غ‬Launched in 1985 to boost tourism in Dubai
‫ غ‬Currently services 60 destinations in 42 countries
‫ غ‬Emirates strives to be known as an international airline
based in the Middle East rather than just an Arabic airline
that flies abroad
Emirates: “the finest in the sky”
‫ غ‬Received over 200 international
awards of excellence
‫ غ‬First Middle Eastern Airline to
win Passenger Service Award
‫ غ‬One of the youngest fleet of
aircraft in the business- 3 years
“When the going gets tough Emirates gets
going”
‫ غ‬Gulf War
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Only airline to continue flying to Kuwait
Increased number of flights by picking up competitors’ slack
‫ غ‬Still profitable despite open skies policy at Dubai
International Airport
Post September 11th
‫ غ‬Posted an 11% increase in net profits in 2001
‫ غ‬Increased flight service to Pakistan and Afghanistan
‫ غ‬Announced plan to purchase 58 new aircraft as part of
expansion strategy - Cost:$15 Billion
‫ غ‬22 aircraft are Airbus 380-800 largest aircraft in productionto be used for Dubai-New York route
Current Emirates Situation
‫ غ‬Currently increasing number of flights out of Dubai,
especially to Southeast Asia
‫ غ‬War not really effecting business due to no direct flight
with the United States
‫ غ‬Expansion routes planned for New York, San Francisco,
Atlanta and Chicago
Ratio Analysis
Gross Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
Current Ratio
Quick Ratio
Debt to Assets
Debt to Equity
Interest Coverage
8.77%
6.56%
3.97%
15.68%
1.88
1.75
0.75
2.95
22.28
Financial Status
‫ غ‬Government-owned but does not receive
subsidies
‫ غ‬Dh1.5 billion bond issuance in June 2001
 First Emirates Airlines bond issue
 Largest dirham-denominated bond issue
 First to be listed on Dubai Financial Market
‫ غ‬Private-equity
1.5 Billion
Dirhams!!
Relative Valuation
‫ غ‬Comparable firm selection
 Beta
 Growth
 Route structure
 Size
‫ غ‬TEV and Equity multiple analysis
‫ غ‬Equity value of $4.01 billion using EBITDA multiple
Calculating the WACC
‫ غ‬Cost of Debt
 UAE sovereign risk-free rate: 2.93%
 Altman Z-Score Rating: BBB+
 After-tax cost of debt: 4.28%
‫ غ‬Cost of Equity
 Built-up Beta: 0.87
 S & P IFCG Market Return
 Cost of equity: 7.79%
‫ غ‬WACC: 5.48%
Discounted Cash Flow Valuation
‫ غ‬Cash flow estimation
 Margin analysis
 5-year projection
‫ غ‬Equity Value: $4.72 Billion
‫ غ‬Relative Valuation: $4.01 Billion
‫ غ‬EVA: $39.5 million
Route Expansion
‫ غ‬Should Emirates Airlines add a direct flight between New
York and Dubai to its route structure in 2004?
Project Valuation
‫ غ‬Determining Discount Rate
Adjusted beta for added risk = 1.37
‫ غ‬Estimating Cash Flows
 Malaysia Airlines Newark-Dubai revenue percentage
 Costs based on Emirates current route structure
‫ غ‬Initial Outlay – Utilization percentage multiplied by cost of
Airbus A380-800
DCF Valuation
Present Value of Cash Flows$ 192,749,220.28
Initial Investment
$ 220,930,232.56
Net Present Value
$ (28,181,012.28)
Emirates Airlines should not
begin flying to New York in 2004
Option to Delay for One Year
Begin operating New York Dubai route now or delay for one year
Time 0
Time 1
PV of future cash flows
Totals
$11,978,026.41
$359,592,483.73
$371,570,510.14
$11,749,001.05
$352,716,910.43
$364,465,911.48
$11,451,268.08
Option Value if delay and lose first period cash flow
$
138,662,251.17
$0.00
Option Value
=153,698775.52*.17
1.0293
NPV to Delay
$22,227,991.30
NPV to begin NY-Dubai $
(28,181,012.28)
The value of the option
suggests that Emirates
should delay the New
York to Dubai route for
one year.
Conclusions
‫ غ‬Emirates Airlines is a profitable company that consistently beats
industry standards by emphasizing quality service and pursuing
strategies that appear to contradict what majority of carriers follow
‫ غ‬Route Expansion between New York and Dubai should begin in 2005
Thank you for flying with
Emirates Airlines!
Questions ?
His Highness
Sheikh Ahmed bin Saeed Al-Maktoum,
Chairman