FIN 327 San Diego State University Emirates Airlines Case Analysis

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Business Finance

FIN 327

San Diego State University



Respond to the following Questions: (2 pages)

  1. PRIMARY QUESTIONS: What are key forces in the general and industry environments that affect Emirates’ choice of strategy?
  2. How does Emirates compete?
  3. What internal resources and assets does Emirates have that may give it a competitive advantage?

- provide evidence from the case and the youtube video to support your position.

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CASES CASE 12 EMIRATES AIRLINE IN 2017* Within three decades, Emirates Airline went from a small start-up to one of the world's biggest carriers measured by international passenger mileage. Started in 1985, the airline deviated from the strategy of most other airlines to use its position between the U.S., Europe, Africa, and Asia to con- nect flights between distant pairs of cities such as New York and Shanghai or London and Nairobi. Tim Clark, the firm's president, referred to these as “strange city pairs." No air- line has grown like Emirates, whose expansion qualifies it to claim the crown of the freewheeling sultan of the skies. Its strategy of flying large number of passengers all around the world would have been difficult without the introduction of Boeing 777 long-range planes and Airbus 380 superjumbos. In particular, Emirates has managed over the years to radically redraw the map of the world, trans- ferring the hub of international travel from Europe to the Middle East. Dubai, the hub of Emirates, which currently handles over 80 million passengers each year, has become the world's busiest airport for international passengers. A new terminal, the largest in the world, was recently built at a cost of $4.5 billion just to accommodate the almost 240 Emirates aircraft that fly out to 145 destinations around the world (see Exhibit 1). Recent developments, however, such as the drop in oil prices and the growth in terrorist attacks have led to a decline in demand. Many companies, particularly in the Middle East, have been cutting back on travel for their employees, reducing the premium revenue that Emirates has been generating from first and business 1 * Case prepared by Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion. Copyright © 2017 Jamal Shamsie and Alan B. Eisner. EXHIBIT 1 Top Global Airlines There are several rankings of the world's airlines, but a few have consistently been rated highest in service over the last five years. These are listed below in no particular order. Fleet Destinations Started Main Hub 108 63 Singapore 1972 SINGAPORE 161 102 Hongkong 1946 CATHAY PACIFIC 221 142 Dubai EMIRATES 1985 91 78 1960 Bangkok THAI 85 108 1988 Seoul ASIANA 102 109 Abu Dhabi 2003 ETIHAD 68 73 1989 Taipei 106 58 Auckland 1940 AIR NEW ZEALAND 102 119 1949 Jakarta 146 146 Doha QATAR 1994 211 73 1952 Tokyo ANA 42 60 Johannesburg 1934 SOUTH AFRICAN 40 30 London 1984 VIRGIN ATLANTIC 118 42 QANTAS 1920 Sydney 273 190 Frankfurt LUFTHANSA 1953 Source: Skytrax. CASE 12 :: EMIRATES AIRLINE IN 2017 C75 0.0 Profit or Loss (AEDm) 2,619 2,652 3,339 EXHIB 4.451 2,278 ASS 3,565 5,443 No Р class passengers. Growing fears about terrorism have EXHIBIT 2 Performance Highlights led passengers to cut back on international travel and to reduce connecting through the Middle East. This has led Year Ended, Passengers Flown 31 March Emirates to switch from the A380 to the smaller Boeing (thousands) 777 on some routes. 2005 12,529 The largest U.S. airlines have alleged that Emirates, like others such as Etihad and Qatar, have received subsidies 2006 14,498 from their government. These subsidies have, according to 2007 17.544 these claims, provided Emirates with an unfair advantage. Tim Clark, the president has responded to such charges 2008 21.229 by insisting that his carrier has never received government 2009 22,731 subsidies or obtained free or cheap fuel. The airline has always disclosed its finances, used international auditors, 2010 27,454 and posted regular quarterly profits (see Exhibits 2 to 5). 2011 31,422 In fact, according to its financial statements, Emirates has shown profits for the last 27 years. "We are confident that 2012 33,981 any allegation that Emirates has been subsidized is totally 2013 39,391 without grounds," Clark declared. In fact, Emirates claims that it has worked hard to 2014 44,537 achieve its leading position by offering onboard amenities, 2015 49,292 like bars and showers on its aircraft, which other carriers find frivolous (see Exhibit 6). Beyond this, it points to the 2016 51,853 high standards of service from its crew that speak many lan- guages and come from many countries. Emirates' service Source: Emirates Airline. manager, Terry Daly, employs an inspiring quote: "I may not remember exactly what you said. I may not remember exactly what you did. I will always remember exactly how you made me feel. 1,813 1 2,839 1 3,254 5,893 8,330 EXHIBIT 3 Income Statement (United Arab Emirates Dirham) Consolidated Income Statement for the year ended 31 March 2016 2015 83,500 86,728 Revenue 1,544 2,091 Other operating income Operating costs (76,714) (82,926) 8,330 5,893 Operating profit 220 175 Finance income (1,329) (1,449) Finance costs Share of results of investments accounted for using the equity method 142 152 4,771 7,363 Profit before income tax (43) Income tax expense (45) Profit for the year 7,318 4,728 Profit attributable to non-controlling interests 193 173 Profit attributable to Emirates' Owner 7,125 4,555 Source: Emirates Airline. 276 CASE 12. EMIRATES AIRLINE IN 2017 EXHIBIT 4 Balance Sheet (United Arab Emirates Dirham) ASSETS 2016 2015 82,836 80,554 1,317 975 Non-current assets Property, plant and equipment Intangible assets Investments accounted for using the equity method Advance lease rentals Loans and other receivables Derivative financial instruments Deferred income tax asset 522 544 2,580 920 494 619 21 3 4 Current assets 87,752 83,627 Inventories 2,106 Trade and other receivables 1,919 9,321 Derivative financial Instruments 8,589 12 Short term bank deposits 342 7,823 Cash and cash equivalents 8,488 12,165 8,397 31,427 Total assets 27,735 119,179 111,362 EQUITY AND LIABILITIES Capital and reserves Capital 801 801 Other reserves (1,179) (168) Retained earnings 32,287 27,253 Attributable to Emirates' Owner 31,909 27,886 Non-controlling interests 496 400 Total equity 32,405 28,286 po-current liabilities Trade and other payables 513 202 Borrowings and lease liabilities 40,845 42,426 Deferred revenue 1,596 1,650 207 1,090 Jefe no credits 521 Derivative financial instruments 440 Provisions 3,589 3,762 4 Deferred income tax liability 48,250 48,595 continued CASE 12 :: EMIRATES AIRLINE IN 2017 C77 EXHIBIT 4 Continued 2016 2015 Current liabilities Trade and other payables 27,037 Income tax liabilities 27,770 35 Borrowings and lease liabilities 34 9,260 Deferred revenue 5,382 1,316 Deferred credits 1,244 139 49 Derivative financial instruments 737 2 38,524 Total liabilities 34,481 86,774 83,076 Total equity and liabilities 119,179 111,362 Source: Emirates Airline. EXHIBIT 5 Cash Flow Statement (United Arab Emirates Dirham) 2016 2015 Operating activities Profit before income tax 7,363 4,771 Adjustments for: Depreciation and amortisation 8,000 7,446 Finance costs - net 1,109 1,274 (Gain) / loss on sale of property, plant and equipment (367) (132) Share of results of investments accounted for using the equity method (142) (152) Net provision for impairment of trade receivables 21 32 Provision for employee benefits 733 669 Net movement en derivative financial instruments (5) (17) Gain on sale of intercouried for using the equity method (12) Employee benefit payments (585) (534) Income tax paid (62) (68) Change in inventories (168) (213) Change in receivables and dance lesse rentals (2,234) 194 Change in provisions, payables, deferred credits and deferred revenue 454 (5) Net cash generated from operating activities 14,105 13,265 Investing activities Proceeds from sale of property, plant and equipment 6,535 3,478 C78 CASE 12 :: EMIRATES AIRLINE IN 2017 2016 2015 (374) 19,504) (157) (10.269) (12) (19) (23) Additions to intangible assets Additions to property, plant and equipment Investments in associates and joint ventures Acquisition of a subsidiary, net of cash acquired Movement in short term bank deposits Finance income Dividends from investments accounted for using the equity method Net cash used in investing activities Financing activities 665 266 231 168 128 115 (2,361) (6.411) Proceeds from loans 1,213 Repayment of bonds and loans 2.215 (1,703) Aircraft finance lease costs (622) Other finance costs (918) (951) (294) Repayment of lease liabilities (341) (4,055) Dividend paid to Emirates' Owner (5,628) (2,100) (869) Dividend paid to non-controlling interests Net cash used in financing activities (118) (68) (7,975) (6,264) Net change in cash and cash equivalents 3,7696 590 Cash and cash equivalents at beginning of year 8,393 7,800 Effects of exchange rate changes 3 3 Cash and cash equivalents at end of year 12,165 8,393 Source: Emirates Airline. HO EXCTS Service For Premium Passengers On Emirates 1.6 ans of in-seat entertainment * CIRC Dom Perignon, 2000 champagne Seveda carier pegouet cuisine prepared by chefs of 47 nationalities $ Oferta gest selection of premium wines * Use bone china by Royal Doulton Use specially made cutlery by British design house Robert Welch Provide Bulgari-designed amenity kits Feature a stand-up bar Offer two on-board walnut and marble design showers Launching a Dream The roots of Emirates can be traced back to Gulf Air, which was a formidable airline owned by the governments of Bahrain, Abu Dhabi, Qatar, and Oman. In the early 1980s, the young sheikh of Dubai, Sheikh Mohammed bin Rashid al Maktoum, was upset by the decision of Gulf Air to cut flights into and out of Dubai. He responded by resolving to start his own airline that would help build Dubai into a center of business and tourism, given the emirates lack of significant oil resources. The sheikh recruited British Airways veteran Sir Maurice Flanagan to lay the groundwork for the new air- line, which he bankrolled with $ 10 million in royal funding. He placed a member of his royal family, Sheikh Ahmed bin Saeed al Maktoum, to the top post. At 26 years old, Ahmed bin Saeed had just graduated from the University of Denver in the U.S. Since he had not held a job before, the young * Only for first-class passengers. Source: Emirates Airline. beli CASE 12 :: EMIRATES AIRLINE IN 2017 079
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Explanation & Answer


OUTLINE, Emirates Airlines Case Analysis

The political environment has a significant impact on the operation of the airline. For the
crew and passengers' safety, the airline limits its travels to areas that are flagged as prone
to terrorist attacks. The fluctuations in oil prices impact the business strategy as it will
affect the kind of planes the company will operate.

Emirates competes through providing world-class services. The high standards of service
from the crew who make the customers feel appreciated and the offering of onboard
amenities like bars and showers set the airlines apart from its competitors.

The company's internal resources that have given it a competitive advantage are factors
like operating a vast fleet of airplanes such as the introduction of the Boeing 777 in 1996
and the Airbus in 2008. This extensive fleet and its headquarters in Dubai gave the airline
a competitive edge of managing its route and the benefit of connecting flights between
distant pairs of cities such as Shanghai and New York.

by Emirates Emirates

Submission date: 25-Sep-2020 12:12AM (UTC-0400)
Submission ID: 1396496469
File name: Emirates_Airlines_Case_Analysis_1.docx (19.04K)
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