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 ‫غ‬ ‫غ‬ ‫غ‬ ‫غ‬ ‫غ‬ ‫غ‬ 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 ‫غ‬ ‫غ‬ ‫غ‬ ‫غ‬ 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 ‫غ‬ ‫غ‬ ‫غ‬ ‫غ‬ 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   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