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

Middle East Region Overview غغ United Arab Emirates

Political Social Economic

غ Airline Industryغ Company Overviewغ Emirates Airline Valuationغ Project – New York/ Dubai Routeغ Conclusionsغ Q&A

Middle East Overview

غ Characterized by countries whose economies are over-dependent on oil

غ Differ on size, wealth, and political agendas

غ UAE, 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 British - Trucial States (150 yrs)غ Perpetual Treaty of Maritime Truce (1850s) غ Federation state formed on December 2,

1971 غ Seven Emirates: Abu Dhabi, Dubai, Ajman,

Fujairah, Sharjah, Ras Al-Khaimah, and Umm Al-Qaiwain

Political Structure

,Federal Supreme Court, Supreme Council غCabinet of Ministers, Parliamentary Body, Federal National Council and an independent judiciary

,President: Sheikh Zayed bin Sultan Al Nuhayyan غruler of Abu Dhabi

Vice President & Prime Minister: Sheikh غMaktoum bin Rashid Al Maktoum, ruler of Dubai

No political parties غRuling families غ

“It’s all in the family”

Social Structure

غ Population: 3,480,000 people غ Religion: Muslim (96%) غ Spoken Language: Arabicغ Labor force: 1.6 million people

78% in services, 15% in industry and 7% in agriculture

Economic Structure

2001 غ GDP: $67.6 bn or $21,000 bn per capita 70 غ % of government revenue from oil production

Free zones غ Dirham pegged against dollar غUneven oil distribution among 7 emirates غغ Markets

Dubai Financial Market (DFM) Abu Dhabi Securities Market (ADSM)

= 3.67

US & UAE Relations

Established formal diplomatic relations غsince 1974

Goal: security assistance and the shared غcommitment to security and stability of the Gulf region

Link of petroleum غGulf War غ September 11th: UAE severed its ties to the غ

Taliban

Current Situation

غ UAE lends help to the US Access to its airfields

غ President Zayed attempt for peace in the Middle East Urge Arab world to ask Hussein to step down Telephone conversation between Zayed and Bush

غ Altered attitude since US air strikes on Iraq

Airline Industry

غ History

غ Conflicts: Economy Terrorism War in Iraq SARS

Costs

غ Labor

غ Aircraft maintenance

غ Debt servicing

غ Fuel

غ Aircraft delays

Industry Ratios

غ Load Factor : passenger-kilometers expressed as a percentage of seat-kilometers

غ Revenue Passenger Kilometers : the number of revenue passengers carried on each flight stage by the flight stage distance

غ Available Seat Miles : the number of passenger seats available for sale on each flight stage by the stage distance

Competitors

Company Overview

غ Launched in 1985 to boost tourism in Dubai

غ Currently services 60 destinations in 42 countries

غ Emirates 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”

غ Received over 200 international awards of excellence

غ First Middle Eastern Airline to win Passenger Service Award

غ One of the youngest fleet of aircraft in the business- 3 years

“When the going gets tough Emirates gets going”

غ Gulf War Only airline to continue flying to Kuwait Increased number of flights by picking up

competitors’ slack

غ Still profitable despite open skies policy at Dubai International Airport

Post September 11th

غ Posted an 11% increase in net profits in 2001

غ Increased flight service to Pakistan and Afghanistan

غ Announced plan to purchase 58 new aircraft as part of expansion strategy - Cost:$15 Billion

غ 22 aircraft are Airbus 380-800 largest aircraft in production- to be used for Dubai-New York route

Current Emirates Situation

غ Currently increasing number of flights out of Dubai, especially to Southeast Asia

غ War not really effecting business due to no direct flight with the United States

غ Expansion routes planned for New York, San Francisco, Atlanta and Chicago

Ratio Analysis

Gross Profit Margin 8.77%Net Profit Margin 6.56%Return on Assets 3.97%Return on Equity 15.68%Current Ratio 1.88Quick Ratio 1.75Debt to Assets 0.75Debt to Equity 2.95Interest Coverage 22.28

Financial Status

غ Government-owned but does not receive subsidies

غ Dh1.5 billion bond issuance in June 2001 First Emirates Airlines bond issue Largest dirham-denominated bond issue First to be listed on Dubai Financial Market

غ Private-equity

1.5 Billion Dirhams!!

Relative Valuation

غ Comparable firm selection Beta Growth Route structure Size

غ TEV and Equity multiple analysis

غ Equity value of $4.01 billion using EBITDA multiple

Calculating the WACC

غ Cost of Debt UAE sovereign risk-free rate:

2.93% Altman Z-Score Rating: BBB+After-tax cost of debt:

4.28%

غ Cost of Equity Built-up Beta: 0.87 S & P IFCG Market ReturnCost of equity: 7.79%

غ WACC: 5.48%

Discounted Cash Flow Valuation

غ Cash flow estimation Margin analysis 5-year projection

غ Equity Value: $4.72 Billionغ Relative Valuation: $4.01 Billion

غ EVA: $39.5 million

Route Expansion

غ Should Emirates Airlines add a direct flight between New York and Dubai to its route structure in 2004?

Project Valuationغ Determining Discount Rate

Adjusted beta for added risk = 1.37

غ Estimating Cash FlowsMalaysia Airlines Newark-Dubai revenue

percentageCosts based on Emirates current route structure

غ Initial Outlay – Utilization percentage multiplied by cost of Airbus A380-800

Present Value of Cash Flows 192,749,220.28$ Initial Investment 220,930,232.56$ Net Present Value (28,181,012.28)$

DCF Valuation

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

$11,451,268.08

$11,749,001.05 $352,716,910.43 $364,465,911.48

Option Value if delay and lose first period cash flow

138,662,251.17$ Option Value=153,698775.52*.17

1.0293

NPV to Delay $22,227,991.30$0.00 NPV to begin NY-Dubai (28,181,012.28)$

The value of the option suggests that Emirates should delay the New York to Dubai route for one year.

Conclusions

غ Emirates 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

غ Route Expansion between New York and Dubai should begin in 2005

Thank you for flying with Emirates Airlines!

Questions ?

His HighnessSheikh Ahmed bin Saeed Al-

Maktoum,Chairman