The report explains the analysis of liabilities of Emirates airline based on its 2010/2011 fiscal year annual report. Emirates airline is an international airline located in Dubai (United Arab Emirates). Liabilities refer to the obligations of a company and comprise of current liabilities and long term liabilities. The annual report shows an increase in both current and long term liabilities. This shows that the company is on safe side but its debt ratio indicates that the airline needs to improve on its financial risk management.
The purpose of this report is to explain the analysis of liabilities. The report is based on the consolidated financial statements of Emirates as of 31st March 2011 and is found in the Emirates group 2010 - 2011 annual report. Emirates airline is an international airline located in Dubai (United Arab Emirates). It was conceived in March 1985. Its main activity is the provision of commercial air transportation services. Emirates airline is a subsidiary of The Emirates Group and is wholly owned by the government of Dubai.
The company operates with over 50,000 members of staff. The airline operates over 2400 passenger flights per week and has a mixed fleet of airbus and Boeing wide-body air craft. The airline has been recording profits consistently every year, except the second, experiencing a growth of over 20% per year. It is ranked among top 10 airlines in the world in terms of passenger kilometers and revenue as of year 2007.
Definition of liabilities
Pratt (2010) argues that liabilities are obligations of a company and constitute the amounts owed to creditors for a former transaction. They mostly have the word payable in the account title. They can be thought to be a source of company's assets. Liabilities will also comprise amounts received in advance for impending services. Liabilities are either categorized as either long term liabilities or current liabilities.
According to Nikolai, Bazley and Jones (2009), Long term liability are the obligations of a company which it does not expect to liquidate using its current assets or creating current liabilities or by using current assets within one year or its normal operating cycle whichever is longer. Long term liabilities are also referred as non current liabilities. These obligations may be outstanding for several years and may include items like long-term notes payable, mortgage payable, projected liabilities that are from long term warranties, bonds payable and accrued pension cost.
Borrowing and lease liability analyzed in the annual report include; finance leases, operating leases while retirement benefit obligation involves funded scheme and unfunded scheme. Deferred revenue it relates to the regular flyer program and it shows the fair outstanding award credits. The revenue fulfills obligations by supplying free or discounted goods or services on the redemption of award credits. Deferred credit is the revenue accrued by a firm but not yet reported as income. In Emirates the deferred credits which are moved to property, plant and equipment are consequent to transformation in the organization of a certain operating lease to a finance lease.
Deferred income tax liability is liability that is recorded on the balance sheet that comes from income earned and is recognized for accounting but not for purposes of tax. Derivative financial instrument are classified as non-current if the remaining maturity of the hedged item is more than 12 months at the end of reporting period. Accounts payable also known as notes payable give the lender a written documentation of the obligation if legal remedies are required to collect the debt. Accounts payable need the borrower to pay interest and are frequently issued to cover short -term financial requirements. They are also issued for varying periods of time.
Pratt (2010) argues that current liabilities are obligation anticipated to involve the use current assets or the establishment of other current liabilities. The obligations include short-term debts, current maturities in long term debts, deferred revenues, dividends (to be paid to shareholders), third party collections, periodic accruals, and potential obligations
Comparison of liabilities for the fiscal year 2009/2010 and 2010/2011
Total liabilities increased from 38072 AED million to 44188 AED million. This gives a 16.06% rise.
Comparison of non-current liabilities
Non-current liabilities Non- current liabilities for the year 2011(AED m) Non- current liabilities for the year 2010 (AED m) Difference(AED m) Percentage change Borrowing and lease liabilities 20502 16753 3749 18.27% Retirement benefit obligation 390 364 26 6.67% Deferred revenue 1722 1483 239 13.88% Deferred credits 401 460 -59 -14.71% Deferred income tax liability 2 4 -2 -100% Trade and other payables 31 21 10 32.26% Derivative financial instruments 642 467 175 27.26% Total long-term liabilities 23690 19552 4138 17.47% Comparison of current liabilities
current liabilities current liabilities for the year 2011 (AED m) current liabilities for the year 2010 (AED m)
Difference(AED m) Percentage change Trade and other payables 17551 15475 2076 11.83% Income tax liabilities 22 19 3 13.64% Borrowings and lease liabilities 2728 2852 -124 4.55% Deferred credits 136 162 -26 -19.12% Derivative financial instruments 61 12 49 80.33% Total Current liabilities 20498 18520 1978 9.65% Analysis of the liabilities
The table for non current liabilities shows that there was an increase in long term liabilities. The rise may be as a result of an inflow of current assets. The table for current liabilities shows an increase in current liabilities from year 2010 to 2011. This indicates a good sign to the company. According to the annual report above current liabilities increased this shows a positive cash flow effect. The rise represents an upsurge in expenses incurred on credit in one operating cycle. This shows that the actual operating expenses were less than the reported total accrual operating expenses.
Debt ratio = total liabilities/ total assets
Debt ratio for year 2011= 44 188/65090 = 67.88%
Debt ratio for year 2010 =38072/55547 = 68.54%
According to Burrow and Dlabay (2007), a stable company which has a long operating history can carry a ratio where debt is more than 50% of its total assets. Emirates Company having existed for 26 years, is stable and therefore can withstand a debt ratio of 67%.
Faerber (2007), indicates that when the debt ratio of a company are on an increasing trend investors get scared as this does not portray a proper path for the company. It shows that a company is financially stable and can meet its obligation well. Emirates airline have experienced a decrease in debt ratio from 68% to 67 %and this means that it is on a positive growth. Comparing quick assets and short term debt, it gives a ratio of 0.93 which is close to one. This shows that the company is safe. The decrease in debt ratio signifies a good trend for the company.
Conclusion and recommendations
According to the annual report and the analysis of its consolidated financial statement, Emirate airline has shown an increase in its liabilities. This indicates that the company experienced positive growth during fiscal year 2010/2011.
Burrow and Dlabay (2007), argues that a company with more than 50% debt ratio is trending on risky grounds as this can destabilize its financial status. Emirates airline should therefore aim at achieving an appropriate balance between risk and return and minimize the potential adverse effects on its financial performance. Risk management procedure should be designed in order to identify and analyze such risks and then set appropriate risk limits. The airline should also monitor the risk and should adhere to risk by means of reliable and up to date information systems.