Emirates Airline, cash rich, is unlikely to be dragged into Dubai World debt crisis
Emirates Airline is one of the most high profile and glamorous of the Emirate of Dubai’s jewels. So was Dubai World until its massive debt burden started to make it look shaky last year. But, apart from the common link to Dubai’s credit stature, that is where the commonality will probably end. Emirates the airline is a cash-flow rich entity, which, according to its most recent annual report, also had cash assets of USD2 billion at 31-Mar-2009. The carrier recently reported an improved, USD204.9 million profit for the six months to 30-Sep-2009; despite a 13.5% fall in revenue for the period, costs had been pruned by 15.8%.
Just last week Emirates Chairman and CEO, Sheikh Ahmed bin Saeed Al Maktoum, stated the carrier faces no difficulty financing the delivery of additional new aircraft, thanks to the carrier’s “excellent” liquidity position.
But it was inevitable that, when Dubai World yesterday shook global financial markets by seeking a six month moratorium on repayment of its debt – reputedly USD59 billion in total – rumours immediately abounded about the next steps for Emirates. After all the carrier is very near the epicentre of the storm.
That the announcement in this typically opaque country came after local exchanges closed, just before the three day Eid holiday, will only ensure that rumours and uncertainty reverberate around the world at least until after this weekend. It was also Thanksgiving in the US, with markets closed there, so Friday’s typically quiet day on Wall Street is likely to be a lot more active than usual; a lot of financial markets employees’ holidays will be shaken up, as financiers struggle to assess the extent of the damage. European share markets shed over 3% in trading in an immediate reaction to the Dubai World announcement, although Asian markets in morning trading today, although significantly down, were not quite as badly hit. Most will be waiting for a lead from Wall Street later today.
One of the constant rumours that has emerged again in the wake of this week's revelations is that Emirates Airline will be folded into neighbouring Etihad Airways, whose home Emirate, Abu Dhabi is the capital of the UAE and is the richest of the seven Emirates. The logic for this is that Abu Dhabi has money and Dubai has debt. But beyond that, the reasoning peters out. In fact, the UAE is a federation of neighbouring emirates, each governed by a separate family.
The potential for Emirates Airline to be taken over by Etihad in the current circumstances could be likened to the prospect of Air France taking over Lufthansa if Germany’s debt problems became severe.
Anything is possible, but some things are more likely than others.
Perhaps the more relevant concern for Emirates is the effect that the scare will have on the cost of debt. The airline has followed a relatively conservative strategy in its borrowings, but it is inevitably exposed to interest rate fluctuations where those rates are not fixed. As noted in the carrier’s annual report on the financial year to 31-Mar-2009, “Emirates borrowings and lease liabilities (net of cash) after including operating leases, at 31 March 2009, comprised 61% on a fixed interest rate basis with the balance 39% on floating interest rates. A one percentage point increase in interest rates would increase the interest charges and the operating lease charges (net of interest income) during the next financial year by AED 109 million (2007-08: AED 57 million).”
That said, the airline was also last week projecting a profit of USD1 billion for the coming year.
(For more detailed analysis of the Emirates Airline position, see our website for the full story later today)