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TO: Sheikh Maktoum bin Rashid Al Maktoum FROM: Emirates Consulting RE: Emirates Airlines Expansion to the Unites States- New York DATE: April 9, 2003 The purpose of this study is to evaluate Emirates Airline’s investment decision to expand operations by providing non-stop service from Dubai to New York. The intrigue of this case is that Emirates Airlines is a private airline operating in the most high risk and unpredictable geographic region in the world, within an industry that is facing many critical problems for the foreseeable future. Yet, Emirates is prospering and expanding. Contrary to many commercial airlines with more resources, more prominence and much larger revenues and fleet sizes, who are considering or have filed for bankruptcy, Emirates Airlines remains standing. Even more interesting is that all flights fly to and from Dubai, which is surrounded by a tumultuous war zone, and the areas adjacent to the United Arab Emirates have been high tension zones since the September 11th attack. In a time when many airlines are struggling, Emirates announced the purchase of 58 new aircraft and expansion of routes to various areas around the world. It is not only prospering and profiting, but they are also ranked among the top airlines in the industry when it comes to service and customer satisfaction. For these reasons, a financial analysis of Emirates seemed like it would reveal answers surrounding its unexpected success. Similarly, the valuation of the project to begin a route from Dubai to New York is equally interesting because it is another proposed, unconventional strategy which may lead to profitability.

The fascination in this case lies in the fact that even though Emirates is a prominent Middle Eastern airline gaining much respect and a good reputation, it is a private company. Emirates Airlines recently offered a bond issuance to outside investors in order to increase capital relating to future plans for the company. Where all the other airlines that trade publicly have posted losses or low profits, Emirates’ steady gains can be seen in the financials. Also, because they are a private company not much information is readily available. However, after much research into the airline, the industry and the region in which it operates, a portrait of a well-run company with a proactive strategy emerges. Fareeda Gaffoor Janita H. Kanjibhai Jennifer Koenig Devanshi H. Patel Sara L. Yue

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Emirates Airline: Penetrating the North American Market

Emirates Airline is known for going against conventional thinking when running its business. Thus far, this strategy has been profitable for the company. In November 2001, the airline announced that it would begin a 13 ½ non-stop flight from Dubai to New York starting in June of 2003. However a postponement in the delivery of the Airbus A380-800 aircraft that would service the new route has caused a delay. This will be Emirates’ attempt at penetrating the North American market. In the current politically charged climate there is debate as to whether or not it will be profitable to expand service to this new route from Dubai to New York. Tensions between Washington and the Arab world create restraints as to when Emirates will be able to expand service. However, the main question currently facing Emirates is whether it should expand to New York at this point in time.

Unlike many other airlines, Emirates sees no threat surrounding the tensions in the Middle East. The climate has been this politically charged for the past ten years. In fact, during the first Gulf War in 1991, Emirates Airlines was the only airline that did not cancel any of its flights. They continued flying to Kuwait when a majority of its competitors stopped. Emirates continued business as usual and picked up additional business from those airlines that downsized and stopped flights in the region. This strategy exemplifies how Emirates has gone against conventional thinking and come out ahead.

Country Risk Analysis Middle East Region Overview

The Middle Eastern region is characterized by economies that are over-dependent on oil; however, they differ on size, wealth, and political agendas. A few of the key players in this region include: Iran, Iraq, United Arab Emirates, Qatar, and Saudi Arabia. Of these countries, the United Arab Emirates is quite comparable in many aspects to its neighbors.

The UAE and Qatar are not expected to suffer from as much government instability in the threat

of war as the other countries. Iran and Iraq, however, have had their share of political unrest, which has drastically affected their oil exports and prices. To counterattack these effects, Iraq has put pressure on the other OPEC countries to increase oil prices and decrease oil exports to the US and Great Britain. As a result, the GDP of all Middle Eastern countries will decrease due to the heavy reliance of oil revenues in exports and as a percentage of GDP. While oil is what makes these countries wealthy, the UAE, Saudi Arabia, and Qatar enjoy higher GDP per capita over Iraq because of their political situations. Dictatorial governments in Iraq allocate funds to programs that will not necessarily aid the country in the long-run. Literacy rates of Saudi Arabia, Qatar, Iran, and the UAE have increased steadily over the past decade. This is mostly owed to government beliefs that educated citizens will

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augment the status of the country in all aspects. All five countries export to and import from similar countries including; Japan, Italy, China and the US. The main export for these countries is oil and the main imports are machinery and equipment, chemicals and food.

United Arab Emirates

The United Arab Emirates (UAE) is located in the Middle East between Oman and Saudi Arabia, bordering the Gulf of Oman and the Persian Gulf. The country is slightly smaller than the state of Maine, which makes it a very small country within the Middle East region. The population of the UAE is approximately 3,480,000 people. The literacy rate for the UAE is 79.2% for the total population above 15 years. When categorized by sex, men and women have comparable literacy rates, a rarity in the Middle East region. The population is predominantly Muslim (96%), with the remaining 4% of the population consists of Christians, Hindus and others. Although Arabic is the official language of the country, Persian, English, Hindi and Urdu are also spoken.

The UAE is a federation state formed on December 2, 1971 and is composed of seven

emirates. The emirates included in the UAE are Abu Dhabi, Dubai, Ajman, Fujairah, Sharjah, Ras Al-Khaimah, and Umm Al-Qaiwain. Prior to the formation of the federation state, the UAE existed as the Trucial States that belonged to the British for the previous 150 years. The Rulers and the British signed a Perpetual Treaty of Maritime Truce in the 1850s that guarantees peace and protection from external threats. In exchange, the British had direct involvement in its foreign affairs and external defenses. When the British intended to withdraw from the Gulf in 1968, the rulers of the seven emirates came together and formed the federation state with hopes to increase their role in global politics. Economic Environment

United Arab Emirates’ economy is heavily dependent on oil production. Abu Dhabi is the largest producer, followed by Dubai, and to a much lesser extent, the remaining emirates. Although oil’s contribution to GDP has been declining in the past few years, government revenue and the non-oil economy continue to be heavily reliant. GDP for the year ending 2001 was 67.6(US$bn) and 21,000(US$bn) per capita, and 70% of government revenue resulted from oil production. Fluctuations in oil prices impact the growth and volatility of the UAE’s economy.

The UAE is a member of the WTO, but has been slow to comply with its requirements for liberalizing trade and competition. The banking sector is closed to foreign investment and other ventures must be 51% owned by a local partner. The exceptions to these rules are in free zones, where 100% foreign ownership is permitted. The limitations on foreign direct investment deter the process of economic diversification. Abu Dhabi is the most resistant to opening its economy, but it has pursued private sector involvement to improve infrastructure regarding water and power. Dubai has chosen to focus its efforts on expanding its services sector by creating Dubai Internet City (DIC) and Dubai Media City (DMC), which are free zones where investors can retain 100% ownership. Dubai also allows foreign investors to own property and purchase shares in UAE listed companies. The UAE typically runs a budget deficit, and the 2002 budget projects one of Dh2.17bn. Federal spending is expected to increase by 2.2%, and revenue is expected to grow by 3%. Abu Dhabi, Dubai and the UAE Central Bank are the main contributors to the federal budget. The numbers

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that are provided exclude stock holdings by the emirates, which are approximately valued at US$250bn, and the profits and dividends from these investments are sufficient to fund the deficit. The current exchange rate between the dirham and the dollar is US$1:Dh3.673. The dirham is pegged against the dollar and interest rates track those in the US with a positive differential. Inflation has averaged around 2% for the past five years and is largely maintained through currency management, price controls and subsidies. The emirates suffer from the uneven distribution of oil, and therefore have varying levels of wealth within its respective economies. Abu Dhabi is the most oil abundant, and although Dubai has fewer reserves, it has sufficiently developed as a financial, trading and manufacturing center. Therefore, Abu Dhabi and Dubai are the most prosperous emirates. A high level of debt stunts Sharjah’s growth, unsuccessful oil explorations plague Ras al-Khaimah, and a gas field off the coast of Umm al-Qaiwain has not been commercially profitable. To remedy the disparities in each economy, suggestions of production-sharing agreements and increased investment in the tourism industry are seriously being considered. Abu Dhabi discovered oil in 1958 and Dubai followed in 1966. This sector dominates the economy and it is currently nearing production capacity according to OPEC’s quota constraints. Since Dubai has decided to concentrate its resources in the services sector, it has decreased oil production by 25%, thereby enabling Abu Dhabi to continue at a higher level. The UAE is also abundant in gas resources, which has a large world demand. Although, the UAE cannot focus on exporting because it is having trouble meeting domestic demand due to the increase in power-generating and water-desalination capacity. The UAE has tried to respond to this challenge by starting the Dolphin Project, which will connect a pipeline from Qatar to markets in Abu Dhabi, Dubai, Oman and Pakistan. Hydrocarbon-based activity and aluminum production has dominated the manufacturing sector. Due to the desert climate, the agricultural industry only contributes to 3.9% of GDP, and the government continues to support the sector because of the large workforce that farming employs. The construction sector profited during the late 1990’s by building many new hotels, office buildings, airports and shopping malls. Since the economy has slowed down, Dubai is losing money because of its abundant spare capacity. The government also encourages private sector involvement and the development of free zones. Jebel Ali Free Zone was formed in Dubai in 1985, and attracts around 2,200 businesses from 100 countries. The financial services sector offers mainly short and medium term notes, and long-term financing is obtained internationally. Most projects involve government backing which decreases default risk. Two stock exchanges were launched; the Dubai Financial Market (DFM) and the Abu Dhabi Securities Market (ADSM), but low trading volumes have kept them underdeveloped. Investors have preferred to place their money abroad, primarily in markets such as London and Hong Kong. Money laundering is the main problem being addressed by authorities in the financial sector, and an anti-money laundering act was ratified in 2002, which allows the Central Bank to freeze suspicious funds.

The UAE’s main export partners are Japan (30%), India (7%), Singapore (6%), South Korea (4%) and Oman and Iran and they import from U.S., Germany, Japan, and France. The largest commodities exported are crude oil, natural gas, and re-exports of dried fish and dates. The UAE imports many goods such as machinery and transport equipment, chemicals and food, but not more than 7% in each category. In 2001, the UAE had a trade surplus, and it will become the founding member

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of the Gulf free trade zone which will go into effect in 2003. This will create a unified tariff of 5% and it will be the largest Arab trade bloc and one of the most prominent consumer markets in Asia.

Political Environment

A high degree of political and economic power exists in the individual emirates. The federation state operates as a system that includes a Federal Supreme Court, Supreme Council, Cabinet of Ministers, Parliamentary Body, Federal National Council and an independent judiciary. The Federation Constitution was established in 1971, which allows each emirate the freedom to have its own institutions and laws other than those specified in the Federal Constitution. Therefore each emirate has its own judiciary system and control over its resources, such as oil. In terms of natural resources, Abu Dhabi has the most oil resources, which gives this emirate the most power out of all seven emirates.

UAE’s chiefs of state are President Sheikh Zayed bin Sultan Al Nuhayyan, ruler of Abu Dhabi

and Vice President Sheikh Maktoum bin Rashid Al Maktoum (also Prime Minister of UAE), ruler of Dubai. The President and Vice President are elected every five years with no barriers on how many terms a person is allowed to be elected. Zayed has been serving as the President since the inception of the UAE. The President is chosen by the Supreme Council of the Union, which is composed of rulers of the seven emirates. As for Vice President/Prime Minister Maktoum, he took on the role of vice president upon his father’s (UAE’s previous and only Vice President) death in 1990. Together Zayed and Maktoum have effective veto power in the Federation Supreme Council.

There are no political parties in the UAE. Emirs (rulers) and their families are the most

important political sectors. This is particularly true in the emirates of Abu Dhabi and Dubai. For example, Vice President/Prime Minister Maktoum, ruler of Dubai, after the passing of his father, came to power and took the place of his father to serve in office. Another example is seen in the Zayed family. Sheikha Fatima bint Mubarak, wife of Sheikh Zayed, is the Chairperson of the General Women’s Union, whereas their son, Sheikh Ahmed bin Saeed Al Maktoum, leads Emirates Airlines. Zayed became the ruler of Abu Dhabi after his father, who took the reign from Zayed’s grandfather. This ruling family tradition is perhaps the strongest political element in the UAE.

Relations between the U.S. and the UAE have been a friendly from the beginning. The U.S. is

the third country to establish formal diplomatic relations with the UAE. Marcelle M. Wahba is the current U.S. ambassador to the UAE in Abu Dhabi. He comes from a long line of U.S. ambassadors that have served in the UAE since 1974. The UAE’s relationship with the U.S. includes security assistance and the shared commitment to security and stability of the Gulf region. This relationship is further strengthened by the link of petroleum. During the U.S. campaign to stop Iraq’s occupation of Kuwait, its relations with the UAE dramatically increased. Now the relations between the two countries are stronger than ever. Following the September 11th attacks in the U.S., the UAE severed its ties to the Taliban.

Since its inception, the UAE has been experiencing tremendous success. While the seven

emirates are very diverse in terms of culture and customs, their fate is tied into one. Most recently, Zayed, serving successfully as President of the UAE for the past thirty-six years, has been reelected to continue his reign as President in December 2001. He is known as “the wise man of the Arab world” with considerable influence in the region.

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Current Situation

The UAE’s attitude towards the Unites States and its intentions in the Middle East have been different between the times leading up to the United States’ air strike in mid-March and times after the beginning of the war. The UAE, a solid ally to the United States, lends its help by providing access to its airfields. The UAE also updated its air force bases with the purchase of advanced US F16 fighter jets. On March 1, 2003, the UAE became the first Arab nation urging Saddam Hussein to step down. President Zayed brought this proposal to the Arab summit in the Egyptian Red Sea Resort of Sharm el-Sheikh as an attempt to avoid American led war in the region and especially the extreme devastation it would cause the Iraqi people. President Zayed stated that this proposal is “a way out of this complicated and dangerous crisis”. However, the summit ended without formally considering the proposal. Other attempts for peace in the Middle East region by President Zayed include the telephone conversation between himself and President Bush. Although the call was initiated by Bush as part of his efforts to rally support for the disarmament of Iraq, President Zayed turned conversation into peace talks and diplomatic ways of resolving the issue. This clearly demonstrates the UAE’s effort for peace in the Middle East. This attitude of support for the U.S. has been slightly altered after the launch of air strikes against Saddam. In the weeks after the initial launch of air strike and other military means, Arabs in the UAE have come to feel anger and resentment against the US for its actions. To an extreme extent, some Arabs feel that the main victim of this war is the Arab-Muslim world and the main US target is the Islamic civilization. The Red Crescent Society of the UAE has provided relief materials to a number of Iraqi hospitals.

The UAE government has committed itself to promoting freedom of the press. However, self-censorship is practiced by many journalists for fear of sanctions. They particularly avoid subjects related to religion, morals, foreign relations or members of ruling families. This self-censorship has perhaps opened up due to the current situation in the Middle East. The people of the UAE, similar to the Americans at home, have been closely watching the most updated developments via satellite. Networks such as Abu Dhabi TV, Al Jazeera, BBC and CNN have become the provider of many war updates. Abu Dhabi TV has broadcasted major political events in the past month, such as the Iranian position on the war against Iraq.

Industry Analysis Airline Industry Overview

The airline industry operates in an environment where carriers are constantly pressured by government regulations, intense competition and high fixed costs. Approximately 80% of costs are fixed or semi-variable. Agency commissions, food and ticketing fees are the only costs that depend on the number of passengers traveling. Once a route structure is established and aircraft is determined, crew and staff size are permanent. Major cost components include labor, aircraft maintenance, debt

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servicing, fuel and aircraft delays. It is difficult for airlines to control many of these costs. Labor flexibility is limited because of union constraints, aircraft maintenance is necessary, and becomes increasingly expensive as each plane ages, debt costs average around 65% and fuel prices are generally uncertain. An airline can attempt to purchase new aircraft to avoid maintenance costs, but this in turn will drive up its debt liability. Similarly, although higher travel demand increases revenue, this demand creates airport congestion and greater air traffic control delays which negatively impact profitability.

Approximately twenty-three airlines operate in sixteen countries in the Middle East. Airlines in

this regions share similar needs for cost reduction. The most common areas include user charges, taxation, security, insurance and fuel. Another concern that aids in congestion is the restrictions posed on air space. In order to maximize revenues and capacity, airlines frequently calculate ratios such as load factor (passenger-kilometers expressed as a percentage of available seat-kilometers), revenue passenger kilometers (the number of revenue passengers carried on each flight stage by the flight stage distance) and available seat miles (the number of passenger seats available for sale on each flight stage by the stage distance). These numbers enable carriers to measure how effectively they are spreading their fixed costs.

Emirates Airlines directly competes with Middle East carriers such as Kuwait Airways, Gulf Air, Pakistan International, Qatar and Royal Jordanian Airlines, who service Dubai and other cities in the United Arab Emirates. If Emirates Airlines decides to expand a route from Dubai to New York, they will continue to compete with various Middle East airlines, as well as American, European and Asian airlines such as United, Northwest, British Airways and Malaysian Airlines.

Current Status Recently, the airline industry has been consumed with excessive loss, restructurings and bankruptcies. Despite a three billion dollar bailout package by the United States government, many companies continue to struggle and remain unprofitable. Besides the overall declining state of the global economy, events such as September 11th, the conflicts with Iraq, and the outbreak of Severe Acute Respiratory Syndrome (SARS) have escalated the troubles. Emirates Airlines, as well as other carriers which mainly conduct operations in the Middle East region, are predominately affected by the war in Iraq. Before the first Gulf war, the airline industry was experiencing healthier economic and financial conditions. For the five years prior to the War’s inception, the industry achieved $3.9 billion dollars in net profits and had sufficient cash reserves. Even though the industry was stable, it still incurred $13 billion dollars in losses and took four years to recover. Many jobs were cut and some medium-sized airlines declared bankruptcy. Airlines that survived these setbacks expanded during the 1990’s when the economy prospered and business travel significantly increased. The situation that surrounds the current war in Iraq poses greater threats because of the events that have already negatively impacted the airline industry. A slow economy coupled with September 11th, were the catalysts that propelled the industry into the poor state in which it presently operates. The current war poses larger problems, not only because its duration is unknown, but also because of the instability that exists within the industry. The direct effects of the war have been reduced passenger demand, less frequent route travel and restricted air space. Similarly, fuel costs have increased over

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100%. Since 2001, losses have accumulated to $18 billion, and conservative estimates project 2003 losses to be another 6.7 billion in revenue, 70,000 job cuts and 2,200 daily flights.

Competitors Pakistan International Airlines was established in 1954 when leading industrialist, Mr. M.A. Ispahani, who founded Orient Airways, merged his company with the state-owned airline. Its first international route was to London, via Cairo and Rome. PIA continued to expand its fleet and develop its business model, and sealed its success by boasting the fastest flight time between London and Karachi. Pakistan International Airlines grew throughout the 1990’s and adopted a new corporate image that represented change and modernity. PIA currently serves seventy destinations worldwide.

Gulf Air began in 1950 and operated as a small commuter service airline. British Overseas Air was the main shareholder until 1973 when the governments of Abu Dhabi, Bahrain, Qatar and Oman purchased BOAC’s shares. Gulf Aviation Company is recognized as the national carrier of the four states. In 1982, Gulf Air becomes the first airline that is able to land in Riyadh, and the following two decades are filled with growth. Gulf Air flies to approximately fifty destinations, with the majority of them located in the Middle East. Gulf Air coins itself as the national airline of Bahrain, Omar, and the UAE. Malaysian Airlines started as Malayan Airways in 1937 when the Ocean Steamship Company of Liverpool, the Straits Steamship Company of Singapore and Imperial Airways approached the government of the colonial straits settlement to run an air service between Penang and Singapore. It evolved into Malaysian Air when Malaysia was formed in 1963. Malaysia Airlines briefly partnered with Singapore Air, but split in 1971. Since then, the company has grown and currently has a fleet of ninety-five aircrafts and serves over 114 destinations. Malaysia Airlines is the only Airline that provides direct, non-stop service from New York to Dubai.

Dubai International Airport Dubai International Airport was established in 1959 by HH Sheikh Rashid bin Saeed Al Maktoum. The airport has grown from 9 airlines serving 20 destinations to over 100 airlines serving 140 destinations. In 1997, the Dubai Department of Civil Aviation launched a $540 million dollar expansion plan which has aided DIA in being the hub of the Middle East. About 13.5 million passengers traveled through Dubai International Airport in 2001, and projections for 2015 estimate that the number of travelers will rise to 51 million. Dubai has also implemented an open skies policy allowing any other competing airlines to fly into Dubai and directly compete with Emirates. This policy was put in place in order to increase traffic, especially tourism into Dubai so the economy could diversify and become less dependant on oil.

Internal Analysis Emirates Airline: A Brief History Emirates Airlines was created in order to drive the economy of Dubai, specifically through tourism. Since Dubai does not have as much oil as the other emirates, the rulers were determined to be

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less dependent on oil and decided to attract tourists and businesses to the city. Emirates proves its achievements by consistently earning higher profits than Gulf Air, which is partially owned by the government of Abu Dhabi and ha limited service to Dubai.

Emirates Airlines is a successful international airline launched in 1985 with services to 60 destinations in 42 countries throughout Europe, Middle East, Far East, Africa, Asia and Australia. Emirates Airlines, a part of the Emirates Group, started as a quality-effective airline, setting extremely high standards in its services to customers in each class. Its cabin crew composes people from over 80 nationalities for the purpose of providing a more comfortable setting for all of its customers. Over the years, Emirates Airline has demonstrated its distinct quality through the receiving more than 200 international awards of excellence. Emirates’ main hub is Dubai and recent new routes additions include Perth, Mauritius and Cochin.

The last ten years follows Emirates Airlines on its journey to success as it constantly expands,

utilizes technology, and overcomes obstacles of the industry. Destination additions in July 1992 included Paris, Rome, Zurich, and Jakarta. In November 1993, they expanded to the United States through a joint venture with United Airlines, which enabled customers to fly to the U.S. from Dubai by making a connection in London. In March 1994, it only had 15 planes and limited destinations, yet they were still receiving numerous passenger service awards. Emirates was the first Middle Eastern airline to win Air Transport World’s Passenger Service Award for 1992. In fact, it was the first airline to put personal video systems in each of the seats.

In March 1995, under the leadership of Chairman of the Board Sheikh Ahmed bin Saeed Al

Maktoum, the airline projected 5 million passengers for the year 2000. At this time, ten years after the company’s inception, Emirates was on the verge of launching a marketing campaign as “the finest in the sky” to portray themselves as an international airline based in the Middle East rather than just an Arabic airline that flies abroad. Emirates has overtaken Gulf Air and managed to stay successful despite increased competition from Dubai’s open skies policy. Open skies means that other airlines may fly freely into Dubai airspace and compete with Emirates; however, Emirates cannot fly directly into other Gulf States because of competition from other airlines. While Emirates was acquiring its third 777-200, Gulf Air was eliminating a large fraction of its fleet. Emirates is also supported by Dubai’s long-term goal of increased tourism. Emirates ensures that its planes are in their best shape before they are flown, and it also guarantees that its planes obtain a high utilization rate for a constant stream of revenue. The airline also has one of the youngest fleet of aircraft in the business, with an average age of just three years.

September 11th Situation

Emirates Airline shocked the airline industry by posting an 11% increase in net profits for 2001 despite the post-September 11th airline industry slump. Instead of accepting the unavoidable negative profits that would await them, their chairman pointed out, “We only briefly and marginally reduced our schedules, redoubled our efforts in our markets, severely restrained costs, and kept to our plans." They worked to garner the customers from their competitors who reduced their traffic to Dubai. In fact, if anything, Emirates is expanding at this time in order to support Dubai’s plans to increase its level of tourism by bringing 15 million tourists by 2010. Although the government of Dubai owns them, they do not receive any subsidies.

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Today, Emirates Airlines, in business for 18 years, has a reputation for its quality service and technological innovations. It is the world’s fastest growing airline as it doubles its size about every 3 years. In October 2002, it launched its first global advertising campaign. It has prospered due to Dubai being a commercial center despite the political unrest in its neighboring countries. It is constantly developing new routes including recent ones to Osaka, Moscow, and Shanghai. When other airlines reduce its service, Emirates is the one to expand. In such times as the 1991 Persian Gulf War, or recently regarding Pakistan and Afghanistan, Emirates Airlines increased service despite the presence of American forces pursuing terrorist groups. Currently, Emirates is planning to open a 13 ½ hour nonstop flight from Dubai to New York. Emirates will have to wait to see if the negative stigma attached with the Middle East will lower the successes of this new route.

Post September 11, when the majority of the airline industry experienced a severe decline

Emirates Airlines showed a profit. Also, when some airlines refused to serve Pakistan and Afghanistan last year, Emirates increased flight service to these countries. This strategy helped them remain profitable for the past two years, avoiding the industry trend. Also, as the Gulf War looms among the region today, Emirates has increased the number of flights to and from Dubai to service the increase in demand. The airline also announced in November of 2001 that it planned on buying 58 new aircraft; this was part of the expansion strategy. This announcement came at a time when many other airlines were taking planes out of service and reducing flights in response to plummeting passenger numbers worldwide. Outlook on Expansion

Emirates recently made a statement regarding its expansion plans to New York. Currently, they

plan on adding the daily nonstop, round-trip routes in April 2004 between JFK and Dubai, and they are also considering the additions of San Francisco, Chicago and Atlanta.

In the politically charged climate Emirates Airlines is increasing its number of flights to and from

Dubai. “The situation in the Middle East has been like this for the last ten years, it is nothing new to us and the airline has continued to grow because we are a proactive company,” says Emirates general manager of promotion, media relation and PR, Boutrous Boutrous. Currently Emirates is not seeing a decreasing trend in passenger traffic. In fact, the number of flights to Southeast Asia is increasing due to demand. Part of this increase in demand is attributed to the business from those airlines that are not flying to the Middle East due to the war in Iraq. Emirates ensures that they would not be flying if it were not absolutely safe. Also, the war has not had much effect on passenger traffic because Emirates does not fly directly to the United States.

The Dubai-New York route is scheduled to begin operations in April 2004. This appears to be a profitable investment for the firm; however, due to instability of the political climate in the Middle East, Emirates may consider postponing the date. Thus far, Emirates seems to be pursuing an effective growth and expansion strategy, especially when many of its competitors are suffering due to the industry deterioration. Their aggressive strategy and continued excellence have made them stand out in a time of uncertainty, especially since they are an internationally recognized and accomplished airline based in the Middle East. Therefore, Emirates’ management committee will not only have to grapple with the new route expansion decision, but also decide the optimal time to begin service.

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March 15, 2003 43. U.S. Department of State – www.state.gov 44. “Gulf Air Sees Strong First Quarter Earnings.” www.menafn.com 45. “Airlines Battle Three Deadly Forces.” www.the couriermail.com

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Teaching Note Solution Synopsis Emirates Airlines currently flies to over 55 destinations that span across Europe, Africa, Asia, and Australia. Given that this company has much room to grow, it is only natural that it considers expanding to North America. As a result, Emirates’ latest endeavor is to add a non-stop route from New York to Dubai as its first direct route to the United States. While this route was scheduled to begin in 2003, it has been postponed to April 2004 due to delayed aircraft shipments from Airbus. This delay, however, could actually prove profitable given the current turmoil in the Middle East. Given that the high volatility in passenger forecasts, we valued the addition of this route as a project and as a real option since Emirates may delay this route for one more year until 2005 when passenger growth forecasts may increase. Objectives This case serves as an example in valuing an airline and its project within an emerging market. It provides the student with an outlet to achieve many objectives. First, given the current state of the airline industry and the Middle Eastern region, it may be used as a discussion tool for evaluating the most volatile industry and its operations within the most unpredictable region of the world. In evaluating the risk and the cash flows of a project, one needs to take into account not only the risk of the firm and/or the country, but also the risk of industry as well as the region. This case provides a discussion on how to value the risk associated with a region engulfed in constant turmoil. This case may also be used to learn how to value a private equity firm. When a firm is not publicly traded or is not required to publish it annual reports, valuing this firm becomes quite a challenge. We conducted both a discounted cash flow valuation as well as a relative valuation to retrieve Emirates Airlines’ equity value. Students will learn how to choose comparable firms for a relative valuation, how to calculate an appropriate discount rate, and how to measure an appropriate risk factor for a firm that is not publicly traded. In addition, students will also gain some insight into multiple methods of valuation. Throughout this case, we cover discounted cash flow valuation of a firm, relative valuation of a firm, cash flow valuation as a perpetuity for a project, and a real option valuation for a project. Students may use this case to discuss appropriate valuation methods for firms and/or their projects as well as accounting for varied risk factors. A summary of the objectives is as follows: To study a volatile industry within a volatile region To learn how to value a private equity firm To study multiple valuation methods: discounted cash flow valuation, relative valuation, cash flow perpetuities, and real options (See Case document for discounted cash flow and relative valuation of firm.) Project Valuation

14

Calculating an appropriate discount rate In computing the discount rate for this project, we utilized many of the same inputs as the firm valuation but included a higher risk factor. The risk-free rate used was the EBOR rate of 2.93%. Using the return from the S&P IFCG index which contains the returns of major Middle Eastern markets, we then calculated a risk premium of 5.57%. The major element that we altered from the firm valuation was beta, our risk measurement factor. The beta of this project should be significantly higher than the risk of the firm given the high volatility in the industry and in the Middle Eastern market. The number of people flying to the Middle East has drastically declined due to the current war in Iraq, for example Qantas expects their bookings to fall by 15-20% while the war continues. To fuel this passenger decline, some airlines such as Alitalia and KLM have temporarily suspended flights to the Middle East. Therefore, Emirates is taking a huge risk in adding a route from the Dubai to New York. If passenger forecasts continue to decline, this project will continue to fall in value. The risk of a project is also strongly influenced by the risk of the industry of that project. In this case, the airline industry is one of the most volatile industries since the September 11th plane hijackings. Many airlines such as United Airlines have filed for bankruptcy due to a significant loss in revenue and reduced customer sentiment towards flying. Therefore, we decided to augment Emirates’ company of beta of 0.87 by approximately 60% increasing it to 1.37. This is a much more accurate measure of the risk in this industry and region. Taking into account the adjusted beta, we computed a final weighted average cost of capital for the project as 6.431%. Given the volatile state of the industry, it was calculated that the current constant average growth rate of passenger forecasts is approximately less than 1%. Using future passenger growth rates, we estimated that passenger forecasts would grow by 4.6% given high demand and by 1.6% given low demand. Determining the Cash Flows The next step in our project valuation involved projecting the future cash flows from Emirates adding a New York -- Dubai route to their destination list. In order to estimate revenues, we utilized one of Emirates’ closest competitors: Malaysia Airlines. This airline not only has a range of destinations very similar to Emirates, but it also currently has a non-stop route from Dubai to Newark. Therefore, we felt Malaysia would be the best company to use in estimating our cash flows. We determined the number of flights Malaysia flies along this particular route each year: 312 flights. We divided this by Malaysia’s total number of flights per year to find that this route encompasses about 0.55% of their total departures. We then multiplied this by Malaysia Airlines’ revenues to retrieve an estimate of the revenues for one year from a New York – Dubai route. Cost of goods sold and selling, general, and marketing expenses were estimated based on Emirates’ current route and cost structure. We determined the costs per route for Emirates as a percentage of revenues and applied this to the expected revenues from this new route. It would not be appropriate to also use Malaysia Airlines’ cost structure given that each company uses a different supply chain and would therefore not incur the same costs for the above-mentioned categories.

15

The capital expenditure figures were calculated using Emirates’ current fleet figures and the current cost of an Airbus A380-800 which will be the plane used for this new route. We determined the percentage of an airplane’s value utilized per route and multiplied this by the Airbus list price to determine our initial outlay. Net Present Value of Cash Flow Perpetuity After calculating the operating cash flows from running this route for one year, we divided this value by the difference between the discount rate and the growth rate to obtain the present value of the route. We then subtracted the initial investment of utilized percentage of the Airbus A380 to find a net present value of approximately -$28 million. Given that this value is negative, management’s decision should technically be to decide against adding a New York – Dubai route. Given low current passenger forecasts due to the war in Iraq and other factors, the cash flows are simply not enough to overtake the initial investment of a new aircraft which is the chief capital expenditure of this project. Real Option Valuation Based on the valuation of the project, it would appear that Emirates should abandon this new route. However, Emirates technically has the option to postpone adding New York to its destination list when passenger growth increases. The time frame of the current war in Iraq is very unclear as is the time frame of the recovery period. Therefore, if Emirates opened this route in April 2004 as planned, it will not produce a profit as is evidenced by the negative net present value of the project. However, we hypothesized that if Emirates delayed the project for one year and passenger growth increased as is projected by the International Air Transport Association, then it would be a much more valuable project to undertake. We then decided to analyze this case as a real option where the measure of volatility is the passenger growth rate. Given future forecasts, we speculated that if demand increased, the growth rate would rise to 4.6%, and if demand fell, the growth rate would decrease to 1.6%. We then conducted a binomial option pricing analysis to determine the value of this option to delay. We retrieved a net present value of about $22 million if Emirates delays the addition of this route, implying that Emirates should begin offering their New York – Dubai route in 2005 when passenger forecasts will have increased and consumer sentiment will have risen.

16

Emirates Airlines Valuation

Emirates Airlines is a private equity firm. The company was valued using relative and discounted cash flow methods. The firms chosen for the relative valuation compared to Emirates based on route structure and risk factors. These companies include United Airlines, Northwest, Malaysia Airlines, Air France, Singapore Air, Cathay Pacific, Korean Air, British Airways, Lufthansa and Delta. The Total Enterprise Value/Revenue, Total Enterprise Value/EBIT, and Market to Book Value ratios yielded Emirates Airlines’ equity to be between $258.41 and $437.93 millions of dollars. The outliers were the Price/Earnings ratio and the Total Enterprise Value/EBITDA ratio which yielded equity values of $829.29 million and $3.12 billion respectively. The discounted cash flow valuation was conducted to cross-reference the relative valuation. This yielded an equity value of $4.72 billion dollars. Margin analysis was used by calculating the revenue growth rates, as well as growth rates for other accounts, and cash flows were projected for five years, terminating in 2007. While $4.72 billion does not fall within the range calculated by the majority of the multiples in the relative valuation, it is very close to the equity value computed using the Total Enterprise Value/EBITDA multiple. These results are not surprising given that Emirates’ competitors incur a much higher risk factor and much lower cash flows. Therefore, it may be expected that a multiple analysis using relative valuation would produce a range of values significantly lower than a discounted cash flow valuation using firm-specific inputs. Clearly, the $4.72 billion equity value is a much more appropriate approximation given Emirates’ ability to overcome the high volatility of the airline industry. This value takes into account Emirates’ unsystematic risk as well as the volatility of its cash flows. The following spreadsheets demonstrate beta, risk premium, WACC, and credit rating determinations.

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Valuation Exhibits

Bond Spreads (In basis points over applicable Treasury instrument) As of March 28, 2003

Rating 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 30 yr

Aaa/AAA 43 53 62 71 85 95 105 Aa1/AA+ 47 58 67 81 95 105 120 Aa2/AA 53 63 72 86 110 115 130 Aa3/AA- 58 68 77 96 115 130 145 A1/A+ 63 78 87 106 130 145 165 A2/A 68 88 97 121 140 165 185 A3/A- 78 93 107 131 150 180 205

Baa1/BBB+ 98 113 127 146 170 195 220 Baa2/BBB 113 128 142 161 185 215 240 Baa3/BBB- 133 148 162 181 205 230 255 Ba1/BB+ 650 600 550 500 450 475 425 Ba2/BB 1000 950 900 700 650 750 600 Ba3/BB- 1300 1250 1150 1000 900 900 1000 B1/B+ 1500 1400 1300 1200 1100 1200 1250 B2/B 1600 1500 1400 1350 1250 1300 1400 B3/B- 1700 1600 1500 1400 1300 1350 1500

Caa/CCC 2300 2100 1900 1800 1600 1500 1600 Source: http://www.bondsonline.com/asp/corp/spreadtran.html

18

S&P/IFCG Indices

Price Index Total Return Index Market Feb. 2003 Jan. 2003 % Change % Change Feb. 2003 Jan. 2003 % Change % Change(Number of Stocks) (U.S. $) (U.S. $) Over Month Year-to-Date (U.S. $) (U.S. $) Over Month Year-to-Date

Mideast/Africa Bahrain (11) 81.62 84.91 -3.9 -4.6 100.24 104.28 -3.9 -4.6Egypt (52) 39.00 42.83 -8.9 -7.0 59.59 65.45 -9.0 -7.0Israel (50) 111.68 110.45 1.1 -0.4 128.04 126.44 1.3 -0.2Jordan (29) 167.67 176.83 -5.2 -2.1 303.77 320.38 -5.2 -2.1Morocco (19) 149.77 143.46 4.4 8.6 183.41 175.15 4.7 8.9Nigeria (31) 126.84 123.35 2.8 17.5 448.64 436.28 2.8 17.5Oman (27) 88.81 89.89 -1.2 2.6 111.34 112.69 -1.2 2.6Saudi Arabia (27) 124.20 127.14 -2.3 -1.2 156.00 156.68 -0.4 0.8South Africa (67) 179.98 179.90 0.0 -2.7 247.59 246.59 0.4 -1.9Zimbabwe (32) 2702.70 2110.93 28.0 70.8 8254.79 6438.95 28.2 71.2 Average Market Total Return 8.52% Source: http://www2.standardandpoors.com/spf/xls/index/IFCGmonthly.xls

Treasury Rate Emirates Bank Offer Rate (EBOR) 2.93% Source: www.eiu.com and United Arab Emirates Central Bank

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Altman Z-Scores for Emirates Dirhams (AED 000's) 3/31/2002 Total Assets 11,784,325 Total Current Assets 5,232,973 Total Current Liabilities 2,779,039 Retained Earnings 2,593,000 EBIT 625,794 Book Value of Equity 2,820,931 Total Liabilities 8,798,500 Working Capital 2,453,934 3/31/2002 X1 = Working Capital/Total Assets 20.824% X2 = Retained Earnings/Total Assets 22.004% X3 = EBIT/Total Assets 5.310% X4 = BV of Equity/Total Liabilities 32.061% 3/31/2002 Model 1: EM Score 6.0268638 EM Score Bond Rating 2002 6.026 BBB+ 3/31/2002 Tax Rate 2.6% Based on Altman Z-Score Model Default Spread (5 years, BBB+) 0.0146 + 5 Year Treasury Yield 0.0293 Pre-Tax Cost of Debt 0.0439 * (1 - Marginal Tax Rate = 2.6%) 0.974 After-Tax Cost of Debt 4.2759%

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Calculation of Beta Company Ticker Levered Market Value Market Value Debt/Equity Beta Debt (000s) Equity (000s) UAL UAL 1.92 10,152,000 54,924 184.8358162 Northwest NWAC 1.68 6,982,000 631,731 11.05217462 Malaysia MAS 1.58 1,128,347 1,174,092 0.961038497 Air France 3/02 AF 1.33 4,500,352 2,274,013 1.979035528 Cathay Pacific 12/01 0293 HK 0.67 4,846,318 4,877,612 0.993584114 Korean Air 12/01 0349 KS 1.51 902,828 691,580 1.305456982 British Airways 3/02 BAB 1.63 10,708,000 2,014,684 5.314977436 Singapore 3/02 SIAL 0.77 1,104,459 3,721,980 0.296739559 Lufthansa DLAKF 1.01 4,194,060 3,319,920 1.263301525 Delta DAL 1.59 10,369,000 1,174,330 8.829715066 Average 1.308 3.555 Marginal Tax Rate 2.6% Unlevered Beta (? U) 0.29304758 Emirates Debt/Equity 2.029 Imputed Beta for Emirates 0.87209365

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Cost of Capital Using Built-Up Beta

(Cost of Debt using Altman Model) Imputed Levered Beta (?) 0.872094

* Risk premium (Rm-rf) 0.0557

+ Yield on EBOR Treasury Bond (rf) 0.0293

Cost of Equity (kE) 0.077876 * Weight for Equity 0.3429 MV Weighted Equity 0.0267

After-tax Cost of Debt (kD) 0.0428 * Weight for Debt 0.6571 MV Weighted Debt 0.028098 MV Weighted Equity 0.0267 + MV Weighted Debt 0.028098 After-tax WACC using MV weights 5.4799% Risk free rate: 2.93% Return on Market 8.52% Debt 65.71% Equity 34.29%

22

Margin Analysis

Emirates Airlines 2002 2001 Dirham (AED 000's) Total Current Assets 5,232,973 3,214,633 - Cash 3,124,392 1,448,367 -Held-for-trading Investments 27,434 ________ Noncash Current Assets 2,081,147 1,766,266 Total Current Liabilities 2,779,039 2,458,380 -Borrowings and Lease Commitments 546366 457,725 Nondebt Current Liabilities 2,232,673 2,000,655 Noncash Current Assets 2,081,147 1,766,266 - Nondebt Current Liabilities 2,232,673 2,000,655 Noncash Working Capital (NWC) -151,526 -234,389 Margin Analysis 2002 2001 Mean Median Cost of Goods Sold/Sales 3.03% 2.55% 2.79% 2.79% SGA/Sales 69.1% 69.7% 69.39% 69.39% EBITDA/Sales 16.3% 18.6% 17.44% 17.44% EBIT/Sales 8.6% 10.4% 9.49% 9.49% Net Working Capital/Sales -2.1% -3.7% -2.87% -2.87% CapEx/Sales 11.5% 3.7% 7.57% 7.57% Income Tax/Income Before Tax 2.6% 2.2% 2.44% 2.44% Percentage Change 2002 Revenue Growth 13.36% EBIT -5.99% Depreciation 9.31% CapEx 11.50%

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Discounted Cash Flow Valuation

Assumptions Dirhams (AED 000's)

Revenues (LTM) 7,274,700 EBIT (LTM) 625,800 Depreciation & Amortization (LTM) 1,187,463 Noncash Working Capital (LTM) -151,526 Capital Expenditures (CapEx) (LTM) 833,966 Cash and Marketable Securities (LTM) 3,151,826 Cost of Goods Sold/Revenues 3% SGA/Revenues 69.1% Growth rate in revenue 13.4% Growth rate in depreciation & amortization 6.97% CapEx/Revenues 11.5% Marginal tax rate (?) 2.6% Noncash Working Capital/Revenue -2.1% After tax WACC using Built-up Beta (MV weights) 5.4799% Stable Growth Time (Year) 0 1 2 3 4 5 2002 2003 2004 2005 2006 2007 Revenues 7,274,700 8,246,527 9,348,180 10,597,002 12,012,655 13,617,425Less: Cost of Goods Sold 220,627 250,101 283,511 321,386 364,320 412,989Gross Profit 7,054,073 7,996,426 9,064,668 10,275,616 11,648,335 13,204,436Less: Selling, general, and admin (SGA) 5,240,810 5,698,358 6,459,601 7,322,539 8,300,757 9,409,654EBITDA 1,813,263 2,298,068 2,605,067 2,953,077 3,347,579 3,794,781Less: Depreciation and Amortization 1187463 1,270,229 1,358,764 1,453,470 1,554,777 1,663,145EBIT (Unadjusted) 625,800 1,027,839 1,246,302 1,499,607 1,792,802 2,131,637*(1 - Marginal Tax Rate) 0.974 0.974 0.974 0.974 0.974 0.974EBIT*(1-?) 609,529.20 1,001,115 1,213,899 1,460,618 1,746,189 2,076,214 Noncash Working Capital (NWC) -151,526 171,768 194,715 220,727 250,214 283,640Change in Noncash Working Capital (? NWC) 82,863 323,294 22,947 26,012 29,487 33,426 EBIT*(1-?) 609529.2 1,001,115 1,213,899 1,460,618 1,746,189 2,076,214+ Depreciation 509,729 545,257 583,262 623,915 667,402 713,920

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- Capital Expenditures (CapEx) 833,966 945,375 1,071,668 1,214,832 1,377,121 1,561,091- Change in Noncash Working Capital (? NWC) 82,863 323,294 22,947 26,012 29,487 33,426Free Cash Flow to the Firm (FCFF) 202,429 277,702 702,546 843,688 1,006,982 1,195,617Terminal Value in Year 5 21,818,320 Free Cash Flow to the Firm (FCFF) 277,702 702,546 843,688 1,006,982 1,195,617+ Terminal Value @ EOY5 21,818,320Total Cash Flows to Firm 277,702 702,546 843,688 1,006,982 23,013,936 After tax WACC (MV weights) 5.4799% 5.4799% 5.4799% 5.4799% 5.4799%1+WACC(MV weights) 1.055 1.055 1.055 1.055 1.055Cumulative Product of [1+WACC(MV weights)] 1.055 1.112600403 1.173569514 1.237879657 1.305713914PV Factor based on MV (1/Cumulative Product) 0.948048147 0.898795288 0.852101207 0.80783297 0.76586455 Total Cash Flows to Firm 277,702 702,546 843,688 1,006,982 23,013,936* PV Factor based on MV 0.948048147 0.898795288 0.852101207 0.80783297 0.76586455PV of Cash Flows to Firm 263,275 631,445 718,908 813,474 17,625,558Value of Op Assets (using MV WACC) (in 000s) 20,052,659 + Cash and Equivalents 3,151,826 Value of Firm (using MV WACC) (in 000s) 23,204,485 - Firm's Debt 5,722,799 PV of Equity (AED 000's) 17,481,686 PV of Equity (USD 000's) 4,720,055Exchange Rate: $.27/AED

Sensitivity Analysis of WACC and Revenue Growth Rate Revenue

Growth Rate $4,720,055.25 10% 11% 12% 13% 14% 3.5% 5,997,041.62 6,579,658.49 7,182,554.23 7,806,259.96 8,451,316.02 4.0% 5,123,460.64 5,627,576.31 6,149,170.27 6,688,699.35 7,246,628.30

WACC 4.5% 4,444,566.44 4,887,724.81 5,346,188.20 5,820,355.81 6,310,633.78 5.0% 3,901,941.17 4,296,420.70 4,704,470.99 5,126,445.27 5,562,702.91 5.5% 3,458,410.15 3,813,138.64 4,180,022.79 4,559,378.37 4,951,526.58 6.0% 3,089,190.53 3,410,862.06 3,743,513.45 4,087,429.32 4,442,899.22 6.5% 2,777,125.22 3,070,887.49 3,374,637.80 3,688,634.52 4,013,140.52

25

7.0% 2,509,959.35 2,779,855.56 3,058,892.48 3,347,306.07 3,645,336.38 7.5% 2,278,706.25 2,527,969.67 2,785,641.97 3,051,939.80 3,327,083.52 8.0% 2,076,626.07 2,307,882.54 2,546,909.89 2,793,907.90 3,049,079.79 8.5% 1,898,564.99 2,113,975.91 2,336,596.88 2,566,612.90 2,804,212.11 9.0% 1,740,514.63 1,941,880.18 2,149,959.23 2,364,923.67 2,586,948.36 9.5% 1,599,310.62 1,788,145.82 1,983,252.06 2,184,789.57 2,392,921.33 10.0% 1,472,421.58 1,650,013.38 1,833,479.67 2,022,970.26 2,218,637.48

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Economic Value Added Durham's (AED 000's)

Book Value of Equity (LTM) 2,820,931+ Book Value of Debt (LTM) 5,722,799BV of Total Capital (LTM) 8,543,730 Percentage Weights BV of Equity/ BV of Total Capital 33.02%BV of Debt/BV of Total Capital 66.98% Cost of Equity 7.79%After tax Cost of Debt 4.28% After tax WACC 5.4353%Marginal Tax Rate 2.6% LTM EBIT(1-?) (LTM) 609,529After tax WACC 5.4353%BV of Total Capital (LTM) 8,543,730EVA (AED 000) 145,149EVA ($000) $ 39,519.61

Relative Valuation

Total Dollar Amounts in Millions of Dollars Total Enterprise Value (TEV) Multiples

Equity Total 2002 2002

Market Total Enterprise TTM TTM TTM TTM TTM

Company Name Ticker Value (mill) Debt Value Revenue EBITDA EBIT Revenue EBITDA

UAL UAL $ 54.92 $ 10,152.00 $10,206.92 $ 13,767.00 $ (780.00) $ (2,646.00) 0.7 NMFNorthwest NWAC $ 631.73 $ 6,982.00 $ 7,613.73 $ 9,489.00 $ 57.00 $ (846.00) 0.8 133.57423Malaysia MAS $1,174.09 $ 1,128.35 $ 2,302.44 $ 2,204.71 $ 86.54 $ (204.38) 1.0 26.606785Air France 3/02 AF $2,274.01 $ 4,500.35 $ 6,774.36 $ 11,616.46 $ 1,186.96 $ 297.17 0.6 5.7073234Cathay Pacific 12/01 0293 HK $4,877.61 $ 4,846.32 $ 9,723.93 $ 4,243.46 $ 683.41 $ 609.14 2.3 14.228568Korean Air 12/01 0349 KS $ 691.58 $ 902.83 $ 1,594.41 $ 4,276.12 $ 473.90 $ 157.38 0.4 3.3644619

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British Airways 3/02 BAB $2,014.68 $ 10,708.00 $12,722.68 $ 11,887.00 $ 940.00 $ (157.00) 1.1 13.53477Singapore 3/02 SIAL $3,721.98 $ 1,104.46 $ 4,826.44 $ 4,970.76 $ 949.80 $ 597.43 1.0 5.0815354Lufthansa DLAKF $3,319.92 $ 4,194.06 $ 7,513.98 $ 17,602.40 $ 2,971.93 $ 1,669.00 0.4 2.5283166Delta DAL $1,174.33 $ 10,369.00 $11,543.33 $ 13,305.00 $ 2,457.00 $ 1,309.00 0.9 4.69814 *NMF - Not meaningful figure Mean 0.9 9.5 Median 0.8 5.4 StDev 0.5 8.2 Max 2.3 26.6 Min 0.4 2.5 Emirates Airlines $ 1,558.15 $ 1,980.68 $ 493.70 $ 170.39 $ 1,980.68 $ 493.70

Emirates Airlines Implied Equity Valuation Mean Equity Value ($USmillions) $ 258.41 $3,116.54 Median Equity Value ($USmillions) $ 95.69 $1,105.07

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Peer Group

Exchange Revenues EBIT EBITDA BV Equity BV of Debt Net Income Beta Price

Company Ticker Currency Rate $/FC (mil) (mil) (mil (mil) (mil)

UAL UAL USD $13,767.00 $(2,646.00) $ (780.00) $ 1,306.00 $ 10,152.00 $ (2,048.00) 1.92 $ 0.83

Northwest NWAC USD $ 9,489.00 $ (846.00) $ 57.00 $ (2,036.00) $ 6,982.00 $ (798.00) 1.68 $ 7.36

Malaysia MAS Ringitt 0.2631579 $ 2,204.71 $ (204.38) $ 86.54 $ 1,647.31 $ 1,128.35 $ (219.89) 1.58 $ 0.94

Air France 3/02 AF Euros 1.0483 $11,616.46 $ 297.17 $1,186.96 $ 4,315.85 $ 4,500.35 $ 190.75 1.33 $ 10.35

Cathay Pacific 12/01 HKD 0.12824 $ 4,243.46 $ 609.14 $ 683.41 $ 4,118.43 $ 4,846.32 $ 510.78 0.67 $ 1.46

Korean Air 12/01 0349 KS Korean Won 0.0008363 $ 4,276.12 $ 157.38 $ 473.90 $ 2,558.65 $ 902.83 $ 444.45 1.51 $ 9.70

British Airways 3/02 BAB USD $11,887.00 $ (157.00) $ 940.00 $ 2,873.00 $ 10,708.00 $ (202.00) 1.63 $ 18.62

Singapore 3/02 SIAL SGD 0.5765 $ 4,970.76 $ 597.43 $ 949.80 $ 6,042.01 $ 1,104.46 $ 732.39 0.77 $ 3.06

Lufthansa DLAKF USD $17,602.40 $ 1,669.00 $2,971.93 $ 4,324.45 $ 4,194.06 $ 751.42 1.01 $ 8.70

Delta DAL USD $13,305.00 $ 1,309.00 $2,457.00 $ 5,577.00 $ 10,369.00 $ (1,287.00) 1.59 $ 9.52

Emirates AED 0.27227

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Preliminary Calculations for Dubai - New York Route Valuation Assumptions Price of Airbus A380 $ 250,000,000.00 as of Jan. 2003 Depreciation expense for 15-year useful life $ 16,666,666.67 Malaysia's flights for Newark - Dubai 312 Malaysia's total number of flights 56,750 Percentage of flights for Newark route 0.005498 Malaysia's revenues for 2002 (Ringitts) 7,721,637,821 Malaysia's revenues for Newark route (Ringitts) 42,452,000 Sales projection in US$ for New York route $ 11,171,578.95 Emirates' Number of aircraft 38 Emirates' Number of routes 43 Initial Investment of aircraft given percentage of planes to routes $ 220,930,232.56 Malaysian Ringitt 0.263157895 UAE Dirham 0.27227 Emirates operating costs breakdown 2002 AED’000 Cost per route Employee (see (a) & (d) below) 1,290,796 $ 8,173.14 Fuel and oil 830,135 $ 5,256.30 Sales and marketing 810,979 $ 5,135.01 Aircraft operating leases (see (b) below) 702,370 $ 4,447.31 Handling (see (c) below) 444,986 $ 2,817.59 Inflight catering 392,506 $ 2,485.29 Overflying (see (c) below) 232,712 $ 1,473.50 Cost of goods sold 220,627 $ 1,396.98 Aircraft maintenance 196,805 $ 1,246.14 Landing and parking (see (c) below) 149,246 $ 945.00 Corporate overheads (see (e) below) 678,660 $ 4,297.18 6,511,485 $ 37,673.44 --> annual cost projection for new route WACC Calculation Tax rate 2.60%

30

Risk-free rate 2.930% + 5- year default spread BBB+ 1.460% After-tax cost of debt 4.276% Risk Premium 5.570% Beta 1.370 Cost of Equity 10.561% Debt weight 0.6571 Equity weight 0.3429 WACC 6.4310%

31

Dubai - New York Route Valuation Assumptions Passenger Growth Rate Forecasts

2002 -11.00%2003 1.60%2004 3.10%2005 4.60%2006 4.60%

Source: International Air Transport Association 5-year constant average passenger growth rate 0.58%Tax rate 2.60%WACC 6.43% Project Valuation using Cash Flow Perpetuity Sales $ 11,171,578.95 - Costs $ 37,673.44 - Depreciation $ 16,666,666.67 EBIT $ (5,532,761.16) * (1-t) 97.40%EBIT (1-t) $ (5,388,909.37) + Depreciation $ 16,666,666.67 Incremental OCF $ 11,277,757.29 Perpetuity Calculation = FCFF/(WACC - g) = 11,277,757.29 (6.43% - 0.58%) Present Value of Cash Flows $ 192,749,220.28 Initial Investment $ 220,930,232.56 Net Present Value $ (28,181,012.28)

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Option Valuation Begin operating New York Dubai route now or delay for one year

Time 0 Time1 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 $0.00NPV 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.

Risk Neutral Probability of a Rise =( (1.0293)*11,451,268.08)-11749001.05) 0.17 11,978,026.41-11,749,001.05 Initial investment $(220,930,232.56)

33

High growth 4.60% Low growth 2.60% Average 3.10% WACC 6.4310%

34

Macroeconomic Exhibits

United Arab Emirates Current 2002 Data Population (millions) 3.50 Major Cities Abu Dhabi (capital), Dubai, Sharjah Age: 0-14 years 27.70% 15-44 years 69.70% 45 years and over 2.60%Population Growth 1.58%Literacy 79.20%Total Labor Force (millions) 1.6Unemployment 2.40%Wage Rate (monthly) Dh8,000 (college grads), Dh5,000 (HS grads) GDP ($US billions PPP) $ 51 GDP Per Capita ($US PPP) $ 21,100 GDP Growth Rate (Real) 5.60%Inflation 4.50%Currency Emirati dirham (AED)Exchange Rate (Per $US) 3.6725Government Structure Federation Leader President Zayid bin Sultan Al Nuhayyan External Debt ($US billions) $ 12.60 Short -term Interest Rate 6.23%Current Account Balance ($US billions) $ 19 Highways (Total/Paved) (km) 4835Shipping Ports Ajman, AlFujayrah, Das Island **Source: CIA World Factbook 2002

35

Middle East Comparison Data (2000-2002) IRAN - Selected series from 2000 to 2002

Series Name Unit 2000 2001 2002 GDP (% real change pa) % 5.198 4.965 5.7 Nominal GDP (US$ at PPP) mil USD 445788.8 478977.9 512711 Exchange rate LCU:US$ (av) IRR/USD 8077.6 7921.5 7937 Stockmarket index X 2978.26 n.a. n.a. Change in $ value of stockmarket index (% pa) % 35.018 n.a. n.a. Population million 63.66 64.53 65.5 GDP per head USD 1,106 1,302 1,700 IRAQ - Selected series from 2000 to 2002

Series Name Unit 2000 2001 2002 GDP (% real change pa) % 4 -6 -4.5 Nominal GDP (US$ at PPP) mil USD 81211 78142 74626 Exchange rate LCU:US$ (av) IQD/USD n.a. n.a. n.a. Population million 22.95 23.58 24.22 GDP per head USD 1,380 1,180 1,060 QATAR - Selected series from 2000 to 2002

Series Name Unit 2000 2001 2002 GDP (% real change pa) % 7.2 5.2 3.4 Nominal GDP (US$ at PPP) mil USD 17241 18566 19437 Exchange rate LCU:US$ (av) QAR/USD 3.64 3.64 3.64 Stockmarket index X n.a. n.a. n.a. Average real wage index (LCU, 1996=100) X n.a. n.a. n.a. Average real wages (% change pa) % n.a. n.a. n.a. Change in $ value of stockmarket index (% pa) % n.a. n.a. n.a. Population million 0.57 0.6 0.61 GDP per head USD 28,874 26,940 28,450 SAUDI ARABIA - Selected series from 2000 to 2002

36

Series Name Unit 2000 2001 2002

GDP (% real change pa) % 4.857 1.186 0.6 Nominal GDP (US$ at PPP) mil USD 227977.3 236132.3 240503 Exchange rate LCU:US$ (av) SAR/USD 3.745 3.745 3.745 Stockmarket index X 225.8 260 280 Population million 20.35 21.03 21.7 GDP per head USD 9,274 8,870 8,510 UNITED ARAB EMIRATES - Selected series from 2000 to 2002

Series Name Unit 2000 2001 2002 GDP (% real change pa) % 6.9 1.3 2.4 Nominal GDP (US$ at PPP) mil USD 49585 53006 53695 Exchange rate LCU:US$ (av) AED/USD 3.6725 3.6725 3.673 Population million 3.108 3.29 3.48 GDP per head ($ at PPP) USD 22,602 20,520 20,110 Middle East Comparison Data 2002 Iran Iraq Qatar Saudi Arabia GDP (% real change pa) (2000-2002 average) 5.288 -2.167 5.267 2.214

Nominal GDP (US$ at PPP) 512,711

74,626

19,437

240,503

Population (millions) 65.5 24.22 0.61 21.7

GDP per head 1,700 1,060 28,450 8,510 Oil -- % of GDP 30% 45%Oil -% of government revenues 72% 75% Oil -% of exports 85% 95% 80% 90% Trade Policy, export to Japan, Italy, UAE, US, Italy Japan, Singapore, UAE US, Japan, South Korea, Japan, India, Singapore, France, China France Spain South Korea, US Singapore, India South Korea, Oman, IranTrade Policy, import from Germany, Italy, France, Australia, UK, Japan, Germany US, Japan, Japan, UK, US, Italy, China, Japan, UAE China, Russia , Italy, US Germany, UK Germany, South KoreaLiteracy Rate, 2002 72.10% 58% 79% 78% **Source: EIU Country Data

37

Population (millions)

0

10

20

30

40

50

60

70

Iran Iraq Qatar Saudi Arabia UAE

38

Change in GDP (%)

-3.000

-2.000

-1.000

0.000

1.000

2.000

3.000

4.000

5.000

6.000

Iran Iraq Qatar Saudi Arabia UAE

39

GDP per Capita (USD)

-

5,000

10,000

15,000

20,000

25,000

30,000

Iran Iraq Qatar Saudi Arabia UAE

UAE Population (millions)

0

0.5

1

1.5

2

2.5

3

3.5

4

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

40

UAE Population Growth (%)

-4

-2

0

2

4

6

8

10

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

UNITED ARAB EMIRATES - Economic Data 1992 - 2003

Series Name Unit 1992 1993 1994 1995 1996 1997 1998 1999 GDP (% real change pa) % 2.69 -0.9 6.5 6.7 5.9 8.1 1.1 3.7Nominal GDP (US$ at PPP) mil USD 34383 34073.5 36288.3 38719.6 41313.8 43751.3 47295.2 47815.4Real GDP mil AED 130535.8 129361 137769.4 147000 155673 168282.5 170133.6 176428.6Real GDP (PPP US$ at 1996 prices) mil USD 34643 34331 36562 39012 41314 44660 45152 46822Real GDP (US$ at 1996 prices) bil USD 37.392 37.056 39.464 42.108 44.593 48.205 48.735 50.538Private consumption (% of GDP) % 44.538 44.215 45.097 47.143 45.449 47.572 53.134 46.691Exports of G&S (% of GDP) % 70.769 75.402 77.86 74.422 76.848 70.971 67.37 62.222Imports of G&S (% of GDP) % 57 66.897 70.282 67.347 64.692 62.196 67.37 52.532Domestic demand (% of GDP) % 86.231 91.494 92.422 92.925 87.844 91.225 100 90.31Gross national savings rate (%) % 39.1 50.2 32.6 32.8 40.3 39.5 35.5 37Gross national savings/investment % 161.9 170.9 111.2 115.2 152.7 140.3 117.9 139.7Agriculture/GDP % n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Industry/GDP % n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Services/GDP % n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

41

Petroleum production (b/d) th b/d 2290 2170 2220 2200 2227.5 2280 2300 2115Petroleum reserves (barrels) mil barrels 98100 98100 98100 98100 98100 97800 97800 97800Consumer prices (% change pa; av) % 6.825 4.703 5 4.4 2.589 2.035 1.994 2.1Exchange rate LCU:US$ (av) AED/USD 3.671 3.671 3.671 3.671 3.671 3.67112 3.6725 3.6725Lending interest rate (%) % 0 0 7.6 7.58 9.7 9.5 9 10.6Exchange rate LCU:$ (end-period) AED/USD 3.671 3.671 3.671 3.671 3.671 3.6725 3.6725 3.6725Real effective exchange rate X 95.294791 91.434823 87.512858 83.110659 91.051675 100 113.2 103.7Public debt bil USD 2.608008717 7.180849905 6.854862435 6.653255244 4.376382457 5.191204901 6.728304969 8.895820286 9.229680054Public debt (% of GDP) % 7.365 20.2 18.696 16.615 9.814 10.521 14.476 15.351Money market interest rate (%) % 3.65 2.67 4.309 5.682 5.176 5.445 4.4 5.26Consumer price index (av) X 112.7 118 123.9 129.352 132.7 135.4 138.1 141Consumer price index (1996=100; av) X 84.928 88.922 93.369 97.477 100 102.035 104.069 106.255Consumer price index (end-period) X n.a. 120.95 126.626 131.026 134.05 136.75 139.55 142.25Population million 2.16 2.1 2.29 2.31 2.44 2.62 2.78 2.94

GDP per head USD 16,395 16,928 16,011 17,335 18,276 18,839 16,720 19,710Population (% change pa) % 3.349 -2.778 9.048 0.873 5.628 7.377 6.107 5.755Labour force million 0.77 0.86 0.941 1.074 1.27 1.35 1.41 1.54Private consumption per head USD 7302 7484.7 7220.5 8172.2 8306.1 8962.1 8883.8 9202.9Real GDP growth per head (% pa) % -0.638 1.931 -2.336 5.776 0.258 0.673 -4.719 -1.944Current account balance/GDP % 14.9 20.8 3.3 4.3 13.9 11.3 5.4 10.5Inward direct investment bil USD 0.111 0.111 0.062 0.399 0.13 0.1 0.1 0.16International reserves bil USD 5.8938 6.2862 6.8405 7.6526 8.2383 8.5536 9.2584 10.7658Current-account balance bil USD 5.292 7.4 1.2 1.734 6.2 5.6 2.5 6.1Goods: exports fob bil USD 24.271 26.8 27 30.434 37.3 40.5 33.8 36.5Goods: imports fob bil USD -15.827 -21 -24.1 -26.9 -26.9 -30 -28.7 -27.9Trade balance bil USD 8.444 5.8 2.9 3.534 10.4 10.5 5.1 8.6IMF credit bil USD 0 0 0 0 0 0 0 0Change in international reserves bil USD -0.3467 -0.3924 -0.5543 -0.8121 -0.5857 -0.3153 -0.7048 -1.5074Foreign-exchange reserves bil USD 5.7118 6.1037 6.6588 7.4709 8.0555 8.3723 9.0771 10.6751Gold, national valuation bil USD 0.182 0.1825 0.1817 0.1817 0.1828 0.1813 0.1813 0.0907Capital flight bil USD -5.777 -6.989 -2.726 1.263 -7.183 -6.748 -7.518 -5.324Total foreign debt bil USD 10.983 10.963 13.401 10.827 10.876 12.349 18.172 18.923Public medium & long-term bil USD 2.608 3.821 3.434 3.17 1.545 2.713 3.265 4.614Private medium & long-term bil USD 0 0 0 0 0 0 0 0IMF debt bil USD 0 0 0 0 0 0 0 0Short term bil USD 8.375 7.142 9.967 7.657 9.331 9.636 14.907 14.309Net debt bil USD 5.0892 4.6768 6.5605 3.1744 2.6377 3.7954 8.9136 8.1572Total foreign debt service, paid bil USD 0.948 0.791 1.409 1.146 1 0.968 1.633 1.612

42

Short-term debt (interest only) bil USD 0.365 0.293 0.458 0.659 0.55 0.593 0.749 0.937IMF debits bil USD 0 0 0 0 0 0 0 0Total exports fob bil USD 24.2713 23.6448 27.3849 29.1719 35.116 38.829 34.029 40.4Export 1 bil USD 14.0561 12.122 11 11.8 14.2 14.41 9.623 12.893Tourism receipts bil USD 24.2713 23.6448 27.3849 29.1719 33.596 33.999 31.071 36.474Export market 1 (% share) % 38.931 38.499 38.596 38.39 37.773 35.795 29.294 29.124Import market 1 (% share) % 8.849 9.155 8.671 8.402 11.017 11.276 10.082 8.524Export 1 (% share) % 57.912 51.267 40.168 40.45 40.4 37.1 28.3 31.9 **Source: Economist Intelligence Unit

UAE GDP (US millions)

0

10000

20000

30000

40000

50000

60000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

43

UAE Change in GDP (%)

-2

-1

0

1

2

3

4

5

6

7

8

9

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

44

UAE GDP Per Capita (USD)

0

5,000

10,000

15,000

20,000

25,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

45

UAE Exchange Rate (AED/USD)

3.67

3.6705

3.671

3.6715

3.672

3.6725

3.673

3.6735

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

46

UAE Interest Rates

0

2

4

6

8

10

12

1994 1995 1996 1997 1998 1999 2000 2001 2002