Abstract
Emirates Airline is one of the leading international airlines that offer multiple services to the international passengers. It is the largest airline of Middle East in terms of its revenue, profitability and the number of passengers. Its profit has been increasing over the last many years and reached to $1.5 billion in 2015. Despite of its success, to maintain and further grow its profitability and revenue, Emirates airline is needed to focus on the information, analysis and assessments of the factors that can impact its business performance. These factors might include the increasing competition, regulations of IATA, fluctuation in oil prices, charges of fuel and airport charges. On the basis of the significant nature of Management Accounting, Activity-based Costing and Sensitivity Analysis techniques are recommended to abstract the important information for the future strategic planning and decisions, keeping the affecting factors and their influence in mind.
Background of the company
Emirates Airline is one of the leading international organizations with the business interest in aviation, leisure business and travel and tourism. It is one of the largest airlines based in Dubai, UAE. It operates more than 3,300 flights in a week from its hub airport of Dubai International. It is one of the largest networks of airlines operating in more than 78 countries and more than 148 cities. It is the largest airline of Middle East Region while included in the top largest airlines of the world in terms of its revenue, passengers and size of the fleet (Ropaza, 2014).
Emirates Airline provides the best airline services to the international passengers. Its services include transportation and travelling service, fly catering service, accommodations for young flyer, entertainment at flight and first class lounges (Bloomberg, n.d.). Other than the biggest airline, it is also considered as the largest employer in its region, employing more than 62,000 employees in its 50 units of business and associated companies. Emirates expanded its business in each and every aspect of the travel and tourism business field to achieve competitive advantage and become the leading organization in the world (The Emirates Group, 2016).
The company is making progress every year in terms of increasing its revenue and profit. In 2015, the company has announced the ever highest revenue of $2.8 billion. Over the period of 27 years, emirates organization has been making profit. According to the company’s statement, 60% of the revenue comes from its international business. The company has made the profit of $1.5 billion. Although, the company has made a significant profit, it has faced a number of problems, risks and challenges in its international operation over the same period of time (Emirates, 2015).
As Emirates is an international airline, therefore, the all the international airlines such as British Airway, American Airline, AirAsia, Easyjet are included in the list of competitors of Emirates Airline. However, Etihad and Qatar airlines are the major competitors because of the major hub in Middle East. Although, Emirates is successful in the Middle East, however, the growing services and connecting opportunities to its competitors can impact its performance and profitability in the coming years (CAPA, 2014).
In addition to this, the role of the IATA is very important as it directly influences the cost and consequently the profits of the business through its consistently evolving regulations. For instance, regulatory charges from IATA, price of oil, and charges from airports are factors that affect the business costs and its resulting profitability (IATA, 2010). With these factors at affect, the management at the Emirates Airline like any other airline, needs to integrate the impact of these factors in its overall cost assessment for sustaining and improving its profits.
Review of management accounting (nature and role)
Management accounting is one of the most considerable terms used in the economics. It can be studied or viewed as the accounting that is oriented to the management. It can simply be defined as the accounting in relations with the functions of management. It helps in determining the role of accounting in the activities of the management and different from the financial management (Malik, n.d.). The accounting management is considered as responsible for designing the system of accounting to serve the needs of the company in terms of its operations. A management is mainly considered as responsible for planning, implementing and controlling the operational activities for that it needs to have accounting information for making decisions (Chapman, Hopwood & Shields, 2006). Information and data based decisions reduces the risk of failure.
The management accounting involves the responsibility of the entire staff of the company to provide information of accounting to the management. Using the management accounting, the management gets help in analyzing its course of actions and can put down some best possible alternatives in terms of profiting, costing and pricing etc (Scapens, 1990). However, it must be clear here that the decisions of management are not solely based on the accounting information. The major functions of accounting management include (Malik, n.d.):
Interpretation and analysis of data
Function as a mean for communication
Make control easy
Make use of both quantitative and qualitative data
Recommendations
Based on the nature and the role of management accounting and its importance for the business process, some effective methods and techniques of management accounting is going to recommend to Emirates airline to manage the influence of the critical factors mentioned above.
Activity-Based Costing (ABC)
The first technique is ABC costing, that is the most popular technique of management accounting. Sometimes, the airlines have failed to calculate and measure the accurate cost of the services and daily operations. However, using the ABC techniques, the actual cost can be calculated (Rchid et al, 2013). Emirates Airline can implement ABC technique because it is very useful to improve and sustain the business process and performance.
Activity Based Costing is recommended because it impacts directly on the financial performance of the organization (Rchid et al, 2013). It involves providing the information for the cost of the business activities. The proper costing is very important for Emirates to reduce the impacts of the external factors that can increase its cost and reduce the profitability (Hansson, Ringbeck & Franke, 2003). For instance, the fluctuation in oil prices can impact the prices of emirates. The oil prices have been reducing in the international market (Tyerberg, 2015) that is resulted in the cost advantage, not for Emirates but for the global airline industry. The profitability of the airline firms can be improved with the reduction in oil prices (IATA, 2014). Therefore, ABC technique will help Emirates to reduce the impacts of cost advantage to its competitors and pricing of the products.
For example, Emirates by measuring the impacts of reduction in oil prices, can offer discounts and competitive prices to its international passengers. As the competition is increasing, Emirates is needed to focus on its charges to attract the customers.
Sensitivity analysis
Along with ABC costing technique, Sensitivity analysis is also considered as one of the most important and worthy techniques to help the management in decision making and planning and the implementation of the decisions.
Sensitivity analysis helps to analyze each factor and input to reduce the risks of the particular decision and strategic action (Saltelli, 2002). Let’s consider that if Emirates will announce to reduce the prices and offer discounts considering the continuous reduction in oil prices and oil prices will unfortunately increase, it will impact the whole business, revenue and profitability of the airline. Therefore, before going to make decisions, the airline is needed to look at each individual impact of that decision.
In line with these impacts, sensitivity analysis is very important to raise questions such as what the lower prices and discounts will impact on the revenue and profitability if the oil prices will increase rather than lowering down. All the available and predicted options must be analyzed to bring the central decision to reduce the risks of failure and loss.
Strengths and weaknesses of the analysis
The analysis is significant as it is important to recognize the role of the management techniques and their implementation. Defining and analyzing the role of each technique is an effective way of introducing the suggestions for the management. The management of Emirates can understand the need of the management accounting techniques in line with the changing business environment, needs of the market and the pressure from the external factors. For instance, the airline industry is strongly competitive that is resulted in the merger of the airlines and the reduction in the charges of the services. Therefore, before making such decisions, the management must have a big picture of the decision to understand its future outcomes.
Despite of these strengths, the analysis is weakened. The analysis and discussion is mainly revolving around the fluctuation in oil prices and its impact on the prices and profitability. It would be more useful and practical to make more market research collecting more evidences of the influencing factors to the profitability of the airlines. It would help to suggest some other management accounting techniques that Emirates should use for its sustainable business performance and growth in profitability. Therefore, lacking the complete market research is the greatest weakness of the analysis.
List of References
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