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How Can Airlines Operate With Constant Losses?  
User currently offlineBigBill From United States of America, joined Apr 2009, 43 posts, RR: 0
Posted (4 years 2 months 4 weeks 23 hours ago) and read 3227 times:

Hello everyone,

This may be a stupid question, but I'm relatively new here so please go easy on me  Smile

For at least the past year or two, most of the major carriers in the U.S. have posted large quarterly/yearly losses. How can an airline continue to operate when this kind of thing has been going on for years? Was this happening before the economic recession started too? As a business, you have to make money at some point!


BigBill
23 replies: All unread, jump to last
 
User currently offlineDALCE From Netherlands, joined Feb 2007, 1661 posts, RR: 7
Reply 1, posted (4 years 2 months 4 weeks 23 hours ago) and read 3198 times:

Since the US Government has a law called Chapter 11, a loss making company gets additional time to regain profits without having the pressure to pay bills.
To me as a European, this law seems a sort of artificial method of keeping companies alive that should be dead.
Basically, a company needs to make money in order to stay alive, except for companies in the USA.
This is however no offence to the USA-people on this forum, but this law is crazy.

Just my $ 0.02



flown on : F50,F70,CR1,CR2,CR9,E75,143,AR8,AR1,733,735,736,73G,738,753,744,319,320,321,333,AB6.
User currently offlineBMI727 From United States of America, joined Feb 2009, 15470 posts, RR: 26
Reply 2, posted (4 years 2 months 4 weeks 23 hours ago) and read 3188 times:

Having losses isn't always a huge problem as long as they are making an operating profit. For one thing, airlines "lose" tons of money on depreciation of their aircraft, which goes on the balance sheet, but does not directly affect cash flow.


Why do Aerospace Engineering students have to turn things in on time?
User currently offlineMasseyBrown From United States of America, joined Dec 2002, 5214 posts, RR: 7
Reply 3, posted (4 years 2 months 4 weeks 22 hours ago) and read 3118 times:



Quoting BMI727 (Reply 2):
Having losses isn't always a huge problem as long as they are making an operating profit. For one thing, airlines "lose" tons of money on depreciation of their aircraft, which goes on the balance sheet, but does not directly affect cash flow.

You are almost correct. (I know that feeling.  Smile )

Depreciation charges are included in the calculation of operating results. Positive cash flow is what keeps them going in lean times.



Consilivm: Cave ne nothi te vexant
User currently offlineFlighty From United States of America, joined Apr 2007, 8203 posts, RR: 3
Reply 4, posted (4 years 2 months 4 weeks 22 hours ago) and read 3096 times:



Quoting DALCE (Reply 1):
To me as a European, this law seems a sort of artificial method of keeping companies alive that should be dead.

The government doesn't provide money to keep them alive. They get the money from somewhere. Investors, banks, friendly suppliers. So, it's not "artificial" in the sense that the government is keeping them alive... the capitalist markets are keeping them alive.


User currently offlineSlz396 From , joined Dec 1969, posts, RR:
Reply 5, posted (4 years 2 months 4 weeks 22 hours ago) and read 3098 times:

What is important for an airline to be able to keep going, is to be able to have sufficient money to pay its bills, money which is normally taken from the cash flow of the company.

Cash flow can be seen as the money circulating within the company from the time customers paysfor their ticket, to the time they actually use it. As long as cash flow is positive, a company is not in immediate danger to halting its operations.

Profitability is an accountancy term ment to identify whether or not the company is making money (i.e. whether they can keep some of their cash flow for themself in the end). If a company is making money, they can then use that money to invest in the company, or alternatively to give it back to the shareholders. On the other hand, if a company isn't making any money, they can sell assets or ask the shareholders to pay the difference. Most of the times however, the company doesn't do so and simply gets a loan from the bank, which is then called debt. Many US airlines have HUGE debts.

A company which doesn't turn a profit needn't go out of business, for as long as its shareholders agree to pay its depts. It's something which was widely happening in Europe up until around 15 years or so and which is still happening around the globe today. It really depends what the shareholder's interests are: does he want to see some return on his investment, or does he just want his airline to fly to certain places, no matter what?


User currently offlineFlylot From United States of America, joined Dec 2007, 186 posts, RR: 0
Reply 6, posted (4 years 2 months 4 weeks 22 hours ago) and read 3041 times:



Quoting MasseyBrown (Reply 3):
Positive cash flow is what keeps them going in lean times.

so its like living from paycheck to paycheck?



"In Soviet Russia, airplane flies on you"
User currently offlinePanHAM From Germany, joined May 2005, 8740 posts, RR: 28
Reply 7, posted (4 years 2 months 4 weeks 22 hours ago) and read 2974 times:



Quoting DALCE (Reply 1):
Since the US Government has a law called Chapter 11, a loss making company gets additional time to regain profits without having the pressure to pay bills.

we have basically the same in European countries. It is a re-organisation under court order with simultaneous protection from creditors. But the question was not about chapter 11, that comes after all cash is eaten up and the carrier has no assets to sell and lease back..

Which basically already answers the question. Losses in one quarter can be off-set by profits in other quarters, new cash can be generated by mergers or new equity and losses can be cut as well by strict cost control.

US carriers are not subsidized, sames as European, however in many countries of the world, the "flag carrier" is something like a national pride and has to be kept going by all means. There are airlines that never made a nickel or a dime and don't even have proper accounting, but they fly because the government writes a check every time they need one. The problem is, that these carriers undercut the profitable well managed airlines



I'm not fishing for compliments
User currently offlineBMI727 From United States of America, joined Feb 2009, 15470 posts, RR: 26
Reply 8, posted (4 years 2 months 4 weeks 22 hours ago) and read 2961 times:



Quoting MasseyBrown (Reply 3):
Depreciation charges are included in the calculation of operating results.

I was wrong. Somewhere I heard that some airline increased their profits by a nice margin simply be depreciating their aircraft over a longer period of time.

Quoting Flighty (Reply 4):
The government doesn't provide money to keep them alive. They get the money from somewhere. Investors, banks, friendly suppliers.

What Chapter 11 does is protect the airline from creditors while they reorganize. Usually such plans are made with the input of the creditors. It seems pretty rare that the creditors are ever really out for blood, and it is usually in their best interest for the airline to succeed so that they get their money and don't have to deal with selling whatever collateral they may have.

Quoting Slz396 (Reply 5):
Cash flow can be seen as the money circulating within the company from the time customers paysfor their ticket, to the time they actually use it.

I think I saw something about this as part of the Frontier bankruptcy. Their credit card processor was going to change the ratio of money Frontier got when the sale occurred versus when the flight was completed. This posed a cash flow crunch for them, and they declared bankruptcy to keep the deal from being altered.



Why do Aerospace Engineering students have to turn things in on time?
User currently offlineJFKLGANYC From United States of America, joined Jan 2004, 3175 posts, RR: 5
Reply 9, posted (4 years 2 months 4 weeks 22 hours ago) and read 2945 times:

[quote=Flylot,reply=6]
so its like living from paycheck to paycheck?[/quote

Well, yes, sort of. It's more like using tomorrow's money to pay today's bills.

You buy a ticket ORD-SEA today on UA. They now have the cash that you paid for that ticket to pay a bill that is due today.

They also have a liability because they owe you a roundtrip flight between ORD-SEA. By the time you actually fly, the money you gave them will be long gone. However, somebody will be buying a ticket that day for a trip 6 months out giving them a constant flow of cash to cover current bills.

Airlines have a long history of slow deaths.

And death is a relative term. Look at the US Airlines today vs 2000:

NW is gone
HP is gone
US is a lot smaller on the East Coast
UA and AA are a lot smaller period
TWA is gone
DL is bigger, but that was done by expanding their footprint through acquisition. They expanded the DL name, but really, in combining DL and NW, they will end up with a smaller footprint then the two companies had separately.


User currently offlineStitch From United States of America, joined Jul 2005, 29681 posts, RR: 84
Reply 10, posted (4 years 2 months 4 weeks 22 hours ago) and read 2925 times:
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Quoting Flylot (Reply 6):
so its like living from paycheck to paycheck?

That is probably not a bad analogy, at least on some levels.


User currently offlineBMI727 From United States of America, joined Feb 2009, 15470 posts, RR: 26
Reply 11, posted (4 years 2 months 4 weeks 22 hours ago) and read 2909 times:



Quoting JFKLGANYC (Reply 9):
They now have the cash that you paid for that ticket to pay a bill that is due today.

Actually, I'm pretty sure that they only get some of the money, which is what posed a problem for Frontier a while back.

While on the subject of airline finances, is it truth or just an urban legend that in theory most airlines would go bankrupt if everyone used their FF miles? Of course there is no way it could happen in reality, but it is an interesting thought.



Why do Aerospace Engineering students have to turn things in on time?
User currently offlineSflaflight From United States of America, joined Nov 2005, 1183 posts, RR: 1
Reply 12, posted (4 years 2 months 4 weeks 17 hours ago) and read 2610 times:



Quoting DALCE (Reply 1):
Since the US Government has a law called Chapter 11, a loss making company gets additional time to regain profits without having the pressure to pay bills.
To me as a European, this law seems a sort of artificial method of keeping companies alive that should be dead.
Basically, a company needs to make money in order to stay alive, except for companies in the USA.

Why do some people post info that is not accurate. The only thing accurate here is the US has a law called Chapter 11; that is all. First, the US government gives ZERO money in the Chapter 11 process. ZERO tax dollars go to a corporation that is in chapter 11. Europeans prop up corporation more than anyone on the planet. Do I need to remind us of how much tax paying money Alitalia and Olympic have received from their governments to keep them alive?
Second, this process is found worldwide. One might want to start reading the threats about JAL.

Quoting DALCE (Reply 1):
This is however no offence to the USA-people on this forum, but this law is crazy.

No offence taken, but it gets old hearing how the US keeps dying companies alive from people who are unaware of how the system works. If one thinks one is offending, it might be wise to research before posting.  Wink


User currently offlineViscount724 From Switzerland, joined Oct 2006, 24075 posts, RR: 22
Reply 13, posted (4 years 2 months 4 weeks 17 hours ago) and read 2546 times:



Quoting Sflaflight (Reply 12):
Europeans prop up corporation more than anyone on the planet. Do I need to remind us of how much tax paying money Alitalia and Olympic have received from their governments to keep them alive?

And some don't. Ask the many employees of Swissair and Sabena who wound up without jobs when their airlines ran out of cash and shut down. The U.S. is olne of the few major countries where you can stay in business even when you can't pay your bills, and legally void lease contracts etc. etc.


User currently offlineSlz396 From , joined Dec 1969, posts, RR:
Reply 14, posted (4 years 2 months 4 weeks 17 hours ago) and read 2527 times:



Quoting PanHAM (Reply 7):
We have basically the same as Chapter 11 in European countries. It is a re-organisation under court order with simultaneous protection from creditors

In Europe, we have something similar indeed, but it's definitely NOT the same:

The 2 biggest differences are:

1- the duration: Chapter 11 can be maintained for years, whereas bankruptcy protection in the EU is something for a very short time only, max a couple of months really.

2- the initiative: Under chapter 11, the company is allowed to restructure itself for as long as they have approval of a (majority?) of creditors, whereas under the EU system the court will replace the management with a caretaker who needs to see to it that assets aren't sold off to the benefit of the shareholders, to the disadvantage of employees and creditors....

In short:
Chapter 11 is FAR FAR FAR more business-friendly than the European equivalent and it has definitely allowed US companies to restructure, which - under EU rules- would have gone bust.


User currently offlineTravelExec From Spain, joined Dec 2007, 449 posts, RR: 0
Reply 15, posted (4 years 2 months 4 weeks 17 hours ago) and read 2479 times:



Quoting Flylot (Reply 6):

so its like living from paycheck to paycheck?

It is like living from paycheck to paycheck, but not paying your mortgage or other bills, and hoping that you will win the lottery to pay them off at some stage in the future...


User currently offlineLHCVG From United States of America, joined May 2009, 1448 posts, RR: 1
Reply 16, posted (4 years 2 months 4 weeks 17 hours ago) and read 2434 times:



Quoting BMI727 (Reply 8):
I was wrong. Somewhere I heard that some airline increased their profits by a nice margin simply be depreciating their aircraft over a longer period of time.

Technically, they can increase profit, depending on how you define it. At the risk of over-generalizing, I would say that depreciation charges are similar to deductions on personal income taxes: you still take in x dollars in actual money (as they airlines do) but then you reduce your net effective income by taking these other charges (say student loan deductions for a person, depreciation for a business). So technically, on the books you have "negative income", even though in real terms you have positive income in strictly money terms (how else would you be able to buy anything). Thats leaving out loans and credit lines of course.


User currently offlineVZLA787 From United States of America, joined Jul 2009, 99 posts, RR: 0
Reply 17, posted (4 years 2 months 4 weeks 14 hours ago) and read 2241 times:

Many interesting viewpoints. The accounting rules on depreciation are of the factors affecting profitability but not actual cash flow. Airlines raise many in so many ways, obtaining cash right away (selling tickets for future dates, selling FF miles in advance, etc), and just posting a liability on the balance sheet (basically something they owe you), which will be repaid at a later date.

While the government does not specifically give the airlines money to stay alive during bankruptcy proceedings, the current law in Ch.11 does actually give the company breathing room (so basically, the law written by congress/gov't does indeed help failing companies).

What is most bizarre, is how Airlines that go into bankruptcy still keep the same management team on board through the reorganization, and even for years after. Why don't they fire these guys? They got the airline in a mess (they can find excuses, labor, fuel, whatever), but the fact is that they didn't manage their assets the right way, so they should be FIRED!!!

On another note, does anybody if passengers affected by liquidations (basically Ch.7) are listed as creditors in liquidations?


User currently offlinePar13del From Bahamas, joined Dec 2005, 6729 posts, RR: 8
Reply 18, posted (4 years 2 months 4 weeks 14 hours ago) and read 2194 times:



Quoting VZLA787 (Reply 17):
What is most bizarre, is how Airlines that go into bankruptcy still keep the same management team on board through the reorganization, and even for years after. Why don't they fire these guys? They got the airline in a mess (they can find excuses, labor, fuel, whatever), but the fact is that they didn't manage their assets the right way, so they should be FIRED!!!

Think about that question for a second while reviewing another post.

Quoting Slz396 (Reply 14):
2- the initiative: Under chapter 11, the company is allowed to restructure itself for as long as they have approval of a (majority?) of creditors, whereas under the EU system the court will replace the management with a caretaker who needs to see to it that assets aren't sold off to the benefit of the shareholders, to the disadvantage of employees and creditors....

Other than one rail company years ago, the US Govt. and its form of government does not really like government officials running or supervising commercial companies. In Chpt.11 in most cases, the company attempts to arrange financing with the aid of its current share holders, it is not in the best interest of those share holders to replace management unless they are the ones forcing the filing. Other financiers have to play nice with current management to smooth the process along, most managers will know this and will attempt to negotiate some settlement while the process is ongoing and they have some form of leverage.


User currently offlineCommavia From United States of America, joined Apr 2005, 11120 posts, RR: 62
Reply 19, posted (4 years 2 months 4 weeks 14 hours ago) and read 2182 times:

A company - not just an airline - can continue operating for quite a long time (some would argue almost in perpetuity) with reporting "losses" because, in the American accounting system, a "loss" is more of a paper term than an economic reality.

As some other posters have hit on, there are plenty of things in the accounting system that go into the calculation of "losses" (or "profits") that appear on a company's income statement that have no bearing whatsoever on cash flow (which appears on the statement of cash flows and ultimately hits the balance sheet). Things like depreciation and amortization, prepaids and accruals, etc. may move around the numbers on the income statement, but have absolutely no impact whatsoever on the actual amount of money in a company's proverbial bank account.

The number that really matters most when considering any company is its cash flow. To use an oft-repeated analogy, if a company were like a human body, cash would be the blood. It is the thing that courses in and out of the heart of the company, and if the company loses cash, it cannot function and dies. And - as airlines in particular have proven over the last decade - it is relatively easy for a company to produce fairly large amounts of positive cash flow but still report operating and/or net "losses" on paper. As long as there is positive cash flow from operations over the long term, a company can really go on operating forever. It's not ideal, perhaps, but cash flow - not profits - is really all a company needs to continue financing its operations and operating.

The reason why "profit" and "loss" are the numbers that get the most attention in the media and public opinion are because they are the simplest and most accessible numbers for most people to read, understand and comprehend without a background in finance. Describing the intricacies of why depreciation expense or unearned income impact the income statement and the balance sheet differently is hard to do during a 30-second soundbite on the evening news.

Quoting DALCE (Reply 1):
To me as a European, this law seems a sort of artificial method of keeping companies alive that should be dead.

First off, as others have said, the government doesn't give companies in bankruptcy any cash. The process does give them some protections from creditors, true, but no cash is transfered from the government to the company - if that were the case, every company would always file for bankruptcy.

Ultimately, though, many would argue that America's bankruptcy laws - as opposed to the receivership/liquidation system common in much of the rest of the world - is reflective of American culture's more broad societal acceptance, and some would argue even encouragement, of failure.

American culture has always rewarded people who take risks, and part of that has been the lack of a major social stigma in this country towards those who try and don't succeed. Bankruptcy is a big part of encouraging people to take those risks.

Our creative, entrepreneurial society is responsible for Microsoft, Google, Apple, Starbucks, Amazon.com, JetBlue, 3M, and so many other innovative, revered and iconic American brands that have completely revolutionized technology and improved the world. And I personally do believe our liberal bankruptcy laws - for all their failings - are part of that.


User currently onlineCubsrule From United States of America, joined May 2004, 22303 posts, RR: 20
Reply 20, posted (4 years 2 months 4 weeks 13 hours ago) and read 2112 times:



Quoting Par13del (Reply 18):
Our creative, entrepreneurial society is responsible for Microsoft, Google, Apple, Starbucks, Amazon.com, JetBlue, 3M, and so many other innovative, revered and iconic American brands that have completely revolutionized technology and improved the world. And I personally do believe our liberal bankruptcy laws - for all their failings - are part of that.

They are, and they may be more efficient than the European alternative. If LH goes bust, lays off all the employees, sells all the planes, etc., it is going to cost a heck of a lot of money for its imaginary successor DeutschAir to rebuild what LH had. Who benefits from that expenditure?



I can't decide whether I miss the tulip or the bowling shoe more
User currently offlineWatewate From Canada, joined Nov 2000, 2284 posts, RR: 1
Reply 21, posted (4 years 2 months 4 weeks 13 hours ago) and read 2045 times:

As others have said, depreciation is a non-cash item that doesn't impact cash flows. Ability to survive has more to do with cash flows rather than net income.

Note that just because a carrier is cash flow positive does not necessarily mean that it's a healthy carrier. A company may liquidate assets, borrow money, issue additional stocks and delay paying its bill, etc. all in order to directly and indirectly increase cash flows.

A carrier that owns much of its capital assets can limp along for a very long time as they can sale-lease back their assets. As long as the quality of the collateral is high, the carrier can last many decades.


User currently offlineFlytravel From United States of America, joined Dec 2009, 873 posts, RR: 0
Reply 22, posted (4 years 2 months 4 weeks 13 hours ago) and read 2008 times:



Quoting Commavia (Reply 19):
American culture has always rewarded people who take risks, and part of that has been the lack of a major social stigma in this country towards those who try and don't succeed. Bankruptcy is a big part of encouraging people to take those risks.

Corporate bankruptcy of course is very different than personal bankruptcy. If one is making decisions at the corporate level that leads to unfavorable results, at worse s/he gets fired, but maybe not, and maybe even leaves with a golden parachute. Personal bankruptcy, one risks and loses a lot more and can carry negative credit score on his/her back for a long time.

ok back to corporate, in general, going through and coming out of a Ch. 11 bankruptcy can help break unfavorable leases and scrap labor agreements, and many companies wind up in better shape without that overhead baggage.

While the gov't/taxpayer isn't directly affected, unless its an auto company or bank in Wall St., someone on the other end, like a trustee loses. In whole though, I agree it's better than something quickly dissolving and everyone loses.


User currently offlineFrmrCAPCADET From United States of America, joined May 2008, 1690 posts, RR: 1
Reply 23, posted (4 years 2 months 4 weeks 12 hours ago) and read 1950 times:

Those who encourage an airliner reporting extended quarterly losses to continue: Lenders, stockholders, employees, maybe even management. There is always a possibility that the donkey may fly*.



*, the man before the maharajah about to be executed: Sire, if you pardon me I will teach your favorite donkey to fly. The deal is accepted and the condemned man is asked why he made this silly agreement. Sirs, The maharajah may die. I may die. Or God willing, the donkey may fly.



Buffet: the airline business...has eaten up capital...like..no other (business)
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