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Financial Question In Relation To Airlines  
User currently offlinedelta2ual From United States of America, joined Dec 2007, 625 posts, RR: 1
Posted (3 years 2 months 21 hours ago) and read 2222 times:

For those of us who are not financial gurus, I'd like to ask a question as it relates to financial statements at ALL airlines.
We hear of CASM/RASM/PRASM, GAAP, EBIT something-or-other, yields, unrestricted cash on hand/restricted cash,fuel hedges,assets vs. liabilities, debt-to profit ratios, etc.
Is there one DEFINITIVE thing that shows the financial health of an airline, and if so, which airline(s) is/are the healthiest right now?

I think with the majors currently reporting quarterly results, this would be good to know for those of us who don't already know.


From the world's largest airline-to the world's largest airline. Delta2ual
11 replies: All unread, jump to last
 
User currently offlinelightsaber From United States of America, joined Jan 2005, 13520 posts, RR: 100
Reply 1, posted (3 years 2 months 19 hours ago) and read 2129 times:
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Quoting delta2ual (Thread starter):
Is there one DEFINITIVE thing that shows the financial health of an airline, and if so, which airline(s) is/are the healthiest right now?

Yes. They are an airline and thus financially unhealthy.     

Seriously, the GAAP numbers show the overall health and should be the first considered. But debt to revenue (and income) are also important factors.

CASM is important as it shows how costly operations are. But there are expenses an airline *must incurr* that are often outside of CASM (e.g., overhead for the headquarters).

RASM is also important as it shows how well the airline keeps premium passengers and how valuable their network is.

RASM/CASM should be greater than 1.0 or something is really wrong.

Like all quarterly reports, one must look deeper:

Is the airline growing (cutting current profits to fund future growth)?
Is CASM low due to a delayed fleet update (future CASM risk)?
What drives RASM? So intrensic advantage/disadvantage or something more temporary.


In general, airlines are a business to turn a large fortune into a small fortune. More money has been destroyed by airlines than made by them since the Wright brothers took flight.   Since their vendors make a profit, the industry continues...

Lightsaber



Societies that achieve a critical mass of ideas achieve self sustaining growth; others stagnate.
User currently offlinemcg From United States of America, joined Sep 2003, 828 posts, RR: 0
Reply 2, posted (3 years 2 months 18 hours ago) and read 2096 times:

Net Income is the most important singal metric. It anwers the simple question "is this airline being operated in profitbale way?". There are lot's of other financial metrics that are in some way important, but job 1 is to be profitable.

User currently offlinefrmrCapCadet From United States of America, joined May 2008, 1739 posts, RR: 1
Reply 3, posted (3 years 2 months 18 hours ago) and read 2066 times:

Whether a company is profitable and how profitable is truly a complex question. If all external circumstances never varied it might be possible to use a single metric. But they never are. The questions Lightsaber posts are all illustritive. One metric not mentioned is the stock price, which theoretically says what the market things the airline is worth, and how much profits it can earn. (Note, I am not a believer in rational markets so this metric is only one view.) You are better off using a handfull of metrics.


Buffet: the airline business...has eaten up capital...like..no other (business)
User currently offlineWestJet747 From Canada, joined Aug 2011, 1932 posts, RR: 10
Reply 4, posted (3 years 2 months 17 hours ago) and read 2019 times:

Quoting delta2ual (Thread starter):
GAAP
Quoting lightsaber (Reply 1):
the GAAP numbers

GAAP is no longer recognized in major economies (apart from Australia who seems to be the only holdout from fully adopting it). As of 2011, International Financial Reporting Standards (IFRS) is the officially accepted framework for reporting, as ruled by the International Accounting Standards Committee (IASC).

I'm not an accountant, just thought I would mention it because it does make a difference on what you see on financial statements!



Flying refined.
User currently offlineWestJet747 From Canada, joined Aug 2011, 1932 posts, RR: 10
Reply 5, posted (3 years 2 months 17 hours ago) and read 2010 times:

Quoting mcg (Reply 2):
Net Income is the most important singal metric. It anwers the simple question "is this airline being operated in profitbale way?". There are lot's of other financial metrics that are in some way important, but job 1 is to be profitable.

   "Cash is king."



Flying refined.
User currently offlineNathanH From United States of America, joined Nov 2010, 59 posts, RR: 0
Reply 6, posted (3 years 2 months 17 hours ago) and read 2009 times:

Quoting WestJet747 (Reply 4):
GAAP is no longer recognized in major economies (apart from Australia who seems to be the only holdout from fully adopting it). As of 2011, International Financial Reporting Standards (IFRS) is the officially accepted framework for reporting, as ruled by the International Accounting Standards Committee (IASC).

I'm not an accountant, just thought I would mention it because it does make a difference on what you see on financial statements!

Does the US not count as a "major economy"?


User currently offlineplanespotting From United States of America, joined Apr 2004, 3539 posts, RR: 5
Reply 7, posted (3 years 2 months 16 hours ago) and read 1953 times:

Like any company, airline or not, you have to have a good look at an income statement, cash flow and any associated footnotes. Net income is obviously a good metric, but so are earnings, cash flow, and even revenue if you compare it to cash flow to see how much capital is actually coming in the door.

Airline-specific statistics aren't really a good bellweather - for instance, you can have the lowest CASM in the industry, but if your RASM is also the lowest in the industry, you could either be making a lot of money or losing a lot of money  



Do you like movies about gladiators?
User currently offlineRoseFlyer From United States of America, joined Feb 2004, 9810 posts, RR: 52
Reply 8, posted (3 years 2 months 16 hours ago) and read 1938 times:

The full financial statement needs to be looked at to see if the company is healthy as a whole.

To see how the operation is doing, a comparison of CASM and RASM is important. You need to look at both. For example in 2009, CO had by far the highest RASM, which makes the airline look very healthy. However they also had the highest CASM of the 5 (at the time) network carriers. High RASM + high CASM does not necessarily mean the most profit. That year, I think United ended up looking the best with the 2nd highest RASM and second lowest CASM (if I remember correctly).

In general it gets confusing quickly.



If you have never designed an airplane part before, let the real designers do the work!
User currently offlinelightsaber From United States of America, joined Jan 2005, 13520 posts, RR: 100
Reply 9, posted (3 years 2 months 13 hours ago) and read 1840 times:
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Quoting WestJet747 (Reply 4):
As of 2011, International Financial Reporting Standards (IFRS) is the officially accepted framework for reporting, as ruled by the International Accounting Standards Committee (IASC).

Has the US given up on GAAP? Serious question. My accountant reference retired a few years ago, so my information is getting out of date.  
Quoting RoseFlyer (Reply 8):
The full financial statement needs to be looked at to see if the company is healthy as a whole.

Exactly. I think we've established that any company's finances shouldn't be trusted by one metric.

Lightsaber



Societies that achieve a critical mass of ideas achieve self sustaining growth; others stagnate.
User currently offlineWestJet747 From Canada, joined Aug 2011, 1932 posts, RR: 10
Reply 10, posted (3 years 2 months 13 hours ago) and read 1831 times:

Quoting NathanH (Reply 6):
Does the US not count as a "major economy"?

The US is expected to make arrangements for adopting of IFRS this year. I believe they are the last G8 nation to *officially* do so.

And don't get me wrong, GAAP is going to be around for a long time to come, but only internally.

Quoting lightsaber (Reply 9):
Has the US given up on GAAP?

Well considering they are one of the last to adopt the new principles, I would say it's the furthest thing from giving up!



Flying refined.
User currently offlinecommavia From United States of America, joined Apr 2005, 11969 posts, RR: 62
Reply 11, posted (3 years 2 months 13 hours ago) and read 1823 times:

Quoting mcg (Reply 2):
Net Income is the most important singal metric. It anwers the simple question "is this airline being operated in profitbale way?". There are lot's of other financial metrics that are in some way important, but job 1 is to be profitable.

I think you would find many who dispute the assertion that "net income" is the "most important single metric."

Income is important, but it's a paper number that includes lots of accounting-driven items like accruals, receivables, depreciation and amortization, etc.

It truly depends on what you're assessing.

If you are trying to gauge the company's solvency, I would argue that cash flow is by far the "most important single metric." Cash is the life blood of a company - without cash, the company ceases to exist. Digging deeper into the Statement of Cash Flows, the critical cash flow metric is cash flow from operations. This is the "cleanest" metric of the company's financial condition - it is the closest that global accounting standards has to a "pure" measure of the company's cash generation - cash going out to pay suppliers, vendors, lessors, creditors, debtors, etc., and cash coming in from customer payments, etc.


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