delta2ual
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Financial Question In Relation To Airlines

Thu Oct 20, 2011 4:19 pm

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.
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lightsaber
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 6:40 pm

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
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mcg
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 7:12 pm

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.
 
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 7:53 pm

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.
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WestJet747
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 8:30 pm

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!
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WestJet747
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 8:35 pm

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."
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NathanH
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 8:37 pm

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"?
 
planespotting
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 9:22 pm

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  
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roseflyer
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RE: Financial Question In Relation To Airlines

Thu Oct 20, 2011 9:38 pm

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.
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lightsaber
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RE: Financial Question In Relation To Airlines

Fri Oct 21, 2011 12:30 am

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.

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WestJet747
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RE: Financial Question In Relation To Airlines

Fri Oct 21, 2011 12:43 am

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!
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commavia
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RE: Financial Question In Relation To Airlines

Fri Oct 21, 2011 12:51 am

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.