Connected1
Senior
- Aug 20, 2002
- 332
- 0
BOW - "Bill of Work" - The level of cleaning assigned for the aircraft, which varies depending upon aircraft type and outbound destination.
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FWAAA
No, Mr Owens, you just don't understand it. Your post is not unlike me asking "Why does AA perform all that heavy maintenance on its airplanes? Wouldn't it be cheaper to fly them until they fall apart? Seems to me that all that heavy maintenance is just wasted money."
You'd call me a dumbass if that were my view, wouldn't you? And rightly so, because if I subscribed to such an uninformed viewpoint, I'd have earned that label.
AA didn't spend anywhere near $240 million for interest on that $3.8 billion of cash. AA earned $157 million in interest income last year, and that is likely almost as much as the interest paid on the $3.8 billion of cash. That's what effective cash management can do for you.
Ever received an offer from your credit card company for something like 1.9% for the life of the balance? I've got a couple of those right now. Wanna know what I did with the money? Invested it. I've done a little better than 1.9%.
I doubt AA did has achieved the same results on its cash balance, but to assert that AA would likely have been profitable last year if only it reduced its cash balance to near zero is just so far out of touch with reality that I feel compelled to point it out for you.
It's not like your (or mine) "free" checking account where you earn zero interest in exchange for free checking; AA actively invests its cash to minimize the net cost of carrying that cash. $157 million of interest income is impressive, especially since AA's cash balance grew during the year (it didn't start 2005 with $3.8 billion of unrestricted cash).
You obsess over the minimum unrestricted cash requirement of $1 billion; do you really think AA's management finds that requirement burdensome?
The fact that management has worked hard to increase the cash balance by $2.8 billion over that minimum amount should tell you something.
Sure, AA told you repeatedly that it was in danger of falling below that minimum in early 2003; had it done so, it would have been in default on most (if not all) of its debt and would have had to file for Ch 11.
Bob, the traffic liability is not like green stamps -- it's a matter of sales made to customers without the product being delivered yet. If we didn't carry that on the balance sheet and have cash to back it up, the credit card companies would simply do what they did to ATA before they filed for bankruptcy -- withhold all of the funds they collect on our behalf, so that they have something with which to issue refunds to customers. We lose the cash up front, and we lose the interest float that provides us, which add up much faster than the three pennies per gallon I like to save on gas by driving a mile extra down the road.
Would you cash in your savings account or 401K to pay off a credit card in full? Or would you risk running less than a $100 checking account balance just to pay down an extra $100 on a credit card bill?
Sometimes you have to keep money in the bank even though you own a balance somewhere else. You still need to have free cash onhand to pay for things which come up unexpectedly. If we had another air traffic shutdown like we did on 9/11, it would be necessary to pay for salaries and other things due to no cash coming in the door.
The AAdvantage miles end up in the accounts of people who used their credit card to make a purchase, many of those miles will never be cashed in, just like green stamps, but in the meantime AA already collected cash for them up front.
The miles are not converted into cash, they are converted into a ticket to ride on the plane so its not as if $5 billion worth of miles requires the company to lay out $5 billion worth of cash, instead those miles are given a value based on a regular fare. So even if $5 billion worth of AAdvantage miles are exercised it might only cost the company $900 million to deliver.
The AAdvantage miles end up in the accounts of people who used their credit card to make a purchase, many of those miles will never be cashed in, just like green stamps, but in the meantime AA already collected cash for them up front.
The miles are not converted into cash, they are converted into a ticket to ride on the plane so its not as if $5 billion worth of miles requires the company to lay out $5 billion worth of cash, instead those miles are given a value based on a regular fare. So even if $5 billion worth of AAdvantage miles are exercised it might only cost the company $900 million to deliver.
jimntx
Bob, I don't think anyone disputes your point that a lot of FF miles are never cashed in--hell, I lived in Houston for over 30 years and am a OnePass member. Right now, I have over 100,000 miles in my OnePass account that I keep "meaning to cash in." However it hasn't happened yet.
The point is though, that neither the FASB--Federal Accounting Standards Board--nor the SEC allows companies to "guess" or estimate how much of an apparent liability is ever going to be exercised. A company must list every dollar of a liability. Such as, Total Accrued Frequent Flyer Miles: 46 Billion.
The company is allowed, however, to put a footnote in the annual report--which I don't think they do--that says something like "Historical experience with this item indicates that no more that 65% of this liability will ever be cashed in by AAdvantage members."
That is permissible.Listing the liability as 29.9 Billion frequent flyer miles (65% of 46 Billion) is not permissible.
Thebalance sheet must be balanced to the total liability, not to what one "thinks" the liability will eventually cost.
From what I've read thats not entirely true. Sometimes liabilities can only be estimated to where they expect that they will fall within a certain range. However they are supposed to go with the high side according to FASB.