Us Airways Reports $177mm Q1 Loss

[ITRADE]

Not too bad of a quarter, but a loss is still a loss and those losses need to be erased.

I would be interested to see how much extra income comes into play starting on May 4...

 

[USA320Pilot]

Funguy2:

I am cautiously optimistic about the results. I knew that March was a good month and that the company made money during this period.

The company's business plan to increase revenue (RJs and alliances) and driving down costs is working, but the problem going forward is further LCC expansion, particularly in Philadelphia.

Regards,

USA320Pilot

 

[USFlyer]

Yes USA320Pilot, there were some positive signs in UAIR's results. Although, it sounds to me like management wants the cost reductions to come from labor, and they have certainly already indicated such, as you consistently point out.

Not so. When asked, Lakefield said US is also talking to creditors, the ATSB and others about cost reductions and what it will take to keep UAIR a going concern. Problem is, the employees -- fair or not -- have the most to lose if UAIR goes under: Personal losses are always harder to take than corporate losses, and UAIR going out of business will not put any creditor out of business at this point.

 

[BoeingBoy]

funguy2,

Since the company recognizes passenger revenue when the transportation is provided, does that affect your timing of reported cash flows (moving them later in the year)?

Jim

 

[USA320Pilot]

Itrade:

Itrade said: “Not too bad of a quarter, but a loss is still a loss and those losses need to be erased. I would be interested to see how much extra income comes into play starting on May 4...

USA320Pilot comments: The company must meet ATSB loan guarantee convenants, begin reducing the losses, and be profitable in 2005. With fuel only hedged to 5% next year and the LCC problem, the company must drive down costs to compete long-term. In regard to the Star alliance, as you know, total annual revenue is expected to jump by $75 million.

Respectfully,

USA320Pilot

 

[MarkMyWords]

Mark:

No, the early payment to the ATSB Loan holders is not a P/L item. The early payment on the ATSB loan is not a loss (nor would adding debt be a profit). It is a cash flow item, so it reduced the amount of cash holdings the company has, but is not a $250 loss. The only affect this should have on P/L is that the smaller loan should amount to less interest expense in future quarters. Also, on the Balance sheet, cash assets will be $250mil less and loan liabilities will be $250mil less.

Thanks Funguy2 - I appreciate the clarification.

 

[USA320Pilot]

Just one more point…

The new business plan targets a 2 cent CASM cost reduction from labor and another 2 cent CASM cost reduction from other sources.

USFlyer is correct that the “Problem is, the employees -- fair or not -- have the most to lose if UAIR goes under: Personal losses are always harder to take than corporate losses, and UAIR going out of business will not put any creditor out of business at this point. “

Respectfully,

USA320Pilot

 

[funguy2]

funguy2,

Since the company recognizes passenger revenue when the transportation is provided, does that affect your timing of reported cash flows (moving them later in the year)?

Jim

Yes it does... Since peak travel is typically June-August, and most leisure passengers purchase their tickets 2 to 4 months in advance, I use that information to estimate that cash inflows dry up by July, as travel drys up after Labor Day.

Once ticket sales dry up, the company must continue to pay to run the airline (i.e. employees keep getting paid every two weeks, etc)... So typically, the cash begins to flow out during this period.

Once the tickets are sold, theoretically the cash is held as an asset and the a liability to provide transportation should be a liability on the balance sheet. The revenue is not recongnized on the income statement until the service is provided.

And, I am not an expert in this area, so if this is incorrect, please correct me... But that is my recollection of how it works.

 

[BoeingBoy]

"The new business plan targets a 2 cent CASM cost reduction from labor and another 2 cent CASM cost reduction from other sources."

And the quickest was to do both is to fly more seat miles - increased flying of existing airplanes being the quickest way to do that.

Jim

 

[BoeingBoy]

funguy2,

I doubt that there's an escrow account somewhere to hold the money from ticket sales until the transportation is provided. It may just be a difference between actual cash flow and reported cash flow - the reported numbers being in line with travel patterns while actual flows follow buying patterns.

Jim

 

[funguy2]

funguy2,

I doubt that there's an escrow account somewhere to hold the money from ticket sales until the transportation is provided. It may just be a difference between actual cash flow and reported cash flow - the reported numbers being in line with travel patterns while actual flows follow buying patterns.

Jim

Boeing Boy:

I am not sure if I exactly follow... But I'll give it a whirl..

I think you are right... There is not an escrow account per se. But cash flow is cash flow... I think what you are calling "Reported Cash Flow" is revenue...

Let me break it down with a simple, it doesn't really work this way, example...

I buy a ticket from PIT to CLT on March 15th for $200 + taxes. My travel will occur on April 15.

That $200 is recorded as an cash inflow. The cash goes into USAirways main bank account. It is also recorded as an increase of cash assets of $200 on the balance sheet. The liability side of the balance sheet also increases by $200 (the value of the liability that US Airways owes me as they are liable to provide my transportation on April 15th).

Now on April 15th, lets say that it costs US Airways $180 to provide me the seat on the flight from PIT to CLT. On April 15th, on the income statement, $200 revenue will be recorded and an expense of $180 will be recorded. If nothing else occured that day, US Airways made a profit of $20. Meanwhile, on the Cash Flow statement, an outflow of $180 is recorded. US Airways cash balance has now increased by $20, again assuming nothing else occurs between March 15 and April 15. On the balance sheet, the $180 liability is removed, and $180 of cash asset is removed, thus assets increased by $20.

This whole thing of cash flow is a little bit more confusing than "a normal" business because of the "pre-payed" nature of this industry.

So while there is no separate escrow account per se, it kind of works like when you write a check... You record the check in your checkbook when you write it, but the money doesn't actually go out of your account until the bank clears your check a week or so (whenever) later. In the meantime, that money is yours, but you've already committed it.

In fact, if you want to continue that analogy further, bankruptcy is like a big bounced check, when you write the check before you know how much your automatic deposit from work will be, and then all of a sudden, the check you wrote is more than the deposit... Well, thats a problem. And if you only have one bank account and no savings, well you stuck the bank with a bad debt... and voila, bankruptcy.

 

[BoeingBoy]

funguy2,

I think we're on the same page here, my sloppy terminology notwithstanding.

Jim

 

[USA320Pilot]

I agree that a change in CEO was necessary and there were a lot of mistakes made by Dave Siegel. However, I believe it's important to give credit where credit is due.

Today's quarterly financial report is encouraging with the company the only major airline to have first quarter break even cash flows. Much of Siegel's business plan is working: improved liquidity, lower unit costs, and increased revenues.

The company has an excellent 2004 fuel hedge program, a better business platform, and the airline had the highest 2003 network carrier “Airline Quality Ratingâ€￾.

There is no question that much of this financial and operational performance was due to the sacrifice and efforts of the employees, but you have to give credit where credit is due.

Dave Siegel was the leader of this turnaround and today we are seeing the benefits of his work. Again, did not agree with everything Siegel did and I have told him so. But, the fact is he was the CEO during 2003 and the first quarter where the company's financial and operational results were impressive in a difficult environment.

The first quarter will buy US Airways time to adjust to the difficult reality of LCC expansion, internet bookings, yield depression, and in particular the Philadelphia competitive threat. However, due to the collective efforts of every employee during the first quarter -- US Airways is better prepared today to compete going forward due to management's business plan.

Respectfully,

USA320Pilot

 

[funguy2]

funguy2,

I think we're on the same page here, my sloppy terminology notwithstanding.

Jim

Excellent... That was my understanding of Accounting 101 applied to airlines... Again, I am no expert, so if I messed something up... (anyone) please correct me. But that is my general understanding of how it goes...

That is also why I keep preaching cash flow... as long as their is enough cash in the bank to cover the expenditures, the company can sustain losses for a time. TWA did it for 10 years... by leveraging assets (borrowing)... but they made it stretch... US Airways can try to do the same, but US Airways is already highly leveraged at this point.

 

[funguy2]

Good point USA320Pilot. This loss (an improvement over last year), is indeed the work of Seigel and team. But a loss is a loss, and while the future looks a little bit brighter, there are still problems out there, which will be amplified at the end of the peak summer season.

I agree that Seigel's departure was aimed at appeasing the unions. However, based on these results, why would Lakefield change the "hammer on the employees plan", since it appears to be working (and he was part of the BOD which approved the plan in the first place)?