Truly profitable?

derg

derg

Apparently a "terse" writer
Staff member
I'm going to delete the name of the carriers so I don't start a flame war, but I found part of the following news release "interesting":

XXXXXX revenue more than doubles
By August Cole, MarketWatch
Last Update: 4:30 PM ET Feb 9, 2006

SAN FRANCISCO (MarketWatch) -- XXXXXX on Thursday reported that fourth-quarter net earnings rose 82% and revenue more than doubled, due to the acquisition of XXXXXX Airlines and the reimbursement of jet-fuel expenses.

The XXXXXXX, XXXXXX-based company's (XXXXX :28.39, -0.04, -0.1% ) fourth-quarter net income reached $38.7 million, or 64 cents a share, up from $21.2 million or 37 cents a share in the year-ago quarter.
Analysts had expected a profit of 63 cents a share, according to Thomson First Call.

Revenue totaled $742.4 million, up from $326.7 million in the year-ago quarter. The company, according to its contracts flying for other carriers, gets reimbursed for jet-fuel costs.
XXXXXXXX operates flights for XXXXXX Airlines' XXXXXX service and XXXXXX service.

The company said that flying-operations expenses more than doubled to $409.3 million, up from $171.2 million a year-ago.
Capacity increased 125% during the quarter; the company's fleet of jets totaled 380 planes, up from 210 in the year-ago period.
XXXXXX announced that it would buy XXXXXX from XXXXXX last August for about $427 million. The deal closed in September. See full story.
On Thursday, XXXXXX stock ended down by 3.2% to $28.43. So far this year, the company's shares are up 9.3%.
Calyon Securities reiterated its buy rating and $34 price target on Thursday.
"With the XXX acquisition, we believe XXXXXX has expanded growth opportunities for 2006, mitigated its business risk with XXXXXX, and decreased its business concentration in XXXXXXX flying," wrote Calyon analyst Ray Neidl. "We believe that on a long-term basis there is value in the shares, especially as XXXXXX has negotiated new long-term, guaranteed contracts for both itself and XXXXXX with XXXXXX for 15-year terms."
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Geez, if NWA was reimbursed for fuel, I think they'd be profitable as well, but does it necessarily mean a profitable, efficient operation if the carrier contracting its services didn't reimburse them for high fuel costs?
 
Wow, it is pretty easy to guess the airline though. Yes, the operation is still profitable, because of the way the revenue scheme is setup.

If we had to pay for the fuel, then we would be able to price our product accordingly. Of course, I firmly believe that said company has demonstrated enough compentency in management to have hedged at the proper time.
 
Doug Taylor said:
I'm going to delete the name of the carriers so I don't start a flame war, but I found part of the following news release "interesting":

Geez, if NWA was reimbursed for fuel, I think they'd be profitable as well, but does it necessarily mean a profitable, efficient operation if the carrier contracting its services didn't reimburse them for high fuel costs?
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Great point Doug. It's the reason that these airlines have been more or less immune from the downturn. I think their immunity is about to wear off.
 
Would NWA actually be profitable? That is completely subjective. I think the difference in pay between a SkyWest ramper and a Northwest ramper would come in to play here.
 
But what's your point? That was the contract they negotiated, they had a product, somebody wanted to buy it, they negotiated a deal, everybodies happy.

It's like saying GE wouldn't be profitable if they had to pay 5 times more for their real estate leases. Well yeh, they wouldn't be, but they don't, so they are.

The regionals (in general) don't control and don't have access to the revenue from their flights, they get paid a "fee for departure" and in return for which the mainline covers many of their variable costs, fuel for example.

If you were under the mis-conception that regional airlines are in the business of operating aircraft for passenger revenue then I can see how you'd be confused, but regionals are in the business of operating aircraft full, empty or in between for a fee. How those flights are filled and charged for is mainlines issue. Remember mainline negotiates long term contracts, so if by some miracle they can double the ticket price, they keep the profit, the regional doesn't get any of it.

There are lots of complicated reasons why mainlines want it this way, but mainly they want it that way so they can feed the mainline planes from markets that cannot be served by mainline planes.

This may change - rumor has it NW's whipsaw RFP wants the bidding regionals to take on fuel risk, the interesting thing will be to see which regionals respond and what the final contract looks like because that's a whole new business model, and anybody who enters into such a contract without being able to control ticket prices and having access to that revenue is going to be in a world of hurt (or not, if fuel prices fall :-).

Regional airlines are not airlines in the sense understand when people talk about United and Delta and American - they're airlines because the FAA certifies them as such - but their business model is VERY different.
 
-----If you were under the mis-conception that regional airlines are in the business of operating aircraft for passenger revenue then I can see how you'd be confused, but regionals are in the business of operating aircraft full, empty or in between for a fee. How those flights are filled and charged for is mainlines issue. Remember mainline negotiates long term contracts, so if by some miracle they can double the ticket price, they keep the profit, the regional doesn't get any of it.
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If you were under the mis-conception that all regionals work for fee for departure, then youre wrong. Some do and some dont dependant upon the particular contract.

Everyone knows Doug is talking about Sun Country Right?
 
BTW, the airline in question is Air Zambia and their regional connection carrier A-gummo-a-gummo-a-gummo Airways! :)

I'd like to know how a regional business model and a major airline business model truly differ. I'm mostly interested in knowing how if I have a contract to perform a service for $X, my costs are $Y so my profit ix $X-$Y, but $Y becomes astronomically higher and I've been granted a stipend to cover my increased cost, how am I an astute businessman when I needed an extra allotment for increased costs?

From a basic business sense, is the business model successful from an "artificial" low cost because of the fuel stipend, or from having a business model that actually generates enough revenue (whether it be from the passenger, or a fee for departure if a specific regional has that type agreement which not all of them do) to cover the actual cost of the operation plus enough to post a solid profit?

I'm curious as to what the actual profit was and how much they recieved from their fuel stipend?

I mean, an answer devoid of all corporate "Ray Neidl Mumbo Jumbo"/"New Market Force Paradigm Shifty" touchy-feely analyst verbiage.
 
Doug Taylor said:
I'm curious as to what the actual profit was and how much they recieved from their fuel stipend?
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Typically, based on the 10Qs I have read, and I have not read them for all companies, the fuel reimbursement is less than 100% of the total fuel cost. Mostly because things like repos etc. aren't covered (I assume, the reason isn't given).

Regionals don't make a PROFIT on the fuel reimbursement, it just mostly neutralizes their cost (add on one line, mostly take from another). So fuel is a net cost, but a very small net cost, but if you took it out profit would increase.
 
Doug Taylor said:
BTW, the airline in question is Air Zambia and their regional connection carrier A-gummo-a-gummo-a-gummo Airways!
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Interesting Fact: A-gummo-a-gummo-a-gummo Airways had to buy specially designed stretch ERJs in order to fit their name down the side. Now you know.
 
Doug Taylor said:
I'm curious as to what the actual profit was and how much they recieved from their fuel stipend?
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If the regional is publicly traded, their 10-K should contain that information. I'm far too stupid to figure out what airline you're talking about, and far too lazy to look up the 10-K anyway.
 
Remember you can't just take away the reimbursed fuel costs and say "well clearly they aren't profitable". Without the reimbursed fuel their REVENUE side of the business would have to change and give completly different numbers.

Again - it's like saying GE would'nt make a profit if they paid 5 times more for their real estate - if they paid 5 times more for their real estate they'd charge more for their engines, washing machines etc. and their revenue would be different.
 
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