Originally Posted by
SebastianDesoto
I have a question about this statement. Please don't take this as a disrespectful challenge, but as in an opportunity to educate. I admit to a severe lack of knowledge about this companies operating procedure. Imagine for a moment you are an instructor in an airline business class and I'll ask a question and you answer it.
What is the motivation to deceive about how these profits are calculated? As I understand it, it is in the companies best interest to be forthright about its operating costs, correct? In order to maintain or increase the value of a companies stock, it has to be honest with it accounting procedure. Wouldn't omitting fuel cost from its operating cost be a glaring dishonesty? Especially if it wants to "sell?" Does not Eagle have its own subset of financial statements?
I understand that there is a round of negotiations with the mainline and the negotiators would like to be able to point at certain aspects of its financial statements to gain leverage, but it sacrifices stock value if it does. Most companies have a major goal to increase the value of their stock. I would think that being deceptive (or just too liberal) with their accounting practices in order to gain negotiating leverage at the expense of their stockholders' trust would not be in the companies best interest. Am I missing something here?
Most regionals operate on contracts to provide a certain amount of capacity in exchange for a fixed, contracted fee. Since fuel costs can fluctuate, a regional which pays for it's own fuel would have to pad that cost by a hefty margin to account for large price spikes...they would charge for a worst-case scenario at all times and pocket the extra when fuel costs are low.
Since regional operating margins are usually slim, no regional would want to contract flying with fuel costs "at risk".
For these reasons, regional contracts almost always stipulate that fuel is paid for by the major airline partner. In most cases, excluding these reimbursed fuel costs from financials is obviously correct.
In the case of eagle, they are actually owned by AMR (The AA holding company). Since they are owned by the people they "contract" for, it might makes sense to have them pay for their own fuel to simplify accounting. Ultimately AMR combines the P&L of AA and AE, it doesn't really matter where the fuel cost is tacked on. If they charge AA, eagle makes a profit. If they charge AE, then AE has a loss and AA has slightly better (but still losing) numbers.
However...AMR has been trying to sell off eagle for several years. In order to make them a viable acquisition, they need to be setup like a stand-alone regional. Nobody would consider buying AE if they were locked into a contract where they had to pay highly unpredictable fuel costs.
In the sense that AE is operated financially like a stand-alone regional, they did make a legit profit. So did some other regionals, based on fixed, guaranteed contract income and few variable costs.