Profit Sharing Misconception / Question ?
11-26-2016, 06:55 AM
#1
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Profit Sharing Misconception / Question ?
Just an academic discussion/question:
I am certainly not an expert in international accounting and I hope someone will chime in and correct me if I am wrong, but I think we may be laboring under a pretty big false impression of how Delta's various foreign investments and joint ventures affect our profit sharing. I'll borrow notEnuf's post from earlier today in another thread as a starting point:
I hear a lot of people say that one of the main reasons it is important to maintain our profit sharing is because that is the only way we will share in the profits of Delta's growing overseas investments and the expanding number of joint ventures.
The problem with that is I don't think it works the way people assume.
Management is happy to let this misconception go uncorrected because we pilots are fooling ourselves into thinking it will be reflected in our profit sharing checks. It won't.
Let's just take Virgin Atlantic as an example since it is Delta's largest investment.
If Virgin makes a profit that does not mean that Delta Air Lines, Inc. books any of that profit.
Delta may be a major shareholder but the only way we "share" any of that profit would be if Virgin paid a dividend or Delta sold the stock. Despite being increasingly "inter-connected" they are still two separate corporations. Virgin's profit is not Delta's profit. At least not directly or immediately.
To think that we are going to be able to capture any of the profit made by Virgin or GOL or Aeromexico as part of our pilot profit sharing check is very misleading. Delta would have to "repatriate" that money and bring it to the Delta corporate income statement before we see any of it.
Put another way - if Virgin becomes hugely profitable and the stock goes way up then that is great for Delta and it will be reflected on Delta's balance sheet but it is not profit. It is not going to be shared by the pilots.
That would be my understanding anyway.
Someone please educate me and point out why I am incorrect.
I am certainly not an expert in international accounting and I hope someone will chime in and correct me if I am wrong, but I think we may be laboring under a pretty big false impression of how Delta's various foreign investments and joint ventures affect our profit sharing. I'll borrow notEnuf's post from earlier today in another thread as a starting point:
Originally Posted by notEnuf
2016 could be the peak for core delta profitability. This is exactly why they have pursued the "virtual merger" strategy. The investments in global network carriers will continue to bring revenue and profits as they expand the industrial model. Virgin Atlantic greatly improved profitability after the Delta team engineered their turn around. The same is happening at GOL now. Aeromexico has announced expansions since the initial Delta investment. Delta also bought 10% of the H shares of CEA.
The corporate profit margin may stay about the same but with this corporate expansion comes more profits.
The corporate profit margin may stay about the same but with this corporate expansion comes more profits.
The problem with that is I don't think it works the way people assume.
Management is happy to let this misconception go uncorrected because we pilots are fooling ourselves into thinking it will be reflected in our profit sharing checks. It won't.
Let's just take Virgin Atlantic as an example since it is Delta's largest investment.
If Virgin makes a profit that does not mean that Delta Air Lines, Inc. books any of that profit.
Delta may be a major shareholder but the only way we "share" any of that profit would be if Virgin paid a dividend or Delta sold the stock. Despite being increasingly "inter-connected" they are still two separate corporations. Virgin's profit is not Delta's profit. At least not directly or immediately.
To think that we are going to be able to capture any of the profit made by Virgin or GOL or Aeromexico as part of our pilot profit sharing check is very misleading. Delta would have to "repatriate" that money and bring it to the Delta corporate income statement before we see any of it.
Put another way - if Virgin becomes hugely profitable and the stock goes way up then that is great for Delta and it will be reflected on Delta's balance sheet but it is not profit. It is not going to be shared by the pilots.
That would be my understanding anyway.
Someone please educate me and point out why I am incorrect.
11-26-2016, 07:58 AM
#2
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From 2015 10-K
We account for the investment under the equity method of accounting and recognize our portion of Virgin Atlantic's financial results in other expense in our Consolidated Statements of Operations. As part of the equity method of accounting, we allocated the investment in Virgin Atlantic to (1) our portion of their equity, (2) adjustments in the fair market value of assets and liabilities and (3) implied goodwill.
Additionally, revenue will be generated by selling tickets on code share flight just as it is today but in greater amounts. The use of other carriers capacity has been noted as what makes the virtual merger more efficient than organic growth.
Equity Method Investments
In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323)." This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used since the investment was acquired. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in AOCI will be recognized through earnings.
We early adopted this standard in the March 2016 quarter. Although none of our available-for-sale or cost investments qualified for use of the equity method during 2016, we expect the tender offer for additional capital stock of Grupo Aeroméxico to be completed in the next six months, at which point our investment will qualify for the equity method of accounting. As of September 30, 2016, the unrealized gain recorded in AOCI related to our investment in Grupo Aeroméxico was $4 million.
Equity Method Investment
Virgin Atlantic
In June 2013, we purchased a non-controlling 49% equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways , for $360 million . In addition, effective January 1, 2014 we began an antitrust immunized joint venture with Virgin Atlantic, which allows for joint marketing and sales, coordinated pricing and revenue management, network planning and scheduling and other coordinated activities with respect to operations on routes between North America and the United Kingdom. As a result of this relationship, our customers have increased access and frequencies to London's Heathrow airport from points in the U.S., primarily from our hub at New York's JFK airport.
In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323)." This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used since the investment was acquired. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in AOCI will be recognized through earnings.
We early adopted this standard in the March 2016 quarter. Although none of our available-for-sale or cost investments qualified for use of the equity method during 2016, we expect the tender offer for additional capital stock of Grupo Aeroméxico to be completed in the next six months, at which point our investment will qualify for the equity method of accounting. As of September 30, 2016, the unrealized gain recorded in AOCI related to our investment in Grupo Aeroméxico was $4 million.
Equity Method Investment
Virgin Atlantic
In June 2013, we purchased a non-controlling 49% equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways , for $360 million . In addition, effective January 1, 2014 we began an antitrust immunized joint venture with Virgin Atlantic, which allows for joint marketing and sales, coordinated pricing and revenue management, network planning and scheduling and other coordinated activities with respect to operations on routes between North America and the United Kingdom. As a result of this relationship, our customers have increased access and frequencies to London's Heathrow airport from points in the U.S., primarily from our hub at New York's JFK airport.
We account for the investment under the equity method of accounting and recognize our portion of Virgin Atlantic's financial results in other expense in our Consolidated Statements of Operations. As part of the equity method of accounting, we allocated the investment in Virgin Atlantic to (1) our portion of their equity, (2) adjustments in the fair market value of assets and liabilities and (3) implied goodwill.
Additionally, revenue will be generated by selling tickets on code share flight just as it is today but in greater amounts. The use of other carriers capacity has been noted as what makes the virtual merger more efficient than organic growth.
Last edited by notEnuf; 11-26-2016 at 08:42 AM.
11-26-2016, 08:43 AM
#4
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The president-elect is stating he wants to reduce corporate taxes and one reason is to entice companies to repatriate their overseas cash. My bet is that will happen.
Also, I'm not sure if we have any money parked overseas so this concern might be a moot point. As of the end of 2014 we did not make Bloomberg's list of top 299 companies for parking overseas money.
U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes - Bloomberg
Also, I'm not sure if we have any money parked overseas so this concern might be a moot point. As of the end of 2014 we did not make Bloomberg's list of top 299 companies for parking overseas money.
U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes - Bloomberg
11-26-2016, 08:44 AM
#5
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Highlighted above. Negative expenses (yes they exist) are added to revenue in P&L. A negative expense from any source can be used to offset an expense, and is hidden when its lumped in with a general category like "Other expenses." Yes Denny, any revenue in excess of expenses is profit. All revenue sources contribute to our PTIX.
AOCI = Accumulated other comprehensive income
AOCI = Accumulated other comprehensive income
Last edited by notEnuf; 11-26-2016 at 08:59 AM.
11-26-2016, 10:05 AM
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Originally Posted by notEnuf
From 2015 10-K
As of September 30, 2016, the unrealized gain recorded in AOCI related to our investment in Grupo Aeroméxico was $4 million.
Equity Method Investment
Virgin Atlantic
As part of the equity method of accounting, we allocated the investment in Virgin Atlantic to (1) our portion of their equity, (2) adjustments in the fair market value of assets and liabilities and (3) implied goodwill.
Additionally, revenue will be generated by selling tickets on code share flight just as it is today but in greater amounts. The use of other carriers capacity has been noted as what makes the virtual merger more efficient than organic growth.
Equity Method Investment
Virgin Atlantic
As part of the equity method of accounting, we allocated the investment in Virgin Atlantic to (1) our portion of their equity, (2) adjustments in the fair market value of assets and liabilities and (3) implied goodwill.
Additionally, revenue will be generated by selling tickets on code share flight just as it is today but in greater amounts. The use of other carriers capacity has been noted as what makes the virtual merger more efficient than organic growth.
"Unrealized gain" and "adjustments in the fair market value of assets" are not counted as profit for purposes of calculating PTIX. Those are balance sheet items. Not P&L.
Denny-
I think you are correct that the "revenue sharing" money will be part of Delta's profit. Just not the profit made by the partner corporations.
Not sure though. I'm a state university guy.
We need to hear from our Harvard/Yale/Goldman Sachs pilots.
11-26-2016, 03:26 PM
#7
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Gains and losses on stocks are required to be included in earnings under the equity method. The real addition to revenue will be the increased Delta portion of shared revenue.
The preferred method for the virtual merger is to use capacity from partners rather than fly more Delta metal. That is more efficient and doesn't increase capacity, which in turn provides pricing power by limiting supply.
The preferred method for the virtual merger is to use capacity from partners rather than fly more Delta metal. That is more efficient and doesn't increase capacity, which in turn provides pricing power by limiting supply.
11-27-2016, 04:54 PM
#8
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Originally Posted by notEnuf
Gains and losses on stocks are required to be included in earnings under the equity method. The real addition to revenue will be the increased Delta portion of shared revenue.
The preferred method for the virtual merger is to use capacity from partners rather than fly more Delta metal. That is more efficient and doesn't increase capacity, which in turn provides pricing power by limiting supply.
The preferred method for the virtual merger is to use capacity from partners rather than fly more Delta metal. That is more efficient and doesn't increase capacity, which in turn provides pricing power by limiting supply.
Whether or not this is included in our PTIX calculation, I don't know.
As to your second statement, I agree with what you said. If their mega virtual merger code sharing system was to reduce the risk of going BK again, I'd almost be ok with it. I fear that, no, I believe, that they are entering these investments to keep total head count down at Delta in the near term, and preventing the type of growth that would kill us in another downturn, in the long term. Actually I think it's just less risky in their eyes to buy a portion of another airline than buy more Widebodies for Delta, and then just organize schedules.
I'd rather see them investing in widebodies for us to fly. Anyone who's been to Paris or Amsterdam has seen the amount of Heavys they have, just sitting at the gates. Their International route network will make your eyes water, if you like that type of flying. But, even though no one wants to talk about the unfairness of government subsidies, neither the French nor Dutch governments are going to let Airfrance/KLM go Tango Uniform.
However, I don't know how much the Chinese government feels about China Eastern, or the Brazilian Gov't feels about Gol. I doubt that Queen would lose much sleep if Virgin Atlantic suddenly found themselves under water with debt. These three investments might not be as safe in terms of government backing.
I'm sorry for the long get-nowhere post. I started this thread with the idea that Delta was investing in these airline's and codesharing with them because if a sudden downturn occurred, their respective Governments would bail them out, which would be way lower risk than growing organically into a downturn. Then, as I was typing, I realized that we don't have an investment in the only code share partner that is low risk. The only investment that might be protected by Government help is Aeromexico. Gol, VA, and CE would probably be allowed to fend for themselves, all things considered.
Anyway, I'll leave this up here, if it's ok. It might spur debate, or thoughts about Delta's objectives with our code sharing network. I don't think it's strictly to screw us over, although I'd like to see us benefit more.
We all might be thanking all things holy if another big recession happens, that we didn't just buy 50 777-300's or 787's.
11-27-2016, 10:37 PM
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From our PWA:
"(PTIX) means, for any calendar year, the Company’s consolidated pretax income calculated in accordance with Generally Accepted Accounting Principles in the United States and as reported in the Company’s public securities filings but excluding..."
The key word here is "consolidated". That means ALL sources of income.
"(PTIX) means, for any calendar year, the Company’s consolidated pretax income calculated in accordance with Generally Accepted Accounting Principles in the United States and as reported in the Company’s public securities filings but excluding..."
The key word here is "consolidated". That means ALL sources of income.
11-28-2016, 02:11 AM
#10
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Big E, I believe there are a couple additional reasons for all the JV code sharing Delta has been accumulating. In addition to sharing the risk in an economic downturn, the code sharing allows Delta to maintain their Capacity Discipline strategy and also eliminates competition on those routes.
What is bothersome to me is that we (DALPA) continue to allow our 50% of this JV International flying to be eroded in every new TA, this TA will lower our 'half' of the pie down to 46.5%. What will we shrink it to in the next TA, and the one after that? When are we going to draw a line and say, 'NO MORE!' ?
What is bothersome to me is that we (DALPA) continue to allow our 50% of this JV International flying to be eroded in every new TA, this TA will lower our 'half' of the pie down to 46.5%. What will we shrink it to in the next TA, and the one after that? When are we going to draw a line and say, 'NO MORE!' ?
Last edited by Timbo; 11-28-2016 at 02:30 AM.
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