Understanding profit sharing. It's the fuel.
 

So, I realize as I age I'm becoming increasingly lazy and more error prone so if one of you young geniuses find an error here please don't hesitate to speak up.

Now, having said that I have long been a little mystified by the PS calculation whilst at the same time knowing that it must be amenable to a simple understanding. So, today I decided to look at the number and see if I couldn't gain a better understanding of what is going on. Namely why was 2015 so high compared to last year when the company is increasing per share earnings year over year?

The first element I looked at was the annual graphic the company provides:

https://i.postimg.cc/j5RX6s9N/PS2018a.jpg


and then looked at the financials from Yahoo Finance:

https://i.postimg.cc/QxvJ4gwj/UAL-financials.jpg

What I learned is that it's not too hard to understand.

First you have the profit of $3.585 billion. Next you have the revenue of $41.3 billion. 6.9% of 41.3 billion is $2.85 billion. 10% of that amount goes to pilot PS. Then $3.585-$2.85= $735 million and 20% of that goes into the pilot PS pool. Then those numbers are divided by the total payroll and added together and divided by the total payroll and THAT is the % the pilots get.

I realize that little sequence is not trivial to follow, but here's the important take away. The $41.3 billion is the revenue number for 2018 on Yahoo and the $2.658 billion is the Pre-tax profit. It's not that complicated to see from whence the numbers come.

But, all of this leads to my primary point. Fuel.

https://i.postimg.cc/4yPpQMq3/fuel.jpg

Fuel costs are the single biggest factor that impact PS. I've already wasted an hour on this, and I want to spend time with my family, but look for further elucidation soon.

Joe Peck

A few added graphics:

https://i.postimg.cc/85wbt2QY/PS2018b.jpg

https://i.postimg.cc/3wX1DyLY/PS2015.jpg

So then all that leads to a simple way to come up with an estimate for next year that should be in the ball park:

Looking at Yahoo Finance and Schwab research it looks like the median for earnings growth for 2019 is about 20% or so putting next years unadjusted pre-GAAP earnings number forecast around $2.68 x 1.2 =$3.2 and revenues are forecast at around $43 billion. Next we add back a guess on "Special Charges" which have ranged from $100 to $500 million over the last several years, and lastly we add back last years profit sharing number (going from memory here) of about $340 million and batta-bing-batta-bang we have our earnings number for PS calculation forecast at $3.2 billlion + $250 million special charges + $340 million PS2017 = $3.79 billion. Last but not least we need a guesstimate of payroll so I'll do one number with payroll unchanged and one number with payroll up 5%.


Now we have the three numbers we need for a guesstimate:

Revenue $43 billion
Earnings $3.8 billion
payroll $7.8 billion

So first 6.9% of $43 million = $2.967 billion and that is the amount of profit of which we get 10% then $3.8 - $2.967 = $833 million and that is the amount of profit of which we get 20%.

So $2.967 x .1 = $297 million / $7774 oayroll = 3.8%
and $833 x .2 = $166 million / $7774 payroll = 2.1%

Finally 3.8 +2.1 = 5.9%

If payroll goes up 5% the percentage falls to 5.6%.

If we save a $1 billion dollars in fuel the percentage goes up to 8.5% or said another way - every $100 million in fuel savings adds about 0.3% to PS.

The key here is that in 2015 when we had a huge PS number oil was around $40 a barrel and our fuel costs were about $3 billion less, and as fuel cost have risen ticket prices (revenue) have not gone up equally.

Also interesting to note that Delta's PS for 2017 was based on revenues of $44 billion and profit of $5.5 billion and oddly enough their payroll number is lower so all in all it makes for a much bigger payout, but not because of the mechanism behind the calculation as they get 10% of the first $2.5 billion which is darn close to the $2.7 billion in our 2017 calculation. It's all about the roughly $2 billion in additional profit they have.

I know, I know . . . who cares right. I just enjoy playing with numbers and have always wanted to have a better understanding of how PS works and now I do, AND I just thought maybe some one else out there might share my enjoyment of playing with numbers. :D

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This

(FWIW, UAL management has promised the investors greater profitability and the recent push toward a better mix of premium passengers combined with increased domestic capacity is their very public plan.

If it works, UAL profit sharing will increase dramatically because of the methodology Sunvox explained in this thread.)

Congratulations Joe, you've reset the calendar for "first-thread about (next years) PS" by a long shot. PS threads typically don't show up till football season. This will be tough to beat. Well done! :D

On a positive note, with the company spending millions on uniforms, painting planes, and the max grounding, the math this year will involve numbers small enough for even a pilot to calculate.

IMO, PS is a form of board room Three-Card Monty where the dealer gets to play behind closed doors.

1. We keep PS in the next contract and the companies profits will be shuffled this way and that so that the actual pile of cash will be limited.

2. We give up PS for another $2/hour and within two years the companies profits will be so stratospheric than we'll kick ourselves for getting rid of it.

I think MU a big enough juggernaut that we ought to get CI's, a raise and keep PS. Anyone try and Non-Rev lately? They're printing cash.

That was one of the points of my wanting to understand better what was behind the numbers, and I feel that I can safely say I have a much better understanding now, and more importantly that understanding makes me disagree with the above idea.

The truth is the basic numbers are super simple: tickets price x number of passengers - fuel and labor and airplane cost. The ancillary minor items do not meaningfully impact PS.

Bottom line: As much as it seems the company can play games with profit sharing it's simply not true. What is true is that profits in our industry are highly linked to oil prices.

Perhaps you're right. But I recall seeing an astonishing amount of new ramp gear right before we went into bankruptcy. New deice trucks, tugs, etc everywhere. They've given me plenty of reasons to remain skeptronic.

There are no open seats anywhere lately. We should be raising ticket prices.