Gorilla said:
Cash is confusing. I am a technical guy, not a business major. If AA has 5 billion in cash, if they stuck it in a money market at 5%, the annual return would be $250,000,000, from the cash interest alone. At a more normal 10% for a business investment, you're looking at $500,000,000, which would be a tidy profit without turning a wheel.
Can someone with some business acumen explain to us engineer dorky types what function the cash serves? Is it a buffer againt operational problems? AA debt is high. Why not use the cash to beat the debt down, or help refinance at a lower rate?
imagine yourself as an airline. you have $20 in your wallet (short term cash) and zero dollars in the bank (long term cash).
your monthly salary of $4,000 is your revenue and is deposited in your checking account at the beginning of the month.
your expenses are simply:
mortgage $1500
car $500
bills/utilities $700
gas $200
cable $100
credit card interest $200
other $100
assume you used a credit card, which you have a balance, to pay off your bills, gas, and cable. you pay off 90% of this each month ($900 = .9 x [$700 + $200 + $100]) from your checking account.
so you have a $700 profit (revenue minus expenses) right? yes. it is an operating profit.
your house and car are considered assets of your airline but they constantly are losing money due to their "usage" thus a depreciation expense must be made to reflect the "loss" to these assets. this expense is $1000 this month. so now you post a "loss" of $300 ($700 - $1000).
your long term cash position goes like this:
$0 + $4000 (revenue) - $1500 (mortgage) - $500 (car) - $900 (credit card) - $ 150 (spending money for your wallet) = $950.
your short term cash position goes like this:
$20 - $100 (other expenses like mcdonalds, that cd you wanted, etc) + $150 (from checking) = $70.
so now you have $1020 in "cash", a monthly "loss" of $300, an operating "gain" of $700.
keep in mind this is an EXTREMELY simple example. there are lots of "depreciations" and accounting tricks used.
as to why they do not pay down the debt. my guess is they calculate an internal rate of return on their money. if that rate of return is higher than the interest they are paying to obtain that money then it makes sense to use the money elsewhere rather than paying down the debt.
