Profit margin v. profitability
Firehoser said:
Good point - you are right - its not the absolute numbers - its the profit numbers in relation to the cost structure - that is in fact the point I was trying to make with my figures. (Don't look at the absolute numbers - look at the profit numbers in relation to the cost numbers). A good non-airline example that also illustrates your point is oil company profits. Their percentage profit hasn't gone up but the price per barrel has - its the producer's price increase that is giving them the huge profit numbers - they are not gouging the public by charging more (in the sense of increasing their profit margins).
But nonetheless every business (and private individual) needs to hang on to some money to weather through the droughts, some money to improve and update infrastructure, and some "play" money available to take advantage of industry opportunites. Its hard to do that on a 7% profit margin with the volumes (cash flow) we are currently looking at, the vunerabilities we have to forces outside our control (fuel price, terrorism, etc.), and the increasing downward pressure on ticket prices as the number of players in our industry increases providing more choice for the customer.
Man, it's tough to keep up with this thread, since Willy has a job and a life, but I can't let you get away with the above so easily. You have a nice way with words, but have completely misrepresented my point. It is NOT about profit against the "cost structure". It IS about profit compared to investment.
You and Joe Merchant talk about profit margin as if it had some magical quality. But you can't talk about profit margin (which isn't even what your original numbers actually showed) as the key indicator of the company's financial well-being. The numbers you were throwing around are return on expenses, which is nice to know, but your 5% "profit margin" is only meaningful in comparison to similarly structured businesses. You can't be profitably in the long term without a positive return to expense ratio, but it is not the definition of profitability. A thin margin makes it tough going, but profitability is all about return on investment. In other words, am I making a good return on the capital I have tied up in the business?
If you want to do a snapshot of ASA's profitability, how about discussing the owner's return on investment? Skywest Holding paid $425M last year for full ownership and you say the 2nd qtr profit was $45M ? That is a quarterly ROI of over 10%, which annualizes to
an incredible 42% ROI. Now that's some profitability. If Willy could get that kind of return on his investments, he would have quit working long ago! And if a new pilot contract really did cost $23M/yr (I can't vouch for that number), it would only reduce the ROI to around 36%. A big drop, but hardly a financial disaster.
So please don't get on here and try and make folks nervous about the company's profitability. Your "profit margin" and "cost structure" talk is all smoke and mirrors. We can make plenty of money for the owners, even if the pilots do get a raise. There is certainly a lot of risk in the airline business, but for now ASA is a real money maker for its owners. So far this venture has been very profitable for the gang out in St. George.