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Author Topic: [ok] Profit vs. Cash flow, Accounting, Income statement  (Read 19797 times)

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #60 on: December 20, 2013, 12:07:54 AM »
Slots as assets is a rather new thing btw, here's a document from 2008: http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/UK_THL_OpenforSkiesOpenForBusiness_May08%282%29!!1!!.pdf

(it does make sense to me too .. but comparing slot prices dynamically all the time over other possibly free slots at the same at the same airport is not possible .. huge amount of calculation involved)



edit: and oh, no balance sheet yet.
« Last Edit: December 20, 2013, 12:19:08 AM by sami »

BD

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #61 on: December 20, 2013, 04:14:03 AM »
Slots as assets is a rather new thing btw, here's a document from 2008: http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/UK_THL_OpenforSkiesOpenForBusiness_May08%282%29!!1!!.pdf

(it does make sense to me too .. but comparing slot prices dynamically all the time over other possibly free slots at the same at the same airport is not possible .. huge amount of calculation involved)

edit: and oh, no balance sheet yet.
Here are relevant notes in the financial section of a proxy for how US Airways treats (or is to treat - with majority vote?) them.  If I read it correctly, domestic take off and landing slots get amortized over 25 years, but international routes are not amortized (they are annually "reviewed for impairment")...

https://materials.proxyvote.com/Approved/90341W/20110411/10K_84420/PDF/us_airways_group-10k2010_0077.pdf

BD

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #62 on: December 20, 2013, 04:16:48 AM »
Planes amortization: regardless of what airlines do in RL, here in AWS you can use them for 30 years (if I'm correct), so they should amortize in 30 years (adding the scrap income to the residual value)...
16 or 20 years might be reasonable too, as that is when most players seem to be scrapping them.  They may still be flyable, but this decision pattern amongst players suggests their economic life is less than 30.

Offline ezzeqiel

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #63 on: December 20, 2013, 08:41:22 AM »
Here are relevant notes in the financial section of a proxy for how US Airways treats (or is to treat - with majority vote?) them.  If I read it correctly, domestic take off and landing slots get amortized over 25 years, but international routes are not amortized (they are annually "reviewed for impairment")...

https://materials.proxyvote.com/Approved/90341W/20110411/10K_84420/PDF/us_airways_group-10k2010_0077.pdf

It says they amortize all intangible assets that has a lifetime (IE: leased gates with expiration date, along with its correspondent slot pairs), and they say they do not amortize indefinite lived assets... in AWS slots are for lifetime (unless you lose them, which is not amortization, is a loss)

16 or 20 years might be reasonable too, as that is when most players seem to be scrapping them.  They may still be flyable, but this decision pattern amongst players suggests their economic life is less than 30.

Well, that actually depends on every company decision... I don't know when players scrap planes here, but since it will be a fixed value for all players, if statistics show that majority of players scrap them at 16/20 years, then 16/20 years amortization is ok...
« Last Edit: December 20, 2013, 08:50:47 AM by ezzeqiel »

Offline ezzeqiel

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #64 on: December 20, 2013, 08:49:54 AM »
Slots as assets is a rather new thing btw, here's a document from 2008: http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/UK_THL_OpenforSkiesOpenForBusiness_May08%282%29!!1!!.pdf

(it does make sense to me too .. but comparing slot prices dynamically all the time over other possibly free slots at the same at the same airport is not possible .. huge amount of calculation involved)

very interesting article, and you see the problem here:

"commentator remarks, suggest the fair value of BA's landing slots could be worth at least 2bn pounds. This compares with a market capitalization for the BA group of 2.6bn pounds".

Amazing... very important and significant piece of information not revealed in balance sheets (anyway, it seems like a very complicated issue)...


If server speed is at risk, I'd say let's use server calculation power to city based demand !

edit: and oh, no balance sheet yet.

Looking forward to it ;)

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #65 on: December 20, 2013, 08:59:00 AM »
Simplest technically would be if we do not track value changes of the slots at all. Just store their purchase price and that is the asset and that's it.. as mentioned, otherwise would probably be too heavy to calc. Or just a straight-line value decrease ...  ...or do not use them as assets at all.

opion 1 of these three probably...
« Last Edit: December 20, 2013, 09:02:09 AM by sami »

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #66 on: December 20, 2013, 09:34:44 AM »
In cash flow statement the one-time lease payment when ordering new/used planes is still under ops costs. Since that's what they basically are, just pre-paid. (unless you have other ideas for this?)

I think this is one of the items that throws off the income statement the most, by far, for airlines starting up and growing, while getting aircraft from Used Market.  Also for airlines making large lease orders from New market.  It is also an asset of significant value for pre-ordered aircraft, that may right now is completely hidden (sometimes for years, on new leased aircraft).

Therefore, I think there should be a balance sheet category (asset) pre-payments and also an expense category on the income statement for lease pre-payments, separate from regular lease payments.

So when an aircraft is leased, the amount paid would be reflected by increasing the pre-payment asset category, and also on lease pre-payment category (separate from normal leases).

It stays like this until the aircraft is delivered.

During the Day End calculation, when the lease expenses are charged, the system should first check if the aircraft is within the pre-payment period.  If past, everything stays the same.  If it is within the pre-payment period, the asset pre-payment category should be reduced by 1 day worth of lease.

The above is for leasing aircraft.  The equivalent should also be there on the other side, when leasing out aircraft.  A liability category for pre-payments received on Balance Sheet and pre-payment category in income section of the Income statement.

As far as the Income Statement, I think lease pre-payments and terminations are very similar.  They are one time expenses, not regular operating expenses, and could possibly be merged.

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #67 on: December 20, 2013, 04:04:09 PM »
Simplest technically would be if we do not track value changes of the slots at all. Just store their purchase price and that is the asset and that's it.. as mentioned, otherwise would probably be too heavy to calc. Or just a straight-line value decrease ...  ...or do not use them as assets at all.

opion 1 of these three probably...

Or give every slot at an airport a fixed value and scale it based on the % of slots used at airport metric that is already calculated.  The benchmark would be 50% and anything plus/minus would scale accordingly.  If you have $10 million in slots at an airport with 50% slots used, then you have $10 million.  If you have $10 million in slots at LHR and 100% slots are used, then it would be worth $20 million (or more?).

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #68 on: December 20, 2013, 05:25:57 PM »
Route editor stores now the actual/true purchase cost of each slot. Though different editing and adjustments possibilities may cause issues here (for example, you buy a slot for $1000, then later edit the route a lot when the original slot is removed and new one is purchased - should the value be now original $1000+what ever the new slot costs, or should we reduce $1000 from assets and add with the new slot price?   ..probably the latter.    ..it's more complicated when a tiny editing of the route can have big slot cost discount so your editing cost may be $100 when original slot costed $50 000, so of course new value of the slot shouldn't be $100 ...  )


edit: Perhaps like this:

 - original slot value stored upon route opening
 - when editing, if the original slot is used, the editing cost is added on top of original value
 - when editing, if large changes are made and original slot is removed and new has to be acquired (100% price) then the old slot value is removed, and new slot value added
?


...and for now the plan is to keep it otherwise simple, and slot's balance values would not decrease or increase at all (if no edits to routes etc. made).

For transition, we'd need to assign some values for the existing slots too. Or should we just keep them at zero to keep it simple, and only future slots count in the balance sheet / asset calculation?


Will work on aircraft valuation after this
« Last Edit: December 20, 2013, 05:36:26 PM by sami »

Offline ZombieSlayer

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #69 on: December 20, 2013, 05:38:44 PM »
Or give every slot at an airport a fixed value and scale it based on the % of slots used at airport metric that is already calculated.  The benchmark would be 50% and anything plus/minus would scale accordingly.  If you have $10 million in slots at an airport with 50% slots used, then you have $10 million.  If you have $10 million in slots at LHR and 100% slots are used, then it would be worth $20 million (or more?).

I can tell you that, with 55% of the LHR slots, I am paying upwards of $2 million per slot. $2 million x 5339 slots = $10.678 Billion in slots.....
Co-Founder Elite Worldwide Alliance
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Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #70 on: December 20, 2013, 06:01:05 PM »
If you were to graph slot costs, it would follow (I believe it should at least) a sigmoid function: http://en.wikipedia.org/wiki/Sigmoid_function

Slots are basically free in the beginning, rise sharply, and whether you buy the 2nd to last slot or the very last slot the marginal costs are negligible (as represented by the sigmoid).  If we plug in the minimum and maximum costs into the sigmoid function ($0 and whatever the max is--let's say $4 mlllion), then you can take the derivative of the function and you'll end up with a Gaussian distribution (normal bell curve).  We can easily calculate the mean and standard deviations of the bell curve.  z-scores (standard deviations) can be used to do a reverse percentile lookup.  So 99% would be a z-score of 3 and 1% would be -3.  So the final calculation would simply be (slots controlled)*(mean value)+(z-score)/3*(mean value) = (slot value) where the first term is the benchmark value and the second term scales the values based on slot availability.  The simplified equation would be (mean value)*[(slots controlled)+(z-score)/3] = (slot value).

That is how I would do it :)  And yes, JetWest's slots would be worth $10 billion, which I think is realistic for 55% of LHR's slots.

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #71 on: December 20, 2013, 06:03:21 PM »
If you were to graph slot costs, it would follow (I believe it should at least) a sigmoid function: http://en.wikipedia.org/wiki/Sigmoid_function

This isn't really related to this at all, since slot costs are already calculated by the system according to supply vs. demand and so on. Now I was just talking about the valuation in the case of route changes etc - and in case of new route the slot's value is what you paid for it.

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #72 on: December 20, 2013, 06:13:04 PM »
This isn't really related to this at all, since slot costs are already calculated by the system according to supply vs. demand and so on. Now I was just talking about the valuation in the case of route changes etc - and in case of new route the slot's value is what you paid for it.

But it is related.  A slot at LHR on day 1 costs next to nothing, but 10 years later it is worth millions.  I was suggesting an easy way to create an algorithm to reflect the true value versus the price paid.  We all know that the real price of something is only what someone else is willing to pay (see used aircraft market).  You said it would be too intensive to calculate ACTUAL value, so this would be a way to approximate value based on supply/demand (slots available) without getting too granular (hourly).

The value of a slot remains constant whether the route is changed or not because a slot is a slot.  Sure there are better times of day to depart than others, but either way you have the same rights to land at the airport as you did before.  Plus, if you are editing a route and have to pay for a new slot (the price difference anyways), then the previous slot is freed up and you still walk away with having one slot.  If you are going to adjust values based on differences, does this mean we'll start getting refunds if we move to cheaper departure times and/or release slots?  If so, it would be a quick way for airlines to raise cash (closing routes).

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #73 on: December 20, 2013, 06:30:46 PM »
Route editor stores now the actual/true purchase cost of each slot. Though different editing and adjustments possibilities may cause issues here (for example, you buy a slot for $1000, then later edit the route a lot when the original slot is removed and new one is purchased - should the value be now original $1000+what ever the new slot costs, or should we reduce $1000 from assets and add with the new slot price?   ..probably the latter.    ..it's more complicated when a tiny editing of the route can have big slot cost discount so your editing cost may be $100 when original slot costed $50 000, so of course new value of the slot shouldn't be $100 ...  )

I know I am in minority, but I think there is just too complicated.  True value would never really be known.  I can have 30 slots in one hour, I bought 1st one for maybe $500, 25th for $500,000, then my competitor went under, slots freed up, and 26-30th for $200,000.  What are the slots worth?

Then, let's say I lose one slot.  Did I lose the $500 one, or $500,000 one?  I would just keep it as a non-operating expense, without keeping track of the it as an asset.  No need to get bogged down on something that really is a significant value only at 1 airport.

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #74 on: December 20, 2013, 06:50:47 PM »
I know I am in minority, but I think there is just too complicated.  True value would never really be known.  I can have 30 slots in one hour, I bought 1st one for maybe $500, 25th for $500,000, then my competitor went under, slots freed up, and 26-30th for $200,000.  What are the slots worth?

Then, let's say I lose one slot.  Did I lose the $500 one, or $500,000 one?  I would just keep it as a non-operating expense, without keeping track of the it as an asset.  No need to get bogged down on something that really is a significant value only at 1 airport.

Slots are worth market value, i.e. whatever the cost is to buy a slot today.  If you wanted to sell a slot for $500k and a the airport is offering them for $250k, the market value is $250k, right?  True value would be determined by market price, without getting too granular (hourly).  An aircraft on the used market is worth substantially more or less than the calculated value when the aircraft are scarce or abundant, right?  If you lose a slot, every slot should be the same price because they all give you rights to depart at the same airport (ignoring hourly differences).

Also it isn't just one airport (LHR).  I am at Paris Orly in DOTM and paying ~$5 million for one set of slots at that is in 1990--not 2010.  I'm sure the situation is the same in Frankfurt, Amsterdam, etc.   It is a significant expense and it is an asset versus a consumable operating expense like fuel.

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #75 on: December 20, 2013, 07:52:22 PM »
I know I am in minority, but I think there is just too complicated.  True value would never really be known.  I can have 30 slots in one hour, I bought 1st one for maybe $500, 25th for $500,000, then my competitor went under, slots freed up, and 26-30th for $200,000.  What are the slots worth?

Then, let's say I lose one slot.  Did I lose the $500 one, or $500,000 one?  I would just keep it as a non-operating expense, without keeping track of the it as an asset.  No need to get bogged down on something that really is a significant value only at 1 airport.

Yes, I agree and that's why I have based (now finalized also the code) the calculation on what you actually paid here, instead of calculated value of what it could be worth potentially. So the slot's value in books is the amount you originally paid for it. And if you later edit the route and pay more due to that the value is increased by that amount (or in case of new slot due to large edit, the old slot value is erased and replaced with the new one).

If you lose slots by inactivity, they are always the certain individual slots and each one has the individual purchase value assigned to them (= not just some random slots). Same when you close the route - the slots have the certain original value assigned to them and it will reduce your "intangible assets value" in balance sheet by that amount then. If it is the "$500 slot" or the "$50000 slot" what goes away shouldn't matter in my mind and it will be invisible to players anyway  ...

So not that complicated in my mind, and also this way there are no sudden large fluctuations in the slot values and no need to calculate them on the fly for everyone all the time etc. And since they do not expire there are no value reductions over a period of time either.

Slot valuation as a concept is (as pointed) something quite new and very different for each real airline (most don't value them all), but it would be neat to have that here and this in my mind is the simplest method.
« Last Edit: December 20, 2013, 07:55:28 PM by sami »

BD

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #76 on: December 20, 2013, 08:03:57 PM »
edit: Perhaps like this:

 - original slot value stored upon route opening
 - when editing, if the original slot is used, the editing cost is added on top of original value
 - when editing, if large changes are made and original slot is removed and new has to be acquired (100% price) then the old slot value is removed, and new slot value added
?


...and for now the plan is to keep it otherwise simple, and slot's balance values would not decrease or increase at all (if no edits to routes etc. made).
Precision is probably not required, or adds little benefit here so this seems a reasonable compromise.

Offline dmoose42

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #77 on: December 20, 2013, 11:25:40 PM »
Sami, I think that your approach of carrying the slots at purchase value is a good balance of combining accuracy in financial reporting (no more massive day one losses) without making the valuation component overly complex (by ignoring it).  I think this is plenty good (a technical term) and allows us to move forward into other things....  Thanks Sami!

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #78 on: December 21, 2013, 11:53:23 AM »
Aircraft valuation vs. aircraft selling

As already discussed, aircraft valuation will change soon so that you will have initially the purchase value of the aircraft (= what you paid for it), and it will then depreciate using the straight-line method over a period of 25 years to a residual value of 10%. This will be known as the 'book value' of the aircraft (any better terms for it for UI?).

And this is the value that will also replace the current 'aircraft value' on company value calculation and also elsewhere in the UI. The current 'value' metric will be removed, since it has got nothing to do with real bookkeeping etc, it's purely a calculated value.

When you sell the aircraft your staff will recommend a good selling price for the aircraft, which you can of course adjust if you wish. The staff will base their calculation to the market situation (is the plane in demand etc) and aircraft specifications (age etc), and their price prediction will also depend on their staff 'efficiency' (staff number vs. requirement, and their morale).

At first point I'll change the selling price system and the value calculation; depreciation will be added later as an expense on the new income statement.


However, for purchases of USED aircraft .. I think the depreciation period could be different. 20 years from the point of purchase of the plane may be too much. However having two different systems in place is difficult and probably confusing.


edit: Also, when buying out a leased plane the 'value' of the aircraft will be determined by the lessor, so that will change a bit too. (but not much)
« Last Edit: December 21, 2013, 12:34:00 PM by sami »

Offline ezzeqiel

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #79 on: December 21, 2013, 12:30:03 PM »
However, for purchases of USED aircraft .. I think the depreciation period could be different. 20 years from the point of purchase of the plane may be too much. However having two different systems in place is difficult and probably confusing.


I don't think it as two separate systems, or difficult... the used airplane will also depreciate at the same rate... if you have a 15yo plane, you'll always know it will have 5 more years of depreciation; it doesn't matter if you just bought it, or if you own them from the factory, the plane will always have a 0 value at 20yo (regardless the purchase date)

However, on that system book values will never be the same as market prices (they aren't anyway in RL), because if you buy a 21yo plane, it will cost something, but it'll have a book value of 0... (this could be solved depreciating the planes in 30 years; the maximum allowed in aws)


In RL, if you buy something that is 10yo and has a lifetime of 20years, you only depreciate 10 more years, since the first 10 were already depreciated by the seller...


EDIT: to depreciate a full 20 years counting from the purchase date, does not makes sense to me... imagine if you buy a 29yo airplane, it will finishing the amortization at 49yo...
« Last Edit: December 21, 2013, 12:34:17 PM by ezzeqiel »

 

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