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Author Topic: Negative Value?  (Read 2451 times)

captain1

  • Former member
Negative Value?
« on: April 29, 2009, 04:05:03 PM »
Can someone please tell me how some of these large airlines continue to exist with 100 + aircraft yet are worth -50,000,000. seems like these companies ought to be forced to shrink or go bankrupt.

Offline Big Ern

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Re: Negative Value?
« Reply #1 on: April 29, 2009, 04:19:16 PM »
Mega loans maybe...?

Kontio

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Re: Negative Value?
« Reply #2 on: April 29, 2009, 04:34:00 PM »
Yep, leased aircraft don't count towards airline value but loans are deducted from . So if an airline with all-lease fleet has more loans than cash then the value is negative. No problem there, airline value really has no bearing on whether the airline continues to exist or not. It can just mean that the airline is expanding very aggressively.

eqthomas

  • Former member
Re: Negative Value?
« Reply #3 on: May 02, 2009, 03:33:55 PM »
Okay well this is my question then.  How did all these company get loans big enough to order all these planes?  I have $50MM in cash own 3 planes valued at $70MM and the bank says I can only get a $14MM loan unsecured.  I just don't see how they are able to get large enough loans unsecured and they don't own anything to use as collateral.

Kontio

  • Former member
Re: Negative Value?
« Reply #4 on: May 02, 2009, 03:59:46 PM »
I don't know how these things are calculated but I have much more than 14 million in outstanding loans without any collateral.

Offline JonesyUK

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Re: Negative Value?
« Reply #5 on: May 02, 2009, 05:52:12 PM »
I think that the ammount you can loan depends on your income. With more planes, you make more profit, so the banks will loan you more money.

eqthomas

  • Former member
Re: Negative Value?
« Reply #6 on: May 02, 2009, 07:02:36 PM »
Yeah the loans should be based on you income to a point but if I have $50MM in liquidity there is now reason I shouldn't be able to get an unsecured loan of $50MM.  A company that has liquidity and hard collateral should have a greater bargaining chip over a company that doesn't own anything and probably very limited liquidity.

Offline Sigma

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Re: Negative Value?
« Reply #7 on: May 02, 2009, 07:17:31 PM »
Banks don't lend money just based on how much money you have now, but rather how much ability you've demonstrated to earn money into the future.

So if you're an airline that doesn't own any of its own aircraft, and doesn't have much cash in the bank, but you generate a large return on investment, a bank is going to be very inclined to loan you money.

Whereas, simply having cash now doesn't mean anything.  That doesn't demonstrate any ability to repay a loan with a payoff many years down the road.

Try going into a bank if you're unemployed and asking for a loan for $50,000.  They don't care if you have $100,000 in their bank, they're not going to give you $50,000 if you don't have a job unless you put some of that money you have as collateral -- i.e. you secure the loan.  Which is exactly what you can do in this game -- you can put your planes up as collateral on the loan.

Go into the bank and ask for $50,000 and with a business plan that demonstrates good odds of significant return on investment, and it won't matter to them all that much how much liquidity you have, as long as you've demonstrated significantly good odds of repaying the debt.

The long and short of it --  If you have 4 planes valued at $70MM and want $50M in cash -- why don't you just put up your planes as collatteral?

eqthomas

  • Former member
Re: Negative Value?
« Reply #8 on: May 03, 2009, 12:26:02 AM »
Sigma, I understand this as I am a banking regulator for the US Govt.  The point here is I'm making money and have a steady stream of income, ample liquidity and collateral.  So your point about being unemployed is moot because my airline has a revenue and cash flow stream.  Future cash flow projections are all a part of it and should be but it should not be the tell all.  It is what it is a future projection it is not readily known cash.  Banks do look at liquidity and not just a business plan you have put together.  It is a full process not just one equation being the driver.  That is why you have the long standing principle of the 5 C's of credit with each having multiple parts that make up each.  If you think liquidity doesn't mean much I suggest you go to my agency's site and review our handbooks that we use and banks use in regards to lending. 

www.occ.treas.gov

I don't want to put up my planes as collateral at the time because their is nothing I want to buy at the moment that would require me to.  Cash is king and I have some of my own to use if need be.  My point to this all is how is it all these airlines can get huge amounts of loans with virtually no collateral and limited liquidity?  Where as I had $50MM in liquidity, $70MM in collateral and positive income but if I wanted an unsecured loan I could only get $10MM?  Plus I had already paid two previous loans back early.
« Last Edit: May 03, 2009, 12:31:21 AM by eqthomas »

Kontio

  • Former member
Re: Negative Value?
« Reply #9 on: May 03, 2009, 12:54:47 AM »
eqthomas, you really seem to know the loan business so I bet Sami could use some hints on how things work in real life. As for how it works in the game, my airline is making money quite nicely but I am temporarily about 800k in the red and have some C checks coming up. I lease all my planes. So I went to the bank to see if they would loan me a couple of million to get me over the C checks. I was surprised to find that I could loan about 50M without collateral and 359M if I had full securities. So the game bank doesn't seem to care much about liquidity, I guess.

Offline Sigma

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Re: Negative Value?
« Reply #10 on: May 03, 2009, 01:10:00 AM »
I guess we have to determine if the entire argument is moot -- do we even know that these airlines took huge "mega-loans" to build their empires?

Even before the new system that was implemented this round which is far more generous with the money than the last in my experience, there were players that could attain huge fleets in very short order.  They're not taking out huge loans, they're "gaming the game".  They know precisely what one needs to do to earn huge rates of return, expand the fastest, and earn the largest sums of money as fast as possible.  You can see it now when you look at the Stats, but it's even more evident in the opening months of the game; these players are ordering numerous brand new planes right from the very first day and only expand exponentially from there.  A small handful of players, I presume having played countless beta games is a huge help, just know precisely what they need to do to grow incredibly fast.  I'm sure loans play a part, but it's definitely not the driving factor of their growth.

I'm sure my competitors in DFW in Jet Age #1 are thinking the same of me, even while I look at others that are leagues beyond me.  My competitors all started at the same time as me, but are struggling with 1/4th to 1/10th the market-share that I have, and only able to order small handfuls of narrow-bodies at a time with total order queues that can be counted on one-hand.  My airline on the other hand, has got Sixty wide-bodies on order, and has had as many as over 100 total planes on order at once.

And, no, loans have hardly played a role at all.  I've really only taken loans if it means taking a small one to get an even 10 planes on order rather than the 9 I can afford with cash on-hand, and I immediately pay it back.
« Last Edit: May 03, 2009, 01:18:29 AM by Sigma »

eqthomas

  • Former member
Re: Negative Value?
« Reply #11 on: May 03, 2009, 01:19:01 AM »
Konti, I was just trying to get some understanding because it just didn't make much sense.  I hope you didn't take my post wrong because it was not a shot at you.  I would help if asked.  The current system is a start though.  

Kontio

  • Former member
Re: Negative Value?
« Reply #12 on: May 03, 2009, 06:42:14 AM »
Konti, I was just trying to get some understanding because it just didn't make much sense.  I hope you didn't take my post wrong because it was not a shot at you.  I would help if asked.  The current system is a start though.  

It didn't even cross my mind that your post would be a shot at me and nothing like that was intended on my part either. Sami has been asking about real-life experience while developing similar complex features before, that's why I mentioned it.

captain1

  • Former member
Re: Negative Value?
« Reply #13 on: May 05, 2009, 04:26:47 PM »
The thing I'm trying to figure out is in previous games, once you were in the red for a certain amount of time you were forced into bankrupcy. We are now 2 years into the game and there are mega airlines that have been -50 million or more in value, continually have a negative profit margin but are still growing and ordering aircraft which creates a huge backlog on the new aircraft ordering system. you can argue they have liquid assets of value with owning these aircraft but the amazing thing is most of these companies here have a fleet that is entirely leased. this seems highly unrealistic.

Kontio

  • Former member
Re: Negative Value?
« Reply #14 on: May 05, 2009, 04:29:51 PM »
The thing I'm trying to figure out is in previous games, once you were in the red for a certain amount of time you were forced into bankrupcy. We are now 2 years into the game and there are mega airlines that have been -50 million or more in value, continually have a negative profit margin but are still growing and ordering aircraft which creates a huge backlog on the new aircraft ordering system. you can argue they have liquid assets of value with owning these aircraft but the amazing thing is most of these companies here have a fleet that is entirely leased. this seems highly unrealistic.

The thing that is unrealistic is the way the game calculates profit margins etc. A negative profit margin does not mean the company is losing money.

Online Sami

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Re: Negative Value?
« Reply #15 on: May 05, 2009, 04:38:27 PM »
Negative value does not mean that the company does not have money, necessarily. It may just mean that company has 100m cash but 400m loans, thus value -300m ...... If you then do NOT have cash you cannot get more loans (unless you're doing otherwise great) and you definitely cannot order planes if you don't have cash.

What's the issue here?

eqthomas

  • Former member
Re: Negative Value?
« Reply #16 on: May 05, 2009, 06:45:14 PM »
Sami,

The issue I had here is how were a lot of airlines here able to obtain huge amounts of loans for these huge orders with probably very limited liquidity and virtually no collateral.  Then when I look at my airline with liquidity, cash flow and collateral it was telling me I could only get $10MM loan unsecured even though I had 5x that amount in liquidity, growing cash flow and owned planes?  Then I look at the loan page now and it still says I can only get $14MM unsecured loan and $109MM loan secured with collateral.  How is that given I have $23MM in liquidity, $140MM+ in owned planes and weekly cash flows that are now double what it was when I started in this thread?  Then my credit rating is still a lower B?  Then another thing if you have a negative equity position you are technically insolvent so why would the bank still give you loans as a going concern until you replenish your capital position?
« Last Edit: May 06, 2009, 03:00:16 AM by eqthomas »

Silentradar

  • Former member
Re: Negative Value?
« Reply #17 on: May 06, 2009, 08:17:01 PM »
I am trying to wrap my head around this same issue as well.  I am glad someone said it more eloquently than I would have.  I am watching for a response with great interest.

Offline swiftus27

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Re: Negative Value?
« Reply #18 on: May 06, 2009, 09:15:55 PM »
I personally took issue with this when an airline can still pay for their maint checks despite NO cash.  As long as they are set to auto, the will still happen. 

Also, how are they making payroll?  Shouldnt something happen to workplace morale when their employer is more in debt than the US Government!?

Offline Sigma

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Re: Negative Value?
« Reply #19 on: May 06, 2009, 10:06:38 PM »
eqthomas has a potentially legitimate gripe with loans -- why some people were seemingly able to procure large loans while others weren't. 

But having debt, even a lot of it, doesn't preclude "making payroll" or being unable to make maintenance checks.   Looking at a company's value gives no indication at all to cash on hand.  Debt is a major part of business.  Look at the largest companies in the world and you'll find that virtually every single one of them carries tens of billions in debt; airlines would most certainly fall into this category.  It doesn't mean they can't make payroll.  In reality it's quite the opposite -- they use other people's money (i.e. loans) to pay for things whenever possible, precisely so that they can keep their cash for day-to-day operations rather than tying it up in capital spending that can take years to pay off.

The issue isn't that some airlines have massive amount of debt.  I haven't see any indication that these people are completely insolvent, without the cash flow to pay their loan payments.  The issue is that some airlines were able to use the system MUCH more to their advantage than others.  And if it's not a bug it'd be nice to know how they managed to do it.  If that's indeed what happened at all, it's difficult to say since we can only see the highly abstract figure of airline value.

 

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