Change to Credit Rating and Loans, Depreciation and more.

[swiftus27]

This is going to be fluid as a discussion so we can throw some ideas against the wall.

Here is a sample "proposal":

1.  Past 3 years operational income history.  (40% weighting).   We'd need to set operational profit margin to get the top score in this category and for subsequent ones.    Perhaps prior year is weighted 25%, two years ago is 10% and three years ago is 5%.   
2.  Past 4 quarters operational income history (30% weighting).  We started looking back three years but how are you doing right now?   Add that 4th fleet and suddenly your margins drop to where there's serious cash flow issues.   
3.  Owner/Shareholder Equity Position (20% weighting)   If there is a positive value to the business you get more points in this category.   See below regarding depreciation.
4.  Current Cash Position (10% weighting)      Seriously... if you are begging a bank for a loan because you have no cash, that's a serious red flag.

We should overhaul the depreciation of the airplanes as well.  Start with book value, and reduce it over a 10 or 15 year schedule until it is worth $0 book.  Any scrapping is a taxable event at this point.   Under current model you are almost always scrapping well below book value for a 15-20 year airplane.  The lack of depreciation in this game DRASTICALLY overstates airlines' values.   Allowing more for depreciation will mean lower taxes for the airlines but larger capital gains hits when their planes get disposed of.

Lastly, do we need to incorporate market value?   If you are overpaying for planes (or underpaying if you get a huge bonus for launch customer) the MV of your airplanes should be reflected in an airline value.  Hard part is "market value" in AWS would also need to be overhauled as well. 

Thoughts?   

[schro]

The credit rating doesn't seem to care if there are missed payments - if you miss your payment on a Monday, then go cash positive on a Tuesday, you're right back to AAA as if it never happened.

Swiftus - from an accounting perspective, your proposal is not.... right. If straight line depreciation is used, then the formula is the difference between acquisition cost and expected scrap value over the years of its useful life. The game models this fairly well, but as you point out, it seems like it's depreciating down to FMV at year 25 instead of scrap value at year 25 because there are virtually no cases where you receive scrap payment above book value.

For physical assets, mark to market does not apply.

[swiftus27]

Can't disagree.  I am not asking to be fully GAAP compliant.   After all, Owner's Equity is not a liability irl. 

I don't want to use a 25 year depreciation schedule for an airplane here.   I feel it should be moved up significantly to 15 years maximum.   Owner's equity is just WAY too overstated because MV is always way below BV.    We often have to take extreme losses on sold planes just to get rid of them.   Instead of getting the tax savings on the sale, perhaps we increase depreciation so that BV mirrors MV and that tax savings are felt every year instead of these huge lump sum events. 

Also, yes, missed payments should be incorporated to the credit.

[Todorojoz]

Depreciation of 25 years isn't unrealistic though. You are supposed to depreciate things over the coarse of their useful life. Obviously different aircraft and different companies are going to look at that differently. But expecting most aircraft to last 25 years is realistic. In AWS the average is lower more due to the use of a limited number of fleets, so you have to quickly change from one fleet to another, and the real average her is more likely closer to 20 years. Although, that would be a cool data point to actually get.

Now maintenance (Costs of A, B, C, and D Checks) get added into the value of the aircraft. Is it possible that this is effecting the ending result generally being significantly higher than the scrap cost? The numbers are usually much closer to each other right before a D Check that right after one. This addition to the value is correct to do and is likely having an impact. I haven't collected data to know if this is the big reason or just a small part of it though.

[DanDan]

definitely an issue: the amount of load one can take, the runtime of loads...

example:
an airline worth, value 1B$, rating AA can take loans of about 400M - all with securities
maximum load duration 6 years.

reality:
many airlines have liabilities that are multiple times as high as equity (currently even higher than 20:1).

[Adphlp87]

I think we could just do with a couple of changes with loans.

• Consolidate Loans to change repayments to clear slower or quicker
• Increase credit limit based on value of aircraft on books.