Originally Posted by
HedgeFundFlyer
I'm surprised by the number of posters who automatically assume that the target operating margin is 'arbitrary'. There is a cost to doing business, the weighted average cost of capital, that takes into account the cost of the debt the company has to service as well as the cost of the equity that has been put into the company. One could open up philosophical discussions about calculating the cost of equity, but the main point is that there *is* a cost. If a company is earning less than its cost of capital, it's losing money over the long-term (some like to say "destroying capital"), and it's a dead certainty that this is the worst thing for everyone involved. It would be the same as taking out $100 in debt and putting it into a 5% bank account but paying 7% on the $100 -- you're losing money.
This should not be taken as a broad defense of the BA board and mgt. A 10% operating margin does not necessarily equate into a positive return on capital. This is a problem with setting easy-to-understand incentive bonuses, and any simplistic bonus scheme is susceptible to a "letter of the law, not spirit of the law" attempt to fulfill its terms.
But then that 10% operating margin goal might actually be a fairly reliable proxy for the company earning its cost of capital -- my suspicion is that the goal was arrived at after countless meetings with management consultants and investment bankers.
Of course this is neither here nor there in deciding whether to do IAH-DXB on BA in February.
Cheers.
Hedge Fund Flyer,
A good explanation and a noble effort, but I fear you are wasting your time trying to explain real world economic realities to several people on this board who still seem to be living in some 1970's socialist dream land where BA is a bloated flag carrier which is more of a source of British Nationalist pride rather an efficient air carrier. When one sees quotes like "sipping glasses of port in the boardroom", and comments about the disgusting nature of the City of London and the gap between haves and have nots its clear where these people are coming from. Too many people in Britain still seem to struggle with the whole concept of Capitalism and the Global Free Market and are clinging to very outdated feelings of affection for a failed Socialist system. They seem to view our corporate leaders as ignorant, fat uncaring devils looking to nothing more than feather their own nests whilst the noble gallant "workers" struggle on in horrible conditions sacrificing their own bodies and minds to serve the long suffering customers out of some sense of altruism. These people forget that the capital markets create jobs (surprise ! governments dont), create research and development and innovation and vastly increase the standard of living around the world.
Capitalist rant over