Midwest Q3 Results
Midwest posted their 10-Q for the 3rd quarter today. It appears they are not doing the traditional PR piece or conference call to translate some of the numbers into English. I hope to spend more effort pouring over it today but don’t have the time right now. But here are some things which jump out at me or raise questions.
Three months ended 9/30/07
Net loss of $3.86m versus net profit of $1.68m last year
Nine months ended 9/30/07
Net profit $9.00m versus net profit of $1.80 m last year
By segment:
Midwest Mainline
Third Quarter
2007 - $0.989m
2006 + $1.664m
First Nine Months
2007 + $18.578m
2006 + $5.398m
Midwest Connect
Third Quarter
2007 -$2.868m
2006 +$0.020m
First Nine Months
2007 -$9.567m
2006 -$3.594m
--CASM did indeed drop for both Midwest mainline and Midwest Connect for the quarter year over year. (This drops are in spite of a hit to operating results based on fuel contract value change discussed, and the cost of the takeover fight, both discussed in the next sections). The increased stage length is largely responsible for the drop in CASM in spite of other unfavorable comparison items.
Midwest Mainline Q3
2007 11.39 cents per mile
2006 11.56 cents per mile
Midwest Connect Q3
2007 20.74 cents per mile
2006 28.62 cents per mile
--Cost of takeover flight is not entirely clear. In one place they say the quarterly cost of defense against AirTran was $2.3m. Does that include costs associated with the TPG deal too? In another place, the cost just for advisory of Goldman Saks alone will be $4.4m to $6.6m when the dust settles. Almost certainly that is not just for this quarter, but how much is?
--The affect of the change in accounting for the fuel contracts is becoming clearer. In the first quarter they posted a large profit (Q1 is normally a money-loser) based on the value of these contracts valued at $19.9m. At that time these contracts were nearly all for 2007. Best I can understand it, in (simplified) essence the full benefit of these contracts is no longer realized when the fuel is consumed but rather when the contracts are purchased. I suspect that under the old accounting method Midwest would have spread out the value of these contracts recognized in Q1 ($19.9m) over the full year when they were exercised. What instead shows up on the books is the increase or decrease of the value of their fuel contract holdings in the quarter reported. If the value of their fuel contract holdings held at exactly the same level as they were in Q1, then there would be no line item in this quarter for them…the benefit of these contract was realized back in Q1 at $19.9m and that would be it. However every quarter the value of their rolling fuel contract holdings can change, and for Q3 the current fuel contract holdings have a lower estimated value than what they held back when they were recognized, and that shows up on the quarter’s operating stats as a hit to cost. This quarter it was recorded as a cost increase of $3.3m. Had they not changed accounting method they would not have recorded the $19.9m gain on fuel contracts in Q1 and there would not have been the lose of $3.3m recognized this quarter on fuel contracts. So to look at the $3.3m fuel contract loss for the current quarter without also recognizing the $19.9m fuel contract gain in Q1 is missing half the picture.
On the flip side you can’t really say that the $3.3m hit to operating cost in Q3 is not really operational, since the benefit of this change was realized as a help to operating costs back in Q1. Personally it would make more sense to me if it was segregated from operational results, but I’m not an accountant. And just FYI, I researched a little what lead to the accounting change, and best I can understand it is a combination of the type of contracts Midwest now holds, and the prevailing interpretation of a FASB regulation.