Repooc17

Cash profit is not the correct term. Under GAAP, UA is allowed to expense costs even if they have not been paid - aka accrual basis accounting, and how financial statements are presented.

bocastephen

UA is owned by members of the public who share an ownership interest in the company - although it might appear to be the same thing, in reality it is not. To say people "own" the company implies an active role which does not exist, but to say they "share an ownership interest" implies a passive role, which is more accurate. The shareholders did not reward themselves, UA management and the board unilaterally decided to repurchase shares with excess cash, thus rewarding shareholders (and more likely, themselves). I don't recall news that stated there was a shareholder vote regarding the repurchase, unless there was?

Cash in reserve would have reduced the amount of government hand-outs needed and demonstrated more responsible management.

HNLbasedFlyer

It doesn't really matter unless we have a time machine - and no company is simply going to take most of their profit and just sit it in a rainy day fund - because you'd in short order have a new Board and new Mgmt who followed the will of the shareholders.

The UA Board is elected by the Shareholders - there should be no doubt that had UA been the only airline in the US to just hoard cash - you'd have a different Board who would follow the will of the shareholders.

exp

Not only that, big companies learned that govt. will give you bailouts so why retain cash?

JimInOhio

No company the size of UA would just sit on $9B cash from earnings.

exp

Well Apple sits way more than $9 billion in cash.

They pay a lot of dividends but still accumulates cash.

They're not going to be in a position of needing a bailout any time soon.

fly18725

I think the point is that financial professionals may have more insight into the future and viability of United than anonymous posters on a message board. Of course, that population could have some overlap.

I don’t think corporate governance or institutional shareholding works quite as you project.

While I don’t agree with the concept of share buybacks, the reality is that it is the most practical way to return irregular earnings to investors. It would be counterproductive for airlines to have material dividends or retain or invest the excess cash.

TomMM

I wonder why.

spartacusmcfly

In addition to Apple, Berkshire Hathaway sits on over $100 billion in cash. If a mega-disaster were to impact one of their insurance businesses, they would likely survive, while the rest of the insurance industry would go bust.

This typically happens when Boards incent their executives on EPS instead of something like operating cashflow. Remember, a buyback reduces outstanding shares, thereby jacking up EPS...

I typically defend UA, but not in this case. It's inexcusable UA repurchased $9B, paid no dividend, and then needed funds. Bad Corporate Governance...

cesco.g

Agreed; but in fact this is not a UA-only problem, but has been behavior across many industries - airlines and others.

fly18725

Apple and Berkshire Hathaway sit on large cash balances and return substantial amounts of cash to shareholders. The airline industry can’t do both since it wasn’t consistently profitable until recently.

exp

My point in bringing up Apple was in response to the guy who said a company big as UA can't be holding onto $9 billion in cash.

Is that the most cash they ever held?

They'd have needed a bailout anyways.

jsloan

In most cases, airlines are able to charge more than the marginal cost of transportation for an additional passenger. However, you still need to allocate part of both the fixed and overall variable costs for the flight to that passenger, and that's where you end up with unprofitable leisure passengers -- the passengers make up a small amount of the gross weight of a plane. Most is the fuselage itself, plus the weight of the fuel. If all you have are low-margin customers, they can all be marginally profitable (higher fare than marginal allocated costs) but collectively unprofitable (total fare collected is less than total operating costs).

And, sure, there's definitely a spread among leisure travelers. You can even find leisure travelers in paid business class (generally P fares). But, keep in mind, one Y fare is often 10x the cost of one K fare, and one J fare is often 5x the cost of one P fare. Your leisure travelers aren't all on K/P, but you won't find many on Y/J.

I don't know what "Cash profit" is. I'm guessing you mean operating income? You probably don't mean free cash flow, because that would exclude capital outlays.

For 2019, it looks like UA's Net Income (GAAP) was $3 billion, and their operating income was $4.3 billion. In 2018, the numbers were $2.12 billion and $3.22 billion, respectively. And, they just leveraged their fleet, meaning that their cash outlays will increase (lease payments) while their depreciation will decrease (they don't own the assets anymore). That's going to decrease their operating income. Anyway, if you're suggesting that business travelers only represent about 1/4-1/3 of UA's operating income, I'm not sure what to tell you. UA's entire business model is built around trying to gather high-margin customers. There's a reason that they fly to Singapore instead of Bangkok.

Is it possible to run a business that makes profit flying only leisure customers? Sure -- RyanAir and Allegiant were both very profitable. But it's not possible for UA's business to make a profit flying only leisure customers. They have way too much overhead.

Somebody still has to pay for the paving. What you're basically saying is, "if you ignore the costs of running a business airline, you can make a marginal profit flying only leisure customers."

They sold all of their planes that they could. And they still have more deliveries to take in the future.

It's really not that complicated.

UA's CASM is about 13 cents. Within the framework of their business, there's not much they can do about that. Sure, you can ignore depreciation (about 5% of their total expense) -- in fact, heck, let's assume they can get the costs down to 10 cents. And let's even say that they can run at 100% load, and let's give them 1 cent per ASM for cargo and other operating revenue (in 2019, those categories made up about 8% of UA's income). So, great, all we need to do is make PRASM of $0.09! Easy!

Let's see. IAD-HNL: 4817 miles, so they'd need a $866 RT fare. Quick search... looks like that route is on sale for about $680 RT (although, to be fair, on days when the nonstop is operating, they are charging more than that).
SFO-SIN: 8446 miles, they'd need a $1520 RT fare. Quick search... looks like it's running about $800 RT.
SFO-HKG: 6927 miles, so $1250 RT fare. That one's running at about $850.

On the other hand, AUS-IAH, 140 miles, $25 RT fare. So they'll make a killing on leisure travelers who really, really need to get to Houston for the afternoon but want it to be slower and more expensive than driving.

The simple fact of the matter is that UA's cost structure is that of a business travel airline. They pay rent for clubs. They fly a business traveler schedule to business destinations. They have expensive business-class seats and charge expensive prices to fly them. They can't just pivot and suddenly become a low-cost carrier, even though they seem to have tried that in the past.

They still would have had to leverage themselves to the hilt, which they've done anyway. (MileagePlus is leveraged, the airplanes are leveraged, etc.).

There's no difference between a stock buyback and a paid dividend, except that dividends are taxed immediately, and increases in the share price are only taxed when the shareholders decide to sell. If a UA investor wanted something approaching a dividend, he could have sold 1-2% of his holdings every year. Think of a buyback as an automatic DRIP.

ChurnieEls

UA might see an influx of Reddit money if we draw a line to what's going on with AA this morning.

JimInOhio

But wasn't the question whether it makes sense to operate a flight for mostly leisure passengers vs leaving it parked on the tarmac? The only relevant fixed costs in this case are the crew since they're paying for the aircraft regardless.

If this notion of leisure-only flights is truly cash-negative for UA, they wouldn't have added all of these new Florida flights in the middle of a pandemic.