AA forgave pilot union debt as part of concessions

FWAAA

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On 7/25/2003 11:28:15 AM dogdriver wrote:

If you're going to persist in accusing AMR of "exaggerating their losses," you really should notify the SEC - after all, they offer rewards for tipsters who rat out companies who play fast and loose with the rules - maybe then you could get that new car.

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FWAAA,
I believe that what the previous poster was referring to was the fact that not all of the money lost by AMR was "real money". In last years annual report I remember reading that AMR "lost" $900+ million because they wrote down the value of the F-100 and the Saab 340. Recently they also wrote off about $1 billion worth of "goodwill". These write-offs are all very legal, so there is no reason to tell the SEC (they already know). So when you hear that AA "lost" $5.8 billion over the last 2 years, a large portion of that is not actual cash. But, when it comes to scaring people into giving concessions, the bigger the number, the better.

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I'm well aware of the Mr Owens' gripe with the goodwill writedowns.
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In some ways, the writedowns distort the financial results, while in other ways, they really do represent real value gone poof.

When AA buys airplanes or engines or invests in facilities or buys other airlines, it does not deduct the purchase price from that year's income statement. Instead, it subtracts (writes off) a portion of the purchase price each year against that year's income. That's called depreciation (and amortization, for intangible assets).

Problem is, sometimes the assets become worthless (or worth a heck of a lot less) faster than earlier antixxxxted. No one can argue with a straight face that the F-100s or the Saabs or the ATR-42s are currently worth any substantial amount of money. The used airplane market confirms that these planes are worth very little.

That depreciation occurred much faster than the estimates formulated at the time the planes were purchased. Accordingly, to avoid defrauding the stockholders, AA wrote down the value of those planes with big writedowns. Had AA not done so, the balance sheet would otherwise grossly overstate the value of the airplanes, and that's a no-no.

When AA bought Reno and TWA, it paid more money than the actual cash value of the stuff received in the acquisitions. That happens nearly every time one company acquires another. The excess has for many years been called "goodwill" or "blue sky." Whether AA should have paid more for the goodwill is for another thread. But they did, and they used real money to do so.

But AA didn't write it all off immediately. Problem was, during 2002, it became painfully obvious that the goodwill had ZERO value. How did they know? Nobody would have paid AA $1.4 billion for all of AA, let alone an EXTRA $1.4 billion on top of the value of the tangible assets. So AA followed the rules of the accounting profession and the SEC and wrote it off. By doing so, AA acknowledged that $1.4 billion was gone. Poof. No more.

If that ain't a real loss, I don't know what loss looks like.

Sure, AA didn't spend that $1.4 billion in 2002 (it was spent in earlier years). And AA won't spend that money in 2003 or 2004 (since the goodwill column is finally down to ZERO). But AA sure as xxxx recognized that its asset that had been "worth" $1.4 billion was completely worthless, just the same as if 10 777s had crashed without insurance in 2002. Or if Gordo the Liar had sucessfully stolen 10 777s from AA in 2002.
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So to keep claiming that AA really didn't "lose" that $1.4 billion gets a little tiring. Why not claim that AA really didn't spend $1.366 billion on airplanes and facilities in 2002 (the amount of the 2002 writeoff for depreciation and amortization)??

Airlines (like most other large businesses) do not keep their books on the cash basis, they keep their books using accrual method accounting, which gives a better picture of their financial activities from year to year. And part of accrual accounting is writing off expenses as they accrue, not the day the cash goes out the door.

And if that's just too complex to understand, why not take an accounting class at the local community college? It makes reading financial statements much easier.
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But if anyone thinks they gave up too much based on the fact that AA is now turning cash flow positive - you're beyond help. That's why AA demanded $1.6 billion from the unions. That plus the $200 million in other savings was the amount they were going to get, out of bankruptcy or in Ch 11. But remember, AA would have asked for (and no doubt would have received) wage cuts equal to $500 million more.
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But now UAL is wondering where their exit financing will come from while AA is turning cash positive for the first time in nearly two years. Which airline would you rather work for?
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Aug 20, 2002
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On 7/25/2003 3:28:58 PM FWAAA wrote:

I'm well aware of the Mr Owens' gripe with the goodwill writedowns.
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In some ways, the writedowns distort........

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Thanks for the explanation. (I dropped accounting in college)
 

Bob Owens

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Sep 9, 2002
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"Goodwill" is an unidentifiable, intangible assett.

Its a (legal) sham that businesses have to lower their Tax liability. This way they can claim that the corporate tax rate is higher than yours and mine but in reality, after all the unidentifiables ans intangibles are deducted they pay much less than the "unfair" corporate rate.
 

FWAAA

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Jan 5, 2003
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On 7/26/2003 5:03:44 PM Bob Owens wrote:


"Goodwill" is an unidentifiable, intangible assett.
 
Its a (legal) sham that businesses have to lower their Tax liability. This way they can claim that the corporate tax rate is higher than yours and mine but in reality, after all the unidentifiables ans intangibles are deducted they pay much less than the "unfair" corporate rate.

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Yes, that's it - just like all other deductions available to corporations - it's all just a sham.
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Sure glad YOU aren't paid to keep AA's books.
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Bob Owens

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On 7/26/2003 9:47:40 PM FWAAA wrote:

Yes, that's it - just like all other deductions available to corporations - it's all just a sham.


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Writing off losses, in this instance $988 million, that may never really exist, yea that is a sham, a legal one but its still a sham.
If they can write off losses that are not realized, then they should also pay tax on gains that are not realized.
My 401K went down in value, I can not write off what I lost because, for one, I did not declare what I gained when it grew. Its fair. I should not be able to write off a loss if I did not actually lose. What businesses get to do is write off the loss as Goodwill, but if any of those items gets restored to full value they do not have to declare it as a gain, even though they can use that increased value as collatteral for securing loans etc.
I'll admit I'm not an accountant. But you dont have to be an Accountant to know when you have been cheated, defrauded and mislead. I'm sure that the $988 million, accellerated depreciation, prepaid leases, charges for the AAdvantage program etc were all perfectly legal, just as I',m sure that the impression that it was meant to give exaggerated how bad things actually were.
 

Bob Owens

Veteran
Sep 9, 2002
14,274
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On 7/25/2003 3:28:58 PM FWAAA wrote:



In some ways, the writedowns distort the financial results, while in other ways, they really do represent real value gone poof.

Value. How vauge can you get? We want to know about actual cash, not BS "value".

When AA buys airplanes or engines or invests in facilities or buys other airlines, it does not deduct the purchase price from that year's income statement. Instead, it subtracts (writes off) a portion of the purchase price each year against that year's income. That's called depreciation (and amortization, for intangible assets).
One of the reasons why they do not deduct the "price" is because such items are usually financed, they can write off 100% of the loan payments plus depreciation, which they can accellerate.
By the way, could you tell us "Bonus depreciation" is ?

Problem is, sometimes the assets become worthless (or worth a heck of a lot less) faster than earlier antixxxxted. No one can argue with a straight face that the F-100s or the Saabs or the ATR-42s are currently worth any substantial amount of money. The used airplane market confirms that these planes are worth very little.

Asetts become worth a heck of a lot less than worthless? Doesnt that make them a liability?
Markets are variable. Why should they be able to claim a loss unless its realized? If the assett recovers value, after they take a loss on it to they pay tax on the added "value"? If they dont pay tax for added "value" then why should they be able to claim a loss due to reduced "value"?

That depreciation occurred much faster than the estimates formulated at the time the planes were purchased. Accordingly, to avoid defrauding the stockholders, AA wrote down the value of those planes with big writedowns. Had AA not done so, the balance sheet would otherwise grossly overstate the value of the airplanes, and that's a no-no.

They accellerated depreciation. But unless they actually sold off the aircraft how can they really say what they are worth?


When AA bought Reno and TWA, it paid more money than the actual cash value of the stuff received in the acquisitions.

In other words, management made a bad deal?
That happens nearly every time one company acquires another. The excess has for many years been called "goodwill" or "blue sky." Whether AA should have paid more for the goodwill is for another thread. But they did, and they used real money to do so.
And how are the employees, who took a paycut responsible for this? In other words management xxxxxed up, yet we need to provide them rediculous salaries and bonuses to "stay on".

But AA didn't write it all off immediately. Problem was, during 2002, it became painfully obvious that the goodwill had ZERO value. How did they know? Nobody would have paid AA $1.4 billion for all of AA, let alone an EXTRA $1.4 billion on top of the value of the tangible assets. So AA followed the rules of the accounting profession and the SEC and wrote it off. By doing so, AA acknowledged that $1.4 billion was gone. Poof. No more.
AA followed the rules of the accounting profession. No xxxx. Just like Authur Anderson. The foxes made the rules for the henhouse. Do you think that those rules benifit the foxes or the hens? Nobody said that AA did anything illegal, just deceptive. They decieved the employees into thinking that the company was in worse shape than it is and went way, way beyond what was neccissary to help the company. Of the $3.5 Billion of losses how much of it was "real" in that the present liabilities exceeded the present assetts?

If that ain't a real loss, I don't know what loss looks like.
My 401K went down in "value" over the last few years. How much of that loss is considereed "real"?

Sure, AA didn't spend that $1.4 billion in 2002 (it was spent in earlier years). And AA won't spend that money in 2003 or 2004 (since the goodwill column is finally down to ZERO). But AA sure as xxxx recognized that its asset that had been "worth" $1.4 billion was completely worthless, just the same as if 10 777s had crashed without insurance in 2002. Or if Gordo the Liar had sucessfully stolen 10 777s from AA in 2002. The effect on the balance sheet was exactly the same.

Perhaps the "effect on the balance sheet" was the same, but the balance sheet can have several different "real" results, all legal, depending upon how management chooses to run the company. Right now, in order to maximize the "opportunities" that 9/11, the Gulf War, SARS and the economy have provided it was in their best interests to show maximum losses. Maximum losses to be used to terrorize the workers into submitting to unreasonable demands. If that opportunity was not there then more than likely they would have strung out claiming all those losses to offset taxes in future years. Didnt we see almost the same thing we are seeing now that we did in the early 90s where the airlines claimed fantastically huge losses then staged a "miracle" recovery despite the fact that fares and loads did not change all that much?

So to keep claiming that AA really didn't "lose" that $1.4 billion gets a little tiring. Why not claim that AA really didn't spend $1.366 billion on airplanes and facilities in 2002 (the amount of the 2002 writeoff for depreciation and amortization)??

I did not care what they claimed then, they did not strip me of pay and benifits then.

Airlines (like most other large businesses) do not keep their books on the cash basis, they keep their books using accrual method accounting, which gives a better picture of their financial activities from year to year. And part of accrual accounting is writing off expenses as they accrue, not the day the cash goes out the door.
The accrual basis could exist and be used without accellerated depreciation and "Goodwill".

And if that's just too complex to understand, why not take an accounting class at the local community college? It makes reading financial statements much easier. And leads to an understanding that yes, AA really suffered during 2001 and 2002. It also permits one to see that the concessions and other wage savings just about equaled the amount of negative cash flow for 2002 ($1.8 billion or so).
I have no doubt that the company suffered those two years. What is strange is that after seven record breaking years of profits that just two "bad" years could put the company into bankruptcy. The fact is that during these two years management appeared to have either stuck their heads in the sand or, decided to use this as an opportunity to bust its workers.

But if anyone thinks they gave up too much based on the fact that AA is now turning cash flow positive - you're beyond help. That's why AA demanded $1.6 billion from the unions. That plus the $200 million in other savings was the amount they were going to get, out of bankruptcy or in Ch 11. But remember, AA would have asked for (and no doubt would have received) wage cuts equal to $500 million more.
No doubt based on what? Several legal experts have said that they doubt that the courts would have given as much as we gave. We already gave the company "industry leading concessions". Are you saying that the company automatically gets everything they ask for in bankruptcy even if it already has favorable terms compared to its competitors? Thats not the impression that I got when I read those cases that were quoted and the law. We had to have "good reason" to reject the companies offer. Would the fact that our agreement was already the most company favorable in the industry and that the companies request is not to make us competative but rather that we accept grossly substandard terms to give the company a huge competative advantage, "good reason"? In what way was our agreement "onerous"?

But now UAL is wondering where their exit financing will come from while AA is turning cash positive for the first time in nearly two years. Which airline would you rather work for?
UALs exit from BK has no doubt been complicated by our submission to these totally uncalled for concessions. AA can afford to keep work in house for less than UAL can contract it out. AA has a huge discount on line maint also. Whatever UAL gained from the concessions it recieved were wiped out when we underbid them.

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