Originally Posted by
Roger
Noodles - Firstly let me say I normally have the upmost respect for your analysis but I am sorry but in my opinion in this particular instance your figures are fundamentally flawed in a number of ways.
First things first I recommend you should revisit the investor day briefing for an accurate guide to scheduled capex for the next 3 years, the data on 4 traders is woefully inaccurate and at a material divergence to the companies own information provided last Tuesday in their investor day material. I know because I looked into this matter on Friday and noted some major discrepancies.
Secondly if you look at the graph of scheduled committed capex as shown in the investor day presentation you'll realise that AIR is half way through a complete modernisation of its fleet that incorporates significant fleet expansion and by FY19 will have an extremely young average fleet age of only 6.2 years that will be materially expanded from its present capabilities.
My contention is that normalising earnings based on depreciation being normalised because AIR are both significantly expanding and dramatically modernising its entire fleet is a grossly misleading methodology to analyse normalised earnings so I am sorry Noodles but in this case I believe you analysis is fundamentally flawed and without merit.
I note AIR have a policy or writing off their aircraft over their useful life and from time to time when necessary make such revaluations either up or down as considered necessary to ensure their balance sheet values of fixed assets and aircraft show a true and fair view. I have no qualms whatsoever about AIR's depreciation as disclosed in their financial statements and accept it has historically been an accurate guide to the actual utilisation rate of its capital equipment and thus I contend any attempt to normalise earnings on the basis that current and expected depreciation is not a fair representation of asset utilisation is wholly inappropriate. Trust me on this, the accountant in me has been all over this issue like a hawk looking for a feed and there isn't any problem here.
Put more succinctly, if you spoke with AIR management and got the data from them I am 100% confident you would find that if you normalised capex over the years taking out the capex costs of the dramatic fleet expansion and modernisation I am sure you would find that normalised capex was accurately reflected by normal depreciation. If anything normalised capex could be slightly less than depreciation as AIR write their fleet off over 18 years normally but we have a bunch of 21 year old 767-300's still flying well and earning AIR good money that will have extremely low or no remaining book value.
Surely people can understand that when you both substantially modernise and grow your fleet this requires billions of dollars of additional capex. If it were not so AIR would not be presently growing at its fastest pace in its 76 year history while contemporaneous aiming for one of the youngest and most fuel efficient fleets in the world. The PE of 4.2 stands as far as I am concerned...just waiting for the bottom...quite when that is...is the $64,000 question.