|
Let us take Midway Airlines to
illustrate the analysis of interest expense. Table T-13.10 presents
Midway's income statements and RMA statistics for the air carrier
industry.
|
Table T-13.10 |
|
Midway Airlines Income Statements |
|
. |
1998 |
% |
RMA |
1997 |
% |
1996 |
% |
|
Revenues (in $ millions) |
211 |
100.0 |
100.0 |
186 |
100 |
180 |
100 |
|
Salaries |
32 |
15.2 |
|
26 |
14 |
25 |
14 |
|
Fuel |
20 |
9.5 |
|
22 |
12 |
27 |
15 |
|
Aircraft rentals |
30 |
14.2 |
|
30 |
16 |
34 |
19 |
|
Commissions |
15 |
7.1 |
|
14 |
8 |
14 |
8 |
|
Maintenance |
16 |
7.6 |
|
16 |
9 |
18 |
10 |
|
Fees |
10 |
4.7 |
|
10 |
5 |
13 |
7 |
|
Depreciation |
6 |
2.8 |
|
2 |
1 |
1 |
1 |
|
Other |
56 |
26.5 |
|
51 |
27 |
71 |
39 |
|
Operating expenses |
185 |
87.7 |
94.5 |
171 |
92 |
203 |
113 |
|
Operating income |
26 |
12.3 |
5.5 |
15 |
8 |
-23 |
-13 |
|
Interest income |
4 |
1.9 |
|
2 |
1 |
1 |
1 |
|
Interest expense |
-6 |
-2.8 |
1.1 |
-2 |
-1 |
-2 |
-1 |
|
Profit before tax |
24 |
11.4 |
4.4 |
15 |
8 |
-24 |
-13 |
|
Source: Midway Airlines Corporation 1998 Annual Report |
We see in the table that interest expense almost tripled in
1998 to 2.8% of revenues, from 1% it was the year before. In
his message to shareholders, Midway's chairman tells about adding
eight aircrafts to the fleet (an increase of 62%) and hiring
150 employees (an increase of 19%). It is clear that to finance
such a large expansion new funds are needed. Note #3 to financial
statements indicates that long term debt has been restructured,
with a $34 millions variable rate note refinanced with a fixed
rate 6.9% secured note of the same amount, and a new note of
$34 millions issued in 1998, thus doubling long term debt. To
make this additional borrowing possible, note #1 states that
the corporation has gone through a quasi-reorganization whereby
accumulated deficits of $51 millions were reclassified as a reduction
of paid-in capital, and new shares were issued.
These events explain why the previously noted low salaries
were tolerated by the employees in light of prior years losses
and potential bankruptcy. But the bold steps undertaken in 1998
give the airline a brighter future even if interest expense is
out of line with RMA of only 1.1%. Note however, that RMA's statistic
and consequently this analysis omit implied interest of operating
lease (see Chapter 11). |
