It was a record year of profits at American Airlines.
But how much of a record was it? Did the Fort Worth-based carrier make $3.3 billion or $1.3 billion in the fourth quarter?
It depends on your view of accounting.
Newspapers, including the Star-Telegram, use Associated Press style which means whenever a company reports its earnings, the net income figures used are determined by Generally Accepted Accounting Principles (GAAP).
In American’s case, the GAAP net income figure was $3.281 billion to be exact.
Wall Street analysts and investors, however, would rather see how much a company is making on an ongoing basis with year-over-year comparisons. So they use figures that take out one-time accounting charges and credits that GAAP requires.
For American, that net income number excluding “special charges” was $1.3 billion, or $2.00 a share, beating Wall Street’s estimates of $1.97 per share.
So why the difference?
It all comes back to taxes.
American had been losing money for years and had not been paying taxes to the U.S. government because it didn’t have any profits to pay taxes on. As a result, they stockpiled deferred tax assets which ended up being valued at $2.9 billion.
The carrier explained it all in an investor update it filed with the Securities and Exchange Commission on January 12.
“In accordance with U.S. Generally Accepted Accounting Principles (GAAP), the Company provides a valuation allowance for its deferred tax assets, which includes the NOLs, when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. As of September 30, 2015, a full valuation allowance was provided on these deferred tax assets. In connection with the preparation of the Company’s financial statements for the fourth quarter of 2015, management has determined that critical integration milestones have been met, and for purposes of applicable GAAP, the Company will be profitable on a sustained basis. Accordingly, the Company will reverse approximately $2.9 billion of the valuation allowance as of December 31, 2015,” American said in the filing.
Now that the company expects to report a profit for the foreseeable future, it is transferring the asset to its income statement so it can use what is essentially a tax deduction on future tax payments. While the tax asset has value, it’s not like American earned an extra $3 billion in cash in the fourth quarter.
Delta Air Lines and United Airlines both made similar tax valuations as well in the past two years.
When you add the $3 billion positive tax valuation and then subtract $450 million in expenses related to the merger and $592 million in an accounting charge related to the write-off of Venezuelan bolivars held by American, that totals to about $2 billion in one-time accounting items that Wall Street doesn’t really care about.
And that’s how you get from $3.3 billion in profits to $1.3 billion.