On May 25, [correction: the internal memo was sent on May 15, 2012] Airport CFO Marsha Stone, sent an internal memo to all airport employees, refuting the notion that the airport is in "financial trouble" - instead laying out how the airport actually saw a real net operating profit of $74.9 million in 2011.
Wells got the story aired all over town that the airport is facing financial problems. By doing so, he misled the press and the public about the true nature of the airport's situation. But, was his real target for the misinformation Judge Michael Keele, who is considering the Airport's lawsuit against the MDC that aims to derail plans for a Fast Park facility on a prime site in Ameriplex?
Here are links to the news articles (with the exception of those printing AP reports and/or IBJ reporting): IBJ (Chris O'Malley - May 14 - May 24) Indy Star (Dan McFeeley - May 24, 25) WRTV (Norm Cox on May 14 and general story on May 24) Fox59 (Kjerstin Ramsing May 14 and general story on May 24).
I have uploaded a copy of the internal memo sent by Marsha Stone, so you can review it in its entirety.
Stone begins by blaming the media for the misinformation getting published. She says:
You may have noticed recent news stories referring to supposed "financial trouble" faced by the Indianapolis Airport Authority. Driving these stories is the format in which our financial reports are required to be presented by various accounting rules and the difficulty the media and others have in analyzing and reporting on them.She goes on to explain that the loss is merely a "paper loss".
In our 2011 audited financial statements, the IAA reported $167.8 million in operating expenses - but $106.2 million of that was a "paper loss" that is based on the depreciation, or loss in estimated value, of property. IAA's annual depreciation expense also includes this charge for property we (IAA) didn't even have to pay for, such as the FedEx sort facility. Yet when our tenants build such improvements on our property, we must record them as an IAA asset, and annually record their depreciation as an IAA expense. However, losses attributed to a depreciation involve no change in the Authority's cash levels.
An analogy would be if someone gave you a new car as a gift, then pointed out that you faced an immediate "loss" due to its depreciation. Even though you spent nothing on the car and saw no loss in cash, you could be said to have suffered from an "operating loss" on the car's annual depreciation.Stone goes on to note that, outside of on paper, there was no loss - but actually a $74.9 million PROFIT.
Looking at our operating expenses for 2011 excluding depreciation, they totaled $61.6 million. Comparing that to our operating revenue of $136.5 million, you can see we earned a $74.9 million operating profit excluding depreciation, meaning the IAA generated positive cash flow. In fact, we recently made a $20 million early payment against our debt principal, which will save us $1 million per year in interest payments.So, Stone's scapegoat is an uninformed media who do not know how to properly read an annual report. But that doesn't pass the smell test. All of the media outlets mentioned above simultaneously talked about the supposed financial woes of the airport all while getting the get-tough message from Mike Wells. No, Wells got the reporting he wanted.
The question is, who was Wells' real target for his misinformation campaign? The media? Well, they bought his story, and published it. The public? Well, they read it and absorbed the idea that the airport is navigating a rough patch that requires considerable effort to reverse. But, there may be one particular individual in the public who was a prime target for the incorrect status of the airport's finances.
The reason I say that is because of how I ended up with this internal memo. I did not get it from an employee trying to feed me the tip. I got it as part of the response to an open records request I made for all correspondence between representatives of the airport and representatives of Doninger Tuohy & Bailey, the law firm representing the airport in its lawsuit against the MDC, the lawsuit that hopes to keep the Fast Park facility from being built in Ameriplex.
The airport's Chief Legal Officer, Joseph Heerens, emailed a copy of the internal memo to Brian Tuohy, who is the lead attorney in the lawsuit. It is possible that the two had an off-topic chat about the news reports of financial woes at the airport and Heerens sent the internal memo to Tuohy for its gossip value.
More troubling and equally plausible is the idea that the news stories were planted so the presiding Judge on the lawsuit would read them in the papers or see them on TV news and come away with the same misimpression of the airport's finances as everyone else. The email to Tuohy could then have been pertinent to the case as a way to keep Tuohy from verbalizing the erroneous information directly to Judge Keele and thus violating legal ethics.
Whatever the motivation, Mike Wells' credibility, and frankly that of the entire Indianapolis Airport Authority, is shot. I don't have any idea what information Mayor Ballard has received regarding the airport's profits or losses. If he has been fed the same lies as the press and the public, then he has no moral recourse but to remove Wells from the Airport Board. If he knows that Wells is lying to the press and the public, then he has but one political move to correct his image; and that again is to remove Wells from the Board.
The Airport Authority is a municipal corporation of Indianapolis - it is a unit of local government. The President of the Board, one Mike Wells, who certainly knows his way around real estate depreciation, misled the press and the public about the state of airport finances - happy to let everyone think the airport is losing money hand over fist, when the reality is that it is making money hand over fist. This is no small error - it is the most cynical manipulation of the press that I have ever seen.
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6 comments:
Marsha Stone is talking about cash flow or Earnings Before Interest & Depreciation and Amortization (EBITDA).
Excluding these item shows if you can pay your bills with cash or if you will need to borrow money.
Mr Wells was correct in his statements because the excluded items reflect the need to replace and invest in upkeep of assets as they age. Its just a matter of timing.
Also you may want to understand the airports debt borrowings before you get too excited with the assumption that that the public has been mislead and the airport is really rolling in a big pile of money.
But, the assets would be replaced by others, or are pretty darned new and won't need even a facelift for decades IF airport built buildings are subject to depreciation for accounting purposes.
$75 million profit vs. $30 million loss are dramatically different scenarios and clearly attributable to depreciation. Pretending that dire circumstances exist and need the airport city model to pull it together, and the claim that they can't stand any competition from off-airport parking facilities, isn't being honest with the public. And, being honest with the public should be the least we expect from our government.
Your a really smart person.
Study those cash flow statements more closely and consider the enormous costs of replacement and upkeep.
Don't forget to look at the decreasing top line revenue and increasing debt.
Why should debt go up at this point? We should be on the downswing given the enormous price tag for the new terminal.
And, any revenue drop projections have something to do with landing and gate fees; pricing for which the airport has some flexibility.
According to testimony by Bob Duncan at the MDC, those fees have dropped dramatically so far, with the ambition to let them drop even more going forward. The public should be having a conversation as to whether keeping land off the tax rolls is worth dropping fees to airlines (passenger & cargo).
Keep in mind the combination of higher fees and airline industry consolidation result in canceled flights.
Canceled flights, mean less passengers.
Less passengers and planes means less retail sales, car rental, parking fees.
Pricing and the burden of passenger & cargo airlines for infrastructure are worthy of discussion, however there are many variables that are tightly interconnected beyond this issue.
I just took a quick look at the 2009 - 2010 financial statements.
As you review these keep in mind that restricted and unrestricted descriptions on the financial statements.
It also appears they did some significant refinancing that included off balance sheet Financial Derivatives and Capital Leases.
Look at the "Debt refunding and repurchase program" and footnotes.
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