As you know, I almost never allow guest posts on the site, but that doesn’t stop people from sending over ideas. On very rare occasion, one comes through that grabs my attention. This one — from a contributor I’ll call “the Accountant” — is a very interesting catch. I don’t know what it means for Breeze, but it does at least create a possibility that the general narrative about the airline isn’t right.
I should note that I asked Breeze to comment on this and did not receive a response.
Breeze Aviation Group, Inc., dba Breeze Airways is David Neeleman’s latest airline, flying for almost three years now.
As a private company, Breeze doesn’t file SEC financials, but as a US commercial airline of more than $20mm in annual revenues, it must file quarterly Form 41 financials with the Department of Transportation (DOT), among them Schedule P-1.2 and Schedule P-6. These are available for download on the Bureau of Transportation Statistics website.
Schedule P-1.2 is an income statement. Schedule P-6 rearranges the same total operating expense of Schedule P-1.2 into different categories. All the filings provide are numbers, no commentary.
As some observers have noticed, Breeze’s DOT financials seem catastrophic, leading to some hair-raising headlines, albeit, so far, mostly in smaller media outlets. If you believe the DOT financials, Breeze seems in really bad shape:
Anyone with a bit of financial sophistication will note that what really matters is cash losses, not income statement losses, which is true, up to a point. But Form 41 Schedule B-1 (which is a balance sheet that must be filed by carriers including Breeze) shows paid-in capital (to Breeze) of $381mm and retained earnings of negative $408mm as of Sep 30, 2023. Those are very large accumulated losses.
Breeze doesn’t act like it. There’s been no obvious big change in revenue strategy. There have been no announced departures from the management team, and most people would say that’s a pretty sharp bunch. If Breeze was really on a precipice, wouldn’t some management be headed out the door? Breeze doesn’t seem to be turning back aircraft. To date, Breeze investors have apparently dutifully funded horrific losses.
Perhaps Neeleman has reality-distortion abilities a la Steve Jobs and keeps Breeze management and investors in a hypnotic daze. You are getting very sleepy…
Or maybe something else is going on.
“Others” of Unusual Size
Look at Schedule P-6 for Breeze. The following table consolidates a half-dozen salary & benefit categories into one line, but left all the other non-zero lines as they are from Breeze’s Schedule P-6:
What sticks out is the “Other” line, in bold above, sometimes the single biggest number in a quarter, bigger than total salaries and benefits or fuel. Those are big, big numbers.
Is that normal? Not for passenger airlines as reflected in Schedule P-6. If you look, airline by airline, quarter by quarter at the “Other” category for all significant US passenger carriers1 as a percent of total operating expense, “Other” averages less than 1% of total operating expense in both 2022 and for the three available quarters of 2023. For the other startup carrier, Avelo (which is just a month older then Breeze), “Other” is zero for all three quarters of 2023. (There is no Schedule P-6 data for Avelo for 2022.2)
Whereas for Breeze, “Other” as a percent of total expenses for 2022 and 2023 was… wait a minute, what the heck? For every quarter of 2022, “Other” is just a bit over 25% of operating expenses for all four quarters. And for 2023, “Other” is just a bit over 33% of operating expense for all three available quarters. Actually, it’s just a bit over 1/3 – 33.33%:
Those “Other” percentages are sketchy AF, both the consistency of them and the way they jump from one plateau (of around 25%) in 2022 to another (of around 33%) in 2023. Normal expense items don’t do that.
To quote Joe Pesci and Marisa Tomei in My Cousin Vinnie, “is that it?”, “no there’s mowah!”. Look at the variability of each of the expense categories in the Schedule P-6 based financials for Breeze, expressed as a percent of operating expenses. Specifically, line by line, for 2022 and 2023 in turn, take the standard deviation of the Schedule P-6 expense line percentages, and divide by the average of those percentages, across all four (for 2022) and three (for 2023) available quarters.
In the case of 2022 and 2023, the resulting measure of variability for “Other” (as a percent of operating expense) is at least an order of magnitude lower than for any other expense category. If you didn’t follow that, it’s simply creating a numerical measure of variability that turned out to be consistent with the notion that the “Other” line item, as a percent of total operating expenses, is unusually consistent across quarters. In other words, it’s not just your lying eyes.
To sum up, the mere existence of this massive expense category and its uniformity are unusual, as is the fact that it jumps from just above 25% every quarter of 2022 to just above 33% every quarter of 2023.
All of which is to say that the “Other” line item in Schedule P-6 for Breeze is hard to take at face value.
“Other” is Defined by Federal Regulation
Federal regulations define, far more tightly than you might think, what goes where in Schedule P-6. Airlines don’t get to squint at a particular number, throw it in “Other” on Schedule P-6, and call it good.
“14 CFR § 12 – Objective Classification—Operating Revenues and Expenses” of the US federal regs defines about 80 accounts and subaccounts that airlines must track, including by different functions across the company (those functions also defined by regulation). These accounts and subaccounts are then assigned to line items of Schedule P-6, the instructions for which appear to be most recently defined in Attachment A to OST3 Guidance Directive 248, dated to the year 2000.
“Other” is assigned a bunch of accounts that mostly amount to cats and dogs – things like foreign exchange gains/losses, corporate memberships and (in a blast from the 20th century past) some aircraft interchange4 expenses. There is also a catch-all category for expenses not captured by all the other expense accounts. But if your expense does fit elsewhere in that fairly extensive taxonomy, you’re not allowed to put it in “Other”.
That said there are freight airlines and at least one regional which have big “Other” lines in their Schedule P-6. So it does happen – it just doesn’t happen for any of the mainline passenger airlines, other than Breeze. So assuming Breeze is living up to its DOT obligations, whatever that big item is in “Other,” it’s something you don’t see too often in the passenger airline business.
These Hard-to-Believe “Other” Numbers Drive Breeze Results
If you find a number hard to believe, it’s natural to wonder what happens without that number.5
Take the Breeze financials, and quarter by quarter in 2022, deduct an amount from the “Other” line equal to 25% of total operating expense. Do the same thing for 2023, but this time deduct an amount from the “Other” line equal to 1/3 of the total operating expense. In each case, as shown in the nearby table, it leaves a small positive residual, the size of which, relative to total operating expenses, is much more typical of a mainline scheduled passenger airline reporting Schedule P-6. Just saying.
If we look at Breeze financials where we substitute residual “Other” for the actual “Other” filed in Schedule P-6, results obviously change a lot:
Huh, look at that, a positive operating margin in 2Q23. And break-even in 3Q23. That’s interesting.
We are not claiming this is the right way to look at Breeze. The point is that the view of Breeze as suffering catastrophic losses depends heavily on this mysterious, hard-to-believe “Other” line. Once you regard that line as subject to doubt, how well Breeze is doing is up in the air. If you believe the “Other” line doesn’t belong in the financials at all — which we are not saying — then under that assumption the resulting financials suggest Breeze is well on its way to making money, indeed, has even had a solidly profitable quarter.
Again, that might not be right. But it is true that how you view Breeze depends very much on how much you believe that “Other” number.
What’s Going On?
Good question. Outside of Breeze and its bankers/lawyers/investors/etc, probably no one knows.
The fact that even a small amount of analysis makes “Other” stand out as unusual suggests it’s not motivated by a desire to mislead. Any competent analyst looking at Schedule P-6 would see this issue almost instantly. Though it must be said that while there have been people who’ve noticed Breeze’s apparently disastrous financials, no one seems to have published anything noting this Schedule P-6 weirdness.
1 American, Delta, Southwest, United, Alaska, JetBlue, Hawaiian, Spirit, Frontier, Allegiant, Sun Country
2 Avelo didn’t file Schedule P-1.2 or Schedule P-6 in 2022, though DOT 2021 Schedule P-1.1 financials for Avelo show revenues above $20mm, so presumably, by DOT rules, Avelo should have filed Schedule P-1.2 in 2022.
3 The DOT’s Office of the Secretary of Transportation
4 Aircraft interchanges were multistop flights by one aircraft, where some legs were flown by crews from one airline and others by another airline. Yes, aircraft swapping – pilot goes home with another airline’s airplane. In the time of regulation, it was a way of cobbling together same-plane service for passenger convenience that otherwise wouldn’t exist. Oddly, the last aircraft interchange continued well after deregulation (into the 1990s) between Dallas and Alaska via Seattle on American and Alaska.
5 Another thing: if you have reason to doubt one number in a set of financials, particularly a number that drives those financials, it’s also not crazy to wonder how much to believe the other numbers.