In our low-cost airline rankings (May 2010) we omitted to put a footnote in explaining that the operating result figure used for AirAsia was an EBITDAR rather than EBIT figure, which is the standard used for the other operating results listed. So the AirAsia operating profit shown of $364.8 million and operating margin of 40.4% were before depreciation, a much higher figure than the pure EBIT number as it excludes depreciation of around $130 million. AirAsia profits before tax for the 2009 financial year were still a commendable $170 million, but not as impressive as we listed.

So how much of a difference can deprecation make? We asked our resident expert, CTAIRA analyst Chris Tarry. "Strictly speaking depreciation is a charge that reduces the value of an asset over its economic life and is in effect a usage charge. Whilst in effect it appears as a charge against profits and a cost of business there is no corresponding cash outflow.

"There are a wide range of depreciation policies evident in the industry for the same types of aircraft in terms of the rate at which an aircraft should be depreciated and its residual value. In this respect British Airways uses 18-25 years to "estimated residual values"; American Airlines is 20-30 years for passenger aircraft to a residual value of 5-10%; SAS uses a period of 20 years to 10%; Singapore Airlines a period of 15 years to 10% for new passenger aircraft; and lessors International Lease Finance and AerCap both depreciate over 25 years to 15% passenger aircraft.

"As a result of this, and because of differences between airlines in respect of the amount of their fleet that is on operating leases, a better measure of cross company airline performance is considered to be EBITDAR (Earnings before Interest, Depreciation, Amortisation and Rentals) and this takes out the effect of differences in depreciation policies as well as between owned and leased fleets.

EBITDAR is also considered to be a proxy for the cash generation capability of the business and is also used as a key element of the fixed charge coverage ratio (EBITDAR/ (interest cost + leasing costs)) which is one from a range of covenants that a bank or other lender may require the airline to at least maintain."

Source: Airline Business