United Airlines charged itself $2.2+ billion for nothing last week, prompting a 13% drop in its stock price to a 52-week low.
What happened was that the company had accounted for something called goodwill on its balance sheet. This category of entries is made up of all the things that can't be categorized or valued accurately, like brand, reputation, and the zeitgeist of consumer disposition. It's a common practice, whether for airlines or widget makers.
OK, so I don't understand what happened.
In an industry where the meal service is managed down to the cost of each grain of salt (not to mention more macro pricing models for luggage and legroom), United and its cadre of accommodating analysts had put a wet thumb in the air, and plugged a few billion into the spreadsheet.
Now they've taken it out. Poof.
Nothing never cost so much.
Am I missing something? Nothing changed, really, beyond somebody entering a different value into a field on a PC somewhere at the Mother Ship.
Sure, the company and its industry are in a tailspin (sorry), and it's fair to guesstimate that the flying public feels ever-less regard for airline brands. Exceptions like JetBlue and Southwest command some modicum of loyalty, which flares egregiously among the most committed and vocal faithful, but I doubt it would be so exceptional if it weren't attached to the lowest prices.
So what, exactly, had that goodwill represented over the years? If it's worthless now, it had to have been worth something before...or, better put, had a rationale behind the worth.
Do you think any of these values applied?
- United was able to charge a pricing premium over its competition. No, that was due to government regulation
- It could pay lower wages, since employees experienced some added value from working at such a great brand name. Er, no.
- The company got better efficacy for its marketing expenditures, since the goodwill was so pervasive. I'd bet it paid exactly the same as any other advertisers, and its marketing wasn't any less or more successful, on average, than any other
- United got faster regulatory approvals, since the government also felt some of that goodwill. I doubt it
- Its customers were more tolerant of weather delays or service issues because they felt so good about the brand
United's goodwill wasn't based on any of these (or any other) tangible benefits to the business. It was simply a good dream that got interpreted in different ways, depending on who was doing the sleeping.
Now everyone is awake.
That's the funny thing about intangibles; goodwill (and brand, reputation, etc.) are defined as things so pervasively important that they defy any objective description or measure, and are accountable for nothing certain. I'm all for a catch-all bucket for aspects of business that don't fit neatly into another pail, but intangibles are not so much a bucket as they are a Schrodinger's box. You never know what's inside. What's inside doesn't know what's inside.
Seems like a dumb way to conduct business.
I wonder how many other businesses have goodwill values that do nothing more than make for heady quotes for the media in up-markets, only to risk evaporation when the market turns? Oops. It already has.
Stay tuned for more goodwill write-downs. Nothing never cost so much.