Acaca15 your example is flawed.You state that the banks wont...

Acaca15 your example is flawed.

You state that the banks wont lend $5000 after 5 years because the entity is only earning $1000 per year. Incorrect, the company has EBITDA of $3000 per year in the first 5 years. $2000 of the EBITDA was depreciation which is a non cash item. Banks would have no problem lending $5000 against EBITDA of $3000 per year.

But lets take your example and apply debt. Instead of buying one aircraft with 100% equity the business has 25% equity to 75% debt ratio. So it borrows $30,000 and buys 4 aircraft. With 4 times as many aircraft its revenue is also 4 times. So it now earns $12000 per year. $8000 per year goes towards depreciation and (of which $6000 goes to debt payments), $1000 goes in dividend, $1500 goes in interest which leaves an extra $1500 in profits per year.

At the end of year 5 the debt will be completely paid off, there will be $10,000 cash remaining from depreciation and there will be additional profits of $7500. Finally, whilst the assets are fully depreciated, they still have some resale value. Lets say they are worth 20% of the value of an equivalent new aircraft - so they are sold for $3000 each which raises another $12000.

At the end of year five, the company will still retain its $10,000 initial equity cash but will also have another $19500 in profits which could be paid in dividends and would provide both accounting and economic profits.

Despite the increase in cost of aircraft in the second 5 year period, it could now purchase double the number of aircraft using the same debt/equity ratio and thereby double its turnover and we can just keep going with the scenario.

Of course its even more complex than the above because, for example, you need to incorporate tax.

I understand what your trying to say which is namely that every business has to achieve a sustainable level of profits over the long term.

It is also exactly what Alan Joyce is saying. The key area where Qantas does not have sustainable profits is in the international arm. Rightly so, Alan Joyce is saying Qantas will not invest further capital into Qantas International until its makes sustainable profits. This is exactly what the Unions and Virgin groupies like Ben Sandilands dont want to understand.