Free Flight
30th Apr 2009, 12:21
Received this from someone far cleverer than me - I wonder if anyone has the answers.
MESSAGE TO THE CHIEF EXECUTIVE
Dear Mr Tyler,
Thank you for your recent communication “Message from the Chief Executive” which I received through the medium of the company CX World newspaper.
I have read your comments and observations about state of the airline industry in general and of our company in particular (indeed, it is difficult to walk anywhere in CXCity without being confronted with endless loops of doom and gloom!) and am keen to understand the implications more fully given the substantial sacrifice expected from everyone, not least from yourself.
I would, therefore, be delighted if you can provide answers and opinions to the following issues which I am trying to understand:
1. Given the substantial loss suffered by the company in 2008 (HK$ 8.56B) and bearing in mind that the operating loss was only HK$539M which includes all
the realised losses for fuel hedges up to 31st December 2008 of HK$309million, can you explain to me how this loss was accrued and who was responsible for making the decision to hedge fuel purchases so far in advance and to such a high level? Why stop or reduce hedging fuel whilst the fuel price was increasing and then increase the fuel hedging when the price was decreasing?
2. The other significant cost to our company P&L was the fine of HK$468M paid to the U.S.A. Department of Justice for actively participating in
the cargo pricing cartel over many years contrary to the laws of the U.S.A. and, it is alleged, several other countries and jurisdictions around the world in our network structure.
Whilst recognising the improvements in our Compliance Policy, the total cost of the decisions made previously will likely cost our company in excess of HK$1.0billion at a time when we can least afford it.
I have seen no announcement of an internal investigation into the illegal
activities of our employees as a result of this cartel nor any conclusion as to who was responsible and any action taken against them. Can you enlighten all of us who are about to donate money into the accounts of this company about the disciplinary action taken against those employees whose actions have been prejudicial to the interests, good name and reputation of the company?
3. You will no doubt be strangely pleased that the price of Brent Crude has now increased to such an extent that our future cash losses against the fuel hedging contracts has decreased these losses by about HK$1.677 billion less any contracts closed during the first QTR.
Of course, following on from this is the Mark-to-Market provisions related to the increasing Brent crude price covering the next three years which would appear to be increasing our P&Lposition by HK$2.457 billion (less any realised losses from 1 QTR contracts).
This is an excellent improvement in position from the loss in 2008 and will mean that we will be in a much stronger position in 2009. As a indicative
trend, I note that our associate airline, Air China, has announced a turn around from its 9.15 billion yuan loss last year to a first QTR profit of 981
million yuan which will no doubt be repeated by our company.
4. At the last G20 meeting in London, one of the areas of concern which came about was the International Accounting Standards Board requirements to use “mark-to-market” losses in the P&L rather than the Balance Sheet. This was of course the main reason that Cathay Pacific recorded a loss when the potential losses for the next three years have to be taken on the P&L in the reporting year.
Should the mark-to-market reporting requirements be changed by the IASB or the HK authorities, this will enable Cathay Pacific to make a restatement of their 2008 accounts and may be able to show operating results that are closer to the cash flow position.
5. The Cathay Pacific Group results include a loss of HK$ 1.0 billion for the realised 4th QTR fuel hedging losses of Air China – which the Group has
taken up. This seems not to be a reciprocal arrangement – I would ask Mr Pratt and Mr Chen (the Air China directors) whether Air China has contributed to our losses?
I look forward to your replies to these issues which relate to the past performance of the company and would now like to further understand the requirements of the company for the future.
1. I have received the request for a voluntary donation to the accounts of the company of between one and four weeks of my salary in order to preserve cash. It will come as no surprise that the same thoughts had been occurring to both me and my family – now is the time to preserve our cash and to try to get through the hard times ahead when we are all unsure of the future. Partners and other family members are all facing possible redundancy and we are all preserving cash to ensure we can survive.
For many years my remuneration has failed to keep up with the cost of living and I am at the stage now of being fully committed and having little or no discretionary spending. I have enquired of the suppliers of my mortgage, food, telephone, electricity, gas and other essentials if they would be willing to waive the payments during the time of my SLS and have been unable to find the support that you would expect of a grateful supplier to a long term and loyal customer.
I am therefore at a loss to understand how I am to be able to contribute the company cash reserves at this time – perhaps you could approach these creditors for me?
2. My son asked me why I will have to stop his pocket money and I explained that the company I worked for needed the money more than he did. He asked what I would get for the money and, when I explained that it was to secure the future of the company, he asked if my job was definitely going to be OK.
I had to explain that the company said there was no guarantee that I would still keep my job if things remain bad for a long time.
3. This started to concern me and a friend in HSBC asked me why Cathay Pacific wouldn’t carry out either a Rights Issue or an issue of new shares to the employees. I have to say that I was stumped for an answer since HSBC did the former and one or two other companies are making new share issues to recapitalise their companies.
Surely the best show of confidence you can have as a company is the employees investing in the company and making a commitment to the future financial success by becoming shareholders? I would rather subscribe to buy Cathay Shares than simply give away my family income.
4. This then started me to think of all the “stakeholder” groups of Cathay Pacific (you know how the business advisors like to include all people who have an interest in the success of a company – suppliers, customers, employees, management, etc. - as “stakeholders”); the only stakeholder group that isn’t contributing to the security and future of the company as far as we know is the shareholders.
Now, the shareholders have enjoyed many years of excellent dividends from the company and they have never been asked to input cash into the company.
In 2003 when SARS devastated the performance of the company and dividends were expected to drop significantly, the profit of HK$1.303
billion was all distributed and even more money was given from the company internal reserves to top up the dividend to HK$1.606 billion, so I don’t think the shareholders have suffered too much.
So, to ask a direct question, why must my son give up his pocket money and the shareholders give up nothing?
5. I must say that I was impressed by the offer of the Chairman, yourself and the COO by giving up the bonus paid by Cathay Pacific for the year 2008 – HK$7.578 million in basic pay bonus and HK$ 2.450 million bonus paid into retirement schemes comes to over HK$ 10 million dollars between the three of you and that will help the company immensely.
I noted in the Annual Report that you are actually employed by JSSHK and I assume that your bonuses from this company will also be foregone?
6. I note that JSSHK received no Service Fees this year (calculated at 2.5% of net profit of CX) as opposed to the HK$ 182 million they received last year and only received expenses of HK$ 138 million up by 27+% from the previous year. Given that the Executive directors cost HK$ 40 million
and the Executive Officers cost under HK$ 45 million, the expenses of the JSSHK contract would appear to be a prime candidate for asking for some relief since there is some HK$ 53 million of expenses that may be able to be saved.
7. In conversation with a business analyst friend (sorry, I seem to have a lot of friends!) he remarked that our company was making a remarkably good job of ensuring the future ability of the company to expand at short notice by overstaffing the company and ensuring that the additional costs are paid for by the employees.
He remarked that companies normally have quite high costs in down-sizing their workforce because of redundancy payments and this is dead money.
It is, however a cost that has to be accepted if the reduced cash flow later is to be taken as an advantage. The down side to laying off employees is the extra training costs of re-employing those staff or their replacements when the upturn comes along. By avoiding the extra training costs later and avoiding having to pay the staff redundancy and getting the staff to pay for the privilege, the company has achieved massive savings paid for by the employees without having to recompense them at a later date.
I think my friend genuinely meant it as a compliment but I fear that he may be unaware of the lack of commitment to reimburse the employees later on!
8. I am sure that the productivity of the staff is a particularly satisfying factor for you; year on year, the total passenger turnover increased by 17.2% and
yet the staff costs only increased by 2.4%. This follows a marvellous record of increasing turnover with increasing staff productivity – in 2001, the staff costs were 24.61% of total costs and yet in 2008 that percentage had dropped to less than half at 12.20%.
If we take out the costs of fuel from the equation then the figures for costs excluding fuel are 26.03% in 2008 versus 30.68% in 2001
which represents an improvement in productivity of over 17.8%.
Given this remarkable increase in productivity, should the company still be looking to the staff for further personal sacrifices?
I am sure that the committed and loyal staff of our company would be interested to hear the answers to these questions prior to having to sacrifice their
hard earned wages.
Mr Tyler, you are in control of the staff which made our airline the best in the world for the third time this decade – your stewardship in these difficult
times will be reflected in the morale and service levels for years to come. I wish you all the best in ensuring that the long term performance of the staff
is everything that the shareholders desire.
From your dedicated staff.
MESSAGE TO THE CHIEF EXECUTIVE
Dear Mr Tyler,
Thank you for your recent communication “Message from the Chief Executive” which I received through the medium of the company CX World newspaper.
I have read your comments and observations about state of the airline industry in general and of our company in particular (indeed, it is difficult to walk anywhere in CXCity without being confronted with endless loops of doom and gloom!) and am keen to understand the implications more fully given the substantial sacrifice expected from everyone, not least from yourself.
I would, therefore, be delighted if you can provide answers and opinions to the following issues which I am trying to understand:
1. Given the substantial loss suffered by the company in 2008 (HK$ 8.56B) and bearing in mind that the operating loss was only HK$539M which includes all
the realised losses for fuel hedges up to 31st December 2008 of HK$309million, can you explain to me how this loss was accrued and who was responsible for making the decision to hedge fuel purchases so far in advance and to such a high level? Why stop or reduce hedging fuel whilst the fuel price was increasing and then increase the fuel hedging when the price was decreasing?
2. The other significant cost to our company P&L was the fine of HK$468M paid to the U.S.A. Department of Justice for actively participating in
the cargo pricing cartel over many years contrary to the laws of the U.S.A. and, it is alleged, several other countries and jurisdictions around the world in our network structure.
Whilst recognising the improvements in our Compliance Policy, the total cost of the decisions made previously will likely cost our company in excess of HK$1.0billion at a time when we can least afford it.
I have seen no announcement of an internal investigation into the illegal
activities of our employees as a result of this cartel nor any conclusion as to who was responsible and any action taken against them. Can you enlighten all of us who are about to donate money into the accounts of this company about the disciplinary action taken against those employees whose actions have been prejudicial to the interests, good name and reputation of the company?
3. You will no doubt be strangely pleased that the price of Brent Crude has now increased to such an extent that our future cash losses against the fuel hedging contracts has decreased these losses by about HK$1.677 billion less any contracts closed during the first QTR.
Of course, following on from this is the Mark-to-Market provisions related to the increasing Brent crude price covering the next three years which would appear to be increasing our P&Lposition by HK$2.457 billion (less any realised losses from 1 QTR contracts).
This is an excellent improvement in position from the loss in 2008 and will mean that we will be in a much stronger position in 2009. As a indicative
trend, I note that our associate airline, Air China, has announced a turn around from its 9.15 billion yuan loss last year to a first QTR profit of 981
million yuan which will no doubt be repeated by our company.
4. At the last G20 meeting in London, one of the areas of concern which came about was the International Accounting Standards Board requirements to use “mark-to-market” losses in the P&L rather than the Balance Sheet. This was of course the main reason that Cathay Pacific recorded a loss when the potential losses for the next three years have to be taken on the P&L in the reporting year.
Should the mark-to-market reporting requirements be changed by the IASB or the HK authorities, this will enable Cathay Pacific to make a restatement of their 2008 accounts and may be able to show operating results that are closer to the cash flow position.
5. The Cathay Pacific Group results include a loss of HK$ 1.0 billion for the realised 4th QTR fuel hedging losses of Air China – which the Group has
taken up. This seems not to be a reciprocal arrangement – I would ask Mr Pratt and Mr Chen (the Air China directors) whether Air China has contributed to our losses?
I look forward to your replies to these issues which relate to the past performance of the company and would now like to further understand the requirements of the company for the future.
1. I have received the request for a voluntary donation to the accounts of the company of between one and four weeks of my salary in order to preserve cash. It will come as no surprise that the same thoughts had been occurring to both me and my family – now is the time to preserve our cash and to try to get through the hard times ahead when we are all unsure of the future. Partners and other family members are all facing possible redundancy and we are all preserving cash to ensure we can survive.
For many years my remuneration has failed to keep up with the cost of living and I am at the stage now of being fully committed and having little or no discretionary spending. I have enquired of the suppliers of my mortgage, food, telephone, electricity, gas and other essentials if they would be willing to waive the payments during the time of my SLS and have been unable to find the support that you would expect of a grateful supplier to a long term and loyal customer.
I am therefore at a loss to understand how I am to be able to contribute the company cash reserves at this time – perhaps you could approach these creditors for me?
2. My son asked me why I will have to stop his pocket money and I explained that the company I worked for needed the money more than he did. He asked what I would get for the money and, when I explained that it was to secure the future of the company, he asked if my job was definitely going to be OK.
I had to explain that the company said there was no guarantee that I would still keep my job if things remain bad for a long time.
3. This started to concern me and a friend in HSBC asked me why Cathay Pacific wouldn’t carry out either a Rights Issue or an issue of new shares to the employees. I have to say that I was stumped for an answer since HSBC did the former and one or two other companies are making new share issues to recapitalise their companies.
Surely the best show of confidence you can have as a company is the employees investing in the company and making a commitment to the future financial success by becoming shareholders? I would rather subscribe to buy Cathay Shares than simply give away my family income.
4. This then started me to think of all the “stakeholder” groups of Cathay Pacific (you know how the business advisors like to include all people who have an interest in the success of a company – suppliers, customers, employees, management, etc. - as “stakeholders”); the only stakeholder group that isn’t contributing to the security and future of the company as far as we know is the shareholders.
Now, the shareholders have enjoyed many years of excellent dividends from the company and they have never been asked to input cash into the company.
In 2003 when SARS devastated the performance of the company and dividends were expected to drop significantly, the profit of HK$1.303
billion was all distributed and even more money was given from the company internal reserves to top up the dividend to HK$1.606 billion, so I don’t think the shareholders have suffered too much.
So, to ask a direct question, why must my son give up his pocket money and the shareholders give up nothing?
5. I must say that I was impressed by the offer of the Chairman, yourself and the COO by giving up the bonus paid by Cathay Pacific for the year 2008 – HK$7.578 million in basic pay bonus and HK$ 2.450 million bonus paid into retirement schemes comes to over HK$ 10 million dollars between the three of you and that will help the company immensely.
I noted in the Annual Report that you are actually employed by JSSHK and I assume that your bonuses from this company will also be foregone?
6. I note that JSSHK received no Service Fees this year (calculated at 2.5% of net profit of CX) as opposed to the HK$ 182 million they received last year and only received expenses of HK$ 138 million up by 27+% from the previous year. Given that the Executive directors cost HK$ 40 million
and the Executive Officers cost under HK$ 45 million, the expenses of the JSSHK contract would appear to be a prime candidate for asking for some relief since there is some HK$ 53 million of expenses that may be able to be saved.
7. In conversation with a business analyst friend (sorry, I seem to have a lot of friends!) he remarked that our company was making a remarkably good job of ensuring the future ability of the company to expand at short notice by overstaffing the company and ensuring that the additional costs are paid for by the employees.
He remarked that companies normally have quite high costs in down-sizing their workforce because of redundancy payments and this is dead money.
It is, however a cost that has to be accepted if the reduced cash flow later is to be taken as an advantage. The down side to laying off employees is the extra training costs of re-employing those staff or their replacements when the upturn comes along. By avoiding the extra training costs later and avoiding having to pay the staff redundancy and getting the staff to pay for the privilege, the company has achieved massive savings paid for by the employees without having to recompense them at a later date.
I think my friend genuinely meant it as a compliment but I fear that he may be unaware of the lack of commitment to reimburse the employees later on!
8. I am sure that the productivity of the staff is a particularly satisfying factor for you; year on year, the total passenger turnover increased by 17.2% and
yet the staff costs only increased by 2.4%. This follows a marvellous record of increasing turnover with increasing staff productivity – in 2001, the staff costs were 24.61% of total costs and yet in 2008 that percentage had dropped to less than half at 12.20%.
If we take out the costs of fuel from the equation then the figures for costs excluding fuel are 26.03% in 2008 versus 30.68% in 2001
which represents an improvement in productivity of over 17.8%.
Given this remarkable increase in productivity, should the company still be looking to the staff for further personal sacrifices?
I am sure that the committed and loyal staff of our company would be interested to hear the answers to these questions prior to having to sacrifice their
hard earned wages.
Mr Tyler, you are in control of the staff which made our airline the best in the world for the third time this decade – your stewardship in these difficult
times will be reflected in the morale and service levels for years to come. I wish you all the best in ensuring that the long term performance of the staff
is everything that the shareholders desire.
From your dedicated staff.