Mark to Market
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Join Date: Mar 2010
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Mark to Market
In 2007/ 2008 CX management complained about the fuel price. Their hedging policy was poor. In 2009, this year, Cathay made a substantial profit on their fuel hedging position, (after paying an independant company to give them advice). Tony Tyler was quick to point out that this profit was only a "book" profit, based on mark to market accounting principles. He professed that it wasn't an operating profit.
C'mon Tony you are telling "porky pies" here mate. Lets have a closer look.
"Mark to market accounting method rule for taxation. Those that elect mark to market treatment shall recognize gain or loss as if the property/ commodity were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year".
Lets look closer. An example, A notional freighter will operate next financial year and with a hedged fuel price of $40/barrell it will make $150,000 profit (based on 80% load factor and other assumptions I won't bore you with). Then the spot fuel price rises to say $70/barrell (as it did this financial year). At the spot price, the profit on this flight will now be $100000 due to the increased fuel price, however this is hypothetical because the fuel is already paid for under fuel hedging at $40 barrell.
Useing "m to m" principles managment can book $50000 of the profit on this flight in this financial year, based on the spot price, under the fuel hedgeing account. The flight will always make $150K, but $50K of this profit has been brought forward. In a different bucket, the fuel hedge bucket.
When the numbers are realised ala yesterday Tony can tell everyone that fuel mark to market profits aren't real profits and then goes on to say that the underline operating profit is only $285Million "pretty skinny". Err but Tony, fuel hedging gains are $2.8 BILLION!!!
Ok some of you can argue that these fuel options could be sold to another carrier and realised directly through the sale of fuel, yes this is true, however this would surrender market share to competitors and you would only make $50000 not $150000, so would probably be a little silly, however not beyond these guys I guess.
For Tony to Quote "mark to market" profits as only "book" profits is totally misleading. A profit is a profit Tony don't play with words, please forward profit to all employees forth with.
Endith the lessen!
C'mon Tony you are telling "porky pies" here mate. Lets have a closer look.
"Mark to market accounting method rule for taxation. Those that elect mark to market treatment shall recognize gain or loss as if the property/ commodity were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year".
Lets look closer. An example, A notional freighter will operate next financial year and with a hedged fuel price of $40/barrell it will make $150,000 profit (based on 80% load factor and other assumptions I won't bore you with). Then the spot fuel price rises to say $70/barrell (as it did this financial year). At the spot price, the profit on this flight will now be $100000 due to the increased fuel price, however this is hypothetical because the fuel is already paid for under fuel hedging at $40 barrell.
Useing "m to m" principles managment can book $50000 of the profit on this flight in this financial year, based on the spot price, under the fuel hedgeing account. The flight will always make $150K, but $50K of this profit has been brought forward. In a different bucket, the fuel hedge bucket.
When the numbers are realised ala yesterday Tony can tell everyone that fuel mark to market profits aren't real profits and then goes on to say that the underline operating profit is only $285Million "pretty skinny". Err but Tony, fuel hedging gains are $2.8 BILLION!!!
Ok some of you can argue that these fuel options could be sold to another carrier and realised directly through the sale of fuel, yes this is true, however this would surrender market share to competitors and you would only make $50000 not $150000, so would probably be a little silly, however not beyond these guys I guess.
For Tony to Quote "mark to market" profits as only "book" profits is totally misleading. A profit is a profit Tony don't play with words, please forward profit to all employees forth with.
Endith the lessen!
