Sources inform me that the reason for the loss was that KQ used to erronously carry its gains/losses on derivative (fuel hedge) through equity,while in real sense they should have taken it through P&L as per IAS 39. This is because the fuel hedge is a financial asset/liability. The loss was hence occasion by the reversal of this treatment,and thats why KQ even paid some dividends cause their net asset position did not change.

Just to explain what a hedge/derivative is. A derivative is a form of insurance that companies that are exposed to volatile products e.g forex,fuel,etc buy to primarily smoothen their operations. It will involve one party (in this case KQ) paying a determined amount to another party (some merchant bank) and in exchange the merchant bank will pay KQ if they spend more than a determined ceiling price on fuel. If the fuel price is lower than the determined ceiling price,then KQ will simply purchase the fuel at the market price but will also have to honor its fixed periodic payments to the merchant bank for the duration of the hedge.

Thus when the fuel price is lower than the ceiling price,the periodic fixed payments by KQ to the end of the hedge will be discounted and disclosed as derivative transaction on the face of the balancesheet and in this case will likely be a liability. When the fuel price moves over the ceiling price,then the savings from the agreed price and the market price less the fixed payments by KQ will be discounted and shown as a derivative transaction on the face of the balancesheet and will most likely be a financial asset.


I've noticed the youth in particular coming in to a workplace with a completely outsized notion of their own value and importance... just a thinly-veiled arrogance. May be the credit crunch induced recession is whats needed to remind us all about the value of hard work.... By Anonymous

Pari Passu all other factors e.g. pax,yields,etc... I think KQ will do (relatively) well in 2009-10 (excepting any fuel hedge movements). KQ will bleed cash coz of hedge payments BUT hopefully,they will have earned some cash through their operations. One point that has been lost is that LOWER fuel prices also BENEFIT the airline. How? Well,they are dominant on some routes thus they can still charge high airfares but use 'cheaper' fuel.

Greedy when others are fearful,Very fearful when others are greedy - to paraphrase WB

Chief: If you read between the lines or not... the issue is that IAS 39 means you load all longer-term gains/losses into one quarter or half or full year... So KQ's hedge losses are being piled in one year... when lower oil prices WILL benefit KQ much more...

Greedy when others are fearful,Very fearful when others are greedy - to paraphrase WB