I was surprised to read in the news today that Southwest Airlines Posted its first loss in 17 years. They are even going to dial back on growth. It is an amazing thing for an airline that was the only one to turn profit during the years following September 11th.
It definitely needs to be noted that the entire loss is due to a one time write down of options contracts held to hedge against fuel costs. Because of American accounting standards they have to mark these kinds of assets at their market value. Since they have contracts that give them the option to buy at higher prices than the current spot price, those contracts are worthless.
I still believe Southwest is a worthwhile company to invest in. The “mark to market” accounting standard has been giving a lot of people problems lately. I find this to be at the heart of the whole financial crisis in which we are currently drowning.
“Mark to Market” means that a company has to carry assets on their books at the price they could receive for them if they were to sell them in the marketplace.
For instance…
In this scenario guy 1 would have to write down the value of that suck to zero because no one in the market wants it. That’s the same thing that happened to these banks with mortgage backed securities. This is where you get the huge write-offs that are causing everyone to freak out. No actual money changes hands. The write-off repo man doesn’t some to your door. Although that would be cool…
My point is that yes the crisis is bad and there are real problems that need to be solved, but the issues are being compounded by American Account Standards. So remember kids. Friends don’t let friends mark things to market!
