Inside the world of business
The language of losses
The type of language a company chooses to describe its business can, at times, be an indicator of unease; it is hard not to feel that something of that nature is afoot with the latest accounts from Facebook Ireland Ltd. The company bills third-party customers for targeted advertisements on its website and the markets it covers includes such wealthy locations as Germany, Australia and France.
It also earns income from these markets from a games credits system it operates.
In its latest accounts, the company disclosed that revenue had jumped to more than €1 billion during 2011, from just €229 million in 2010, the kind of progress most companies don’t even dream about.
Despite this explosion in income, the poor dears at Facebook Ireland Ltd lost €18.37 million in 2011 – before taxation – having made €1.9 million the previous year when turnover was just a sliver of what it was to become.
How could they have made such a hames of it? “Administrative expenses”, according to the accounts. They increased to more than €1 billion, having been just €221 million the previous year. Talk about a failure in cost control!
Closer reading though of the Ernst Young audited accounts reveals that this surge in administrative expenses arose not just from the greatly increased headcount (an average of 287 in 2011 compared to 151 a year earlier), but also in the amount of money paid in royalties to its immediate parent.
The company paid €540 million in 2011 to its immediate parent, Facebook Ireland Holdings, for the right to utilise the Facebook platform, compared with just €98 million the previous year.
It also paid €373 million directly to its US parent, Facebook Inc, compared with €83 million the previous year. These payments were for management and data services.
Facebook Ireland Holdings is an unlimited company and so does not publish its accounts. We don’t know, therefore, how much corporation tax it pays, if any, in this State. (So the only corporation tax paid, as far as we know, on this €1 billion business, was €3.5 million, as per the Facebook Ireland Ltd accounts.)
Facebook Ireland Holdings is owned by Facebook companies in the Cayman Islands and it would be surprising if it does not make substantial payments to those companies, the express purpose of the whole system being to guide the flow of profits from markets around the world through Dublin, and onwards to the Caribbean tax haven, avoiding as much tax as possible on the way.
Some people – such as Google chief executive Eric Schmidt – call this sort of stuff capitalism. Others, such as British Labour MP Margaret Hodge, call it outrageous. Ernst Young, being an accountancy service, calls it administrative expenses.
Ryanair denies breach of aircraft weights
We all know what happens if you exceed your cabin baggage allowance on a Ryanair flight: credit card, at least €60 and thank you very much for flying with Europe’s favourite airline.
What happens though if Ryanair’s aircraft go over their declared weight? German airport spot-checks reportedly found Ryanair aircraft weighed up to eight tonnes beyond their declared 67 tonnes.
According to checks by German airports in Lübeck and Hahn, reported yesterday in Die Welt daily, the aircraft weights were often closer to 75 tonnes.
If confirmed this would increase the airline’s levy by €17 on each German flight. With a reported daily frequency of 50 flights, that works out at €850 a day, or €370,000 annually, in Germany alone.
Trade website Cargoforwarder quoted unnamed airline experts who said that based on Ryanair’s 1,500 daily flights in Europe, the total annual fee saving could be close to €50 million.
At the heart of this weighty issue is the 66.990 tonnes claimed by Boeing as the weight of the 737-800 planes it built for Ryanair. Deviations in certified weights are possible with aircraft, however, and the highest registered weight for any craft – in this case 74.990 tonnes – is the one used for levying fees.
A spokesman for Germany’s DFS aviation authority said its legal experts were examining the case and would intervene if it found indications of permanent fee evasion by the Irish airline.
Ryanair issued a statement yesterday saying there was “no truth to this story”.
“Ryanair’s 737 aircraft operate at different certified weights in full compliance with Boeing’s flex-weight programme, as certified and approved by the Irish Aviation Authority [IAA] and we will continue to do so,” it said. “Ryanair is not paying back fees for alleged ‘higher allowances’. These claims are simply untrue.”
The IAA declined to comment, saying it was between Ryanair and Eurocontrol, the European air safety authority. Eurocontrol said it became aware “some time ago that there is an issue with Ryanair’s declarations” and was “actively attempting to address the issue with Ryanair”.
The body relies on weight declarations of carriers, but is reviewing this system. It added that the Ryanair review “was purely a financial issue and that there are no safety implications”.
GM gamble pays off for Uncle Sam
US auto giant General Motors is shaking off the unfortunate moniker of “Government Motors”. The firm earned the nickname after receiving about $50 billion from the US treasury as part of its bankruptcy restructuring in 2009 under the Troubled Asset Relief Program (Tarp).
It came at a time when it seemed the death knell was being sounded for at least two of the big-three US car firms. Since then GM has undergone something of a phoenix-like revival.
Yesterday it said it will buy back 200 million of its shares from the US treasury, which plans to sell its remaining stake within 15 months.
GM chief financial officer Dan Ammann said the automaker will pay $5.5 billion, or $27.50 a share, for the treasury-held shares in a deal expected to close by year-end.
That represents a 7.9 per cent premium on Tuesday’s closing price.
The stock sale is part of a broader push to wind down the controversial financial bailout, created by US president Barack Obama’s predecessor, George W Bush, to prevent the collapse of the banks during the 2007-09 financial crisis.
Obama heavily promoted his decision to use public funds to rescue the motor industry and save jobs as he campaigned for re-election in swing states like Michigan and Ohio. Voters in both states backed him again in the November election, providing critical support in his victory.
The bailouts of GM and Chrysler Group by US and Canadian governments propped up an industry that has since reported three straight years of at least 10 per cent growth. Cutting the stake could be good for GM’s image, along with proof perhaps that there is life still left in the US motor industry.
For the US government the story is perhaps less positive. Tarp was approved by Congress as a $700 billion program, though the US treasury eventually disbursed $418 billion. On Wednesday it said it had recovered $381 billion to date, or about 90 per cent. If the US treasury sold its remaining stock at the price GM is paying now, it would come up short by more than $12 billion.
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