EasyJet 2010 Annual Report Download - page 88

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easyJet plc
Annual report and accounts 2010
Notes to the accounts
continued
86
23 Financial risk and capital management continued
Fuel price risk management
easyJet is exposed to fuel price risk. The objective of the fuel price risk management policy is to provide protection against sudden
and significant increases in jet fuel prices, thus mitigating volatility in the income statement in the short term. In order to manage the risk
exposure, forward contracts are used in line with policy to hedge between 50% and 80% of estimated exposures up to 12 months in
advance, and to hedge between 20% and 50% of estimated exposures from 13 up to 24 months in advance. In exceptional market
conditions, the Board may accelerate or limit the implementation of the hedging policy.
Market risk sensitivity analysis
Financial instruments affected by market risk include borrowings, deposits, trade and other receivables, trade and other payables and
derivative financial instruments. The following analysis illustrates the sensitivity of such financial instruments to changes in relevant foreign
exchange rates, interest rates and fuel prices. It should be noted that the analysis reflects the impact on profit or loss after tax for the year
and other comprehensive income on financial instruments held at the reporting date. It does not reflect changes in revenue or costs that
may result from changing currency rates, interest rates or fuel prices. Sensitivity is calculated based on all other variables remaining
constant. The analysis is considered representative of easyJet’s exposure over the 12 month period.
The currency sensitivity analysis is based on easyJet’s foreign currency financial instruments held at each balance sheet date taking into
account forward exchange contracts that offset effects from changes in currency exchange rates. The increased sensitivity in the US dollar
and euro rate represents sterling weakening against each variable currency with the –10% sensitivity reflecting stronger sterling.
The interest rate analysis assumes a 1% change in interest rates over the reporting year applied to end of year financial instruments.
The fuel price sensitivity analysis is based on easyJet’s fuel related derivative financial instruments held at the end of each reporting period.
The impact of a 1% increase in interest rates and a 10% increase in the fuel price is disclosed. A corresponding decrease results in an equal
and opposite impact on the income statement and other comprehensive income in both reporting periods.
Sensitivities are calculated based on a reasonably possible change in the rate applied to the value of financial instruments held at each
balance sheet date.
Currency rates
At 30 September 2010
US dollar
+10%
£ million
US dollar
–10%
£ million
Euro
+10%
£ million
Euro
–10%
£ million
Interest rates
1% increase
£ million
Fuel price
10% increase
£ million
Income statement impact: gain / (loss) 12.5 (15.0) (4.2) 5.3 0.6 –
Impact on other comprehensive income:
increase / (decrease) 42.7 (52.1) (13.6) 19.5 – 46.9
Currency rates
At 30 September 2009
US dollar
+10%
£ million
US dollar
–10%
£ million
Euro
+10%
£ million
Euro
–10%
£ million
Interest rates
1% increase
£ million
Fuel price
10% increase
£ million
Income statement impact: gain / (loss) 17.9 (13.8) (1.1) 0.9 0.4 –
Impact on other comprehensive income:
increase / (decrease) 44.9 (37.6) (14.5) 12.0 – 31.4
The market risk sensitivity analysis has been calculated based on spot rates for the US dollar, euro and jet fuel at close of business
on 30 September each year.