EasyJet 2012 Annual Report Download - page 30

Strategic
impact Risk description and potential impact Current mitigation
EFFICIENT ASSET UTILISATION
Asset allocation
easyJet has a leading presence on the top 100 routes in Europe
andpositions at primary airports that are attractive to time sensitive
consumers. easyJet manages the performance of its network
bycareful allocation of aircraft to routes and optimisation of its
flyingschedule.
If we fail to continue to optimise our network and fleet plan this
willhave a major impact on easyJet’s ability to grow and gain the
required yield. In addition, poor planning of the correct number
ofaircraft to fly the schedule would have a critical impact on
easyJet’s costs and reputation.
A Network Portfolio Management Strategy is in place which
looks to take a balanced approach to the route portfolio
that we fly to ensure that we optimise each aircraft to get
the best return for each time of day, each day of the week.
Route performance is monitored on a regular basis and
operating decisions are made to improve performances
where required.
STRONG BALANCE SHEET
Exposure to fuel price fluctuations and other
macroeconomic shifts
Sudden and significant increases in jet fuel price and movements
inforeign exchange rates would significantly impact fuel and other
costs. Increases in fuel costs have a direct impact on the financial
performance of the company. If not protected against, this would
have a material adverse effect on financial performance.
easyJet’s business can also be affected by macroeconomic issues
outside of our control such as weakening consumer confidence,
inflationary pressure or instability of the Euro. This could give rise
toadverse pressure on revenue, load factors and residual values
ofaircraft.
Board approved hedging (jet fuel and currency) in place
that is consistently applied. Policy is to hedge within a
percentage band for rolling 24 month period.
To provide protection, the Group uses a limited range of
hedging instruments traded in the over the counter (OTC)
markets, principally forward purchases, with a number of
approved counterparties.
A strong balance sheet supports the business through
fluctuations in the economic conditions for the sector.
Regular monitoring of markets and route performance
by our network and fleet management teams.
Financing and interest rate risk
All of the Group’s debt is asset related, reflecting the capital
intensive nature of the airline industry.
Market conditions could change the cost of finance which may
havean adverse effect on our financial performance.
Group interest rate management policy aims to provide
certainty in a proportion of its financing.
Operating lease rentals are a mix of fixed and floating rates.
All on balance sheet debt is floating rate, re-priced up to
sixmonths.
None of the agreements contain financial covenants to
bemet.
A portion of US dollar mortgage debt is matched with
USdollar money market deposits.
Liquidity risk
The Group continues to hold significant cash or liquid funds as
aform of insurance.
Lack of sufficient liquid funds could result in business disruption
andhave a material adverse effect on our financialperformance.
Board policy is to maintain a targeted level of free cash and
money market deposits.
This allows the business to ride out downturns in business
ortemporary curtailment of activities (e.g. fleet grounding,
security incident, extended industrial dispute at a key supplier).
Credit risk
Surplus funds are invested in high quality short-term liquid
instruments, usually money market funds or bank deposits.
Possibility of material loss arising in the event of non-performance
ofcounterparties.
Cash is placed on deposit with institutions based upon
credit rating with a maximum exposure of £150 million
forAAA counterparty money market funds.
Performance and risk
Financial review
continued
easyJet plc
Annual report and accounts 2012
28