EasyJet 2014 Annual Report Download - page 129

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Accounts & other information
www.easyJet.com 127
Foreign currency risk management
The principal exposure to currency exchange rates arises from fluctuations in both the US dollar and euro rates which impact
operating, financing and investing activities. The aim of foreign currency risk management is to reduce the impact of exchange
rate volatility on the results of easyJet. Foreign exchange exposure arising from transactions in various currencies is reduced
through a policy of matching, as far as possible, receipts and payments in each individual currency. Any remaining significant
anticipated exposure is managed through the use of forward foreign exchange contracts. In addition, easyJet has substantial
US dollar balance sheet liabilities, which are offset by holding US dollar cash and money market deposits.
Financing and interest rate risk management
Interest rate cash flow risk arises on floating rate borrowings and cash investments.
Interest rate risk management policy aims to provide certainty in a proportion of financing while retaining the opportunity
to benefit from interest rate reductions. All borrowings are at floating interest rates re-pricing every three to six months.
A significant proportion of US dollar loans by value are matched with US dollar cash and money market deposits. Operating
leases are a mix of fixed and floating rates. Of the 72 operating leases in place at 30 September 2014 (2013: 72), 71% were
based on fixed interest rates and 29% were based on floating interest rates (2013: 75% fixed, 25% floating).
All debt is asset related, reflecting the capital intensive nature of the airline industry and the attractiveness of aircraft as
security to lenders. These factors are also reflected in the medium-term profile of easyJet’s borrowings and operating leases.
At 30 September 2014 the Company had 94 (2013: 78) unencumbered aircraft.
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 Board approved policy to hedge between 65% and 85%
of estimated exposures up to 12 months in advance, and to hedge between 45% and 65% 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, money market 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 statement of financial
position 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.