Ryanair 2010 Annual Report Download - page 128

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While these hedging strategies can cushion the impact on Ryanair of fuel price increases in the short
term, in the medium to longer-term, such strategies cannot be expected to eliminate the impact on the Company
of an increase in the market price of jet fuel. The unrealized gains/(losses) on outstanding forward agreements at
March 31, 2010 and 2009, based on their fair values, amounted to 142.6 million and 1(106.7) million (gross of
tax), respectively. Based on Ryanair’s fuel consumption for the 2010 fiscal year, a change of $1.00 in the
average annual price per metric ton of jet fuel would have caused a change of approximately 10.9 million in
Ryanair’s fuel costs. See “Item 3. Key Information—Risk Factors—Risks Related to the Company—Changes in
Fuel Costs and Fuel Availability Affect the Company’s Results and Increase the Likelihood that the Company
May Incur Losses.”
Under IFRS, the Company’s fuel forward contracts are treated as cash-flow hedges of forecast fuel
purchases for risks arising from the commodity price of fuel. The contracts are recorded at fair value in the
balance sheet and are re-measured to fair value at the end of each fiscal period through equity to the extent
effective, with any ineffectiveness recorded through the income statement. The Company has considered these
hedges to be highly effective in offsetting variability in future cash flows arising from fluctuations in the market
price of jet fuel because the jet fuel forward contracts typically relate to the same quantity, time, and location of
delivery as the forecast jet fuel purchase being hedged and the duration of the contracts is typically short.
Accordingly, the quantification of the change in expected cash flows of the forecast jet fuel purchase is based on
the jet fuel forward price, and in the 2010 fiscal year, the Company recorded no hedge ineffectiveness within
earnings. The Company has recorded no level of ineffectiveness on its jet fuel hedges in its income statements to
date. In the 2010 fiscal year, the Company recorded a positive fair-value adjustment of 137.3 million (net of tax)
within accumulated other comprehensive income in respect of jet fuel forward contracts, and in the 2009 fiscal
year, the Company recorded a negative fair-value adjustment of 193.3 million (net of tax) within accumulated
other comprehensive income.
FOREIGN CURRENCY EXPOSURE AND HEDGING
In recent years, Ryanair’s revenues have been denominated primarily in two currencies, the euro and
U.K. pound sterling. The U.K. pound sterling and the euro accounted for approximately 28% and 62%,
respectively, of Ryanair’s total revenues in the 2010 fiscal year, as compared to approximately 32% and 58%,
respectively, in the 2009 fiscal year. As Ryanair reports its results in euro, the Company is not exposed to any
material currency risk as a result of its euro-denominated activities. Ryanair’s operating expenses are primarily
denominated in euro, U.K. pounds sterling and U.S. dollars. Ryanair’s operations can be subject to significant
direct exchange rate risks between the euro and the U.S. dollar because a significant portion of its operating
costs (particularly those related to fuel purchases) is incurred in U.S. dollars, while none of its revenues are
denominated in U.S. dollars. Appreciation of the euro against the U.S. dollar positively impacts Ryanair’s
operating income because the euro equivalent of its U.S. dollar operating costs decreases, while depreciation of
the euro against the U.S. dollar negatively impacts operating income. It is Ryanair’s policy to hedge against a
certain portion of its exposure to fluctuations in the exchange rate between the U.S. dollar and the U.K. pound
sterling at the time Ryanair enters into U.S. dollar-denominated purchases. From time to time, Ryanair hedges
its operating surpluses and shortfalls in U.K. pound sterling. Ryanair matches certain U.K. pound sterling costs
with U.K. pound sterling revenues and may choose to sell any surplus U.K. pound sterling cash flows for euro.
Hedging associated with the income statement. In the 2010 and 2009 fiscal years, the Company entered
into a series of forward contracts, principally euro/U.S. dollar forward contracts to hedge against variability in
cash flows arising from market fluctuations in foreign exchange rates associated with its forecast fuel,
maintenance and insurance costs and euro/U.K.pound sterling forward contracts to hedge certain surplus U.K.
pound sterling cash flows. At March 31, 2010, the total unrealized gain relating to these contracts amounted to
143.3 million, compared to a 146.0 million unrealized gain at March 31, 2009.
Under IFRS, these foreign currency forward contracts are treated as cash-flow hedges of forecast U.S.
dollar and U.K. pound sterling purchases to address the risks arising from U.S. dollar and U.K. pound sterling
exchange rates. The derivatives are recorded at fair value in the balance sheet and are re-measured to fair value
at the end of each reporting period through equity to the extent effective, with ineffectiveness recorded through
the income statement. Ryanair considers these hedges to be highly effective in offsetting variability in future
cash flows arising from fluctuations in exchange rates, because the forward contracts are timed so as to match
exactly the amount, currency and maturity date of the forecast foreign currency-denominated expense being
hedged. In the 2010 fiscal year, the Company recorded a positive fair-value adjustment of 137.9 million (net of
tax) within accumulated other comprehensive income in respect of these contracts, as compared to a positive
adjustment of 140.2 million in the 2009 fiscal year.