Aer Lingus 2008 Annual Report Download - page 62

AER LINGUS GROUP PLC - ANNUAL REPORT 2008
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Judgement is used by the Group in assessing the particular items which should be disclosed in the income statement and related
notes as exceptional items.
2.21 Financial risk management
2.21.1 Financial risk factors
The Group’s activities expose it to a variety of financial risks: currency risk, interest rate risk, credit risk, liquidity risk (including funding
and cash management) and commodity price risk. The Group’s overall risk management programme focuses on the reduction or,
where possible, elimination of the impact of volatility in currency, interest rates and other markets, on the Group’s performance.
The purpose of the Board approved Aer Lingus Group plc Treasury Policy (the “Treasury Policy”) is to regulate how the operations
of the individual treasury activities of the Group are to be conducted and how the associated risks are to be controlled.
The Treasury Policy seeks to ensure that activities undertaken will not subject the Group to undesired levels of risk and that the
treasury function will contribute to financial performance through focused management of treasury activities. The Group adopts a
strategic approach to management of its treasury exposures. This approach involves placing certain levels of cover and developing
strategies to manage the remaining exposures based on business risks and an assessment of the likely movement in market rates.
This approach is business based, strategic and ongoing. The emphasis is on risk management and reduction and protecting the
Group from the financial impact of volatility in financial markets and fuel markets.
The Treasury Policy contains targets in relation to liquidity levels and to the levels of hedging to be placed in managing financial risks,
as outlined below. However, the Treasury Policy provides flexibility, by allowing deviations from these minimum targets, where this is
considered to be in the best interests of the Group, in the context of market conditions.
The Group recognises the significant impact treasury exposures can have on corporate financial performance. The management
of treasury exposures therefore receives an appropriate level of senior management attention.
The market in which Aer Lingus operates poses significant financial, commercial and commodity price risks for the Group. The
Group recognises that it must manage the financial risks associated with the market in which it operates and the treasury function
manages the financial (treasury) risks detailed below.
a) Market risk
i. Currency risk
The main currency exposures result from a deficit in US dollars and a surplus in sterling. A large proportion of the treasury function’s
work in relation to currency risk relates to the management of the Group’s cashflow exposures. Significant currency exposures are
managed for the current and next financial years on a selective hedging basis. The dollar deficit arises because the dollar costs
for fuel and aircraft rentals, etc., exceed dollar sales in the US. The sterling surplus arises because UK sales exceed sterling costs.
Profits are reduced by a stronger dollar and/or a weaker sterling.
Additionally, significant currency exposure results from the US dollar capital commitments relating to the purchase of aircraft.
Acquisition costs are increased by a stronger dollar.
The treasury function manages the following currency risk generating activities: cashflow exposures, non-cashflow income
statement exposures and balance sheet exposures. The products used by the treasury function in managing currency risk are
predominantly forward foreign exchange contracts.
Currency risks are hedged on a selective hedging basis. The Group’s risk management policy targets a minimum of 50% cover for
these exposures for the current financial year and a minimum of 25% cover for the following financial year. In addition, a minimum
of 50% of the committed capital expenditure will be hedged when the commercial contract is signed. This minimum level is actively
reviewed in the context of the scale and delivery timescales for flight equipment.
Based on the surplus in sterling at 31 December 2008, a 5% weakening of the EUR/GBP exchange rate over the year end
rate would result in a reduction in profit of €2.7m for the year. Based on the deficit in US dollars at 31 December 2008, a 5%
strengthening of the EUR/USD exchange rate over the year-end rate would result in a reduction in profit of €20.1m for the year.
Basis of Preparation and Statement of
Accounting Policies continued