Aer Lingus 2008 Annual Report Download - page 63

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AER LINGUS GROUP PLC - ANNUAL REPORT 2008
ii. Interest rate risk
The Group is exposed to interest rate risk associated with its long term funding requirements and its programme of surplus funds
investment. Higher interest rates increase the costs of gross debt and lower interest rates lower the returns from cash investments.
Overall the Group is in a net cash position. Interest rate exposure on debt is managed by placing matching investments, which serve
as natural hedges in relation to both interest rate and currency exposures on the debt. Apart from these investments, the Group
holds surplus cash, predominantly in euro, and therefore the major interest rate exposure the Group has is to movements in the
euro interest rates. This exposure is actively reviewed and managed.
A 1% fall in interest rates based on net surplus free cash throughout 2008 would reduce profits by €7.6m.
iii. Commodity price risk
The Group’s fuel requirement exposes the Group to the market volatility of jet fuel prices. The Group is subject to jet fuel price risk
resulting from its operating activities. The volatility of jet fuel prices has been significant in recent years and can have a significant
effect on profitability in these operations. The primary policy objective for the management of fuel price exposure in the Group is
to contribute to the achievement of the Group’s profitability in a risk managed and cost effective manner.
The treasury function manages the fuel price exposure associated with the Group’s trading activities on a selective hedging basis.
The Group’s risk management policy targets a minimum of 40% cover for fuel exposures for the current financial year and a
minimum of 20% for the following financial year.
The products used by the treasury function in managing commodity price risk are predominantly commodity swaps.
A US $10 increase in the price per tonne of jet fuel in 2008 would have increased fuel costs by $5.4m.
b) Credit risk
Credit risk is managed on a group basis. Credit exposures result from investment activity with financial counterparties, and from
transacting derivative financial instruments used in managing the Group’s foreign exchange, fuel and interest rate risks. Group
policy requires financial counterparties to hold minimum credit ratings from independent rating agencies. The appropriateness and
utilisation of Board approved credit limits are regularly monitored and reviewed in light of the commercial requirements of the Group.
Credit risk arises from credit exposure to trade receivables, cash and cash equivalents including deposits with banks and financial
institutions, derivative financial instruments and loans and receivables. The maximum exposure to credit risk is represented by the
carrying amount of each financial asset.
At 31 December 2008, the Group had a total credit exposure of €1.1bn relating to cash and deposits, which was spread over 30
financial counterparties. Of this, €0.8bn was due to mature within 12 months. All approved counterparties have minimum short-term
credit ratings equivalent to P1 (Moody’s). The Group does not have any material credit risk arising from trade and other receivables.
Of the total credit exposure of €1.1bn, 16% was held with financial institutions, holding long-term credit ratings of AAA, and 68%
with ratings equivalent to AA1/AA2 ratings (Moody’s). The remaining 16%, held with financial institutions with long-term ratings of
AA3 or A1, mainly comprised deposits with maturity dates within one year.
c) Liquidity risk
The principal policy objective in relation to liquidity is to ensure that the Group has access, at minimum cost, to sufficient liquidity to
enable it to meet its obligations as they fall due and to provide adequately for contingencies. In implementing this policy, the Group
is required to maintain, at all times, access to Board approved minimum requirements. In addition, this liquidity requirement, once
drawn, must continue to be accessible for an agreed further period. Cash balances in excess of these levels are normally maintained
in order to enable the Group to take advantage of commercial opportunities and withstand business shocks.
The Group has long term debt almost exclusively associated with aircraft acquisitions. All borrowing is undertaken by the treasury
function. Group policy is to maintain, at all times, cash and/or committed facilities for a high proportion of the net forecasted
borrowing requirements for the following 12 months. Where borrowings are made to fund the acquisition of aircraft, policy
requires at least 80% of such borrowings must be from facilities that are committed for a period of not less than five years.