Aer Lingus 2011 Annual Report Download - page 80

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Annual Report 2011
78
FINANCIAL STATEMENTS Aer Lingus Group Plc
Notes to the consolidated financial statements (continued)
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. In addition to these investments, the Group
holds further cash, predominantly in euro, and therefore the major interest rate exposure the Group has is to movements in the euro
interest rate. This exposure is actively reviewed and managed. A 1% fall in interest rates based on net surplus cash throughout 2011
would reduce profits by ¤3.6m (2010: ¤3.9m).
(iii) Commodity price risk
The Group’s fuel requirements expose 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. The primary policy objective for the management of fuel price exposure in the Group is to increase the
predictability of future fuel costs in a risk managed and cost effective manner.
The group treasury function manages fuel price risk within a tightly controlled framework. From July 2009, the Group introduced a
systematic fuel hedging policy covering the following 2 year period. This systematic hedging policy targets specific cover levels for
each following period on a rolling basis ranging from 90% cover for the following month to 5% cover 24 months out. This generates
average cover levels of approximately 60% for the next 12 month period (rolling year 1) and 15% for the following 12 months (rolling
year 2). Under the policy the Group can derogate from this systematic hedging requirement, in event of unusual market conditions.
The products used by the group treasury function in managing commodity price risk are predominantly jet fuel swaps.
A US $10 increase in the price per tonne of jet fuel in 2011 would have increased fuel costs by approximately $4.3m, based on an
estimated burn/MT of 431,000 tonnes, absent hedging (2010: $4.3m).
(b) Credit risk
Credit risk is managed on a group basis. Credit risk arises from loans and receivables, derivative financial instruments, deposits and
cash and cash equivalents with banks and financial institutions and trade and other receivables. The maximum exposure to credit risk
is represented by the carrying amount of each financial asset.
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.
At 31 December 2011 the Group had a total credit exposure of ¤0.9bn relating to bonds, deposits, cash and derivatives which was
spread over 30 counterparties. Of this ¤0.7bn was due to mature within 12 months. The Group does not have any material credit risk
arising from the ageing of trade and other receivables.
59% of the total credit exposure of ¤0.9bn, was held with financial institutions, holding long-term credit ratings equivalent to AAA to
AA3 (Moody’s). 33% of the total credit exposure was held with financial institutions, holding long term-ratings equivalent to A1 to A2.
The remaining 8% was held with financial institutions with long-term credit ratings below A2.