Aer Lingus 2012 Annual Report Download - page 20

2012 FINANCIAL REVIEW Aer Lingus Group Plc
ANNUAL REPORT 2012
18
€ million 2012 2011 % Increase/
(decrease)
Ground operations and other costs 126.2 129.1 (2.2%)
2011 ground operations and other costs were adversely impacted by aircraft and crew hire-in costs and additional flight cancellation charges as a result
of operational disruption in Q1 2011. In addition, non-recurring project costs, specifically in the area of IT, were incurred in 2011. There is therefore an
underlying increase in ground operations and other costs in 2012 which is primarily attributed to an increase in volume related costs and hardware and
software licence fees associated with continuing investment to improve our IT infrastructure.
€ million 2012 2011 % Increase/
(decrease)
Other gains/losses (13.3) (3.0) 343.3%
Other gains and losses relate primarily to net gains arising on the maturity of US$ and GBP currency contracts which are used to manage FX exposure.
Aer Lingus is structurally short US$ in any financial year. This is due to the fact that a significant portion of our cost base is denominated in US$ (including
fuel, aircraft hire, certain airport charges and an element of our maintenance costs) while the majority of our revenue is generated in euro. The extent to
which we are short US$ varies from year to year, depending upon the strength of our US$ denominated long haul revenue ticket sales on one hand and
the dollar cost of fuel on the other. In 2012, we were short some US$260 million. In addition, we also earn GBP revenues which exceed the level of costs
we incur in that currency. This typically leaves us with an annual GBP surplus.
We seek to protect ourselves from fluctuations in the US$ and GBP exchange rates through a systematic hedging programme. In 2012, the average US$
rate on our maturing US$ hedging contracts of €1 = US$1.39 compared favourably to the actual average US$ exchange rate in the spot market of 1.29.
The average actual hedged rate of surplus GBP sold in 2012 was €1 = £0.84 which compared unfavourably to the average actual GBP spot rate of 0.82.
These differences drove a net gain of €13.3 million in 2012 which provided some offset to the increase in fuel costs described above.
For 2013, and as detailed in the fuel, currency and emissions hedging section below, as at 31 December 2012 we had hedged US$132 million of our total
expected 2013 US$ trading requirement at an average rate of €1 = US$1.35. At 31 January 2013, the forward average US$/EUR rate for 2013 was 1.36.
Therefore, should the US$ spot rate remain close to this average forward rate for the rest of the year, we are likely to incur a small loss on our US$ hedging
in contrast to the significant gain recorded in 2012.
An overview of FX rates for 2012 is as follows:
Foreign currency rate 31 December Average during year
2012 2011 2012 2011
Euro/US$ 1.32 1.30 1.29 1.40
Euro/GBP 0.82 0.84 0.82 0.87
Greenfield
In 2012, we achieved new savings under our Greenfield cost reduction programme with an annual value of €19.9 million. When combined with the €84.3
million of annual cost savings already achieved at the start of the financial year, we have now achieved a total annual cost saving of €104.2 million which
exceeds our €97 million goal for the three year programme. The savings achieved in 2012 were split as €6.7 million staff savings and €13.2 million non-staff
savings. The initiatives undertaken to deliver the 2012 savings achieved included fuel management, overtime reduction, aircraft insurance savings, stock
disposals and sourcing and supplier management improvements. Although the formal Greenfield programme has come to an end we continue to pursue
cost saving opportunities and initiatives throughout the business.