Aer Lingus 2012 Annual Report Download - page 29

PRINCIPAL RISKS AND UNCERTAINTIES Aer Lingus Group Plc
ANNUAL REPORT 2012
27
Fleet The Group seeks to maintain a balance between owned
and leased aircraft to give it the flexibility to reduce
capacity at short notice by handing back leased aircraft.
Maintaining this flexibility can result in higher operating
costs. In addition, the Group has commitments to
purchase new aircraft costing some €937 million over
the period to 2019. There is a risk that these aircraft may
not meet the Group’s needs if market conditions or the
Group’s business changes in the period up to delivery.
There is also the risk that the Group may not be able to
raise finance to fund these purchases in the future and
have to rely on its own resources.
Commercial operations, network planning, fleet
management and supplier management are integrated
under the Chief Commercial Officer to give the best
overview of likely fleet requirements. The Company also
undertakes an ongoing review, in terms of production
and possible delays, of the ordered aircraft program.
The Group regularly prepares and updates 5 year plans to
assist it in managing its fleet and order book. The Group
maintains significant cash balances, partly in response to its
aircraft order book.
Cost recovery The Group operates in an extremely competitive market.
The core Irish market is very price sensitive, with a
substantial majority of passengers travelling for leisure
or family reasons. Fuel and airport charges represented
some 49.4% of the Group’s total costs in 2012. Volatility
in the price of jet fuel can have a significant negative
impact on costs and airport charges are largely outside
the Group’s control. The Group is particularly vulnerable
to increases in charges at Dublin, which is its hub airport.
In 2012, the Group became subject to the EU carbon
emissions trading scheme (ETS), which requires the
Group to buy credits for CO2 emissions in excess of a
free allowance. This has added to cost. Uncertainty over
the future of the ETS makes it difficult to determine how
best to hedge the Group’s exposure to that cost over
the medium term. The nature of our markets can make
it very difficult to pass cost increases on to passengers
without an adverse impact on traffic volumes.
The Group seeks to mitigate pressure on its margins by
implementing fuel surcharges on long haul flights, using
hedging techniques to reduce the volatility in fuel prices
and by actively managing those costs over which the Group
has more control. The Group pays close attention to the
profitability of individual routes and is prepared to consider
reductions in capacity or other actions if cost increases
erode margins.
Organisational capacity The Group is engaged in a change programme to create
a flexible, entrepreneurial company with a competitive
cost base. The extent of change that is required is
significant and a challenge for the Group’s managers
and staff at all levels. The Group is reliant on third party
support for certain important initiatives.
The programme office continues to monitor the progress
of important projects being implemented in the business.
Initiatives are being launched to improve the engagement of
staff and assist managers to improve their own performance.
The change programme receives the close attention of
Executive Management and their direct reports.
Operational disruption
Long term disruption, or the inability to recover promptly
from short term disruptions, can have a material adverse
impact on the Company’s business in terms of lost
bookings and revenue, additional cost and damaged
customer confidence.
The Group remains exposed to potential future events, the
nature and timing of which may be outside its control and
which can occur at short notice.