Aer Lingus 2013 Annual Report Download - page 100

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2.26 Exceptional items
Exceptional items are material non-recurring items that derive from events or transactions that fall within the ordinary activities of the
Group and which individually or, if of a similar type, in aggregate, are separately disclosed by virtue of their size or incidence. Such items
may include business repositioning costs, takeover defence costs, profit or loss on disposal of significant items of property, plant and
equipment, litigation costs and settlements, profit or loss on disposal of investments and impairment of assets, or once off costs or credits
where separate identification is important to gain an understanding of the financial statements. 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.
2.27 Dividend distribution
Dividends to the Company’s shareholders are recognised as liabilities in the Company and the Group's financial statements in the period in
which the dividends are approved by the Company’s shareholders.
3 Financial risk management
3.1 Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including exchange rate, commodity price and interest rate risk),
credit risk and liquidity risk. The Group’s risk management programme focuses on the unpredictability of financial markets and seeks to
minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain
risk exposures.
Financial risk management is carried out by a central treasury department (Group treasury) under policies approved by the Board of
Directors. Group treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board
provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk,
interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess
liquidity.
(a) Market risk
(i) Foreign exchange risk
The main currency exposures result from a structural trading deficit in US dollars and a surplus in sterling. A large proportion of the Group
treasury function’s work in relation to foreign exchange rate risk relates to the management of the Group’s cashflow exposures. Significant
currency exposures are managed for the current and future financial years on a systematic, amortising basis within pre-set bands. The dollar
deficit arises because the dollar costs for items such as fuel and aircraft rentals 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 capital commitments relating to the purchase of aircraft which are priced in US
dollars. Acquisition costs are increased by a stronger dollar.
The Group treasury function manages both cashflow exposures and statement of financial position exposures arising from currency risk.
The products used by the Group treasury function in managing currency risk are predominantly forward foreign exchange contracts.
Based on the trading deficit in US dollars for the year ended 31 December 2013, a 5% weakening of the EUR to USD exchange rate over the
year-end rate would result in a reduction in profit of €8.3 million for the year (2012: €8.7 million). Based on the trading surplus in sterling
for the year ended 31 December 2013, a 5% strengthening of the EUR to GBP exchange rate over the year end rate would result in a
reduction in profit of €6.2 million for the year (2012: €6.0 million). The impact of such currency movements after taking account of hedging
would have been negligible for both 2013 and 2012.
(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 reduce 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. 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 2013 would reduce profits by
€4.5 million (2012: €4.4 million).
(iii) Commodity price risk
Aviation jet fuel requirements expose the Group to the market volatility of jet fuel prices. 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 reduce the volatility and 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. The Group operates a systematic fuel hedging
policy covering a rolling two year period. This hedging policy targets specific cover levels for each period on a rolling basis ranging from
90% cover for the following month to between zero and 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.