EasyJet 2013 Annual Report Download - page 125

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The principal exposure to currency exchange rates arises from fluctuations in both the US dollar and euro rates which
impact operating, financing and investing activities. The aim of foreign currency risk management is to reduce the
impact of exchange rate volatility on the results of easyJet. Foreign exchange exposure arising from transactions in
various currencies is reduced through a policy of matching, as far as possible, receipts and payments in each individual
currency. Any remaining significant anticipated exposure is managed through the use of forward foreign exchange
contracts. In addition, easyJet has substantial US dollar balance sheet liabilities, partly offset by holding US dollar cash.
In the prior year, the residual liability was managed using forward foreign exchange contracts.
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Interest rate cash flow risk arises on floating rate borrowings and cash investments.
Interest rate risk management policy aims to provide certainty in a proportion of financing while retaining the opportunity
to benefit from interest rate reductions. Interest rate policy is used to achieve the desired mix of fixed and floating rate
debt. All borrowings are at floating interest rates repricing every three to six months. A significant proportion of US dollar
loans by value are matched with US dollar cash, with the cash being invested to coincide with the repricing of the
debt. Operating leases are a mix of fixed and floating rates. Of the 72 operating leases in place at 30 September 2013
(2012: 55), 75% were based on fixed interest rates and 25% were based on floating interest rates (2012: 75% fixed,
25% floating).
All debt is asset related, reflecting the capital intensive nature of the airline industry and the attractiveness of aircraft as
security to lenders. These factors are also reflected in the medium term profile of easyJet’s borrowings and operating
leases. As at 30 September 2013, the Company had 78 (2012: 69) unencumbered aircraft.
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easyJet is exposed to fuel price risk. The objective of the fuel price risk management policy is to provide protection against
sudden and significant increases in jet fuel prices, thus mitigating volatility in the income statement in the short-term. In order
to manage the risk exposure, forward contracts are used in line with Board approved policy to hedge between 65% and 85%
of estimated exposures up to 12 months in advance, and to hedge between 45% and 65% of estimated exposures from
13 up to 24 months in advance. In exceptional market conditions, the Board may accelerate or limit the implementation
of the hedging policy.
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Financial instruments affected by market risk include borrowings, deposits, trade and other receivables, trade and other
payables and derivative financial instruments. The following analysis illustrates the sensitivity of such financial instruments
to changes in relevant foreign exchange rates, interest rates and fuel prices. It should be noted that the analysis reflects
the impact on profit or loss after tax for the year and other comprehensive income on financial instruments held at the
reporting date. It does not reflect changes in revenue or costs that may result from changing currency rates, interest
rates or fuel prices. Sensitivity is calculated based on all other variables remaining constant. The analysis is considered
representative of easyJet’s exposure over the 12 month period.
The currency sensitivity analysis is based on easyJet’s foreign currency financial instruments held at each statement
of financial position date taking into account forward exchange contracts that offset effects from changes in currency
exchange rates. The increased sensitivity in the US dollar and euro rate represents sterling weakening against each
variable currency with the -10% sensitivity reflecting stronger sterling.
The interest rate analysis assumes a 1% change in interest rates over the reporting year applied to end of year
financial instruments.
The fuel price sensitivity analysis is based on easyJet’s fuel related derivative financial instruments held at the end
of each reporting period.
The impact of a 1% increase in interest rates and a 10% increase in the fuel price is disclosed. A corresponding
decrease results in an equal and opposite impact on the income statement and other comprehensive income
in both reporting periods.
Sensitivities are calculated based on a reasonably possible change in the rate applied to the value of financial instruments
held at each statement of financial position date.
123
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