EasyJet 2013 Annual Report Download - page 43

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41
www.easyJet.com
Strategic report
CAPITAL DISCIPLINE
Risk description and potential impact Current mitigation
Asset allocation
easyJet has a leading presence on the top 100 routes in
Europe and positions at primary airports that are attractive to
time sensitive consumers. easyJet manages the performance
of its network by careful allocation of aircraft to routes and
optimisation of its flying schedule.
If easyJet fails to continue to optimise its network and fleet
plan, this will have a major impact on easyJet’s ability to grow
and gain the required yield. In addition, poor planning of the
correct number of aircraft to fly the schedule would have a
critical impact on easyJet’s costs and reputation.
A network portfolio management strategy is in place which
looks to take a balanced approach to the route portfolio that
easyJet flies, to ensure that it optimises each aircraft to get the
best return for each time of day and each day of the week.
Route performance is monitored on a regular basis and
operating decisions are made to improve performance
where required.
The fleet framework arrangements in place, together with our
leasing policy, provide easyJet with significant flexibility in
respect of scaling the fleet according to business requirements.
Exposure to fuel price fluctuations and other
macroeconomic shifts
Sudden and significant increases in jet fuel price and
movements in foreign exchange rates would significantly
impact fuel and other costs. Increases in fuel costs would have
an adverse effect on the financial performance of easyJet if
not protected against.
easyJet’s business can also be affected by macroeconomic
issues outside of its control such as weakening consumer
confidence, inflationary pressure or instability of the euro. This
could give rise to adverse pressure on revenue, load factors
and residual values of aircraft.
A Board approved hedging policy (fuel and currency) is in
place that is consistently applied. The policy is to hedge within
a percentage band for a rolling 24 month period.
To provide protection, easyJet uses a limited range of hedging
instruments traded in the over-the-counter (OTC) markets.
These are principally forward purchases with a number of
approved counterparties.
A strong balance sheet supports the business through
fluctuations in the economic conditions for the sector.
Regular monitoring of markets and route performance is
undertaken by easyJet’s network and fleet management teams.
Financing and interest rate risk
All of easyJet’s debt is asset-related, reflecting the capital
intensive nature of the airline industry.
Market conditions could change the cost of finance which may
have an adverse effect on easyJet’s financial performance.
easyJet presently finances its fleet through a mix of sale and
leaseback transactions, internal resources, cash flow and bank
borrowing. In the future easyJet may use forms of debt, sale
and leaseback transactions or other financing structures, which
may include the sale or securitisation of aircraft or public debt
offers where the Board considers these sources of financing
more favourable.
easyJet’s interest rate management policy is based on a
natural hedge with cash deposits mirroring floating debt.
None of the agreements contain financial covenants.
A portion of US dollar mortgage debt is matched with
US dollar money market deposits.
Operating lease rentals are a mix of fixed and floating rates.
Liquidity risk
easyJet continues to hold significant cash or liquid funds as
a form of insurance.
A misjudgement in the level of liquidity required could result in
business disruption and have an adverse effect on easyJet’s
financial performance.
Board policy is to maintain target liquidity at £4 million per
aircraft. This allows the business to better manage the impact
of downturns in business or temporary curtailment of activities
(e.g. fleet grounding, security incident, extended industrial
dispute at key supplier).
Counterparty risk
Surplus funds are invested in high quality short-term liquid
instruments, usually money market funds or bank deposits.
There is a possibility of loss arising in the event of non-
performance of counterparties.
Cash is placed on deposit with institutions based upon their
credit rating with a maximum exposure of £200 million for any
individual AAA counterparty money market fund.