Ryanair 2009 Annual Report Download - page 119

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Item 11. Quantitative and Qualitative Disclosures About Market Risk
GENERAL
Ryanair is exposed to market risks relating to fluctuations in commodity prices, interest rates and
currency exchange rates. The objective of financial risk management at Ryanair is to minimize the negative
impact of commodity price, interest rate and foreign exchange rate fluctuations on the Company’s earnings, cash
flows and equity.
To manage these risks, Ryanair uses various derivative financial instruments, including interest rate
swaps, foreign currency forward contracts and commodity forwards. These derivative financial instruments are
generally held to maturity and are not actively traded. The Company enters into these arrangements with the
goal of hedging its operational and balance sheet risk. However, Ryanair’s exposure to commodity price,
interest rate and currency exchange rate fluctuations cannot be neutralized completely.
In executing its risk management strategy, Ryanair currently enters into forward contracts for the
purchase of some of the jet fuel that it expects to use. It also uses foreign currency forward contracts intended to
reduce its exposure to risks related to foreign currencies, principally the U.S. dollar. Furthermore, it enters into
interest rate contracts with the objective of fixing certain borrowing costs and hedging principal repayments,
particularly those associated with the purchase of new Boeing 737-800s. Ryanair is also exposed to the risk that
the counterparties to its derivative financial instruments may not be creditworthy. Were a counterparty to default
on its obligations under any of the instruments described below, Ryanair’s economic expectations when entering
into these arrangements might not be achieved and its financial condition could be adversely affected.
Transactions involving derivative financial instruments are also relatively illiquid as compared with those
involving other kinds of financial instruments. It is Ryanair’s policy not to enter into transactions involving
financial derivatives for speculative purposes.
The following paragraphs describe Ryanair’s fuel hedging, foreign currency and interest rate swap
arrangements and analyze the sensitivity of the market value, earnings and cash flows of the financial
instruments to hypothetical changes in commodity prices, interest rates and exchange rates as if these changes
had occurred at March 31, 2009. The range of changes selected for this sensitivity analysis reflects Ryanair’s
view of the changes that are reasonably possible over a one-year period.
FUEL PRICE EXPOSURE AND HEDGING
Fuel costs constitute a substantial portion of Ryanair’s operating expenses (approximately 44.1% and
36.4% of such expenses in fiscal years 2009 and 2008, respectively, after taking into account Ryanair’s fuel
hedging activities). Ryanair engages in fuel price hedging transactions from time to time, pursuant to which
Ryanair and a counterparty agree to exchange payments equal to the difference between a fixed price for a given
quantity of jet fuel and the market price for such quantity of jet fuel at a given date in the future, with Ryanair
receiving the amount of any excess of such market price over such fixed price and paying to the counterparty the
amount of any excess of such fixed price over such market price.
Ryanair has historically entered into arrangements providing for substantial protection against
fluctuations in fuel prices, generally through forward contracts covering periods of up to 18 months of
anticipated jet fuel requirements. Ryanair (like many other airlines) has, in more recent periods, entered into
hedging arrangements on a much more selective basis. See “Item 3. Risk Factors—Risks Related to the
Company—Changes in Fuel Costs and Fuel Availability Affect the Company’s Results and Increase the
Likelihood that the Company May Incur Losses” and “Item 11. Quantitative and Qualitative Disclosures About
Market Risks—Fuel Price Exposure and Hedging” for additional information on recent trends in fuel costs and
the Company’s related hedging activities, as well as certain associated risks. See also “Item 5. Operating and
Financial Review and Prospects—Fiscal Year 2009 Compared with Fiscal Year 2008—Fuel and Oil.” Ryanair
has entered into forward jet fuel (jet kerosene) contracts covering approximately 90% of its estimated
requirements for the period from April to December 2009 at prices equivalent to approximately $620 per metric
ton. In addition, Ryanair has entered into forward jet fuel (jet kerosene) contracts covering approximately 60%
of its estimated requirements for the period from January 2010 to March 2010 at prices equivalent to $610 per
metric ton. While these hedging strategies can cushion the impact on Ryanair of fuel price increases in the short
term, in the medium to longer-term, such strategies cannot be expected to eliminate the impact on the Company
of an increase in the market price of jet fuel. The unrealized losses on outstanding forward agreements at March
31, 2009 and the unrealized gains at March 31, 2008, based on their fair values, amounted to €106.7 million and