Ryanair 2012 Annual Report Download - page 123

123
FUEL PRICE EXPOSURE AND HEDGING
Fuel costs constitute a substantial portion of Ryanair‘s operating expenses (approximately 43.0% and
39.1% of such expenses in fiscal years 2012 and 2011, 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 deficit of such fixed price under 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. Key Information—Risk Factors—Risks
Related to the Company—Changes in Fuel Costs and Fuel Availability Affect the Company‘s Results and
Increases 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 2012 Compared with Fiscal Year 2011—
Fuel and Oil.‖ As of July 27, 2012, Ryanair had entered into forward jet fuel (jet kerosene) contracts covering
approximately 90% of its estimated requirements for the fiscal year ending March 31, 2013 at prices equivalent
to approximately $1,000 per metric ton. In addition, as of July 27, 2012, Ryanair had entered into forward jet
fuel (jet kerosene) contracts covering approximately 50% of its estimated requirements for the first half of the
fiscal year ending March 31, 2014 at prices equivalent to approximately $935 per metric ton, and had not
entered into any jet fuel hedging contracts with respect to its expected fuel purchases beyond that period.
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 gains on outstanding forward agreements at March
31, 2012 and 2011, based on their fair values, amounted to €145.8 million and €383.8 million (gross of tax),
respectively. Based on Ryanair‘s fuel consumption for the 2012 fiscal year, a change of $1.00 in the average
annual price per metric ton of jet fuel would have caused a change of approximately €1.7 million in Ryanair‘s
fuel costs. See ―Item 3. Key Information—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.‖
Under IFRS, the Company‘s fuel forward contracts are treated as cash-flow hedges of forecast fuel
purchases for risks arising from the commodity price of fuel. The contracts are recorded at fair value in the
balance sheet and are re-measured to fair value at the end of each fiscal period through equity to the extent
effective, with any ineffectiveness recorded through the income statement. The Company has considered these
hedges to be highly effective in offsetting variability in future cash flows arising from fluctuations in the market
price of jet fuel because the jet fuel forward contracts typically relate to the same quantity, time, and location of
delivery as the forecast jet fuel purchase being hedged and the duration of the contracts is typically short.
Accordingly, the quantification of the change in expected cash flows of the forecast jet fuel purchase is based on
the jet fuel forward price, and in the 2012 fiscal year, the Company recorded no hedge ineffectiveness within
earnings. The Company has recorded no level of ineffectiveness on its jet fuel hedges in its income statements to
date. In the 2012 fiscal year, the Company recorded a positive fair-value adjustment of €127.6 million (net of
tax) within accumulated other comprehensive income in respect of jet fuel forward contracts, and in the 2011
fiscal year, the Company recorded a positive fair-value adjustment of €335.8 million (net of tax) within
accumulated other comprehensive income.
FOREIGN CURRENCY EXPOSURE AND HEDGING
In recent years, Ryanair‘s revenues have been denominated primarily in two currencies, the euro and
U.K. pound sterling. The U.K. pound sterling and the euro accounted for approximately 24% and 65%,
respectively, of Ryanair‘s total revenues in the 2012 fiscal year, as compared to approximately 24% and 67%,
respectively, in the 2011 fiscal year. As Ryanair reports its results in euro, the Company is not exposed to any
material currency risk as a result of its euro-denominated activities. Ryanair‘s operating expenses are primarily
denominated in euro, U.K. pounds sterling and U.S. dollars. Ryanair‘s operations can be subject to significant
direct exchange rate risks between the euro and the U.S. dollar because a significant portion of its operating