Last checked at 5 Dec 2014 10:17
easyJet plc ("the Company")
Annual report and accounts 2014
The Company announces that a copy of the Annual report and accounts for the year ended 30 September 2014 has been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.hemscott.com/nsm.do.
This document is also available to view on the Company's website. The direct link to download the 2014 Annual Report and Accounts is http://2014annualreport.easyjet.com/.
In compliance with DTR 6.3.5, the following information is extracted from the 2014 Annual report and accounts and should be read together with the Company's Final Results announcement issued on 18 November 2014 which can be found at http://otp.investis.com/clients/uk/easyjet/rns/regulatory-story.aspx?cid=2&newsid=457001. Together these constitute the information required to be communicated to the media in unedited full text through a Regulatory Information Service. This information is not a substitute for reading the full 2014 Annual report and accounts.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The following responsibility statement is extracted from the Statement of Directors' Responsibilities on page 92 of the 2014 Annual report and accounts and is repeated here solely for the purpose of complying with DTR 6.3.5. The statement relates to the full 2014 Annual report and accounts and not the extracted information presented in this announcement or the Final Results announcement:
The Directors are responsible for preparing the annual report, the Directors' remuneration report and the accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare accounts for each financial year. Under that law the Directors have prepared the Group and Company accounts in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period. In preparing these accounts, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the accounts; and
• prepare the accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the accounts and the Directors' remuneration report comply with the Companies Act 2006 and, as regards the Group accounts, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of, amongst other things, the financial and corporate governance information provided on the easyJet website: http://corporate.easyjet.com/investors. Legislation in the United Kingdom governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.
The Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's and the Company's performance, business model and strategy.
Each of the Directors, whose names and functions are listed on pages 54 and 55 confirm that, to the best of their knowledge:
• the Group and Company accounts, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and Company; and
• the Strategic report, included in the annual report, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
In accordance with Section 418 of the Companies Act 2006, each Director in office at the date the Directors' report is approved, confirms that:
• so far as the Director is aware, there is no relevant audit information of which the Company's auditors are unaware; and
• he/she has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.
The annual report on pages 1 to 92 was approved by the Board of Directors and authorised for issue on 17 November 2014 and signed on its behalf by:
Carolyn McCall OBE | Chief Executive |
Chris Kennedy | Chief Financial Officer |
PRINCIPAL RISKS AND UNCERTAINTIES
The risks and uncertainties set out below are extracted from the pages 28 to 35 of the 2014 Annual report and accounts and are repeated here solely for the purpose of complying with DTR 6.3.5.
The risks and uncertainties described are considered to have the most significant effect on easyJet's strategic objectives. This list is not intended to be exhaustive. Many risks, however, remain outside easyJet's full control, for example adverse weather, pandemics, acts of terrorism, changes in government regulation and macroeconomic issues.
Risk description and potential impact | Current mitigation |
SAFETY FIRST | |
Major safety incident/accident Failure to prevent a major safety incident (such as a hull loss) or deal with it effectively. This could adversely affect easyJet's reputation and its operational and financial performance.
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easyJet's number one priority is the safety and security of its customers and people. easyJet operates a Safety Management System (SMS) using a leading software system (SafetyNet). This is used to collect and analyse safety data and enables learning from easyJet and industry events/incidents to be captured and embedded into future risk mitigations. Data collected is also used to project potential areas of risk. A robust incident reporting process and 'Just Culture' are in place. The following also support the SMS: • a Safety Committee (a committee of the Board) provides oversight of the management of easyJet's safety processes and systems (see pages 58 to 59); • a Safety Review Board (at Executive Management Team level) is responsible for directing overall safety policy and governance; • airline and departmental Safety Action Groups responsible for the identification, evaluation and control of safety-related risks; and • weekly operations meetings, safety reporting and monitoring of fatigue risk management. Crew are trained to current safety guidelines. easyJet has response systems in place and provides training for crisis management, including the performance of regular crisis management exercises. Hull (all risks) and liabilities insurance (including spares) is held. easyJet has been working alongside the Civil Aviation Authority (CAA) on the implementation of the new European Aviation Safety Agency (EASA) safety regulations. easyJet was issued an EASA Air Operators Certificate in October 2014. |
Security and terrorist threat or attack Failure to identify or prevent a major security-related threat, prevent a terrorist attack, or react to either immediately and effectively. This could adversely affect easyJet's reputation and its operational and financial performance. |
The Director of Safety and Security and the Head of Security work with relevant authorities and governments around easyJet's network to ensure that security measures are effective and in compliance with all regulatory requirements. A significant amount of work is carried out with the aim of enhancing: • early identification of developing and emerging security risks; • the active management of security risks; • the reduction of the impact of any security-related incident; and • the Group's security culture and awareness. There is a Security Decision Making Group, whose purpose is to make strategic decisions on whether easyJet continues to operate in countries or areas affected by security-related incidents. It is attended by the Chairman, Chief Executive, and appropriate members of the Executive Management Team and senior management. Crew are trained to current security guidelines. |
OPERATIONAL EXCELLENCE | |
Impact of mass disruption A number of factors could lead to widespread disruption to easyJet's network, including forces of nature (extreme weather, volcanic ash, etc.), union activity and strike action, acts of terrorism and epidemics/pandemics. Any mass disruption could adversely affect easyJet's reputation and its operational and financial performance. Mass disruption has the potential to have a significant adverse effect on easyJet's financial results, especially if it should occur during easyJet's peak summer months. As the largest number of easyJet aircraft are positioned at Gatwick (the world's busiest single runway airport) easyJet could be disproportionately affected by the closure of that airport for a significant period of time. |
Processes are in place to manage mass disruption. Crisis management exercises are performed regularly and a business continuity programme is also in place. Board policy is to maintain target liquidity at £4 million per aircraft. This allows the business to manage the impact of downturns in business or temporary curtailment of activities better. In addition, easyJet has secured business disruption insurance. In 2014, Gatwick Airport has invested in improved resilience to meet the requirements of the McMillan review. easyJet and Gatwick Airport have developed joint contingency plans to provide an effective response to disruptive events. |
Single fleet risk easyJet is dependent on Airbus as its sole supplier for aircraft, with two aircraft types (A319 and A320). There are significant cost and efficiency advantages of a single fleet; however, there are two main associated risks: • technical or mechanical issues that could ground the full fleet, or part of the fleet, which could cause negative perception by the flying public; and • valuation risks which crystallise on the ownership exit of the aircraft. The main exposure at this time is with the ageing A319 fleet, where easyJet is reliant on the future demand for second-hand aircraft. |
The efficiencies achieved by operating a single fleet type are considered to outweigh the risks associated with easyJet's single fleet strategy. The Airbus A320 family (which includes the A319) and Boeing 737 family are the two primary fleets used for short-haul travel. There are approximately 5,000 of each fleet operating globally with a proven track record for reliability. easyJet operates a rigorous established aircraft maintenance programme. To mitigate the potential valuation risks, easyJet constantly reviews the second-hand market and has a number of different options when looking at fleet exit strategies. easyJet targets an owned to leased split of aircraft of 80:20. Leasing facilitates the exit strategy of older A319s and protects residual values, as well as providing flexibility in managing the fleet size. |
IT system failure easyJet is dependent on a number of key IT systems and processes operated at London Luton airport and other key facilities. A loss of systems or access to facilities, including the website, could lead to significant disruption and could have an adverse operational, reputational and financial impact. |
Key systems are hosted across two data centres in two distinct locations with failover arrangements between them. This arrangement is reviewed and tested regularly to identify areas for improvement and resilience. An experienced IT team is in place to respond rapidly to any unforeseen incidents that may arise. Alternative sites are available should there be a need to relocate critical staff at short notice due to a loss of facilities. |
Scalability and flexibility of key IT systems The rapid growth of easyJet over recent years, in particular through the introduction of new sales channels and initiatives, creates additional complexity in IT systems. If not managed effectively, the core applications could lose their flexibility and create issues of scalability, which could increase cost and cause delays when implementing required business change. |
Enterprise architecture is reviewed and improvements are made where opportunities arise. easyJet plans for, and maintains, appropriate capacity for key systems, and performs structured testing to ensure that they are sufficiently scaled to meet forecast growth. easyJet is a member of relevant systems user groups, which provide contact with other users and the ability to share any issues and review system assessments. easyJet holds regular meetings with key providers of systems and applications to discuss performance, continuous improvements and future innovation. easyJet has established an IT Governance and Oversight Committee (a committee of the Board). The purpose of this committee is to provide independent oversight over the governance and control relating to the Group's IT business area (see page 65 for further details). |
Dependence on third-party service providers easyJet has entered into agreements with third-party service providers for services covering a significant proportion of its operation and cost base. Failure to adequately manage third-party performance could adversely affect easyJet's reputation and its operational and financial performance. Loss of these contracts or inability to renew or negotiate favourable replacement contracts could have an adverse effect on future operating costs. |
easyJet has a centralised procurement team which ensures that the Group has competitive supply options or suitable alternatives. The procurement process is then supported by a supplier management framework covering business ownership and accountability. There are alternative service providers within the major markets in which easyJet operates. |
Industrial action easyJet, and the aviation industry in general, has a significant number of employees who are members of trade unions. Industrial action taken by easyJet employees, or by the employees of key third-party service providers, could impact on easyJet's ability to maintain its flight schedules. This could adversely affect easyJet's reputation and its operational and financial performance. |
Employee and union engagement takes place on a regular basis. As easyJet operates across Europe, there are multiple unions of which crew are members. Each of the countries have localised employment terms and conditions which mitigates the risk of large-scale internal industrial action occurring at the same time. Processes are in place to adapt to disruptions as a result of industrial action. The level of standby crew cover in place recognises the external factors and volatility that impact the airline industry. |
Senior management succession and reliance on key personnel easyJet's current and future success is reliant on having the right people with the right capabilities in key leadership positions. Failure to develop and grow the capabilities and behaviours required of senior management to ensure that all key business roles have clear successors, could adversely affect easyJet's ability to deliver its strategic objectives. |
Key business roles within easyJet, and succession plans for these, have been identified. easyJet's aim is to develop talent from within. There are several talent development programmes in place for individuals who have been identified for fast-tracking into more senior roles as vacancies arise. In addition, a management development programme is in place to develop people management and senior leadership capabilities. These programmes operate at various levels within the organisation. |
EFFICIENT ASSET UTILISATION | |
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 schedules. The competitive environment is highly dynamic and if easyJet does not continue to optimise its network and aircraft allocation, its competitive advantage could be weakened and its ability to sustain earnings growth would be threatened. |
A portfolio management strategy is in place which takes a balanced approach to the routes that easyJet flies, balancing short-term returns with longer-term sustainable growth. 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 the Group's leasing policy, provide easyJet with significant flexibility in respect of scaling the fleet according to business requirements. |
STRONG BALANCE SHEET | |
Exposure to fuel price fluctuations and other macroeconomic shifts Sudden and significant increases in jet fuel price and/or a weakening in the exchange rate relative to the US dollar would significantly impact fuel 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 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'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 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 Group to better manage the impact of downturns in business or temporary curtailment of activities. |
Counterparty risk Surplus funds are invested in high-quality short-term liquid instruments, usually money market funds, bank deposits or tri-party repos. There is a possibility of loss arising in the event of non-performance of counterparties which could adversely affect easyJet's financial performance. |
Cash is placed on deposit with institutions based upon their credit rating, with a maximum exposure at the time of deposit of £150 million for any individual AAA rated counterparty money market fund. Counterparties must have a minimum credit rating of A- and counterparty credit ratings are monitored on a daily basis. Tri-party repos are collateralised with a range of high-quality debt instruments which are publicly traded. The collateral basket is reviewed on a regular basis. |
REPUTATIONAL RISKS | |
Major shareholder and brand owner relationship easyJet has two major shareholders (easyGroup Holdings Limited and Polys Holding Limited) which, as a concert party, control 34.6% of its ordinary shares. Shareholder activism could adversely impact the reputation of easyJet and cause a distraction to management. easyJet does not own its company name or branding which is licensed from easyGroup IP Licensing Limited. The licence includes certain minimum service levels that easyJet must meet in order to retain the right to use the name and brand. The easyJet brand could also be impacted through the actions of easyGroup or other easyGroup licensees. |
easyJet has an active shareholder engagement programme led by its investor relations team. As part of that programme easyJet seeks to engage with easyGroup Holdings Limited on a regular basis alongside all its other major shareholders. This is to ensure that the Board and management team are kept aware of the views of all shareholders. Representatives from the Board and senior management take collective responsibility for addressing issues arising from any activist approach adopted by the major shareholder. The objective is to address issues when they arise, as effectively as possible. easyJet's brand licence with easyGroup IP Licensing Limited contains terms agreed between the parties for the regular meeting of senior representatives from both sides to actively manage brand-related issues as they arise. Such meetings occur on a quarterly basis and have proven an effective way of managing brand-related issues. Separately, easyJet monitors compliance with brand licence service levels and has a right to take steps to remedy any instance of non-compliance. |
Ineffective or non-delivery of projects supporting the business strategy During the year, the business has initiated a number of key projects and programmes to deliver key elements of the strategy. If these projects and programmes do not deliver the benefits and cost savings planned, easyJet could fall short of its planned financial results. |
A portfolio management office and experienced project teams are in place to oversee delivery of a portfolio of projects and programmes, and track budgets and benefits realisation. A steering group, consisting of the Executive Management Team and key senior management, provides challenge to project teams, monitors progress and ensures that decisions are made at the appropriate level. Strong cost control is a key behaviour across the Company. easyJet lean initiatives drive cost reduction and efficiency in targeted areas. |
Cyber threats and information security easyJet receives most of its revenue through credit card transactions and operates as an e-commerce business. It faces both external cyber threats and internal risks to its data and systems. A security breach could result in an adverse impact for the business and reputational damage. |
easyJet continues to focus on the protection of information. Controls are in place to ensure customer, employee and other potentially sensitive information is collected, held and processed securely, including: • monitoring of secure systems against unauthorised access; • quarterly review of the security of internal systems and easyJet.com through penetration testing; • enhanced physical security at head office buildings; • periodic mandatory employee security training to maintain staff awareness; • consideration of information security risks within procurement processes; and • monitoring and control of scanning software for fraudulent customer activity by the Revenue Protection team. There is an Information Security Steering Group, chaired by the General Counsel, which oversees any developments in data threats and controls. |
Bribery Act Non-compliance with the Bribery Act 2010 could adversely affect easyJet financially and reputationally. |
easyJet has a zero tolerance approach to bribery which is reinforced by a strong ethical tone from the top. The adoption of appropriate anti-bribery controls has been a key point of focus for the legal compliance programme at easyJet. These include: • completion of risk assessments to determine specific compliance needs; • specific policies, including ethics, anti-bribery and corruption policy, and gift and hospitality policy; • online training module and mandatory training for all managers and administrative employees in the UK and across the easyJet network; • targeted face-to-face training for employee groups perceived as higher risk; • the adoption of anti-bribery due diligence and standard anti-bribery clauses for inclusion in supplier contracts; and • maintaining awareness of a whistleblowing helpline. |
EXTERNAL RISKS | |
Competition and industry consolidation easyJet operates in competitive market places against both flag carriers and other low-cost airlines. easyJet's key competitive advantages are its network, cost base and efficient and robust capital structure. Failure to retain these advantages could impact its profitability. Industry consolidation will also affect the competitive environment in a number of markets. This could cause a loss of market share and erosion of revenue. |
Regular monitoring of competitor and consolidation activity, enabling key routes and positions to be readily defended. easyJet seeks to have a rapid response to any such activity that may impact easyJet's ability to grow the business. The Network Development Forum, a cross-functional panel of senior executives, approves new routes and bases and the allocation of assets around the network. |
Legislative and regulatory risks Legislative decisions, particularly at a national and European level, can have a significant impact on the airline industry, for example increasing Air Passenger Duty in the UK. The airline industry is currently heavily regulated, with expected increased regulator intervention. This includes environmental, security and airport regulation, which have charges levied by regulatory decision rather than by commercial negotiation. easyJet is exposed to regulatory oversight across its network, which will increase as easyJet grows geographically. An inadequate knowledge or misinterpretation of local regulations could result in fines or enforcement orders. This could adversely affect easyJet's reputation, cost base and market share.
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easyJet seeks to have a key role in influencing future and existing policy and regulations which affect the airline industry. This work is coordinated by the Regulatory Affairs Group. Country oversight boards are established for easyJet's main markets, raising awareness of potential changes and impacts in the different countries.
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easyJet is required under European law to compensate passengers for certain long flight delays and cancellations. The interpretation of this law varies by jurisdiction. | Tight operational controls, including availability of standby aircraft and crew to minimise the potential incidence of claims. In addition, country-specific plans are in place to address differing interpretations of the legislation. |
End
5 December 2014
For further details please contact easyJet plc:
Institutional investors and sale side analysts:
Will MacLaren | Investor Relations | +44 (0) 7961 763 879 |
Michael Barker | Investor Relations | +44 (0) 7985 890 939 |
Media:
Paul Moore | Corporate Communications | +44 (0) 7860 794 444 |
Edward Simpkins | RLM Finsbury | +44 (0) 207 251 3801 |
+44 (0) 7947 740 551 |