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Easyjet PLC Annual Report 2016
5295_rns_2017-02-10_2c9333c3-8402-490d-8a57-1976e33c5355.pdf
Annual Report
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easyJet Airline Company Limited
Annual report and accounts
For the year ended 30 September 2016
Registered Number 03034606
easyJet Airline Company Limited
Contents
- Strategic report 1
- Directors' report 3
- Statement of Directors' responsibilities 5
- Independent auditors' report 6
- Income statement 8
- Statement of comprehensive income 9
- Statement of financial position 10
- Statement of changes in equity 11
- Statement of cash flows 12
- Notes to the accounts 13
easyJet Airline Company Limited
Reports of the Directors for the year ended 30 September 2016
Strategic report
Review of the business
easyJet Airline Company Limited (the "Company") is incorporated in the United Kingdom and is the principal operating subsidiary of easyJet plc. The Company is an airline carrier operating principally in Europe. easyJet plc and all of its subsidiaries ("the Group") is managed on a unified basis, and a full strategic report for the year, including a review of the Group's business, future developments and principal risks, may be found on pages 1 to 42 of easyJet plc's published Annual report and accounts for the year ended 30 September 2016.
easyJet Group is a low cost European point-to-point short-haul airline, carrying over 73 million passengers on more than 800 routes across more than 30 countries.
easyJet has built one of Europe's leading short-haul airlines. Our network of primary airports, routes and slots, combined with a clear focus on making travel easy and affordable, enables us to provide a friendly, efficient service with low fares for our customers. This year we have made considerable investments in our business. We have further strengthened our network, continued to invest in projects to deliver customer benefits and cost savings and reinforced the balance sheet. This will enable us to target long-term earnings growth and drive long-term value to our shareholders. Our sustainable business model makes travel easy and affordable and drives growth and returns for shareholders. The core values underpinning the Group's cause, to make travel easy and affordable, are:
- safety;
- simplicity;
- one team;
- integrity;
- passion; and
- pioneering.
This will be achieved by focusing on our strategy:
- build strong number one and two network positions;
- a lean cost advantage;
- customer and operational excellence;
- data and digital;
- grow revenue; and
- the best people.
The Group delivered a resilient financial performance this year, despite a challenging environment that included a number of events that have disproportionately affected it compared to other airlines. These events include terrorism related events (Paris, Egypt, Brussels, Nice and Turkey) and the immediate impact of the European Union referendum outcome. The Group grew passenger numbers to a record 73.1 million and load factor also increased to a record 91.6%. However total Group revenue declined by 0.4% to £4,669 million and profit before tax of £495 million decreased by £191 million from the year ended 30 September 2015. The Company's revenue declined by 0.2% to £4,728 million, and profit before tax of £335 million decreased by £134 million from the year ended 30 September 2015.
The Company increased its net assets by £343 million to £1,549 million at 30 September 2016. The Company holds cash and cash equivalents and money market deposits totalling £968 million.
The Group raised a €500 million bond in February and secured a sector-leading credit rating (Standard & Poor's: BBB+ stable, Moody's: Baa1 stable). In October 2016 a further €500 million bond was issued on improved, industry-leading terms. For both of these transactions, an intercompany loan was issued by easyJet plc to the Company for the same amount and under the same conditions.
Key performance indicators
The Group uses a range of both financial and non-financial key performance indicators, as described on pages 16 to 17 of easyJet plc's published Annual report and accounts for the year ended 30 September 2016. The Group is managed as a single entity and accordingly key performance indicators are monitored at Group level, rather than on an individual entity basis.
Principal risks and uncertainties
The Group is affected by a number of principal risks and uncertainties as described on pages 24 to 31 of easyJet plc's published Annual report and accounts for the year ended 30 September 2016. easyJet Airline Company Limited is exposed to these same risks and uncertainties. Financial risk management is described in notes 21 and 22 to the accounts.
easyJet Airline Company Limited
Reports of the Directors for the year ended 30 September 2016
Strategic report (continued)
Results and dividends
The Company's profit after tax for the year was £287 million (2015: £354 million) which has been transferred to reserves. During the year the Company declared an in-specie dividend of £219 million (2015: £180 million) to its immediate parent company, easyJet plc, settled by the cancellation by the sole member of the Company of part of a debt owed to the Company.
On behalf of the board
Andrew Findlay
Director
9 February 2017
Hangar 89
London Luton Airport
Luton
Bedfordshire
LU2 9PF
Registered Number 03034606
2
easyJet Airline Company Limited
Reports of the Directors for the year ended 30 September 2016
Directors' report
The Directors present the Strategic report on pages 1 and 2, the Directors' report on pages 3 and 4, the Statement of Directors' responsibilities on page 5 and the audited accounts for the year ended 30 September 2016.
Results and dividends
The Company's profit after tax for the year was £287 million (2015: £354 million) which has been transferred to reserves. During the year the Company declared an in-specie dividend of £219 million (2015: £180 million) to its immediate parent company, easyJet plc, settled by the cancellation by the sole member of the Company of part of a debt owed to the Company.
Directors
The Directors who held office during the year and up to the date of this report are as follows:
- Carolyn McCall DBE
- Andrew Findlay (appointed 2 October 2015)
- Alita Benson (resigned 31 December 2015)
- Warwick Brady (resigned 30 September 2016)
- Christopher Brocklesby
- Margaret Christine Browne (appointed 1 October 2016)
- Michael Campbell (resigned 31 December 2015)
- Peter Duffy
- Rachel Kentleton (resigned 14 October 2016)
- Catherine Lynn
- Paul Moore
- Jacqueline Simmonds (appointed 4 January 2016)
Employees
The Company is an equal opportunities employer. It ensures that employees and applicants do not receive less favourable treatment on the basis of their age, colour, creed, disability, full or part time status, gender, marital status, nationality or ethnic origin, race or sexual orientation.
The Company treats applicants with disabilities equally and supports current employees who become disabled. This includes offering flexibility and making reasonable adjustments to the workplace to ensure they can achieve their full potential. However, for easyJet's two largest communities, pilots and cabin crew, there are a range of regulatory requirements on health and physical ability which all applicants and current employees must comply with.
It is understood that good communication within the business is vital, especially one that has such an extensive staff base. The Company ensures that key issues and matters are discussed with employees so that it can react quickly and ensure that everyone remains engaged. The Company works with employee representatives and recognises a number of trade unions.
The Company encourages the involvement of employees in its performance through the use of employee share schemes, settled in the shares of the Company's parent undertaking, easyJet plc.
Further details are contained in the published Annual report and accounts of easyJet plc for the year ended 30 September 2016.
Political donations and expenditure
easyJet works constructively with all levels of government across its network, regardless of political affiliation. easyJet believes in the rights of individuals to engage in the democratic process, however it is easyJet's policy not to make political donations.
In May 2016, David Cameron visited easyJet's headquarters in Luton to share his views on the forthcoming EU referendum and take questions from easyJet staff and the media. The cost for hosting David Cameron to the Company, which included additional security provision and staging the event, constitutes political expenditure under the Companies Act 2006, as the former prime minister's visit involved campaigning for the EU referendum. easyJet's political expenditure during the 2016 financial year therefore amounted to £2,056 (2015: nil), all of which was for the hosting of this event.
Principal subsidiaries and overseas branches
Information in respect of the Company's subsidiaries is given in the notes to the accounts. The Company also operates two Spanish branches (one performing self-handling and the other dealing with employment matters) and a Portuguese branch and an Italian branch (both dealing with employment matters).
3
easyJet Airline Company Limited
Reports of the Directors for the year ended 30 September 2016
Directors' report (continued)
Going concern
In adopting the going concern basis for preparing the accounts, the Directors have considered current and ongoing business activities of the Company as well as the principal risks and uncertainties.
The Company holds cash and cash equivalents and money market deposits totalling £968 million as at 30 September 2016. Total debt of £231 million is free from financial covenants, with £45 million due for repayment in the year to 30 September 2017.
Net current liabilities at 30 September 2016 were £1,366 million but included unearned revenue (payments made by customers for flights scheduled post year end) of £568 million.
The business is exposed to fluctuations in fuel prices and US dollar and Euro exchange rates. The Group's policy is to hedge between 65% and 85% of estimated exposures 12 months in advance, and 45% and 65% of estimated exposures from 13 up to 24 months in advance. Specific decisions may require consideration of a longer-term approach. Treasury strategies and actions will be driven by the need to meet treasury, financial and corporate objectives. The Group was compliant with this policy at the date of this Annual report and accounts.
After making enquiries, the Directors have a reasonable expectation that the Company will be able to operate within the level of available facilities and cash and deposits for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the accounts, assuming ongoing support from the Parent Company.
Independent Auditors
The independent auditors, PricewaterhouseCoopers LLP, have expressed their willingness to continue in office.
On behalf of the board
Andrew Findlay
Director
9 February 2017
Hangar 89
London Luton Airport
Luton
Bedfordshire
LU2 9PF
Registered Number 03034606
4
easyJet Airline Company Limited
Reports of the Directors for the year ended 30 September 2016
Statement of Directors' responsibilities
The Directors are responsible for preparing the Strategic report, the Directors' 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 accounts in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. 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 company and of the profit or loss of 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 International Financial Reporting Standards (IFRSs) as adopted by the European Union, and IFRSs as issued by the International Accounting Standards Board (IASB), 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 Company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the accounts comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In accordance with Section 418 of the Companies Act, 2006, each Director in office at the date of 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 Strategic report on pages 1 and 2 and the Directors' report on pages 3 and 4 were approved by the Board of Directors and authorised for issue on 9 February 2017 and signed on behalf of the Board.
Andrew Findlay
Director
5
easyJet Airline Company Limited
Independent auditors' report to the members of easyJet Airline Company Limited
Our opinion
In our opinion, easyJet Airline Company Limited's Accounts for the year ended 30 September 2016 (the "Accounts"):
- give a true and fair view of the state of the Company's affairs as at 30 September 2016 and of its profit and cash flows for the year then ended;
- have been properly prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union; and
- have been prepared in accordance with the requirements of the Companies Act 2006.
What we have audited
The accounts, included within the Annual report and accounts (the "Annual report"), comprise:
- the Income statement and Statement of comprehensive income for the year ended 30 September 2016;
- the Statement of financial position as at 30 September 2016;
- the Statement of changes in equity for the year ended 30 September 2016;
- the Statement of cash flows for the year ended 30 September 2016; and
- the notes to the accounts, which include a summary of significant accounting policies and other explanatory information.
The financial reporting framework that has been applied in the preparation of the accounts is applicable law and IFRSs as adopted by the European Union and applicable law.
In applying the financial reporting framework, the Directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion, the information given in the Strategic Report and the Directors' Report for the financial year for which accounts are prepared is consistent with the accounts.
Other matters on which we are required to report by exception
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion:
- we have not received all the information and explanations we require for our audit; or
- adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
- the accounts are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors' remuneration
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors' remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Responsibilities for the accounts and the audit
Our responsibilities and those of the Directors
As explained more fully in the Statement of Directors' Responsibilities set out on page 5, the Directors are responsible for the preparation of the accounts and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the accounts in accordance with applicable law and International Standards on Auditing (UK and Ireland) ("ISAs (UK & Ireland)"). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
6
easyJet Airline Company Limited
Independent auditors' report to the members of easyJet Airline Company Limited (continued)
What an audit of the accounts involves
We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the accounts sufficient to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
- whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed;
- the reasonableness of significant accounting estimates made by the Directors; and
- the overall presentation of the accounts.
We primarily focus our work in these areas by assessing the Directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the accounts.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited accounts and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Andrew Kemp
Andrew Kemp (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London.
9 February 2017
easyJet Airline Company Limited
Income statement
For the year ended 30 September 2016
| Note | 2016 £ million | 2015 £ million | |
|---|---|---|---|
| Seat revenue | 4,587 | 4,616 | |
| Non-seat revenue | 82 | 70 | |
| Operating lease revenue | 59 | 50 | |
| Total revenue | 4,728 | 4,736 | |
| Fuel | (1,114) | (1,199) | |
| Airports and ground handling | (1,267) | (1,122) | |
| Crew | (545) | (509) | |
| Navigation | (336) | (313) | |
| Maintenance | (271) | (275) | |
| Selling and marketing | (107) | (102) | |
| Other costs | (325) | (377) | |
| EBITDAR | 763 | 839 | |
| Aircraft dry leasing | (246) | (241) | |
| Depreciation | 8 | (121) | (95) |
| Amortisation of intangible assets | 7 | (12) | (13) |
| Operating profit | 384 | 490 | |
| Interest receivable and other financing income | 8 | 4 | |
| Interest payable and other financing charges | (57) | (25) | |
| Net finance charges | 2 | (49) | (21) |
| Profit before tax | 3 | 335 | 469 |
| Tax charge | 5 | (48) | (115) |
| Profit for the year | 287 | 354 |
easyJet Airline Company Limited
Statement of comprehensive income
For the year ended 30 September 2016
| | Note | 2016
£ million | 2015
£ million |
| --- | --- | --- | --- |
| Profit for the year | | 287 | 354 |
| Other comprehensive income/(expense) | | | |
| Cash flow hedges | | | |
| Fair value gains/(losses) in the year | | 10 | (510) |
| Losses transferred to income statement | | 347 | 229 |
| (Gains)/losses transferred to property, plant and equipment | | (28) | 3 |
| Related tax (charge)/credit | 5 | (66) | 56 |
| | | 263 | (222) |
| Total comprehensive income for the year | | 550 | 132 |
For capital expenditure cash flow hedges, the accumulated gains and losses recognised in other comprehensive income will be reclassified to the initial carrying amount of the asset acquired, within property, plant and equipment. All other items in other comprehensive income will be reclassified to the income statement.
Losses/(gains) on cash flow hedges reclassified from other comprehensive income in income statement captions are as follows:
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Revenue | (7) | (64) |
| Fuel | 375 | 299 |
| Maintenance | (8) | (1) |
| Aircraft dry leasing | (11) | (3) |
| Other costs | (2) | (2) |
| | 347 | 229 |
easyJet Airline Company Limited
Statement of financial position
As at 30 September 2016
| | Note | 2016
£ million | 2015
£ million |
| --- | --- | --- | --- |
| Non-current assets | | | |
| Goodwill | 7 | 367 | 367 |
| Other intangible assets | 7 | 152 | 127 |
| Property, plant and equipment | 8 | 2,744 | 2,406 |
| Investments in subsidiaries | 9 | 1 | 1 |
| Derivative financial instruments | 21 | 154 | 44 |
| Restricted cash | 12 | 7 | 6 |
| Other non-current assets | 10 | 121 | 123 |
| | | 3,546 | 3,074 |
| Current assets | | | |
| Trade and other receivables | 11 | 221 | 205 |
| Derivative financial instruments | 21 | 268 | 128 |
| Restricted cash | 12 | - | 6 |
| Money market deposits | 12 | 255 | 289 |
| Cash and cash equivalents | 12 | 713 | 650 |
| | | 1,457 | 1,278 |
| Current liabilities | | | |
| Trade and other payables | 13 | (1,822) | (1,425) |
| Unearned revenue | | (568) | (619) |
| Borrowings | 14 | (45) | (54) |
| Derivative financial instruments | 21 | (275) | (368) |
| Derivative financial instruments with group undertakings | 21 | (61) | - |
| Current tax payable | | - | (21) |
| Provisions for liabilities and charges | 16 | (52) | (47) |
| | | (2,823) | (2,534) |
| Net current liabilities | | (1,366) | (1,256) |
| Non-current liabilities | | | |
| Borrowings | 14 | (186) | (245) |
| Derivative financial instruments | 21 | (49) | (101) |
| Non-current deferred income | 15 | (35) | (47) |
| Provisions for liabilities and charges | 16 | (200) | (130) |
| Deferred tax | 5 | (161) | (89) |
| | | (631) | (612) |
| Net assets | | 1,549 | 1,206 |
| Shareholders' equity | | | |
| Share capital | 17 | 765 | 765 |
| Hedging reserve | | 24 | (239) |
| Translation reserve | | 1 | 1 |
| Retained earnings | | 759 | 679 |
| Total equity | | 1,549 | 1,206 |
The accounts on pages 8 to 35 were approved by the Board of Directors and authorised for issue on 9 February 2017 and signed on behalf of the Board.
Andrew Findlay
Director
10
easyJet Airline Company Limited
Statement of changes in equity
For the year ended 30 September 2016
| | Share capital
£ million | Hedging reserve
£ million | Translation reserve
£ million | Retained earnings
£ million | Total equity
£ million |
| --- | --- | --- | --- | --- | --- |
| At 1 October 2015 | 765 | (239) | 1 | 679 | 1,206 |
| Total comprehensive income | - | 263 | - | 287 | 550 |
| Dividends (note 6) | - | - | - | (219) | (219) |
| Share incentive schemes | | | | | |
| Value of employee services | - | - | - | 17 | 17 |
| Related tax (note 5) | - | - | - | (5) | (5) |
| At 30 September 2016 | 765 | 24 | 1 | 759 | 1,549 |
| | Share capital
£ million | Hedging reserve
£ million | Translation reserve
£ million | Retained earnings
£ million | Total Equity
£ million |
| At 1 October 2014 | 214 | (17) | 1 | 485 | 683 |
| Total comprehensive (expense)/income | - | (222) | - | 354 | 132 |
| Dividends (note 6) | - | - | - | (180) | (180) |
| Proceeds from shares issued | 551 | - | - | - | 551 |
| Share incentive schemes | | | | | |
| Value of employee services | - | - | - | 15 | 15 |
| Related tax (note 5) | - | - | - | 5 | 5 |
| At 30 September 2015 | 765 | (239) | 1 | 679 | 1,206 |
The hedging reserve comprises the effective portion of the cumulative net change in fair value of cash flow hedging instruments relating to highly probable transactions that are forecast to occur after the year end.
easyJet Airline Company Limited
Statement of cash flows
For the year ending 30 September 2016
| Note | 2016 £ million | 2015 £ million | |
|---|---|---|---|
| Cash flows from operating activities | |||
| Cash generated from operations | 19 | 625 | 529 |
| Net interest and other financing charges paid | (3) | (4) | |
| Tax paid | (91) | (96) | |
| Net cash generated from operating activities | 531 | 429 | |
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | 8 | (473) | (460) |
| Purchase of intangible assets | 7 | (37) | (27) |
| Net decrease in money market deposits | 20 | 45 | 277 |
| Other | - | 4 | |
| Net cash used by investing activities | (465) | (206) | |
| Cash flows from financing activities | |||
| Repayment of bank loans | 20 | (98) | (45) |
| Repayment of capital elements of finance leases | 20 | (6) | (5) |
| Net decrease in restricted cash | 6 | 21 | |
| Net cash (used by)/generated from financing activities | (98) | (29) | |
| Effect of exchange rate changes | 95 | 34 | |
| Net increase in cash and cash equivalents | 63 | 228 | |
| Cash and cash equivalents at beginning of year | 650 | 422 | |
| Cash and cash equivalents at end of year | 12 | 713 | 650 |
12
13
easyJet Airline Company Limited
Notes to the accounts
1 Significant accounting policies
Statement of compliance
easyJet Airline Company Limited (the "Company" or "easyJet"), a private Limited company, is a low-cost airline carrier operating principally in Europe and is incorporated and domiciled in the United Kingdom. The address of its registered office is Hangar 89, London Luton Airport, Luton, Bedfordshire LU2 9PF. The Company is a wholly owned subsidiary of easyJet plc, a public limited company whose shares are listed on the London Stock Exchange under the ticker symbol EZJ.
The accounts are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, taking into account IFRS Interpretations Committee (IFRSIC) interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
Basis of preparation
The accounts for the year ended 30 September 2016 are prepared based on the historical cost convention except for certain financial assets and liabilities including derivative financial instruments that are measured at fair value.
The accounting policies set out below have been applied consistently to all years presented in these accounts.
easyJet's business activities, together with factors likely to affect its future development and performance, are described on pages 1 and 2 and on pages 1 to 42 of the easyJet plc Annual report and accounts for the year ended 30 September 2016. Note 22 to the accounts sets out the Company's objectives, policies and procedures for managing its capital and gives details of the risks related to financial instruments held by the Company.
The accounts have been prepared on the going concern basis. Details on going concern are provided on page 4.
The Company is not required, under S400 of the Companies Act 2006, to prepare consolidated accounts and has not elected to do so.
Significant judgements, estimates and critical accounting policies
The preparation of accounts in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the accounts and the reported amounts of income and expenses during the reporting period. Although these amounts are based on management's best estimates of the amount, events or actions may mean that actual results ultimately differ from those estimates, and these differences may be material. The estimates and the underlying assumptions are reviewed regularly.
The following accounting policies are considered critical accounting policies as they require a significant amount of management judgement and the results are material to the Company's accounts.
Aircraft maintenance provisions (Note 16)
The Company incurs liabilities for maintenance costs in respect of aircraft leased under operating leases during the term of the lease. These arise from legal and constructive contractual obligations relating to the condition of the aircraft when it is returned to the lessor. To discharge these obligations, the Company will also normally need to carry out one heavy maintenance check on each of the engines and the airframe during the lease term.
A charge is made in the income statement based on hours or cycles flown to provide for the cost of these obligations. Estimates required include the likely utilisation of the aircraft, the expected cost of the heavy maintenance check at the time it is expected to occur, the condition of the aircraft and the lifespan of life-limited parts.
The bases of all estimates are reviewed annually, and also when information becomes available that is capable of causing a material change to an estimate, such as renegotiation of end of lease return conditions, increased or decreased utilisation, or changes in the cost of heavy maintenance services.
Other provisions (Note 16)
The Company incurs liabilities for amounts payable to customers who make claims in respect of flight delays and cancellations, and refunds of air passenger duty or similar charges. Estimates required include passenger claim rates, level of claims that will be made and the period of time over which claims will be made. The bases of all estimates are reviewed at least annually and also when information becomes available that is capable of causing a material change to the estimate.
Goodwill and landing rights (Note 7)
Goodwill and landing rights are tested for impairment at least annually. The Company has one cash-generating unit, being its route network. In making this assessment, the Company has considered the manner in which the business is managed including the centralised nature of its operations and the ability to open or close routes and redeploy aircraft and crew across the whole route network.
The value in use of the cash-generating unit is determined by discounting future cash flows to their present value. When applying this method, the Company relies on a number of estimates including its strategic plans, fuel prices, exchange rates, long-term economic growth rates for the principal countries in which it operates and its pre-tax weighted average cost of capital.
easyJet Airline Company Limited
Notes to the accounts
1 Significant accounting policies (continued)
Foreign currencies
The accounts of the Company are presented in sterling, rounded to the nearest £million, which is the Company's functional currency. The Company's functional currency is determined by reference to the primary economic environment in which it operates.
Transactions arising in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling using the rate of exchange ruling at the end of a reporting period and (except where the asset or liability is designated as a cash flow hedge) the gains or losses on translation are included in the income statement. Non-monetary assets and liabilities denominated in foreign currencies are translated into sterling at foreign exchange rates ruling at the dates the transactions were effected.
Revenue recognition
Revenue comprises seat revenue, being the value of airline services (net of air passenger duty and similar charges, VAT and discounts), and non-seat revenue.
Seat revenue arises from the sale of flight seats, including the provision of checked baggage, allocated seating, administration, credit card and change fees. Seat revenue is recognised when the service is provided. This is generally when the flight takes place, but in the following cases, this is at the time of booking:
- administration and credit card fees, as they are contractually non-refundable, and
- change fees, as the service provided is that of allowing customers to change bookings.
Amounts paid by 'no-show' customers are recognised as seat revenue when the booked service is provided as such customers are not generally entitled to change flights or seek refunds once a flight has departed.
Unearned revenue represents flight seats, including the provision of checked baggage and allocated seating, sold but not yet flown and is held in the statement of financial position until it is realised in the income statement when the service is provided.
Non-seat revenue arises from commissions earned from services sold on behalf of partners and is recognised when the service is provided. This is generally when the related flight takes place. In the case of commission earned from travel insurance, revenue is recognised at the time of booking as the Company acts solely as appointed representative of the insurance company.
Operating lease revenue arises from the rental of aircraft to other group companies and is recognised on the date that the right to receive consideration occurs.
Goodwill and other intangible assets
Goodwill is stated at cost less any accumulated impairment losses. It has an indefinite expected useful life and is tested for impairment at least annually or where there is any indication of impairment.
Landing rights are stated at cost less any accumulated impairment losses. They are considered to have an indefinite useful life as they will remain available for use for the foreseeable future provided minimum utilisation requirements are observed, and are tested for impairment at least annually or where there is any indication of impairment.
Other intangible assets are stated at cost less accumulated amortisation, which is calculated to write off their cost, less estimated residual value, on a straight-line basis over their expected useful lives. Expected useful lives and residual values are reviewed annually.
Expected useful life
| Computer software | 3-7 years |
|---|---|
| Contractual rights | Over the length of the related contracts |
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated to write off the cost, less estimated residual value of assets, on a straight-line basis over their expected useful lives. Expected useful lives are reviewed annually.
Expected useful life
| Aircraft | 23 years |
|---|---|
| Aircraft spares | 14 years |
| Aircraft – prepaid maintenance | 7-10 years |
| Leasehold improvements | 5-10 years or the length of lease if shorter |
| Fixtures, fittings and equipment | 3 years or length of lease of property where equipment is used if shorter |
| Computer hardware | 3-5 years |
Aircraft held under finance leases are depreciated over the shorter of the lease term and their expected useful lives, as shown above.
Residual values, where applicable, are reviewed annually against prevailing market rates at the end of the reporting period for equivalently aged assets and depreciation rates adjusted accordingly on a prospective basis. The carrying value is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. For aircraft, easyJet is dependent on Airbus as its sole supplier. This gives rise to a valuation risk which crystallises when aircraft exit the fleet, where easyJet is reliant on the future demand for second-hand aircraft.
14
easyJet Airline Company Limited
Notes to the accounts
1 Significant accounting policies (continued)
An element of the cost of a new aircraft is attributed on acquisition to prepaid maintenance and is depreciated over a period ranging from seven to ten years from the date of manufacture. Subsequent costs incurred which lend enhancement to future periods, such as long-term scheduled maintenance and major overhaul of aircraft and engines, are capitalised and depreciated over the length of period benefiting from these enhancements. All other maintenance costs are charged to the income statement as incurred.
Pre-delivery and option payments made in respect of aircraft are recorded in property, plant and equipment at cost. These amounts are not depreciated. Interest attributed to pre-delivery and option payments made in respect of aircraft and other qualifying assets under construction are capitalised and added to the cost of the asset concerned.
Gains and losses on disposals (other than aircraft sale and leaseback transactions) are determined by comparing the net proceeds with the carrying amount and are recognised in the income statement.
Impairment of non-current assets
An impairment loss is recognised to the extent that the carrying value exceeds the higher of the asset's or cash generating unit's fair value less cost to sell and its value in use. Impairment losses recognised on goodwill are not reversed. Impairment losses recognised on assets other than goodwill are only reversed where changes in the estimates used result in an increase in recoverable amount.
Leases
The Company enters into sale and leaseback transactions whereby it sells either new or mid-life aircraft to a third party and immediately leases it back under an operating lease. Surpluses arising on disposal, where the price that the aircraft is sold for is above fair value, are recognised in deferred income and amortised in the income statement on a straight-line basis over the expected lease term.
In some operating sale and leaseback arrangements, receipt of part of the proceeds is deferred until the end of the lease, the amount of which is recorded as deferred consideration within non-current or current assets as appropriate.
Additionally, in some cases, receipt of part of the sales proceeds due is exchanged for a reduction in future lease rentals, which consequently are below market price. As a result, the proceeds received on sale and leaseback are lower than the fair value of the aircraft sold. The resulting shortfall is deferred within non-current or current assets as appropriate, and amortised on a straight-line basis in the income statement over the expected lease term.
Non-contingent operating lease rentals are charged to the income statement on a straight-line basis over the life of the lease. A number of operating leases require the Company to make contingent rental payments based on variable interest rates; these are expensed as incurred.
Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are recognised at the inception of the lease at the fair value of the leased asset, or, if lower, at the present value of the minimum lease payments. Any directly attributable costs of entering into financing sale and leasebacks are included in the value of the asset recognised. Lease payments are apportioned between the finance charges and the reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are included in interest payable and other financing charges.
Financial instruments
Financial instruments are recognised when the Company becomes a party to the contractual provisions of the relevant instrument and derecognised when it ceases to be a party to such provisions.
Where market values are not available, the fair value of financial instruments is calculated by discounting cash flows at prevailing interest rates and by applying year end exchange rates.
Non-derivative financial assets
Non-derivative financial assets are recorded at amortised cost and include trade receivables, cash and cash equivalents and money market deposits.
Cash and cash equivalents comprise cash held in bank accounts with no access restrictions and bank deposits and tri-party repos repayable on demand or maturing within three months of inception. Interest income on cash and money market deposits is recognised using the effective interest method. Restricted cash comprises cash deposits which have restrictions governing their use and is classified as a current or non-current asset based on the estimated remaining length of the restriction.
Impairment losses are recognised on financial assets carried at amortised cost where there is objective evidence that an impairment loss has been incurred. The amount of the loss is measured as the difference between the asset's carrying amount and the present value of future cash flows, discounted at the original effective interest rate.
If, subsequently, the amount of the impairment loss decreases, and the decrease can be related objectively to an event that occurred after the impairment was recognised, the appropriate portion of the loss is reversed. Both impairment losses and reversals are recognised in the income statement as components of net finance charges.
15
easyJet Airline Company Limited
Notes to the accounts
1 Significant accounting policies (continued)
Non-derivative financial liabilities
Non-derivative financial liabilities are initially recorded at fair value less directly attributable transaction costs, and subsequently at amortised cost and include trade and other payables, borrowings and provisions. Interest expense on borrowings is recognised using the effective interest method.
Borrowings are classified as current liabilities unless there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting period date.
Derivative financial instruments and hedging activities
The Company uses foreign currency forward exchange contracts to hedge foreign currency risks on transactions denominated in US dollars, Euros, Swiss francs and South African rand. These transactions primarily affect revenue, fuel, aircraft dry leasing costs, and the carrying value of owned aircraft. The Company also uses cross currency interest rate swaps to hedge currency and interest rate risk on certain borrowings, and jet fuel forward contracts to hedge fuel price risks.
Derivative financial instruments are measured at fair value. Hedge accounting is applied to those derivative financial instruments that are designated as cash flow hedges or fair value hedges.
Fair value hedges
Changes in the fair values of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair values of the hedged assets or liabilities that are attributable to the hedged risk.
Cash flow hedges
Gains and losses arising from changes in the fair value of forward contracts are recognised in other comprehensive income and deferred in the hedging reserve to the extent that the hedges are determined to be effective. All other changes in fair value are recognised immediately in the income statement.
When the hedged forecast transaction relates to an item of property, plant and equipment, the relevant accumulated gains and losses are transferred from the hedging reserve and included in the initial carrying amount of that purchased asset. Otherwise they are recognised in the income statement in the same period in which the hedged transaction affects the income statement.
In the event that a hedged forecast transaction is no longer considered highly probable, any related gains and losses are immediately transferred from the hedging reserve and recognised in the income statement.
Hedge accounting is discontinued when a hedging instrument is derecognised (e.g. through expiry or disposal), or no longer qualifies for hedge accounting. Where the hedged item remains a highly probable forecast transaction, the related gains and losses remain deferred in the hedging reserve until the transaction takes place.
Financial guarantees
If a claim on a financial guarantee given to a third party becomes probable, the obligation is recognised at fair value. For subsequent measurement, the carrying amount is the higher of initial measurement and best estimate of the expenditure required to settle the obligation at the reporting date.
Tax
Tax expense in the income statement consists of current and deferred tax. Tax is recognised in the income statement except when it relates to items credited or charged directly to other comprehensive income or shareholders' equity. The charge for current tax is based on the results for the year, as adjusted for income that is exempt and expenses that are not deductible, using tax rates that are applicable to the taxable income.
Deferred tax is provided in full on temporary differences relating to the carrying amount of assets and liabilities, where it is probable that the recovery or settlement will result in an obligation to pay more, or a right to pay less, tax in the future, with the following exceptions:
- where the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither taxable income nor accounting profit; and
- deferred tax arising on investments in subsidiaries is not recognised where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to apply in the periods in which recovery of assets and settlement of liabilities are expected to take place, based on tax rates or laws enacted or substantively enacted at the date of the statement of financial position.
Deferred tax assets represent amounts recoverable in future periods in respect of deductible temporary differences, losses and tax credits carried forward. Deferred tax assets are recognised to the extent that it is probable that there will be suitable taxable profits from which they can be deducted.
Deferred tax liabilities represent the amount of income taxes payable in future periods in respect of taxable temporary differences.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and it is the intention to settle these on a net basis.
16
17
easyJet Airline Company Limited
Notes to the accounts
1 Significant accounting policies (continued)
Aircraft maintenance provisions
The accounting for the cost of providing major airframe and certain engine maintenance checks for owned and finance-leased aircraft is described in the accounting policy for property, plant and equipment.
The Company has contractual obligations to maintain aircraft held under operating leases. Provisions are created over the term of the lease based on the estimated future costs of major airframe checks, engine shop visits and end of lease liabilities. These costs are discounted to present value.
Where an aircraft is sold and leased back, other than when first delivered to the Company, a liability to undertake future maintenance activities, resulting from past flying activity, arises at the point the lease agreement is signed. This liability is treated as part of the surplus or shortfall arising on the sale and leaseback, the accounting treatment of which is described in the leases accounting policy.
A number of leases also require the Company to pay recoverable supplemental rent to the lessor. The purpose of these payments is to provide the lessor with collateral should an aircraft be returned in a condition that does not meet the requirements of the lease. This recoverable supplemental rent is included in trade and other receivables within current assets and other non-current assets, as applicable, and is refunded when qualifying heavy maintenance is performed, or is offset against the costs incurred at the end of the lease.
Employee benefits
The Company contributes to defined contribution pension schemes for the benefit of employees and has no further payment obligations once the contributions have been paid. The assets of the schemes are held separately from those of the Company in independently administered funds. Contributions are charged to the income statement in the year in which they are incurred.
The expected cost of compensated holidays is recognised at the time that the related employees' services are provided.
Share-based payments
easyJet plc has a number of equity-settled share incentive schemes. The fair value of share options granted under the Save As You Earn scheme is measured at the date of grant using the Binomial Lattice option pricing model. The fair value grants under the TSR based Long Term Incentive Plan is estimated under the Stochastic model (also known as the Monte Carlo model). The fair value of all other awards is the share price at the date of grant.
The fair value of the estimated number of options and awards that are expected to vest is expensed to the income statement on a straight-line basis over the period that employees' services are rendered, with a corresponding increase in shareholders' equity. Where non-market performance criteria (such as ROCE) attached to the share options and awards are not met, any cumulative expense previously recognised is reversed. For awards with market-related performance criteria (such as TSR) an expense is recognised irrespective of whether the market condition is satisfied.
The social security obligations payable in connection with grant of the share options is an integral part of the grant itself and the charge is treated as a cash-settled transaction.
Investments in subsidiaries
Investments in subsidiaries are stated at cost, less any provision for impairment.
Segmental disclosures
The Company has one operating segment, being its route network, based on management information provided to the Executive Management Team, which is easyJet's Chief Operating Decision Maker. Resource allocation decisions are made for the benefit of the route network as a whole, rather than for individual routes within the network. Performance of the network is assessed based on the consolidated profit or loss before tax for the year.
Revenue is allocated to geographic segments on the following bases:
- revenue earned from passengers is allocated according to the location of the first departure airport on each booking; and
- commission revenue earned from partners is allocated according to the domicile of each partner.
easyJet Airline Company Limited
Notes to the accounts
1 Significant accounting policies (continued)
New and revised standards and interpretations not applied
There were no new standards or interpretations/amendments to standards applied during the year ended 30 September 2016.
The following standards and interpretations issued by the International Accounting Standards Board (IASB) have not been applied in preparing these accounts as their effective dates fall in periods beginning after 1 October 2016.
Effective for the year ending 30 September 2017
IAS 1 'Presentation of Financial Statements' – Amendments relating to the Disclosure Initiative.
IAS 16 'Property, Plant and Equipment' and IAS 38 'Intangible Assets' – Amendments relating to Clarification of Acceptable Methods of Depreciation and Amortisation.
IAS 27 'Separate Financial Statements' – Amendments relating to Equity Method in Separate Financial Statements.
IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures' – Amendments relating to Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (not yet EU endorsed).
IFRS 11 'Joint Arrangements' – Amendments relating to Acquisitions of Interests in Joint Operations.
Annual Improvements to IFRS 2012-2014 Cycle.
Effective for the year ending 30 September 2018 (not yet EU endorsed)
IAS 7 'Statement of Cash flows' – Amendments relating to the IASB's Disclosure Initiative intended to provide information to help investors better understand changes in a company's debt.
IAS 12 'Income Taxes' – Amendments relating to the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value.
Effective for the year ending 30 September 2019 (not yet EU endorsed)
IFRS 2 'Share-based Payment' – Amendments clarifying how to account for certain types of share-based payment transactions.
IFRS 9 'Financial Instruments' – Introduces new requirements for classification and measurement of financial assets and financial liabilities, impairment methodology and hedge accounting.
IFRS 15 'Revenue from Contracts with Customers' – Provides a single model for measuring and recognising revenue arising from contracts with customers, unless the contracts are in the scope of other standards, such as IAS 17. It supersedes all existing revenue requirements in IFRS.
Effective for the year ending 30 September 2020 (not yet EU endorsed)
IFRS 16 'Leases' – Provides a single lessee accounting model, specifying how leases are recognised, measured, presented and disclosed.
The Directors are currently evaluating the financial and operational impact of adopting IFRS 15 'Revenue from Contracts with Customers' and IFRS 16 'Leases'. The review of the impact of IFRS 15 and IFRS 16 will require an assessment of all revenue streams and leases respectively, and the impact of adopting these standards cannot be reliably estimated until this work is substantially complete. The directors do not anticipate that the adoption of the other standards and interpretations listed above will have a material impact on easyJet's accounts. Certain of these standards and interpretations will, when adopted, require addition to or amendment of disclosures in the accounts.
18
easyJet Airline Company Limited
Notes to the accounts
2 Net finance charges
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Interest receivable and other financing income | | |
| External interest income | (5) | (3) |
| Dividend income | (3) | - |
| Net exchange gains on monetary assets and liabilities | - | (1) |
| | (8) | (4) |
| Interest payable and other financing charges | | |
| Interest payable to fellow group undertakings | 20 | 17 |
| Interest payable on bank loans | 4 | 4 |
| Interest payable on finance lease obligations | 3 | 3 |
| Other interest payable | - | 1 |
| Net exchange losses on monetary assets and liabilities | 30 | - |
| | 57 | 25 |
| Net finance charges | 49 | 21 |
3 Profit before tax
The following have been included in arriving at profit before tax:
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Depreciation of property, plant and equipment | | |
| Owned assets | 117 | 91 |
| Assets held under finance leases | 4 | 4 |
| Operating lease rentals | | |
| Aircraft - dry leases | 246 | 241 |
| Other assets | 5 | 5 |
Auditors' remuneration
During the year the Company obtained the following services from the Company's auditors:
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Company audit fee | 0.3 | 0.3 |
| Fees for other assurance services | 0.1 | 0.1 |
| | 0.4 | 0.4 |
Fees for other assurance services represent the audit fees of other group entities.
In addition easyJet incurred audit related fees of £38,000 from its auditors.
19
easyJet Airline Company Limited
Notes to the accounts
4 Employees
| Average monthly number of persons employed | 2016 | 2015 |
|---|---|---|
| Number | Number | |
| Flight and ground operations | 8,709 | 8,311 |
| Sales, marketing and administration | 702 | 647 |
| 9,411 | 8,958 | |
| Employee costs | 2016 | 2015 |
| £ million | £ million | |
| Wages and salaries | 421 | 401 |
| Social security costs | 61 | 65 |
| Other pension costs | 40 | 37 |
| Share-based payments | 18 | 15 |
| 540 | 518 | |
| Key management compensation | 2016 | 2015 |
| £ million | £ million | |
| Short-term employee benefits | 6 | 6 |
| Share-based payments | 4 | 3 |
| 10 | 9 | |
| Directors' emoluments | 2016 | 2015 |
| £ million | £ million | |
| Remuneration | 6 | 6 |
| 6 | 6 |
The members of the Executive Management Team are key management as they have collective authority and responsibility for planning, directing and controlling the business. All of the Directors are members of the Executive Management Team.
Two directors receive a taxable payment in lieu of employer pension contributions. All other Directors accrue retirement benefits under the easyJet Group defined contribution pension scheme.
The highest paid director received remuneration totalling £1.2 million (2015: £1.7 million). The highest paid director exercised 87,984 shares during the year, relating to long term service plans.
5 Tax charge
Tax on profit on ordinary activities:
| 2016 £ million | 2015 £ million | |
|---|---|---|
| Current tax | ||
| United Kingdom corporation tax | 49 | 88 |
| Adjustments in respect of prior years | (1) | (1) |
| 48 | 87 | |
| Deferred tax | ||
| Temporary differences relating to property, plant and equipment | 25 | 29 |
| Adjustments in respect of prior years | 1 | - |
| Change in tax rate from financial year 2020 to 17% | (26) | (1) |
| - | 28 | |
| 48 | 115 |
20
easyJet Airline Company Limited
Notes to the accounts
5 Tax charge (continued)
Reconciliation of the total tax charge
The tax for the year is lower (2015: higher) than the standard rate of corporation tax in the UK as set out below:
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Profit on ordinary activities before tax | 335 | 469 |
| Tax charge at 20.0% (2015: 20.5%) | 67 | 96 |
| Expenses not deductible for tax purposes | 3 | 2 |
| Share-based payments | 4 | 19 |
| Adjustments in respect of prior years - current tax | (1) | (1) |
| Adjustments in respect of prior years - deferred tax | 1 | - |
| Change in tax rate | (26) | (1) |
| Total tax charge | 48 | 115 |
Tax on items recognised directly in other comprehensive income or shareholders' equity:
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| (Charge)/credit to other comprehensive income | | |
| Deferred tax on change in fair value of cash flow hedges | (66) | 56 |
| Credit/(charge) to shareholders' equity | | |
| Current tax credit on share-based payments | 1 | 14 |
| Deferred tax charge on share-based payments | (6) | (9) |
| | (5) | 5 |
Deferred tax
The net deferred tax liability in the statement of financial position is as follows:
| Accelerated capital allowances £ million | Fair value gains £ million | Share-based payments £ million | Total £ million | |
|---|---|---|---|---|
| At 1 October 2015 | 150 | (47) | (14) | 89 |
| (Credited)/Charged to income statement | (2) | 1 | 1 | - |
| Charged to other comprehensive income | - | 66 | - | 66 |
| Charged to shareholders' equity | - | - | 6 | 6 |
| At 30 September 2016 | 148 | 20 | (7) | 161 |
| Accelerated capital allowances £ million | Fair value gains £ million | Share-based payments £ million | Total £ million | |
| At 1 October 2014 | 122 | 10 | (24) | 108 |
| Charged/(credited) to income statement | 28 | (1) | 1 | 28 |
| Credited to other comprehensive income | - | (56) | - | (56) |
| Charged to shareholders' equity | - | - | 9 | 9 |
| At 30 September 2015 | 150 | (47) | (14) | 89 |
It is estimated that deferred tax assets of approximately £1 million (2015: £61 million) will reverse during the next financial year. There are no unrecognised deferred tax assets.
easyJet Airline Company Limited
Notes to the accounts
6 Dividends
During the year the Company declared in-specie dividends totalling £219 million (2015: £180 million), equivalent to £0.2863 per share (2015: £0.2353 per share), settled by the cancellation by the sole member of the Company of part of a debt owed to the Company. Dividend distributions are recognised as a liability in the period in which the dividends are approved by the Company's shareholders.
7 Goodwill and other intangible assets
| Goodwill £ million | Landing rights £ million | Computer software £ million | Total £ million | |
|---|---|---|---|---|
| Cost | ||||
| At 1 October 2015 | 367 | 94 | 60 | 154 |
| Additions | - | - | 37 | 37 |
| Disposals | - | - | (22) | (22) |
| At 30 September 2016 | 367 | 94 | 75 | 169 |
| Accumulated amortisation | ||||
| At 1 October 2015 | - | - | 27 | 27 |
| Charge for the year | - | - | 12 | 12 |
| Disposals | - | - | (22) | (22) |
| At 30 September 2016 | - | - | 17 | 17 |
| Net book value | ||||
| At 30 September 2016 | 367 | 94 | 58 | 152 |
| At 1 October 2015 | 367 | 94 | 33 | 127 |
| Goodwill £ million | Landing rights £ million | Computer software £ million | Total £ million | |
| Cost | ||||
| At 1 October 2014 | 367 | 94 | 38 | 132 |
| Transferred from property, plant and equipment | - | - | 27 | 27 |
| Disposals | - | - | (5) | (5) |
| At 30 September 2015 | 367 | 94 | 60 | 154 |
| Accumulated amortisation | ||||
| At 1 October 2014 | - | - | 19 | 19 |
| Charge for the year | - | - | 13 | 13 |
| Disposals | - | - | (5) | (5) |
| At 30 September 2015 | - | - | 27 | 27 |
| Net book value | ||||
| At 30 September 2015 | 367 | 94 | 33 | 127 |
| At 1 October 2014 | 367 | 94 | 19 | 113 |
22
easyJet Airline Company Limited
Notes to the accounts
7 Goodwill and other intangible assets (continued)
The Company has one cash generating unit, being its route network. The recoverable amount of goodwill and other assets with indefinite expected useful lives has been determined based on value in use calculations of the route network.
Pre-tax cash flow projections have been derived from the forecast cashflows presented to the Board for the period up to 2021, using the following key assumptions:
| Pre-tax discount rate (derived from weighted average cost of capital) | 11% |
|---|---|
| Fuel price (US dollars per metric tonne) | 480 - 600 |
| Exchange rates: | |
| US dollar | 1.30 |
| Euro | 1.20 |
| Swiss franc | 1.30 |
Both fuel price and exchange rates are volatile in nature, and the assumptions used represent management's view of reasonable average rates. Operating margins are sensitive to significant changes in these rates.
Cash flow projections beyond the forecast period have been extrapolated using growth rate scenarios ranging from zero up to an estimated average of long-term economic growth rates for the principal countries in which the Company operates. No impairment resulted from any of these scenarios.
The impairment model is sensitive to a sustained significant adverse movement in foreign currency exchange rates
No reasonably possible combination of changes to the key assumptions above would result in the carrying value of the cash-generating unit exceeding its recoverable amount.
8 Property, plant and equipment
| Aircraft and spares £ million | Other £ million | Total £ million | |
|---|---|---|---|
| Cost | |||
| At 1 October 2015 | 2,804 | 44 | 2,848 |
| Additions | 451 | 22 | 473 |
| Transfer to fellow group undertaking | (2) | - | (2) |
| Transfer to maintenance provisions | (9) | - | (9) |
| Disposals | (10) | (3) | (13) |
| At 30 September 2016 | 3,234 | 63 | 3,297 |
| Accumulated depreciation | |||
| At 1 October 2015 | 429 | 13 | 442 |
| Charge for the year | 116 | 5 | 121 |
| Disposals | (10) | - | (10) |
| At 30 September 2016 | 535 | 18 | 553 |
| Net book value | |||
| At 30 September 2016 | 2,699 | 45 | 2,744 |
| At 1 October 2015 | 2,375 | 31 | 2,406 |
23
easyJet Airline Company Limited
Notes to the accounts
8 Property, plant and equipment (continued)
| Aircraft and spares £ million | Other £ million | Total £ million | |
|---|---|---|---|
| Cost | |||
| At 1 October 2014 | 2,403 | 36 | 2,439 |
| Additions | 450 | 36 | 486 |
| Transfer to fellow group undertaking | (8) | - | (8) |
| Transfer to intangible assets | - | (27) | (27) |
| Transfer to maintenance provisions | (40) | - | (40) |
| Disposals | (1) | (1) | (2) |
| At 30 September 2015 | 2,804 | 44 | 2,848 |
| Accumulated depreciation | |||
| At 1 October 2014 | 337 | 11 | 348 |
| Charge for the year | 92 | 3 | 95 |
| Disposals | - | (1) | (1) |
| At 30 September 2015 | 429 | 13 | 442 |
| Net book value | |||
| At 30 September 2015 | 2,375 | 31 | 2,406 |
| At 1 October 2014 | 2,066 | 25 | 2,091 |
The net book value of aircraft includes £280 million (2015: £275 million) relating to advance and option payments for future deliveries of aircraft. This amount is not depreciated.
Aircraft with a net book value of £201 million (2015: £343 million) are mortgaged to lenders as loan security.
The Company holds five (2015: five) aircraft under finance leases, with a net book value of £76 million (2015: £80 million).
The Company is contractually committed to the acquisition of 166 (2015: 150) Airbus A320 family aircraft, with a total list price of US$14.8 billion (2015: US$13.0 billion) before escalations and discounts for delivery in 2017 (21 aircraft), in 2018 (15 aircraft) and between 2017 and 2022 (130 new generation aircraft).
The 'other' category mainly comprises leasehold improvements, computer hardware, and fixtures, fittings and equipment.
9 Investments in subsidiaries
| 2016 £ million | 2015 £ million | ||
|---|---|---|---|
| At 1 October and at 30 September | 1 | 1 |
A list of the Company's subsidiaries is detailed below.
| Country of incorporation | Principal activity | Percentage of ordinary shares held | |
|---|---|---|---|
| Dawn Licensing Holdings Limited | Malta | Holding company | 100 |
| Dawn Licensing Limited | Malta | Graphic design | 100 |
10 Other non-current assets
| 2016 £ million | 2015 £ million | |
|---|---|---|
| Deferred consideration and deposits held by aircraft lessors | 95 | 81 |
| Leased aircraft - shortfall on sale and leaseback | 15 | 35 |
| Recoverable supplemental rent (pledged as collateral) | 7 | 4 |
| Other | 4 | 3 |
| 121 | 123 |
24
easyJet Airline Company Limited
Notes to the accounts
11 Trade and other receivables
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Trade receivables | 62 | 61 |
| Less: provision for impairment | (5) | (3) |
| | 57 | 58 |
| Prepayments and accrued income | 97 | 85 |
| Leased aircraft - shortfall on sale and leaseback | 20 | 20 |
| Recoverable supplemental rent (pledged as collateral) | 5 | 7 |
| Current tax receivable | 4 | - |
| Other receivables | 38 | 35 |
| | 221 | 205 |
Trade and other receivables of £24m (2015: £14m) are up to three months past due but not impaired.
With respect to trade receivables that are neither impaired nor past due, there are no indications at the reporting date that the payment obligations will not be met. Amounts due from trade receivables are short-term in nature and largely comprise credit card receivables due from financial institutions with credit ratings of at least A and, accordingly, the possibility of significant default is considered to be unlikely.
12 Cash and money market deposits
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Cash and cash equivalents (original maturity less than three months) | 713 | 650 |
| Money market deposits (original maturity more than three months) | 255 | 289 |
| Current restricted cash | - | 6 |
| Non-current restricted cash | 7 | 6 |
| | 975 | 951 |
Interest rates on money market deposits and restricted cash are re-priced within 185 days based on prevailing market rates of interest. Carrying value is not significantly different from fair value.
Restricted cash comprises:
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Pledged as collateral to third parties: | | |
| Aircraft operating lease deposits | 7 | 12 |
| | 7 | 12 |
13 Trade and other payables
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Trade payables | 114 | 96 |
| Amounts owed to group undertakings | 1,272 | 942 |
| Accruals | 345 | 302 |
| Leased aircraft - surplus on sale and leaseback | 11 | 12 |
| Taxes and social security | 16 | 18 |
| Other payables | 64 | 55 |
| | 1,822 | 1,425 |
easyJet Airline Company Limited
Notes to the accounts
14 Borrowings
| At 30 September 2016 | Current £ million | Non-current £ million | Total £ million |
|---|---|---|---|
| Bank loans | 37 | 83 | 120 |
| Finance lease obligations | 8 | 103 | 111 |
| 45 | 186 | 231 | |
| At 30 September 2015 | Current £ million | Non-current £ million | Total £ million |
| Bank loans | 47 | 151 | 198 |
| Finance lease obligations | 7 | 94 | 101 |
| 54 | 245 | 299 |
Bank loans, which bear interest at variable rates linked to LIBOR, were drawn down to finance the acquisition of aircraft that have been mortgaged to the lender to provide security. None of the agreements contain financial covenants to be met.
Finance lease obligations relate to aircraft and bear interest partly at fixed rates and partly at variable rates linked to LIBOR.
The maturity profile of borrowings is set out in note 22.
On 10 February 2015 the Company signed a $500 million revolving credit facility with a minimum five-year term. As at 9 February 2017 no amounts had been drawn down under this facility. The facility is due to mature in February 2021.
15 Non-current deferred income
The balance comprises the non-current surplus of sale proceeds over fair value of aircraft that have been sold and leased back under operating leases. This balance will be realised in the income statement over the next six years.
16 Provisions for liabilities and charges
| Maintenance provisions £ million | Other provisions £ million | Total £ million | |
|---|---|---|---|
| At 1 October 2015 | 156 | 21 | 177 |
| Exchange adjustments | 27 | - | 27 |
| Charged to income statement | 53 | 84 | 137 |
| Transferred to fellow group undertakings | 22 | - | 22 |
| Transferred from property, plant and equipment | (9) | - | (9) |
| Utilised | (26) | (76) | (102) |
| At 30 September 2016 | 223 | 29 | 252 |
Amounts transferred from property, plant and equipment relate to aircraft life-limited parts used in engine restoration in the year.
Other provisions comprise liabilities for amounts payable to customers who make claims in respect of flight delays and cancellations, and refunds of air passenger duty or similar charges.
Provisions are analysed as follows:
| 2016 £ million | 2015 £ million | |
|---|---|---|
| Current | 52 | 47 |
| Non-current | 200 | 130 |
| 252 | 177 |
Maintenance provisions are expected to be utilised within seven years. Other provisions are expected to be utilised within one year.
26
easyJet Airline Company Limited
Notes to the accounts
17 Share capital
| Number | Nominal value | |||
|---|---|---|---|---|
| 2016 million | 2015 million | 2016 £ million | 2015 £ million | |
| Allotted, called up and fully paid - Ordinary shares of £1 each | ||||
| At 1 October | 765 | 214 | 765 | 214 |
| Issued in the year | - | 551 | - | 551 |
| At 30 September | 765 | 765 | 765 | 765 |
During the prior year the Company allotted and issued 551 million ordinary shares of £1.00 each, to parent entity easyJet plc, in consideration of the Company being released from its obligation to pay debts of the same amount (£551 million) owed by it to easyJet plc.
18 Share incentive schemes
The Company operates the following share incentive schemes, all of which are settled in the equity of its parent, easyJet plc. Further details are given in easyJet plc's published Annual report and accounts for the year ended 30 September 2016.
The change in the number of awards outstanding and weighted average exercise prices during the year, and the number exercisable at each year end were as follows:
| Grant date | 1 October 2015 million | Granted million | Forfeited million | Exercised million | 30 September 2016 million |
|---|---|---|---|---|---|
| Long Term Incentive Plan | |||||
| 4 January 2012 | 0.1 | - | - | (0.1) | - |
| 18 December 2012 | 0.9 | - | - | (0.6) | 0.3 |
| 17 December 2013 | 0.5 | - | - | - | 0.5 |
| 19 December 2014 | 0.7 | - | - | - | 0.7 |
| 18 December 2015 | - | 0.7 | - | - | 0.7 |
| Save As You Earn scheme | |||||
| 1 July 2012 | 0.1 | - | - | (0.1) | - |
| 1 July 2013 | 0.6 | - | - | (0.4) | 0.2 |
| 1 July 2014 | 0.8 | - | (0.3) | - | 0.5 |
| 1 July 2015 | 1.2 | - | (0.4) | - | 0.8 |
| 1 July 2016 | - | 1.2 | (0.1) | - | 1.1 |
| Share Incentive Plan | 4.0 | 1.0 | (0.2) | (0.6) | 4.2 |
| 8.9 | 2.9 | (1.0) | (1.8) | 9.0 |
Weighted average exercise prices are as follows:
| 2015 £ | Granted £ | Forfeited £ | Exercised £ | 2016 £ | |
|---|---|---|---|---|---|
| Save As You Earn scheme | 11.85 | 11.98 | 13.10 | 8.59 | 12.44 |
The exercise price of all awards, save those disclosed in the above table, is £nil.
The number of awards exercisable at each year end and their weighted average exercise price are as follows:
| Price (£) | Number (million) | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| Long Term Incentive Plan | - | - | 0.3 | 0.1 |
| Save As You Earn scheme | 9.69 | 4.18 | 0.2 | 0.1 |
| 0.5 | 0.2 |
easyJet Airline Company Limited
Notes to the accounts
18 Share incentive schemes (continued)
The weighted average remaining contractual life for each class of share at 30 September 2016 is as follows:
| Years | |
|---|---|
| Long Term Incentive Plan | 8.0 |
| Save As you Earn scheme | 2.2 |
Long Term Incentive Plan
The plan is open, by invitation, to Executive Directors and senior management, and provides for annual awards of Performance Shares worth up to 250% (200% up to 31 December 2014) of salary each year. For awards granted from the 2015 financial year, the vesting of these shares is dependent on return on capital employed (ROCE) targets and total shareholder return (TSR) targets compared to FTSE 31-130 ranked companies at the start of the performance period. All awards have a three year vesting period; 2016 awards are assessed on performance conditions measured over the three financial years ended 30 September 2018.
Save As You Earn scheme
The scheme is open to all employees on the UK payroll. Participants may elect to save up to £500 per month under a three year savings contract. An option is granted by the Company to buy shares at a discount of 20% from market price at the time of the grant. At the end of the savings period the option becomes exercisable for a period of six months. Employees who are not paid through the UK payroll may participate in the scheme under similar terms and conditions, albeit without the same tax benefits.
Share Incentive Plans
The plan is open to all employees on the UK payroll. Participants may invest up to £1,800 of their pre-tax salary each year to purchase partnership shares in easyJet. For each partnership share acquired easyJet purchases a matching share up to a maximum value of £1,500 per annum. Employees must remain with easyJet for three years from the date of purchase of each partnership share in order to qualify for the matching share, and for five years for the shares to be transferred to them tax free. The employee is entitled to dividends on shares purchased and to vote at shareholder meetings.
Subject to Company performance, easyJet also issues free shares to UK employees under a new approved share incentive plan of up to £3,000 per annum in value. There is a similar unapproved free share scheme for international employees.
The fair value of grants under the Save As You Earn scheme are calculated by applying the Binomial Lattice option pricing model. The fair value of grants under the TSR based Long Term Incentive Plan is estimated under the Stochastic model (also known as the Monte Carlo model). The fair value of grants under all other schemes is the share price on the date of grant. The following assumptions are used:
| Grant date | Share price £ | Exercise price £ | Expected volatility % | Option life years | Risk-free interest rate % | Fair value £ |
|---|---|---|---|---|---|---|
| Long term incentive plan | ||||||
| 4 January 2012 | 3.92 | - | - | - | - | 3.92 |
| 18 December 2012 - ROCE | 7.37 | - | - | - | - | 6.92 |
| 18 December 2012 - TSR | 7.37 | - | 33 | 3.0 | 0.44 | 5.16 |
| 17 December 2013 - ROCE | 14.99 | - | - | - | - | 14.99 |
| 17 December 2013 - TSR | 14.99 | - | 31 | 3.0 | 0.76 | 9.83 |
| 19 December 2014 - ROCE | 16.52 | - | - | - | - | 16.52 |
| 19 December 2014 - TSR | 16.52 | - | 29 | 3.0 | 0.78 | 11.65 |
| 18 December 2015 - ROCE | 17.13 | - | - | - | - | 17.13 |
| 18 December 2015 - TSR | 17.13 | - | 29 | 3.0 | 0.81 | 9.69 |
| Save As You Earn scheme | ||||||
| 1 July 2012 | 5.23 | 4.18 | 35 | 3.5 | 0.24 | 1.77 |
| 1 July 2013 | 12.11 | 9.69 | 34 | 3.5 | 0.32 | 3.54 |
| 1 July 2014 | 16.62 | 13.30 | 33 | 3.5 | 1.64 | 5.03 |
| 1 July 2015 | 16.54 | 13.23 | 31 | 3.5 | 0.95 | 4.42 |
| 1 July 2016 | 14.98 | 11.98 | 35 | 3.5 | 0.20 | 4.28 |
28
easyJet Airline Company Limited
Notes to the accounts
18 Share incentive schemes (continued)
Share price is the closing share price from the last working day prior to the date of grant.
Exercise price for the Save As You Earn scheme is set at a 20% discount from the share price at grant date.
Expected volatility is based on historical volatility over a period comparable to the expected life of each type of option.
Levels of early exercises and forfeitures are estimated using historical averages.
The weighted average fair value of matching shares granted under the Share Incentive Plan during the year was £15.04 (2015: £16.69).
For grants under the Save As You Earn scheme after 30 September 2011, the dividend yield assumption is calculated based on the actual yield at the date the options were granted. For the options granted in 2012 to 2014, the dividend yield assumption was 2%, this increased to 2.75% in 2015 and to 3.5% in 2016.
19 Reconciliation of operating profit to cash generated from operations
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Operating profit | 384 | 490 |
| Adjustments for non-cash items: | | |
| Depreciation | 121 | 95 |
| Loss on disposal of property, plant and equipment | 3 | 1 |
| Amortisation of intangible assets | 12 | 13 |
| Share-based payments | 17 | 15 |
| Changes in working capital and other items of an operating nature: | | |
| Decrease/(increase) in trade and other receivables | 8 | (3) |
| Increase/(decrease) in trade and other payables | 111 | (159) |
| (Decrease)/increase in unearned revenue | (51) | 47 |
| Increase in provisions | 35 | 24 |
| Decrease in other non-current assets | 2 | 23 |
| Decrease in derivative financial instruments | (5) | (2) |
| Decrease in non-current deferred income | (12) | (15) |
| | 625 | 529 |
20 Reconciliation of net cash flow to movement in net cash
| | 1 October
2015
£ million | Exchange
differences
£ million | Net cash
flow
£ million | 30 September
2016
£ million |
| --- | --- | --- | --- | --- |
| Cash and cash equivalents | 650 | 95 | (32) | 713 |
| Money market deposits | 289 | 11 | (45) | 255 |
| | 939 | 106 | (77) | 968 |
| Bank loans | (198) | (20) | 98 | (120) |
| Finance lease obligations | (101) | (16) | 6 | (111) |
| | (299) | (36) | 104 | (231) |
| Net cash | 640 | 70 | 27 | 737 |
29
easyJet Airline Company Limited
Notes to the accounts
21 Financial instruments
Carrying value and fair value of financial assets and liabilities
The fair values of financial assets and liabilities, together with the carrying value at each reporting date are as follows:
| 30 September 2016 | Amortisedcost | Held at fair value | Other £ million | Carrying value £ million | Fair value £ million | ||
|---|---|---|---|---|---|---|---|
| Loans and receivables £ million | Financial liabilities £ million | Fair value hedges^{(1)} £ million | Cash flow hedges £ million | ||||
| Other non-current assets | 102 | - | - | - | 19 | 121 | 121 |
| Trade and other receivables | 150 | - | - | - | 71 | 221 | 221 |
| Trade and other payables | - | (1,725) | - | - | (97) | (1,822) | (1,822) |
| Derivative financial instruments | - | - | 61 | 37 | - | 98 | 98 |
| Derivative financial instruments with group undertakings | - | - | (61) | - | - | (61) | (61) |
| Restricted cash | 7 | - | - | - | - | 7 | 7 |
| Money market deposits | 255 | - | - | - | - | 255 | 255 |
| Cash and cash equivalents | 713 | - | - | - | - | 713 | 713 |
| Borrowings | - | (231) | - | - | - | (231) | (237) |
| 30 September 2015 | Amortised cost | Held at fair value | Other £ million | Carrying value £ million | Fair value £ million | ||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Loans and receivables £ million | Financial liabilities £ million | Cash flow hedges £ million | Other £ million | ||||
| Other non-current assets | 85 | - | - | - | 38 | 123 | 123 |
| Trade and other receivables | 136 | - | - | - | 69 | 205 | 205 |
| Trade and other payables | - | (1,329) | - | - | (96) | (1,425) | (1,425) |
| Derivative financial instruments | - | - | (297) | - | - | (297) | (297) |
| Restricted cash | 12 | - | - | - | - | 12 | 12 |
| Money market deposits | 289 | - | - | - | - | 289 | 289 |
| Cash and cash equivalents | 650 | - | - | - | - | 650 | 650 |
| Borrowings | - | (299) | - | - | - | (299) | (304) |
For the financial instruments for which fair value is disclosed in the tables above, the fair value is classified as level 2 of the IFRS13 'Fair Value Measurement' fair value hierarchy. Level 2 is defined as being the fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) which are determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is classified as level 2.
Amounts disclosed in the 'Other' column are items that do not meet the definition of a financial instrument. They are disclosed to facilitate reconciliation of the carrying values of financial instruments to line items presented in the statement of financial position.
Fair value calculation methodology
The fair values of derivatives and financial instruments have been determined by reference to observable market prices where the instruments are traded, where available. Where market prices are not available, the fair value has been estimated by discounting expected future cash flows at prevailing interest rates and by applying year end exchange rates.
easyJet Airline Company Limited
Notes to the accounts
21 Financial instruments (continued)
Fair value of derivative financial instruments
| 30 September 2016 | Quantity million | Non-current assets £ million | Current assets £ million | Current liabilities £ million | Non-current liabilities £ million | Total £ million |
|---|---|---|---|---|---|---|
| Designated as cash flow hedges | ||||||
| US dollar | 2,311 | 56 | 152 | - | - | 208 |
| Euro | 1,700 | 14 | 107 | (67) | (29) | 25 |
| Swiss franc | 356 | - | - | (19) | (11) | (30) |
| South African rand | 428 | 3 | 1 | - | - | 4 |
| Jet fuel | 3 | 20 | 8 | (189) | (9) | (170) |
| Designated as fair value hedges | ||||||
| Cross currency interest rate swaps | 379 | 61 | - | (61) | - | - |
| 154 | 268 | (336) | (49) | 37 | ||
| 30 September 2015 | Quantity million | Non-current assets £ million | Current assets £ million | Current liabilities £ million | Non-current liabilities £ million | Total £ million |
| Designated as cash flow hedges | ||||||
| US dollar | 2,614 | 18 | 71 | (1) | (2) | 86 |
| Euro | 2,360 | 23 | 55 | (3) | (4) | 71 |
| Swiss franc | 329 | 2 | 2 | (1) | (1) | 2 |
| South African rand | 479 | - | - | - | - | - |
| Jet fuel | 3 | 1 | - | (363) | (94) | (456) |
| 44 | 128 | (368) | (101) | (297) |
For foreign currency forward exchange contracts, cross-currency interest rate swap contracts and foreign exchange swap contracts, quantity represents the nominal value of currency contracts held, disclosed in the contract currency. For jet fuel forward contracts, quantity represents contracted metric tonnes.
The hedged foreign exchange and jet fuel transactions are expected to occur on various dates within the next 24 months. The foreign exchange and jet fuel contracts are designated as cash flow hedges and the accumulated gains or losses deferred in the hedging reserve will be recognised in the income statement in the periods that the hedged transaction affects the income statement. This will be within 24 months of the end of the reporting period, except where the gain or loss is included in the initial amount recognised for the purchase of an aircraft in which case recognition will be over a period of up to 23 years in the form of depreciation of the purchased asset.
The group maintains cross-currency interest rate swap contracts as fair value hedges of the interest rate and currency risk on fixed rate debt issued by the group. The cross-currency interest rate swap contracts are designated and qualify as fair value hedges and changes in fair value are recorded in the income statement, together with the change in the fair value of the hedged liability.
The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements:
| 30 September 2016 | Gross amount £ million | Amount not set off £ million | Net amount £ million |
|---|---|---|---|
| Derivative financial instruments | 422 | (264) | 158 |
| Assets | (385) | 264 | (121) |
| Liabilities | 37 | - | 37 |
| 30 September 2015 | Gross amount £ million | Amount not set off £ million | Net amount £ million |
| Derivative financial instruments | 172 | (145) | 27 |
| Assets | (469) | 145 | (324) |
| Liabilities | (297) | - | (297) |
All financial assets and liabilities are presented gross on the face of the statement of financial position as the conditions for netting specified in IAS 32 'Financial Instruments Presentation' are not met.
easyJet Airline Company Limited
Notes to the accounts
22 Financial risk and capital management
All financial risk management activities are carried out at Group level according to policies approved by the Board of Directors of easyJet plc and are described in easyJet's published Annual report and accounts for the year ended 30 September 2016. The Company is exposed to the same financial risks as the Group.
The maturity profile of the Company's financial liabilities based on undiscounted gross cash flows and contractual maturities is as follows:
| At 30 September 2016 | Within 1 year £ million | 1-2 years £ million | 2-5 years £ million | Over 5 years £ million |
|---|---|---|---|---|
| Borrowings | 50 | 52 | 148 | - |
| Trade and other payables | 1,725 | - | - | - |
| Derivative contracts - receipts | (2,384) | (1,123) | (61) | - |
| Derivative contracts - payments | 2,394 | 1,086 | 54 | - |
| At 30 September 2015 | Within 1 year £ million | 1-2 years £ million | 2-5 years £ million | Over 5 years £ million |
| Borrowings | 58 | 52 | 161 | 52 |
| Trade and other payables | 1,329 | - | - | - |
| Derivative contracts - receipts | (2,193) | (1,667) | (73) | - |
| Derivative contracts - payments | 2,433 | 1,727 | 69 | - |
The maturity profile has been calculated based on spot rates for the US dollar, Euro, Swiss franc, South African rand and jet fuel at the close of business on 30 September each year.
Market risk sensitivity analysis
Financial assets and liabilities 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 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 in a cash flow hedge relationship held at the reporting date. The sensitivities are calculated based on all other variables remaining constant. The analysis is considered representative of easyJet's exposure over the next 12 month period.
The sensitivity analysis is based on easyJet's financial assets and liabilities and financial instruments held as at 30 September 2016.
The currency exchange rate analysis assumes a +/-10% change in both US dollar and Euro exchange rates.
The interest rate analysis assumes a 1% increase in interest rates over the next 12 months.
The fuel price analysis assumes a 10% increase in fuel price over the next 12 month.
32
easyJet Airline Company Limited
Notes to the accounts
22 Financial risk and capital management (continued)
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.
| At 30 September 2016 | Currency rates | Interest rates 1% increase £ million | Fuel price 10% increase £ million | |||
|---|---|---|---|---|---|---|
| US dollar +10%^{(1)} £ million | US dollar -10%^{(2)} £ million | Euro +10%^{(1)} £ million | Euro -10%^{(2)} £ million | |||
| Income statement impact: gain / (loss) | 26 | (21) | 10 | (8) | 6 | - |
| Impact on other comprehensive income: increase / (decrease) | 139 | (113) | - | - | - | 83 |
| At 30 September 2015 | Currency rates | Interest rates 1% increase £ million | Fuel price 10% increase £ million | |||
| --- | --- | --- | --- | --- | --- | --- |
| US dollar +10%^{(1)} £ million | US dollar -10%^{(2)} £ million | Euro +10%^{(1)} £ million | Euro -10%^{(2)} £ million | |||
| Income statement impact: gain / (loss) | 30 | (25) | 10 | (8) | 6 | - |
| Impact on other comprehensive income: increase / (decrease) | 109 | (89) | 24 | (20) | - | 79 |
(1) GBP weakened
(2) GBP strengthened
The market risk sensitivity analysis has been calculated based on spot rates for the US dollar, Euro and jet fuel at close of business on 30 September each year.
23 Leasing commitments
Commitments under operating leases
| Aircraft | Other | |||
|---|---|---|---|---|
| 2016 £ million | 2015 £ million | 2016 £ million | 2015 £ million | |
| Total commitments under non-cancellable operating leases due: | ||||
| Not later than one year | 192 | 142 | 2 | 3 |
| Later than one year and not later than five years | 612 | 338 | 6 | 5 |
| Later than five years | 187 | 35 | 2 | 4 |
| 991 | 515 | 10 | 12 |
The Company holds 100 aircraft (2015: 97 aircraft) under operating leases, including those with other group undertakings, with initial lease terms ranging from five to ten years. It is contractually obliged to carry out maintenance on these aircraft, and the cost of this is provided based on the number of flying hours and cycles operated. Further details are given in the critical accounting policies section of note 1.
Commitments under finance leases
| 2016 £ million | 2015 £ million | |
|---|---|---|
| Present value of minimum lease payments fall due as follows: | ||
| Not later than one year | 12 | 8 |
| Later than one year and not later than five years | 114 | 62 |
| Later than five years | - | 45 |
| 126 | 115 | |
| Future finance charges | (15) | (14) |
| 111 | 101 |
The Company holds five aircraft (2015: five aircraft) under finance leases with ten year initial terms. Further details are given in note 14.
33
easyJet Airline Company Limited
Notes to the accounts
24 Contingent liabilities
The Company is involved in a number of disputes and litigation which arose in the normal course of business. The likely outcome of these disputes and litigation cannot be predicted, and in complex cases reliable estimates of any potential obligation may not be possible.
Having reviewed the information currently available, management considers that the ultimate resolution of these claims, disputes and litigation is unlikely to have a material effect on the Company's results, cash flows or financial position.
At 30 September 2016 the Company had outstanding letters of credit, guarantees and performance bonds totalling £49 million (2015: £44 million), of which £38 million (2015: £33 million) expires within one year. The fair value of these instruments at each year end was negligible.
No amount is recognised in the statement of financial position in respect of any of these financial instruments as it is not probable that there will be an outflow of resources.
easyJet plc has given a formal undertaking to the Civil Aviation Authority to guarantee the payment and discharge of all liabilities of the Company. The guarantee is required for the Company to maintain its operating license under Regulation 3 of the Licensing of Air Carriers Regulations 1992.
easyJet plc has also issued guarantees in favour of the Company relating to:
- processing of credit card transactions;
- hedging transactions in derivative financial instruments;
- contractual obligations to Airbus SAS in respect of the supply of aircraft;
- repayment of borrowings financing the acquisition of aircraft;
- payment obligations for the lease of aircraft from lessors outside of the Group;
- bank letters of credit;
- $500m revolving credit facility; and
- brand licence agreement with easyGroup Limited (approved by the shareholders of easyJet plc on 10 December 2010).
On 7 January 2016, the UK Listing Authority approved a prospectus relating to the establishment of a £3,000 million Euro Medium Term Note Programme of easyJet plc, which is unconditionally and irrevocably guaranteed by easyJet Airline Company Limited.
Under this programme, on 9 February 2016 easyJet plc issued notes amounting to €500 million for a seven year term with a fixed annual coupon rate of 1.750%. On the same date an intercompany loan was issued by easyJet plc to easyJet Airline Company Limited for the same amount and under the same conditions. easyJet Airline Company Limited has entered into a cross currency interest rate swap to swap the EUR cash flows with a fixed interest rate to GBP cash flows with a floating interest rate.
Under this programme, on 18 October 2016 easyJet plc issued notes amounting to €500 million for a seven year term with a fixed annual coupon rate of 1.125%. On the same date an intercompany loan was issued by easyJet plc to easyJet Airline Company Limited for the same amount and under the same conditions. In November 2016 easyJet Airline Company Limited then entered into a cross currency interest rate swap to swap the EUR cash flows with a fixed interest rate to GBP cash flows with a floating interest rate.
25 Related party transactions
Transactions with easyJet Group undertakings are carried out on an arm's length basis. Outstanding balances are placed on intercompany accounts (note 13) with no specified credit period, are unsecured, and bear market rates of interest.
Significant transactions are as follows:
- dry lease and other operating costs for leasing aircraft;
- dry lease revenue from sub-leasing aircraft; and
- balance sheet hedges.
Charges for the years ended 30 September 2016 and 2015 are as follows:
| | 2016
£ million | 2015
£ million |
| --- | --- | --- |
| Charges to the Company | 265 | 270 |
| Charges by the Company | 59 | 50 |
34
35
easyJet Airline Company Limited
Notes to the accounts
25 Related party transactions (continued)
During the current year, amounts relating to aircraft life-limited parts were transferred at net book value to easyJet Switzerland SA totalling £2 million (2015: £9 million).
Amounts included in the income statement for the year ended 2016 due under the Brand Licence and other agreements with easyGroup Limited and others, detailed within note 26 to the Group accounts, amounted to £12.7 million (2015: £12.9 million). Royalty payments within this total were £11.7 million (2015: £11.7 million).
At 30 September 2016, £nil million (2015: £1 million) was included in trade and other payables in relation to the Brand Licence and other agreements.
On 9 February 2016 easyJet plc provided easyJet Airline Company Limited a loan of £379 million. The Loan is interest bearing, with an interest rate of LIBOR plus a margin. The loan is repayable within five working days of a written demand of repayment. At the same time easyJet plc entered into a cross-currency interest rate swap with easyJet Airline Company Limited, to convert €500 million with a fixed interest rate of 1.75% per annum to £379 million at a variable rate of LIBOR plus a margin, for a period consistent with the underlying loan.
On 18 October 2016 easyJet plc provided easyJet Airline Company Limited a loan of €500 million. The Loan is interest bearing, with a fixed interest rate of 1.125%. The loan is repayable within five working days of a written demand of repayment.
26 Ultimate controlling company
The Company's parent and ultimate controlling company is easyJet plc, incorporated in England and Wales, registered number 03959649.
The only group in which the results of the Company are consolidated is headed by easyJet plc, the Annual report and accounts of which can be obtained from easyJet plc, Hangar 89, London Luton Airport, Luton, Bedfordshire, LU2 9PF and at www.corporate.easyjet.com.