annual report 2009 - Aer Lingus

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64 Financial Statements Aer Lingus Group Plc – Annual Report 2009Notes to the Consolidated Financial Statements [continued]3 Financial risk management3.1 Financial risk factorsThe Group’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and pricerisk), credit risk, liquidity risk and commodity price risk. The Group’s overall risk management programme focuses on the unpredictabilityof financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivativefinancial instruments to hedge certain risk exposures.Risk management is carried out by a central treasury department (group treasury) under policies approved by the board of directors.Group treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provideswritten principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interestrate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.(a) Market risk(i) Foreign exchange riskThe main currency exposures result from a deficit in US dollars and a surplus in sterling. A large proportion of the group treasuryfunction’s work in relation to foreign exchange rate risk relates to the management of the Group’s cashflow exposures. Significantcurrency exposures are managed for the current and next financial years on a selective hedging basis. The dollar deficit arises becausethe dollar costs for fuel and aircraft rentals, etc., exceed dollar sales in the US. The sterling surplus arises because UK sales exceedsterling costs. Profits are reduced by a stronger dollar and/or a weaker sterling.Additionally, significant currency exposure results from the US dollar capital commitments relating to the purchase of aircraft.Acquisition costs are increased by a stronger dollar.The group treasury function manages the following currency risk generating activities: cashflow exposures, non-cashflow incomestatement exposures and balance sheet exposures. The products used by the group treasury function in managing currency risk arepredominantly forward foreign exchange contracts.Currency risks are hedged on a selective hedging basis. The Group’s risk management policy targets a minimum of 50% cover for theseexposures for the current financial year and a minimum of 25% cover for the following financial year. In addition, a minimum of 50%of the committed flight equipment capital expenditure will be hedged when the commercial contract is signed. This minimum levelis actively reviewed in the context of the scale and delivery timescales for flight equipment.Based on the surplus in sterling for the year ended 31 December 2009, a 5% weakening of the EUR/GBP exchange rate over theyear end rate would result in a reduction in profit of €4.0m for the year. Based on the deficit in US dollars for the year ended31 December 2009, a 5% strengthening of the EUR/USD exchange rate over the year-end rate would result in a reduction in profitof €15.4m for the year.(ii) Interest rate riskThe Group is exposed to interest rate risk associated with its long-term funding requirements and its programme of surplus fundsinvestment. Higher interest rates increase the costs of gross debt and lower interest rates lower the returns from cash investments.Overall the Group is in a net cash position. Interest rate exposures on debt are managed by fixing interest rates or by placing matchinginvestments, which serve as natural hedges in relation to both interest rate and currency exposures on the debt. In addition to theseinvestments, the Group holds surplus cash, predominantly in euro, and therefore the major interest rate exposure the Group has is tomovements in the euro interest rate. This exposure is actively reviewed and managed.A 1% fall in interest rates based on net surplus cash throughout 2009 would reduce profits by €4.9m.
Financial Statements Aer Lingus Group Plc – Annual Report 2009653 Financial risk management [continued](iii) Commodity price riskThe Group’s fuel requirements expose the Group to the market volatility of jet fuel prices. The Group is subject to jet fuel price riskresulting from its operating activities. The volatility of jet fuel prices has been significant in recent years and can have a significant effecton the profitability of operations. The primary policy objective for the management of fuel price exposure in the Group is to reduce thevolatility of fuel costs and increase predictability of future fuel costs.Up to July 2009, the group treasury function managed the fuel price exposure associated with the Group’s trading activities on aselective hedging basis. This risk management policy targeted a minimum of 40% cover for fuel exposures for the current financial yearand a minimum of 20% for the following financial year. From July 2009, the Group introduced a systematic fuel hedging policy coveringthe following 2-year period. This systematic hedging policy targets specific cover levels for each of following 24 months on a rolling basis,ranging from 90% cover going into next month to 3% cover 24 months out. This generates average cover levels of approximately 60%for the near 12 month period (rolling year 1) and 20% for the following 12 months (rolling year 2). Under the Policy, the Group canderogate from this systematic hedging requirement, in event of unusual market conditions.The products used by the group treasury function in managing commodity price risk are predominantly commodity swaps.A US $10 increase in the price per tonne of jet fuel price in 2009 would have increased fuel costs by $5.0m(b) Credit riskCredit risk is managed on group basis. Credit risk arises from loans and receivables, derivative financial instruments, deposits andcash and cash equivalents with banks and financial institutions and trade and other receivables. The maximum exposure to credit riskis represented by the carrying amount of each financial asset.Group policy requires financial counterparties to hold minimum credit ratings from independent rating agencies. The appropriatenessand utilisation of Board approved credit limits are regularly monitored and reviewed in light of the commercial requirements of the Group.At 31 December 2009 the Group had a total credit exposure of €0.8bn relating to bonds, deposits and cash, which was spread over27 financial counterparties. Of this €0.7m was due to mature in 12 months. All approved counterparties have minimum short-term creditratings equivalent to P1 (Moody’s). The Group does not have any material credit risk arising from the aging of trade and other receivables.Following the downgrade of many financial institutions’ ratings in 2009, 8% of the total credit exposure of €0.8bn, was held with financialinstitutions, holding long-term credit ratings equivalent to AAA, AA1 or AA2 (Moody’s). 61% of the total credit exposure was held withfinancial institutions, holding long term-ratings equivalent to AA3/A1. The remaining 31% was held with financial institutions with longtermratings of A2 or A3 (Moody’s), mainly comprising deposits with maturity dates within one year.(c) Liquidity riskThe principal policy objective in relation to liquidity is to ensure that the Group has access at minimum cost, to sufficient liquidity toenable it to meet its obligations as they fall due and to provide adequately for contingencies. In implementing this policy, the Group isrequired to maintain, at all times, access to Board approved minimum requirements. In addition, this liquidity requirement, once drawn,must continue to be accessible for an agreed further period. Cash balances in excess of these levels are normally maintained in order toenable the Group to take advantage of commercial opportunities and withstand business shocks.The Group has long-term debt almost exclusively associated with aircraft acquisitions. All borrowing is undertaken by the group treasuryfunction. Group policy is to maintain, at all times, cash and/or committed facilities for a high proportion of the net forecasted borrowingrequirements for the following 12 months. Where borrowings are made to fund the acquisition of aircraft, policy requires at least 80% ofsuch borrowings must be from facilities that are committed for a period of not less than five years.
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annual report 2009
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Financial HighlightsFor the year en
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Chairman’s Statement Aer Lingus G
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Operating and Financial Review Aer
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Board of Directors Aer Lingus Group
Page 15 and 16: Corporate Social Responsibility Sta
Page 29 and 30: Directors’ Report Aer Lingus Grou
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Page 38 and 39: 36 Directors’ Report Aer Lingus G
Page 41 and 42: Remuneration Committee Report Aer L
Page 43 and 44: Remuneration Committee Report Aer L
Page 45 and 46: Independent Auditors’ Report Aer
Page 47 and 48: Financial Statements Aer Lingus Gro
Page 65: Financial Statements Aer Lingus Gro
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annual report 2009 - Aer Lingus

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