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Annual Report
and Accounts 2011

Principal risks and uncertainties

The risks and uncertainties described below are considered to have the most significant effect on easyJet’s business, financial results and prospects. This list is not intended to be exhaustive.

easyJet carries out a detailed risk management process, to ensure that risks are identified and mitigated where possible, although many remain outside our full control, for example adverse weather, pandemics, acts of terrorism, changes in government regulation and macroeconomic issues. A more detailed overview of the risk management process and internal control can be found in our Corporate Governance section.

The trend line highlighted represents the prevailing inherent risk trend being faced by easyJet. Inherent risk is assessed prior to the determination of all current mitigation.

 
Strategic impactRisk description and potential impactPrevailing inherent risk trendCurrent mitigation
NO COMPROMISE ON SAFETY 

Major safety incident / accident

Failure to prevent a major safety incident or deal with it effectively.

This could adversely affect our reputation, operational and financial performance.

Our number one priority is the safety of our customers and people. We operate a strong safety management system through:

  • Fatigue Risk Management System.
  • Incident reporting.
  • Safety Review Board.
  • Safety Action Group

Management and control system for our operations.

Weekly operations meetings and reporting.

Regular review by the Board of Directors.

We have response systems in place and provide training for crisis management; combined with full crisis management exercises performed at least three times a year.

Insurance is held which is believed to be in line with other airlines.

Security and terrorist threat or attack

Failure to prevent a major security related threat or attack from either internal or external sources or deal with it effectively.

This could adversely affect our reputation, operation and financial performance.

Our number one priority is the safety, including security, of our customers and people. We operate a strong safety management system as set out above.

We constantly ensure that regulations required by relevant governments are enforced. Crew are trained within the current guidelines.

We have response systems in place and provide training for crisis management; combined with full crisis management exercises performed at least three times a year.

Insurance is held which is believed to be in line with other airlines.

 
Strategic impactRisk description and potential impactPrevailing inherent risk trendCurrent mitigation
OPERATIONAL EXCELLENCE

Financial impact of mass disruption in peak seasonal months

A number of factors can lead to widespread disruption to our network, including epidemics / pandemics, forces of nature (extreme weather, volcanic ash, etc), acts of terrorism, union activity and strike action. Any widespread disruption could adversely effect our reputation, operation and financial performance.

If the widespread disruption occurred during our peak summer months then easyJet’s financial results would be significantly impacted. As load factors are also higher during this period, it would potentially take longer to recover from any significant disruption.

Processes in place to adapt to widespread disruption. A full crisis management exercise is performed at least three times a year and a business continuity programme is in place.

Significant analysis and senior management focus has resulted in additional crewing solutions being put into place to further recognise the external factors and volatility that impact the airline industry.

easyJet has a strong financial balance sheet allowing the Company to be in a strong position to withstand potential events that result in periods of reduced revenues.

Single fleet risk

easyJet is dependent on Airbus as its sole supplier for aircraft, with two aircraft types (A319 and A320). All Boeing 737’s are planned to be exited by the end of 2012

There are significant cost and efficiency advantages in a single fleet, however there are two main associated risks:

  • Technical or mechanical issues that could ground the full fleet or part of the fleet which could cause negative perception by the flying public
  • Valuation risks which crystallise on the ownership exit of the aircraft. The main exposure is with the A319 fleet, where we are reliant on the future demand for second-hand aircraft

The efficiencies achieved by operating a single fleet type are believed to outweigh the risks associated with the Company’s single fleet strategy.

A rigorous established maintenance programme is followed.

Constant reviews of the second-hand market and managing exit strategies for the aircraft. easyJet has a number of different options when looking at exit strategies.

IT system failure

easyJet is dependent on a number of key IT systems and processes operated at London Luton airport and other key facilities.

A loss of systems and access to facilities could lead to significant disruption and have an operational, reputational and financial impact.

A business continuity programme, including disaster recovery, is in place and will be further developed over the coming year. This covers alternative sites being available should there be a need to relocate at short notice due to loss of facilities.

Dependence on third-party service providers

easyJet has entered into agreements with third-party service providers for services covering a significant proportion of its operation and cost base.

Failure to adequately manage third-party performance would affect our reputation, operation and financial performance. Loss of these contracts, inability to renew or negotiate favourable replacement contracts could have a material adverse effect on future operating costs.

Processes are in place to manage third-party service provider performance.

Centralised procurement department that negotiates key contracts.

Most developed markets have suitable alternative service providers.

Industrial action

Large parts of the easyJet workforce are unionised. Similar issues exist at our key third-party service providers. If any action was taken this could impact on easyJet’s ability to maintain its flight schedule.

This could adversely effect our reputation, operation and financial performance.

Employee and union engagement takes place on a regular basis.

Significant analysis and senior management focus has resulted in additional crewing solutions being put into place that recognises the external factors and volatility that impact the airline industry.

 
Strategic impactRisk description and potential impactPrevailing inherent risk trendCurrent mitigation
External risks

Competition and industry consolidation

easyJet operates in competitive marketplaces against both flag carriers and other low-cost airlines.

Industry consolidation will affect the competitive environment in a number of markets.

This could cause a loss of market share and erosion of revenue.

Regular monitoring of competitor activity and potential impact of any consolidation activity.

Rapid response in anticipation of, and to, changes.

Regulator intervention

The airline industry is currently heavily regulated, with expected increased regulator intervention; this includes environmental, security and airport regulation in which charges are levied by regulatory decision rather than by commercial negotiation.

easyJet is exposed to various regulators across our network, which will increase as the Company grows geographically. This could have an adverse impact to our reputation, cost base and market share. An inadequate knowledge or misinterpretation of local regulations could result in fines or enforcement orders.

easyJet has a key role in influencing the future state of regulations.

A Regulatory Affairs Group coordinates the work and effort in this area.

REPUTATIONAL RISKS

Major shareholder / investor relationship issues

easyJet has a major shareholder (easyGroup Holdings Limited) controlling over 25% of ordinary shares.

Shareholder activism could adversely impact the reputation of the Company and cause a distraction to management.

easyJet does not own its company name or branding which is licensed from easyGroup IP Licensing. As for all brand licensees, the easyJet brand could be impacted through actions of the easyGroup or other easyGroup licensees.

Dedicated Investor Relations team, utilising a shareholder engagement programme.

Significant Board and Senior management time dedicated to engage with major shareholders.

Ineffective or non delivery of the business strategy

A number of key projects have been set up to deliver key elements of the strategy. If these projects do not deliver the benefits and cost savings planned we could fall short of our planned financial results.

Programme management office (PMO) and experienced project teams have been set up to oversee delivery and track the budget and benefits realisation of all projects.

Steering Group set up with full key senior management involvement to ensure monitoring, challenge and key decisions are being made at the appropriate level.

Information security

easyJet faces external and internal information security risks. The Company receives most of its revenue through credit cards and operates as an e-commerce business.

A security breach could result in a material adverse impact for the business and reputational damage.

Systems are secured and monitored against unauthorised access; this will receive continued focus.

Scanning software for fraudulent customer activity is monitored and controlled by the Revenue Protection team.

Bribery Act 2010

The Bribery Act 2010 came into force in April 2011. To date there are no precedents set in respect of how this will be enforced. As with all companies, if we were found to be in breach of the Act this could adversely affect us financially and reputationally.

easyJet has a strong ethical tone from the top.

Risks assessments have been completed and appropriate actions taken where necessary.

General awareness training has been provided, with additional targeted training given to higher risk groups.

 
Strategic impactRisk description and potential impactPrevailing inherent risk trendCurrent mitigation
END-TO-END CUSTOMER PROPOSITION

Missing optimisation opportunities for aircraft fleet and network portfolio

easyJet has a leading presence on the top 100 routes in Europe and positions at primary airports that are attractive to time sensitive consumers. easyJet manages the performance of its network by careful allocation of aircraft to routes and optimisation of its flying schedule.

If we fail to continue to optimise our network and fleet plan this will have a major impact on easyJet’s ability to grow and gain the required yield. In addition, poor planning of the correct number of aircraft to fly the schedule would have a critical impact on the Company’s costs and reputation.

A Network Portfolio Management Strategy is in place which looks to take a balanced approach to the route portfolio that we fly to ensure that we optimise each aircraft to get the best return for each time of day, each day of the week.

Route performance is monitored on a regular basis and operating decisions are made to improve performances where required.

Exposure to fuel price fluctuations and other macroeconomic shifts

Sudden and significant increases in jet fuel price and movements in foreign exchange rates would significantly impact fuel and other costs. Increases in fuel costs have a direct impact on the financial performance of the Company. If not mitigated, this could have a material adverse effect on financial performance.

easyJet’s business can also be affected by macroeconomic issues outside of its control such as weakening consumer confidence, inflationary pressure or instability of the euro. This could give rise to adverse pressure on revenue, load factors and residual values of aircraft.

Board approved hedging (jet fuel and currency) in place that is consistently applied. Policy is to hedge within a percentage band for rolling 24 month periods.

To provide protection, the Group uses a limited range of hedging instruments traded in the over the counter (OTC) markets, principally forward purchases, with a number of approved counterparties.

A strong balance sheet supports business through fluctuations in the economic conditions for the sector.

Regular monitoring of markets and route performance by our network and fleet management teams.

FINANCIAL DISCIPLINE

Financing and interest rate risk

All of the Group’s debt is asset related, reflecting the capital intensive nature of the airline industry.

Market conditions could change the cost of finance which may have an adverse effect on the financial performance.

Group interest rate management policy aims to provide certainty in a proportion of its financing.

Operating lease rentals are a mix of fixed and floating rates (currently 68% to 32%).

All on balance sheet debt floating rate, repriced up to six months.

None of the agreements contain financial covenants.

A portion of US dollar mortgage debt is matched with US dollar money market deposits.

Liquidity risk

The Group continues to hold significant cash or liquid funds as a form of insurance.

Lack of sufficient liquid funds could result in business disruption and have a material adverse effect on financial performance.

Board policy is to maintain an absolute minimum level of free cash and money market deposits.

Allows business to ride out downturns in business or temporary curtailment of activities (e.g. fleet grounding, security incident, extended industrial dispute at key supplier).

Credit risk

Surplus funds are invested in high quality short-term liquid instruments, usually money market funds or bank deposits.

Possibility of material loss arising in the event of non-performance of counterparties.

Cash is placed on deposit with institutions based upon credit rating with a maximum exposure of £100 million for AAA ratings.

Chris Kennedy

Chris Kennedy

Chief Financial Officer