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The United Kingdom‘s Office of Fair Trading (―OFT‖) wrote to Ryanair in September 2010, advising that it intended to investigate Ryanair‘s minority stake in Aer Lingus. Ryanair objected on the basis that the OFT‘s investigation was time-barred. Ryanair contended that the OFT had the opportunity, which it missed, to investigate Ryanair‘s minority stake within four months from the European Commission‘s June 2007 decision to prohibit Ryanair‘s takeover of Aer Lingus. The OFT agreed in October 2010 to suspend its investigation pending the outcome of Ryanair‘s appeal against the OFT‘s decision that its investigation is within time. On July 28, 2011, the Competition Appeal Tribunal ruled that the OFT was not time barred when it attempted in September 2010 to open an investigation into Ryanair‘s 2006 acquisition of a minority non-controlling stake in Aer Lingus. Ryanair subsequently appealed the Competition Appeal Tribunal‘s decision. On November 24, 2011, the UK Court of Appeal ordered a stay of the OFT‘s investigation pending the Courts review of whether the OFT‘s investigation was time barred. On May 22, 2012, the UK Court of Appeal found that the OFT was not time barred to investigate Ryanair‘s minority stake in Aer Lingus in September 2010. Ryanair subsequently sought permission to appeal that ruling to the UK Supreme Court, but permission was refused.
Should this appeal, or any subsequent appeal to the UK Supreme Court be unsuccessful, Ryanair could suffer losses due to the negative impact on market prices of the forced sale of such a significant portion of Aer Lingus‘ shares. Ryanair believes that the enforcement of any such decision should be delayed until the outcome of Ryanair‘s appeal against the European Commission‘s February 2013 prohibition decision of Ryanair‘s 2012 offer for Aer Lingus, as described below, and the conclusion of any appeals against the UKCC‘s decision in the UK courts. However, it is possible that the UKCC will seek to enforce any such sell-down remedy at an earlier date.
On June 19, 2012, Ryanair made a third offer to acquire all of the ordinary shares of Aer Lingus it did not own at a price of €1.30 per ordinary share. The timing of the offer was influenced by: (i) the continued consolidation of European airlines, and more recently the International Airlines Group (the parent company of British Airways) takeover of British Midland International, where the No. 1 airline at Heathrow was allowed to acquire the No. 2; (ii) the additional capacity available at Dublin airport following the opening of Terminal 2 and the decline in traffic from 23.3 million passengers per annum in 2007 to 18.7 million in 2011, has resulted in Dublin airport operating at approximately 50% capacity; (iii) the change in the Irish government policy since 2006 in that the Irish government indicated that it had decided to sell its stake in Aer Lingus; (iv) the fact that under the terms of the bailout agreement provided by the European Commission, European Central Bank and the International Monetary Fund to Ireland, the Irish government committed to sell its stake in Aer Lingus; (v) the fact that the ESOT (Employee Share Ownership Trust), which at the time of the unsuccessful 2006 offer controlled 15% of Aer Lingus, had been disbanded since December 2010 and the shares distributed to the individual members, with the result that Ryanair‘s new offer was, in Ryanair‘s view, capable of reaching over 50% acceptance either with or without government acceptance; and (vi) the fact that Etihad, an Abu Dhabi based airline, had recently acquired a 3% stake in Aer Lingus and had expressed an interest in buying the government‘s 25% stake in Aer Lingus (the offer therefore provided Etihad or any other potential bidder the opportunity to purchase the government‘s stake).
Ryanair offered to keep Aer Lingus as a separate company, maintain the Aer Lingus brand, and to grow its traffic from 9.5 million to over 14.5 million passengers over a five year period post acquisition, by growing Aer Lingus‘ short haul traffic at some of Europe‘s major airports where Aer Lingus currently operates and Ryanair does not. Ryanair also intended to increase Aer Lingus‘ transatlantic traffic from Ireland, which has fallen in recent years, by investing in operations. If the offer was accepted, the Irish government would have received €173 million in cash. The offer of €1.30 per share represented a premium of approximately 38% over the closing price of €0.94 for Aer Lingus shares as of June 19, 2012. The offer was conditional on competition approval by the European Commission. However, on February 27, 2013, the European Commission prohibited the acquisition by Ryanair of the remaining share capital of Aer Lingus. Ryanair appealed this prohibition to the EU General Court on May 8, 2013. A judgment in this appeal is expected in 2015.
The available-for-sale financial asset balance sheet value of €260.3 million reflects the market value of the Company‘s stake in Aer Lingus as of March 31, 2014, as compared to a value of €221.2 million as of March 31, 2013. In accordance with the company‘s accounting policy, this investment is held at fair value. This investment is classified as available-for-sale, rather than as an investment in an associate, because the Company does not have the power to exercise any influence over Aer Lingus. The increase in the amount of the available for sale financial asset from €221.2 million at March 31, 2013 to €260.3 million at March 31, 2014 is comprised of a gain of €39.1 million, recognized through other comprehensive income, reflecting the increase in Aer Lingus‘ share price from €1.39 per share at March 31, 2013 to €1.64 per share at March 31, 2014. All impairment losses are required to be recognized in the income statement for investments in an equity instrument classified for available for sale and are not subsequently reversed, while gains are recognized through other comprehensive income. The investment had in prior periods been impaired to €0.50 per share.
The Company's determination that it does not have control, or even exercise a ―significant influence,‖
over Aer Lingus through its minority shareholding has been based on the following factors:
(i) Ryanair does not have any representation on the Aer Lingus Board of Directors; nor does it have a right to appoint a director;
(ii) Ryanair does not participate in Aer Lingus policy-making decisions; nor does it have a right to participate in such policy-making decisions;
(iii) There are no material transactions between Ryanair and Aer Lingus, there is no interchange of personnel between the two companies and there is no sharing of technical information between the companies;
(iv) Aer Lingus and its significant shareholder (the Irish government: 25.1%) have historically openly opposed Ryanair‘s investment or participation in the company;
(v) In 2007, 2009 and 2010, Aer Lingus refused Ryanair‘s attempt to assert its statutory right to requisition a general meeting (a legal right of any 5% shareholder under Irish law);
(vi) On April 15, 2011, the High Court in Dublin ruled that Aer Lingus was not obliged to accede to Ryanair‘s request that two additional resolutions (on the payment of a dividend and on payments to pension schemes) be put to vote at Aer Lingus‘ annual general meeting; and (vii) The European Commission has formally found that Ryanair‘s shareholding in Aer Lingus does not grant Ryanair ―de jure or de facto control of Aer Lingus‖ and that ―Ryanair‘s rights as a minority shareholder…are associated exclusively to rights related to the protection of minority shareholders‖ (Commission Decision Case No. COMP/M.4439 dated October 11, 2007). The European Commission‘s finding has been confirmed by the European Union's General Court which issued a decision on July 6, 2010 that the European Commission was justified to use the required legal and factual standard in its refusal to order Ryanair to divest its minority shareholding in Aer Lingus and that, as part of that decision, Ryanair‘s shareholding did not confer control of Aer Lingus (Judgment of the General Court (Third Chamber) Case No. T-411/07 dated July 6, 2010).
Historical Results Are Not Predictive of Future Results
The historical results of operations discussed herein may not be indicative of Ryanair‘s future operating performance. Ryanair‘s future results of operations will be affected by, among other things, overall passenger traffic volume; the availability of new airports for expansion; fuel prices; the airline pricing environment in a period of increased competition; the ability of Ryanair to finance its planned acquisition of aircraft and to discharge the resulting debt service obligations; economic and political conditions in Ireland, the U.K. and the EU; terrorist threats or attacks within the EU; seasonal variations in travel; developments in government regulations, litigation and labor relations; foreign currency fluctuations, the impact of the banking crisis and potential break-up of the euro; competition and the public‘s perception regarding the safety of low-fares airlines;
the value of its equity stake in Aer Lingus; changes in aircraft acquisition, leasing, and other operating costs;
flight interruptions caused by volcanic ash emissions or other atmospheric disruptions; flight disruptions caused by periodic and prolonged air traffic controller strikes in Europe; the rates of income and corporate taxes paid, and the impact of the financial and Eurozone crisis. Ryanair expects its depreciation, staff and fuel charges to increase as additional aircraft and related flight equipment are acquired. Future fuel costs may also increase as a result of the depletion of petroleum reserves, the shortage of fuel production capacity and/or production restrictions imposed by fuel oil producers. Maintenance expenses may also increase as a result of Ryanair‘s fleet expansion and replacement program. In addition, the financing of new Boeing 737-800 aircraft will increase the total amount of the Company‘s outstanding debt and the payments it is obliged to make to service such debt.
The cost of insurance coverage for certain third-party liabilities arising from ―acts of war‖ or terrorism increased dramatically following the September 11, 2001 terrorist attacks. Although Ryanair currently passes on increased insurance costs to passengers by means of a special ―insurance levy‖ on each ticket, there can be no assurance that it will continue to be successful in doing so. See ―Item 3. Key Information—Risk Factors—The 2001 Terrorist Attacks on the United States Had a Severe Negative Impact on the International Airline Industry.‖
RECENT OPERATING RESULTS
The Company‘s profit after tax for the quarter ended June 30, 2014 (the first quarter of the Company‘s 2014 fiscal year) was €196.8 million, as compared to €78.1 million for the corresponding period of the previous year. The Company recorded an increase in operating profit, from €103.3 million in the first quarter of the 2014 fiscal year to €231.8 million in the recently completed quarter. Total operating revenues increased from €1,342.2 million in the first quarter of 2014 to €1,495.7 million in the first quarter of 2015. The increase in operating profit was primarily due to a 9% increase in average fares and a stronger load factor (up 4 points to 86%) and a 2% increase in total operating expenses. Operating expenses increased from €1,238.9 million in the first quarter of 2014 to €1,263.9 million in the first quarter of 2015, due primarily to the 2% decrease in fuel costs and an increase in other operating costs associated with a higher level of activity in line with the growth of the airline. The Company‘s cash and cash equivalents, restricted cash and financial assets with terms of less than three months amounted to €4,483.3 million at June 30, 2014 as compared with €3,592.7 million at June 30, 2013.
The following discussion and analysis of Ryanair‘s financial condition and results of operations is based on its consolidated financial statements, which are included in Item 18 and prepared in accordance with IFRS.
The preparation of the Company‘s financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates.
The Company believes that its critical accounting policies, which are those that require management‘s most difficult, subjective and complex judgments, are those described in this section. These critical accounting policies, the judgments and other uncertainties affecting application of these policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered in reviewing the consolidated financial statements included in Item 18 and the discussion and analysis below. For additional detail on these policies, see Note 1, ―Basis of preparation and significant accounting policies,‖ to the consolidated financial statements included in Item 18.
As of March 31, 2014, Ryanair had €5.1 billion of long-lived assets, virtually all of which were aircraft. In accounting for long-lived assets, Ryanair must make estimates about the expected useful lives of the assets, the expected residual values of the assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate.