«Chief Executive‟s Report 9 Summary Operating and Financial Overview Directors‟ Report 15 Corporate Governance Report Report of the Remuneration ...»
2012: 29.8%). The balance sheet value of €260.3 million (2013: €221.2 million; 2012: €149.7 million) reflects the market value of this investment as at March 31, 2014. In accordance with the Company‘s accounting policy, this asset is held at fair value with a corresponding adjustment to other comprehensive income following initial acquisition. Any impairment losses that arise are recognised in the income statement and are not subsequently reversed. Any cumulative loss previously recognised in other comprehensive income is transferred to the income statement once an impairment is considered to have occurred.
The movement on 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, recognised through other comprehensive income, reflecting the increase in the share price of Aer Lingus from €1.39 per share at March 31, 2013 to approximately €1.64 per share at March 31, 2014.
This investment is classified as available-for-sale, rather than as an investment in an associate, because the Company does not have control or the power to exercise ―material influence‖ over the entity. 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, in particular:
Ryanair does not have any representation on the Aer Lingus Board of Directors, nor does it have a right to appoint a director;
Ryanair does not participate in Aer Lingus‘ policy-making decisions, nor does it have a right to participate in such policy-making decisions;
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;
Aer Lingus and its significant shareholder (the Irish government: 25.1%) have openly opposed Ryanair‘s investment or participation in the company;
In August 2007, September 2007 and November/December 2011, Aer Lingus refused Ryanair‘s attempt to assert its statutory right to requisition a general meeting (a legal right of any 10% shareholder under Irish law);
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;
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); and On February 27, 2013 the European Commission prohibited Ryanair‘s bid made on June 19, 2012, to acquire the entire share capital of Aer Lingus on the claimed basis that it would be incompatible with the EU internal market. Ryanair appealed this decision to the EU General Court on May 8, 2013. The judgment of the EU General Court is expected in 2015 and may affirm or annul the decision of the European Commission.
Following the European Commission‘s decision to prohibit its offer for Aer Lingus, Ryanair actively engaged with the Competition Commission‘s investigation of the minority stake. On August 28, 2013, the UK Competition Commission (UKCC) issued its final decision in which it found that Ryanair‘s shareholding ―gave it the ability to exercise material influence over Aer Lingus‖ and ―had led, or may be expected to lead, to a substantial lessening of competition in the markets for air passenger services between Great Britain and Ireland‖. As a result of its findings, the UKCC ordered Ryanair to reduce its shareholding in Aer Lingus to below 5 per cent of Aer Lingus‘ issued ordinary shares. Ryanair appealed the UKCC‘s final decision to the Competition Appeal Tribunal (CAT) on September 23, 2013. The CAT rejected Ryanair‘s appeal on March 7,
2014. On April 3, 2014, Ryanair applied for permission to appeal the CAT‘s judgment to the UK Court of Appeal. Should Ryanair‘s permission to appeal, the appeal itself or any subsequent appeal to the UK Supreme Court be refused, 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, 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 selldown remedy at an earlier date.
5 Derivative financial instruments
The Audit Committee of the Board of Directors has responsibility for monitoring the treasury policies and objectives of the Company, which include controls over the procedures used to manage the main financial risks arising from the Company‘s operations. Such risks comprise commodity price, foreign exchange and interest rate risks. The Company uses financial instruments to manage exposures arising from these risks. These instruments include borrowings, cash deposits and derivatives (principally jet fuel derivatives, interest rate swaps, cross-currency interest rate swaps and forward foreign exchange contracts). It is the Company‘s policy that no speculative trading in financial instruments takes place.
The Company‘s historical fuel risk management policy has been to hedge between 70% and 90% of the forecast rolling annual volumes required to ensure that the future cost per gallon of fuel is locked in. This policy was adopted to prevent the Company being exposed, in the short term, to adverse movements in global jet fuel prices. However, when deemed to be in the best interests of the Company, it may deviate from this policy. At March 31, 2014, the Company had hedged approximately 90% of its estimated fuel exposure for the year ending March 31, 2015. At March 31, 2013, the Company had hedged approximately 90% of its estimated fuel exposure for the year ending March 31, 2014. At March 31, 2012, the Company had hedged approximately 90% of its estimated fuel exposure for the year ending March 31, 2013.
Foreign currency risk in relation to the Company‘s trading operations largely arises in relation to noneuro currencies. These currencies are primarily U.K. pounds sterling and the U.S. dollar. The Company manages this risk by matching U.K. pounds sterling revenues against U.K. pounds sterling costs. Surplus U.K. pounds sterling revenues are sometimes used to fund forward foreign exchange contracts to hedge U.S. dollar currency exposures that arise in relation to fuel, maintenance, aviation insurance, and capital expenditure costs and excess U.K. pounds sterling are converted into euro. Additionally, the Company swaps euro for U.S. dollars using forward currency contracts to cover any expected U.S. dollar outflows for these costs. From time to time, the Company also swaps euro for U.K. pounds sterling using forward currency contracts to hedge expected future surplus U.K. pounds sterling. From time to time the Company also enters into cross-currency interest rate swaps to hedge against fluctuations in foreign exchange rates and interest rates in respect of U.S. dollar denominated borrowings.
The Company‘s objective for interest rate risk management is to reduce interest-rate risk through a combination of financial instruments, which lock in interest rates on debt and by matching a proportion of floating rate assets with floating rate liabilities. In addition, the Company aims to achieve the best available return on investments of surplus cash – subject to credit risk and liquidity constraints. Credit risk is managed by limiting the aggregate amount and duration of exposure to any one counterparty based on third-party marketbased ratings. In line with the above interest rate risk management strategy, the Company has entered into a series of interest rate swaps to hedge against fluctuations in interest rates for certain floating rate financial arrangements and certain other obligations. The Company has also entered into floating rate financing for certain aircraft, which is matched with floating rate deposits. Additionally, certain cash deposits have been set aside as collateral for the counterparty‘s exposure to risk of fluctuations on certain derivative and other financing arrangements with Ryanair (restricted cash). At March 31, 2014, such restricted cash amounted to €13.3 million (2013: €24.7 million; 2012: €35.1 million). Additional numerical information on these swaps and on other derivatives held by the Company is set out below and in Note 11 to the consolidated financial statements.
The Company utilises a range of derivatives designed to mitigate these risks. All of the above derivatives have been accounted for at fair value in the Company‘s balance sheet and have been utilised to hedge against these particular risks arising in the normal course of the Company‘s business. All have been designated as hedging derivatives for the purposes of IAS 39 and are fully set out below.
Derivative financial instruments, all of which have been recognised at fair value in the Company‘s
balance sheet, are analysed as follows:
(a) Additional information in relation to the above interest rate swaps and forward currency contracts (i.e. notional value and weighted average interest rates) can be found in Note 11 to the consolidated financial statements.
€31.0 million interest rate swap financial liabilities falling due within one year, includes €8.5 million derivative (b) financial liabilities, falling due within one year, in respect of cross currency interest rate swaps (see Note 11 to the consolidated financial statements).
€17.1 million commodity forward contracts relate solely to jet fuel derivative financial assets (see Note 11 of the (c) consolidated financial statements).
Interest rate swaps are primarily used to convert a portion of the Company‘s floating rate exposures on borrowings and operating leases into fixed rate exposures and are set so as to match exactly the critical terms of the underlying debt or lease being hedged (i.e. notional principal, interest rate settings, re-pricing dates). These are all designated in cash-flow hedges of the forecasted variable interest payments and rentals due on the Company‘s underlying debt and operating leases and have been determined to be highly effective in achieving offsetting cash flows. Accordingly, no ineffectiveness has been recorded in the income statement relating to these hedges in the current and preceding years.
The Company also utilises cross currency interest rate swaps to manage exposures to fluctuations in foreign exchange rates of U.S. dollar denominated floating rate borrowings, together with managing the exposures to fluctuations in interest rates on these U.S. dollar denominated floating rate borrowings. Cross currency interest rate swaps are primarily used to convert a portion of the Company‘s U.S. dollar denominated debt to euro and floating rate interest exposures into fixed rate exposures and are set so as to match exactly the critical terms of the underlying debt being hedged (i.e. notional principal, interest rate settings, re-pricing dates).
These are all designated in cash-flow hedges of the forecasted U.S. dollar variable interest payments on the Company‘s underlying debt and have been determined to be highly effective in achieving offsetting cash flows.
Accordingly, no ineffectiveness has been recorded in the income statement relating to these hedges in the current year.
Foreign currency forward contracts may be utilised in a number of ways: forecast U.K. pounds sterling and euro revenue receipts are converted into U.S. dollars to hedge against forecasted U.S. dollar payments principally for jet fuel, insurance, capital expenditure and other aircraft related costs. These are designated in cash-flow hedges of forecasted U.S. dollar payments and have been determined to be highly effective in offsetting variability in future cash flows arising from the fluctuation in the U.S. dollar to U.K. pounds sterling and euro exchange rates for the forecasted U.S. dollar purchases. Because the timing of anticipated payments and the settlement of the related derivatives is very closely coordinated, no ineffectiveness has been recorded for these foreign currency forward contracts in the current or preceding years (the underlying hedged items and hedging instruments have been consistently closely matched).
The Company also utilises jet fuel forward contracts to manage exposure to jet fuel prices. These are used to hedge the Company‘s forecasted fuel purchases, and are arranged so as to match as closely as possible against forecasted fuel delivery and payment requirements. These are designated in cash-flow hedges of forecasted fuel payments and have been determined to be highly effective in offsetting variability in future cash flows arising from fluctuations in jet fuel prices. No ineffectiveness has been recorded on these arrangements in the current or preceding years.
The European Union Emissions Trading System (EU ETS) began operating for airlines on January 1,
2012. In order to manage the risks associated with the fluctuation in the price of carbon emission credits, the Company entered into swap arrangements to fix the cost of a portion of its forecasted carbon emission credit purchases. The Company can forecast its requirement for carbon credits as they are directly linked to its consumption of jet fuel. These instruments have been designated in cash-flow hedges and no ineffectiveness has been recorded in the current year.