2007/082006/072005/062004/052003/042002/03Key Documents

Jet2 plc Company Reports

Business and Financial Review

The Group’s financial performance for the year to 31 March 2016 is reported in line with International Financial Reporting Standards (“IFRS”), as adopted by the EU, which were effective at 31 March 2016.

Group Financial Performance 2015/16

A strong summer season for the Leisure Travel business was followed by a better than expected winter, as customer demand for our flight-only and package holidays remained buoyant. Net ticket yields and average package holiday prices showed healthy increases, resulting in the business increasing its revenue by 12% to £1,405.4m (2015: £1,253.2m).

An improved forward booking position entering summer 2015, consistent demand and the continuing growth of our higher margin package holidays product as a percentage of overall sales all contributed to the Group’s improved operating profit of £105.0m, more than double the previous year’s underlying result of £50.2m. On a statutory basis, operating profit increased by 216% from £33.2m, after an exceptional charge of £17.0m in the previous year.

Net financing costs of £0.8m (2015: income £7.0m) included a net £1.3m charge in relation to the revaluation of foreign currency and pre-delivery payment loan balances held at the reporting date (2015: income £4.8m).

As a result, the Group achieved a statutory profit before tax of £104.2m (2015 Underlying: £57.2m). Group EBITDA increased by 59% to £193.7m (2015 Underlying: £121.5m).

The Group’s effective tax rate of 15% (2015: 18%) was lower than the headline rate of corporation tax of 20% due to certain deferred tax liability reductions. Earnings per share increased by 90% to 60.22p (2015 Underlying: 31.72p). Overall basic earnings per share increased by 169% from 22.42p after adjusting for the exceptional provision of £17.0m charged in the previous year.

Net cash generated from operating activities was £243.9m (2015: £116.1m) out of which capital expenditure of £213.5m (2015: £76.4m) was incurred. The Group generated a net cash inflow(a) of £109.2m (2015: £39.1m), resulting in a year end cash position, including money market deposits, of £412.0m (2015: £302.8m). The Group continues to be funded, in part, by payments received in advance of travel from its Leisure Travel customers, which at the reporting date amounted to £385.8m (2015: £318.7m).

Of these customer advances, £68.5m (2015: £97.5m) was considered restricted by the Group’s merchant acquirers as collateral against a proportion of forward bookings paid for by credit or debit card. These balances become unrestricted once our customers have travelled. The business also had £5.2m (2015: £51.7m) of cash placed with various counterparties in the form of margin calls to cover out-of-the-money hedge instruments.

The Group is continuing to meet the UK Civil Aviation Authority’s required levels of “available liquidity”, which is defined as free cash plus available undrawn banking facilities.

Total shareholders’ equity increased by £161.5m (2015: reduced £24.4m) as profit after tax of £88.8m (2015: £32.8m) was augmented by favourable movements in the cash flow hedging reserve, a result of the reversal of adverse net mark-to-market balances on jet fuel and currency forward contracts held at the end of the previous financial year.

During the financial year the Group entered into an agreement with Boeing to purchase 30 new Boeing 737-800NG aircraft to meet its programme of aircraft fleet replacement and planned Leisure Travel growth. These aircraft have an approximate list price of USD 2.9 billion, however the Group has negotiated significant discounts from this price. The aircraft will be funded through a combination of internal resources and debt and will be delivered between September 2016 and April 2018.

The Group is also required by the UK Civil Aviation Authority to maintain certain levels of “available liquidity”, which is defined as free cash plus available undrawn banking facilities.

Total shareholders’ equity reduced by £24.4m as profit after tax of £32.8m (2014: £35.9m) was exceeded by adverse movements in the cash flow hedging reserve, a result of the net mark-to-market movements on jet fuel and currency forward contracts.

Business & Financial Review: Leisure Airline

Leisure Travel – Leisure Airline

The Group’s Leisure Travel business which incorporates Jet2.com, our leading leisure airline and Jet2holidays, our ATOL licensed package holidays operator, takes customers on holiday to the Mediterranean, the Canary Islands and to European Leisure Cities.

Planning efforts were concentrated on improving flight departure times, our hotel product and increasing the mix of package holiday customers, resulting in a 22% increase to 1.22m customers (2015: 1.00m) choosing a full package holiday, 40% of total departing passengers (2015: 33%). The remaining 1.81m departing passengers chose a flight only (2015: 2.02m).

The average load factor for the year of 92.5% (2015: 91.2%) was supplemented by a 14% increase in net ticket price per passenger to £91.11 (2015: £79.87). The average price of a package holiday increased by 4% to £616.30 (2015: £590.69), reflecting not only increased flight ticket yields but also an increasing number of customers choosing 4 and 5-star packages as the variety of hotels we offer continues to grow.

Non-ticket retail revenue per passenger increased by 3% to £31.98 (2015: £30.91). This revenue stream, which is primarily discretionary in nature, continues to be optimised through our customer contact programme as we focus on Pre-Departure Sales (principally hold bags and advanced seat assignment) and In-Flight Sales (pre-ordered meals, drinks, snacks, cosmetics and perfumes) and ancillary products (car hire and travel insurance).

As a result, total Leisure Travel revenue grew by 15% to £1,261.4m (2015: £1,101.5m) whilst operating profit grew 112% to £99.6m (2015 Underlying: £46.9m).

The delivery of a smooth customer booking journey is of paramount importance to the business whichever booking channel is chosen. As customers’ online browsing and purchasing habits evolve, our websites and mobile applications are continuously developed and refined by our team of software developers to ensure that the search and booking experience is as effortless and efficient as possible, whether the customer uses a PC, tablet or mobile phone. Approximately half of our package holidays are sold online via Jet2holidays.com, whilst 99% of our flight-only seats are booked on the Jet2.com website.

Our customer contact centre in Leeds employs over 300 sales and customer service advisers. Demanding service levels are maintained to ensure that customers’ calls are answered swiftly. Our sales colleagues are trained to handle calls in a friendly and informative manner and to have an intimate knowledge of our products, so that customers’ individual needs can be catered for and to maximise opportunities for sales conversion. Currently 17% of package holiday bookings are made through our call centre. Once a booking has been made, our pre-travel services team takes over, answering queries and ensuring that customers are updated with post-booking information or provided with any further pre-travel assistance as required.

A third of our package holiday sales come through high street travel agents, who are considered very valuable and important distribution partners for the business. Our packages are sold by major travel agent chains, key multiple retailers, homeworker companies and independent agents.

As it has grown, our Leisure Travel business has continually invested in marketing and in improving customer service standards. Jet2holidays benefits from its breadth of hotel choice and a family-focused approach, which includes free child places at hundreds of hotels and a consistently low deposit. Repeat bookings from satisfied customers and our continuing investment in product and in marketing has paid dividends with bookings for summer 2016 on course to surpass last year, whilst at the same time brand awareness continues to improve as a result of our broad marketing strategy.

During the year, Jet2.com expanded its route network, operating a total of 227 routes (2015: 217). Jet2CityBreaks, which offers a packaged flight and hotel product in leading European Leisure Cities proved popular as increasing numbers of customers took the opportunity to visit some of Europe’s most exciting city destinations.

Investment in our attractive product and depth of service offering, together with the growing opportunity to cross-sell between flight-only and package holiday customers means the business remains confident of delivering its growth plans.

Business & Financial Review: Distribution & Logistics

Distribution & Logistics

The Group’s distribution business, Fowler Welch, is one of the UK’s leading temperature-controlled logistics providers to the food industry supply chain, serving retailers, processors, growers and importers across its network of nine distribution sites. A full range of added value services is provided, including storage, case-level picking and the packing of fruits, together with an award winning national distribution network.

Revenue reduced by 5% to £144.0m (2015: £151.7m) primarily due to lower fuel costs which were passed onto customers. The business performed well operationally as varying seasonal volumes were handled efficiently. Further gains were made as a result of a concentrated focus on fleet utilisation. In addition, Fowler Welch’s joint venture, Integrated Service Solutions, which stores, ripens and packs stone-fruit and exotic and organic fruits at Teynham, Kent contributed positively to the overall result.

Fowler Welch’s Kent operations, at its Teynham and Paddock Wood distribution centres, sit in the heart of that county’s fruit growing areas and their proximity to both the port of Dover and the Channel Tunnel make them ideally positioned to provide packing and distribution services for local growers and for fruit and produce imported from across the Channel. The 50,000 square foot extension of the Teynham depot has now been completed adding much needed capacity for further revenue opportunities and the expansion of our joint venture fruit packing business.

Spalding, our key distribution centre in the major growing county of Lincolnshire, delivered improved underlying revenue(a). This increase was generated both through existing and new customer volume growth.

The Heywood “Hub”, Fowler Welch’s 500,000 square foot ambient (non-temperature-controlled) shared user storage and distribution centre, located near Bury, Greater Manchester, saw underlying revenue(a) decrease by 17% year-on-year, reflecting declines within its customer base. Following a review of the site’s product profile and increased sales efforts this valuable site is attracting further new customers.

The Hilsea depot, which is located near to Portsmouth International Port, had a strong year with encouraging underlying revenue(a) growth of 9.0%. New contract wins and growth with existing customers underlined the strength of the range of warehousing, consolidation and distribution services offered.

The dedicated site at Desborough, Northamptonshire, providing distribution services to a major confectionery manufacturer, renewed its contract for a further three years. Investment in state of the art trailers which can be automatically unloaded or used as a conventional trailer will add value for both this customer and Fowler Welch over the new three year term. Our regional distribution sites at Washington, Tyne and Wear and at Newton Abbot, Devon provide direct store delivery services on behalf of leading retailers to over 100 stores every day.

Continued focus on building a quality revenue pipeline and developing creative added value services for its customers remains fundamental to Fowler Welch’s growth strategy. Following the reporting date, the business completed and successfully implemented a 10 year commercial venture to provide a transport and distribution solution for Dairy Crest Limited. This has increased the core vehicle fleet of Fowler Welch by approximately 10%.

Based at Dairy Crest’s National Distribution Centre at Nuneaton near Coventry, a new region for the business, we expect the operation to progressively expand using Dairy Crest’s products as the initial volume, as it is integrated into the Fowler Welch distribution network.

With its strong and committed team, an enhanced national network of sites and the expertise and flexibility to operate effectively in both the temperature-controlled (chill and produce) and ambient arenas, Fowler Welch has a strong operational foundation. The continued addition of better quality revenue streams, supplemented by added value, innovative supply services to key customers, such as those recently implemented for Dairy Crest and our joint venture fruit packing business, provide us with continued confidence for the company’s future profitable growth.

Principal Risks and Uncertainties

The Group’s strategy is to grow its business through a combination of organic expansion and, if appropriate, carefully planned acquisitions in areas related to its existing businesses and markets. This section describes the principal risks and uncertainties which may affect the Group’s business operations, its reputation, financial results and strategic objectives. This list is not intended to be exhaustive.

Safety and security

The safety and security of our customers and our colleagues is a key priority. Failure to prevent or deal effectively with a major safety incident, including a security related threat, could adversely affect the Group’s reputation, and operational and financial performance.

The assessment of health and safety risks in the hotels we feature, as well as the other holiday components we package, is part of our normal package holiday business routines; this is reflected in our package holiday Safety Management System. Supplier compliance is reviewed prior to any hotel being placed on sale or occupied by any Leisure Travel customer, and a compliance programme is in place for all featured hotels, including auditing and ongoing reviews of the safety of the programme. A Health and Safety Steering Committee reviews all activity undertaken. It reports to the Chief Executive Officer of Jet2holidays Limited, and recommends the health and safety strategy implemented by the Board.

Our airline business operates a robust Safety Management System based upon a ‘Just Culture’, which provides an environment where all colleagues are encouraged to report and submit safety related information in a timely manner. This enables proactive assessment and mitigation of risk associated with our operation, escalated via regular internal safety steering committees and action groups.

Compliant and effective Safety Management System oversight is provided by the appropriate use of occurrence report investigations, flight data management, risk management, health and safety and aviation security inspections, together with quality assurance audits across our operations.

All airline safety and security matters are managed by our Safety, Compliance and Assurance group which reports directly to the Accountable Manager (the Managing Director of Jet2.com Limited) and the Safety Review Board. The board meets quarterly, monitors trends and identifies any areas of risk that require closer attention.


The Group is impacted by competitor activity in each business area.

As a result, the Leisure Travel business will continue to focus on its core principles, which are: to be family friendly; to offer value for money; and to give great customer service. It will also continue to focus on customer driven scheduling of flights on popular routes to leisure destinations in order to maximise Load Factor, Net Ticket Yield, Non-ticket Revenue and Average Package Holiday Price, whilst ensuring that our great value proposition remains attractive to our customers.

We continue to work alongside and invest in relationships with key hotel suppliers to ensure the availability of accommodation that meets our customers’ requirements. The operation will continue to benefit from a number of sales channels – taking bookings through its Jet2holidays.com and Jet2.com websites, its call centre, travel agencies and via tour operators – and from non-scheduled aircraft utilisation through its passenger and freight charter activities.

In the Distribution & Logistics business, the loss of a substantial customer is the largest financial risk facing the company. This is mitigated by Fowler Welch’s focus on developing a pipeline of future business opportunities, together with the achievement of high service levels, careful cost control and added value, innovative supply services, in the chilled, produce and ambient market sectors.

IT system dependency and information security

The Group is reliant on a number of key IT systems, their scalability and ongoing development. The Leisure Travel business is dependent on the internet and receives the majority of its revenues through online debit and credit card transactions. Further revenues are received at departure airports and on our flights via Chip & PIN-secured devices. The primary IT risks to the Group are a loss of systems, unauthorised access to facilities, or a security breach, which could lead to disruption that has an operational, reputational and/or financial impact. To mitigate these risks and to ensure any potential loss of functionality is minimised, the Group regularly tests its disaster recovery plan in relation to its IT infrastructure, which would be activated should a loss of functionality occur. The Group also operates a formal IT Change Management process that directs and controls changes to its data processing environment. In addition, the Group is engaged in regular information security reviews and updates its policies and procedures in line with industry best practices and standards and business requirements. The Group has continued to strengthen its cyber threat mitigation by proactively educating its colleagues of the risks. This ensures that the Group has in place systems, controls and processes to protect its network from external and internal security threats. The Group also achieved PCI DSS attestation of compliance in March 2016.

Exposure to fluctuations in fuel prices and exchange rates

The cost of fuel remains a material element of the cost base of the Leisure Travel business, and the effective management of fuel price variation will continue to be important. The Group’s strategy is to manage fuel price risk, via forward contracts, with the aim of limiting exposure to sudden increases in oil prices, whilst ensuring the business remains competitive. The Distribution & Logistics business is not directly affected by such price rises, since contracts allow for increases to be passed on to its customers. The Group, particularly the Leisure Travel business, incurs considerable operational costs which are euro and US dollar denominated and is therefore exposed to sudden movements in exchange rates. To protect against such fluctuations, the Group uses forward currency contracts with approved counterparties. Further information on hedging, which is our key mitigation to these risks, is contained within the treasury management section on pages 19 to 20 and in note 22 to the consolidated financial statements.

Economic conditions

Whilst we believe that UK consumers regard their summer holiday as a very important element of the annual household budget, ultimately, economic conditions are likely to have an impact on the level of demand for the Group’s Leisure Travel services. To mitigate this risk, the Group will continue to focus on serving its customers’ demand for great value package holidays in, and flights to, leisure destinations in the Mediterranean, the Canary Islands and European Leisure Cities.

Environmental risks

As evidenced in recent years, the Leisure Travel business is at potential risk of disruption from the force of nature, such as extreme weather conditions and volcanic activity, and through other external factors, such as: acts of terrorism; epidemics; pandemics; and strike action. The business mitigates these risks by regularly updating a carefully planned response to be implemented by a team of experts should there be significant disruption to our Leisure Travel activities. The Group also maintains prudent levels of liquid funds to enable the business to continue to operate through a period of sustained disruption. In addition, the investment in our commercial centre in Leeds means that we have the ability to run our business from more than one site, which supports our established Business Continuity Plan.

Government policy and regulatory intervention

The airline industry is heavily regulated, with recent intervention including, most notably, passenger compensation claims in relation to flight delays and cancellations under Regulation (EC) No 261/2004.

There is a continuing risk that the imposition of taxes and charges, which are levied by regulatory decision rather than by commercial negotiation at levels in excess of economic cost, may result in reduced passenger demand or adversely impact our cost base. In this regard, the Group will maintain its focus on delivering a great value package holiday product, the careful management of its route network, on-time performance and will continue to engage with policy setters and regulators to encourage legislation that is fit for purpose.

Treasury management

Credit risk

The Group is exposed to credit risk to the extent of nonperformance by its counterparties in respect of financial assets receivable. However, the Group has policies and procedures in place to ensure such risk is limited by placing credit limits on each counterparty. The Group regularly monitors such limits and defaults by counterparties, incorporating this information into credit risk controls. The Group does not currently hold any collateral to mitigate this exposure.

Liquidity risk

Liquidity risk reflects the risk that the Group will have insufficient funds to meet its financial obligations as they fall due. As at the year end, the Group had significant cash balances, together with an unutilised banking facility, for which all covenants had been met. The Group’s strategy for managing liquidity risk is to maintain cash balances in an appropriately liquid form and in accordance with approved counterparty limits, while securing the continuity and flexibility of funding through the use of committed banking facilities and specialist aircraft finance. Additionally, short-term cash flow risk in relation to margin calls in respect of fuel and foreign currency hedge positions is minimised through diversification of counterparties together with appropriate credit thresholds. The Group seeks to match long-term assets with long-term liabilities wherever possible. In addition, a regular assessment is made of future banking facility covenant compliance and headroom.

Fuel, currency and carbon hedging

The Group utilises foreign exchange forward contracts and monthly fuel swaps to hedge its exposure to movements in euro and US dollar exchange rates, and its exposure to jet fuel price movements that arise through its Leisure Travel activities. The Group’s Hedging Policy permits the use of such instruments to manage fuel price and currency risk only. The Board reviews and agrees this policy for managing each of these risks at least annually; these policies have been consistent during the year. It is the Group’s policy that no trading in financial instruments shall be undertaken for speculative purposes.

Details on derivative transactions outstanding at the year end relating to forward currency contracts and aviation fuel swaps are detailed in note 22 to the consolidated financial statements.

The policy in relation to fuel and foreign currency hedging is summarised below:

Aviation fuel price risk

The Group’s policy is to forward cover up to 90% of future fuel requirements, up to 30 months in advance. Further information in relation to aviation fuel swaps held is given in note 22 to the consolidated financial statements. As at 31 March 2016, the Group had hedged substantially all of its forecast fuel requirements for the 2016/17 year. It had also hedged a proportion of its requirements for 2017/18 and the subsequent year. All hedging is in line with the policy.

Foreign currency risk

The Group has significant transactional foreign currency exposure, primarily relating to the euro and the US dollar. Transactional currency exposures arise as a result of purchases denominated in foreign currency undertaken in the ordinary course of business, in particular related to expenditure on hotel accommodation, aviation fuel, aircraft maintenance, air traffic control, and airport charges. The Group’s policy is to cover up to 90% of its expected requirements for a period of up to 30 months in advance, using forward foreign exchange contracts. As at 31 March 2016, the Group had hedged a significant proportion of its forecast foreign exchange requirements for the 2016/17 year and a proportion of its requirements for the subsequent year. Further information in relation to foreign currency exchange risk is given in note 22 to the consolidated financial statements.

Carbon risk

The Group also hedges its carbon exposure in relation to its obligations under the EU Emissions Trading Scheme. As at 31 March 2016, the Group has acquired its entire requirement for the year ending 31 December 2016 and more than half of the following year’s requirement.

Capital risk management

The Group’s objective when managing capital is to safeguard the Group’s ability to continue as a going concern whilst providing a return to shareholders. The Group’s multi-year planning process gives clear visibility of earnings and liquidity to ensure continued operation well within banking facility covenant levels.

EU Referendum

We believe that the foreseeable impacts of the UK public’s recent vote to leave the EU are covered by the principal risks and uncertainties highlighted above.

Gary Brown
Group Chief Financial Officer

27 July 2016