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

Jet2 plc Company Reports

Business and Financial Review

The Group’s financial performance for the year ended 31 March 2017 is reported in line with International Financial Reporting Standards (“IFRS”), as adopted by the EU.

Group Financial Performance 2016/17

Strong customer demand and resilient ticket pricing for the summer 2016 season gave way to heavier price discounting in the second half of the year to achieve the planned growth in customer volumes for the Leisure Travel business. This customer volume increase, plus a 14% increase in Distribution & Logistics revenue to £163.5m (2016: £144.0m), resulted in Group revenue increasing by 23% to £1,729.3m (2016: £1,405.4m). Whilst our higher margin Package Holidays product increased as a percentage of overall sales, contributing positively to the Group trading performance, increased losses in the second half of the year, primarily due to the considerable investment to launch the two new operating bases at Birmingham and London Stansted Airports, resulted in Group operating profit reducing by 2% to £103.0m (2016: £105.0m).

Net financing costs of £12.9m (2016: £0.8m) included a £10.9m charge (2016: £1.3m) for foreign exchange revaluation losses, arising from US dollar denominated debt used to fund the acquisition of aircraft, and other foreign currency denominated balances. The revaluation of the US dollar aircraft debt cannot be naturally offset against the value of the aircraft, which is fixed in pounds sterling at the point of acquisition in order to comply with the requirements of IFRS. As a result, the Group achieved a statutory profit before taxation of £90.1m (2016: £104.2m). Group EBITDA decreased by 2% to £190.0m (2016: £193.7m). The Group’s effective tax rate of 15% (2016: 15%) was lower than the 20% headline rate of corporation tax due to certain deferred tax liability reductions. Basic earnings per share reduced by 14% to 51.80p (2016: 60.22p).

Net cash generated from operating activities was £331.1m (2016: £243.9m), out of which capital expenditure of £473.9m (2016: £213.5m) was incurred. New loans totalling £515.6m (2016: £82.8m) were taken up, as the Group secured both commercial debt and finance lease funding for the purchase of its new Boeing 737-800NG aircraft deliveries, offset by £91.2m (2016: £0.9m) of aircraft pre-delivery loan repayments. This resulted in a net cash inflow(a) of £277.0m (2016: £109.2m) and a year-end gross cash position, including money market deposits, of £689.0m (2016: £412.0m). Net cash, stated  after borrowings of £520.5m (2016: £90.9m), was £168.5m  (2016: £321.1m).

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 £553.9m (2016: £385.8m). Of these customer advances, £82.9m (2016: £68.5m) 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. At the reporting date, the business had no cash placed with counterparties in the form of margin calls to cover out-of-the-money hedge instruments (2016: £5.2m).

The Group continues to exceed 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 £112.7m (2016: £161.5m) which comprised profit after taxation of £76.7m (2016: £88.8m) and a favourable movement in the cash flow hedging reserve. This movement was a result of the reversal of adverse mark-to-market balances on jet fuel forward contracts and in-the-money currency forward contracts held at the end of the previous financial year which matured in the year, and a further net in-the-money movement on all derivative types held, which mature after the reporting date.

During the financial year, the Group entered into an agreement with Boeing to purchase a further four new Boeing 737-800NG aircraft with an approximate list price of US$0.4 billion, to meet its programme of aircraft fleet replacement and planned Leisure Travel growth. The terms for these aircraft are substantially the same as those approved by the Board for 30 aircraft ordered from Boeing in 2015, the Company having negotiated significant discounts from the list price. These aircraft are expected to be funded through a combination of internal resources and debt and will be delivered between August 2018 and January 2019.

Segmental Performance - Leisure Travel

Overall flown passengers in the Leisure Travel business increased by 17% to 7.10m (one-way passenger sectors) (2016: 6.07m) as 1.73m customers (2016: 1.22m) chose our great value Package Holiday product, an increase of 42%, whilst 3.64m (2016: 3.63m) passengers chose our important flightonly product. Package Holiday customers now represent 49% of overall flown customers (2016: 40%).

The increased mix of Package Holiday customers is particularly pleasing, as the longer duration, end-to-end holiday experience allows greater value to be added through product innovation and service at each point in the customer’s journey. Delighting the customer from start to finish lends itself to brand loyalty and retention and a better quality of recurring revenue and profitability, compared to the more impulsive, price sensitive, shorter duration, flight-only product.

Resilient ticket pricing in the first half of the year gave way to a much sharper pricing environment in the second half, as overall net ticket price per passenger reduced by 5% to £86.65 (2016: £91.11). The average load factor achieved was 91.5% (2016: 92.5%). The percentage of customers taking all-inclusive Package Holidays grew from 39% to 41% of total holiday customers, whilst an increasing number chose higher value 4 and 5-star packages as the variety of hotels we offer continued to grow, demonstrating the quality and resilience of the Package Holiday product. However, price was invested to drive the increased Package Holiday customer volumes and market share, which led to the average price of a Package Holiday remaining stable at £617 (2016: £616).

Non-ticket retail revenue per passenger increased by 3% to £33.01 (2016: £31.98). 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 24% to £1,565.8m (2016: £1,261.4m).

We continue to invest for the long-term success of the business and believe that both our new UK operating bases at Birmingham and London Stansted Airports have great potential for our holiday business. Therefore, although trading performance was bolstered by the 17% increase in overall customer volumes, the investment in promotional advertising and the early recruitment of staff to provide a resilient operation ahead of the launch of the two new operating bases, together with the more competitive pricing environment in the second half, meant Leisure Travel operating profit reduced by 1% to £98.5m (2016: £99.6m).

For many families, booking a holiday is the most important purchase of the year and we recognise that every customer is different and their buying habits unique. Therefore, continuously investing in IT development to deliver a smooth customer journey is of paramount importance to the business, whichever of our three booking channels is chosen.

Technology and how the customer interacts with it is perpetually evolving. Over half of our Package Holidays are sold online via Jet2holidays.com, whilst 97% of our flight only seats are booked directly on the Jet2.com website. Increasingly, customers are looking to engage with the overall brand and product experience when making an online booking. Recognising this, the business continues to invest in personalising content and imagery, therefore improving the overall customer experience and engagement and ensuring that conversion rates remain strong, whether the customer uses a PC, tablet or mobile phone.

The business also recognises that human interaction is important for many customers when making such an important purchase, to ensure their individual needs are catered for. Currently 17% (or approximately 300,000) of our Package Holiday customers book through our customer contact centres in Leeds and Manchester, which employ over 300 sales and customer service advisers. Our sales colleagues have an intimate knowledge of our products and are trained to handle calls in a friendly and informative manner. Once a booking has been made, our pre-travel services team takes over, answering queries and ensuring that customers are updated with postbooking information, or provided with any further pre-travel assistance as required.

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

Product innovation supported by a broad, imaginative marketing strategy helps to ensure that Jet2 is front of mind when a customer considers booking a holiday.

  • 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 £60 deposit.
  • Jet2CityBreaks, which offers a packaged flight and hotel product in attractive European Leisure Cities, continued to prove popular as passenger numbers grew in the year.
  • Our recently launched villa proposition, Jet2Villas, means our customers can now enjoy the freedom of a great value Villa Holiday wrapped up in one package with Jet2.com flights, accommodation and car hire all included.
  • Our Resort Flight Check-In® service introduced at many hotels in summer 2016, has proven to be extremely popular and has been expanded to over 180 hotels for summer 2017.

In common with the rest of the UK package travel industry, we have seen an increase in illness-related claims from UK consumers. We believe that many of these claims are questionable and we are working very closely with our hotel partners and the authorities on this issue. We will continue to actively lobby the UK Government for changes to legislation and are seeing some success in this area.

Looking forward, we will continue to invest to build brand and product awareness in our core markets, underpinned by strong and creative marketing campaigns and a keen focus on customer service. We remain confident that with considered investment, we are building a sustainable business that will have a bright future in the UK Leisure Travel market for many years to come.

Segmental Performance - Distribution & Logistics

Revenue at Fowler Welch increased by 14% to £163.5m (2016: £144.0m) primarily due to the new Dairy Crest operation at Nuneaton which commenced in June 2016. Seasonal peaks were well managed and a further important improvement in vehicle miles per gallon was delivered from a continued focus on driver training and operational efficiency. The underlying performance of the business was encouraging, though lower than anticipated revenue at our Heywood ambient operation and a bad debt write-off following the demise of a major poultry supplier, affected the profit in the year.

Revenue at our Spalding operation in Lincolnshire increased by 2%. This 156,000 square foot depot is one of the largest chilled food consolidation hubs in the UK and is the largest chilled site in the Fowler Welch network. Combining a consolidation service for fresh produce and chilled foods, the site picks over 41 million cases per annum and delivers approximately 50,000 pallets of food each week on behalf of local Lincolnshire growers and producers. From the heart of this important growing region, Fowler Welch delivers to all major retailers, successfully managing significant volume uplifts for Valentine’s Day, Mothering Sunday, Easter, Halloween and Christmas.

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. Integrated Service Solutions (ISS), Fowler Welch’s joint venture that ripens, grades and packs a variety of stone fruit, berries and exotic fruits, achieved another year of growth as operations from the new 50,000 square foot extension at the Teynham depot commenced successfully in July 2016.

The Hilsea depot, which is located near to Portsmouth International Port, had another encouraging year with revenue growth of 10%. New volumes were secured from several existing customers, demonstrating the importance of this region in supplying salads, herbs and vegetables to UK retailers and underlining the strength of the range of warehousing, consolidation and distribution services offered.

The new Dairy Crest operation at Nuneaton, near Coventry, contributed positively in the year and we expect the operation to progressively expand as it is more fully integrated into the broader Fowler Welch distribution network.

The Heywood ‘Hub’, Fowler Welch’s 500,000 square foot ambient (non-temperature controlled) shared user storage and distribution centre near Bury, Greater Manchester saw a second year of depressed revenues, down 4% year-on-year. This revenue reduction reflected the highly competitive nature of the ambient grocery distribution market. Following increased sales efforts, the business was successful in securing several smaller contracts toward the end of the financial year and a material new contract commenced in the first quarter of the current financial year.

The dedicated site at Desborough, Northamptonshire, which provides distribution services to a major confectionery manufacturer, implemented new bespoke state-of-the-art trailers that can automatically load at production facilities as well as operate as conventional trailers, demonstrating our principles of listening, responding and delivering. Similarly, the regional distribution sites in Washington, Tyne & Wear and Newton Abbot, near Exeter continued to provide high quality direct store delivery services to over 100 supermarkets.

The further development of services along the supply chain is contributing to a strong pipeline of growth opportunities with both existing and new clients. These added value services, combined with the core competency of consolidating multiple clients to provide the critical mass for efficient distribution, give confidence in the continued profitable growth of Fowler Welch.

Gary Brown
Group Chief Financial Officer

28 July 2017