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

Jet2 plc Company Reports

Business and Financial Review

The Group comprises three principal operating businesses, Leisure Airline, Package Holidays and Distribution & Logistics. The Leisure Airline and Package Holidays operations work closely together to provide a range of leisure travel services to our Northern UK customer base.

2012/13 performance

The Group’s financial performance for the year to 31 March 2013 is reported in line with International Financial Reporting Standards (“IFRS”), as adopted by the EU, which were effective at 31 March 2013.

Group profit before tax increased 44% to £40.5m (2012: £28.1m) in the year ended 31 March 2013 reflecting improved trading in all three businesses. Overall Group turnover increased by 27% to £869.2m (2012: £683.0m), with growth in all segments, including a 114% rise in Package Holidays revenues. Continued focus on the quality of our revenue, operational efficiencies and cost control meant that operating profit grew by 33% to £37.9m (2012: £28.5m). Group EBITDA increased by 33% to £83.4m (2012: £62.9m).

The Group’s effective tax rate of 23% (2012: 19%) was lower than the headline rate of corporation tax, because a future headline rate reduction has lowered the Group’s deferred tax liability.

The Group generated net cash inflows(b) of £68.9m in the year (2012: £45.2m), resulting in a positive cash position, including money market deposits, of £220.9m (2012: £152.0m) as at 31 March 2013. Total cash received from Jet2holidays and Jet2.com customers in advance of their trips, amounted to circa £253m (2012: £180m) at that time.

The Group’s cash generation was principally driven by the Leisure Airline and Package Holidays operations, which continue to benefit from strong forward bookings.

Capital expenditure increased from £47.3m to £79.7m, principally the result of increased expenditure on additional aircraft to meet the needs of the summer 2013 flying programme and the long term maintenance of aircraft. The airline purchased seven aircraft in total - two Boeing 737-800s, two 757-200s and three 737-300s - compared to the previous year’s addition of five Boeing 737-300s.

The Group manages its cash position very carefully, not least because of the restrictions placed on it by the UK Civil Aviation Authority, which requires the Group to maintain certain levels of “available liquidity”, which is defined as free cash plus available facilities. The Group’s cash and money market deposits include cash which is restricted by its merchant acquirers as collateral against a proportion of forward bookings paid for by credit or debit card. These balances are considered to be restricted until the respective customers have travelled.

The Group’s balance sheet continues to strengthen, driven by both profit performance in the year and cash generation from advance bookings; deferred revenue grew 59% year-on-year, as the Group’s leisure travel businesses continue to enjoy strong forward bookings. The increase in shareholders’ equity, the improved gross cash position and the increase in non-current assets are the principal changes in the balance sheet from the previous year end. The overall increase in shareholders’ equity does not equate to the Group’s post tax profit for the year, due to a reduction in the market value of outstanding fuel and currency hedges at the year-end relative to the previous year. The business continues to be funded in part by payments received in advance of travel from our leisure customers.

Subsequent to the reporting date, the Group concluded the renewal of its financing facilities with a consortium of banks. Further details of the refinancing can be found in note 22 (d).

Segmental Performance

Leisure Airline

The Leisure Airline business trades under the Jet2.com brand and operates scheduled flights to a range of leisure destinations from its home base at Leeds Bradford International Airport, and Belfast International, Blackpool, East Midlands, Edinburgh, Glasgow, Manchester and Newcastle airports.

Total Leisure Airline turnover, including sales of seats to Jet2holidays, increased by over 20% to £556.2m (2012: £461.3m). This reflected a 13% increase in passengers to 4.84 million (2012: 4.27 million) and a 16% increase in per passenger ticket yield to £59.67 (2012: £51.47). Retail revenue (non-ticket revenue) grew to £30.96 per passenger (2012: £27.86).

Careful route scheduling and capacity management meant that, although costs grew by 20%, operating profit increased by 23% to £26.7m (2012: £21.7m). Year-on-year fuel costs per passenger improved by 3%. The underlying price of fuel was maintained due to favourable US dollar exchange rates mitigating the increase in the average fuel hedge rate.

During the year, Jet2.com continued the expansion of its scheduled airline network. The addition of two aircraft enabled the business to expand at its newest base, Glasgow Airport. Two further aircraft permitted flight programme growth at East Midlands and Manchester airports, increasing the frequency of flights to tried and trusted Jet2.com destinations. The airline now flies to 51 destinations in 19 different countries and operated a total of 173 (2012: 145) routes in the year, adding the new popular destinations of Pula and Grenoble.

Though overall scheduled airline seat capacity increased by 10% in the year, load factors increased to 90% (2012: 87%). This load factor improvement was in part underpinned by the sale of seats to Jet2holidays which represented 17% (2012: 10%) of total scheduled flying in the year. Net ticket revenue per passenger increased as a higher proportion of flights to “far sun” destinations and the continued development of the airline’s revenue management system resulted in further improvement in the business’s quality of earnings.

Retail revenue (non-ticket revenue) was generated from a number of sources, including hold baggage charges for a sector leading 22kg weight allowance, advance seat assignment, extra leg room seats, in-flight sales and commissions on car hire and travel insurance. Retail revenue performance was optimised through our customer contact programme and dynamic pricing, which takes into account factors such as destination, trip duration, and lead time to departure in order that customers are offered the best products and prices for their particular needs.

As part of Jet2.com’s continued focus on great customer service, Edinburgh and Glasgow Airport passenger handling moved in-house for winter 2012. In addition, aircraft dispatchers at Manchester Airport were also added to core staff as part of our drive to continue to improve operational efficiency and on-time performance.

To ensure that every employee understands the business’s brand values and customer service proposition, a company-wide employee engagement programme called ‘Take Me There’ was delivered. As a result, every employee in the business has received training on the importance of delivering customer service excellence at every point on the customer journey.

Jet2.com is proud to undertake significant flying for Royal Mail. Night mail flights, performed with industry leading punctuality levels, are undertaken every weekday from six UK airports. As announced on 6 June 2013, the airline successfully tendered for and retained six out of the eight routes we currently operate past the termination date of the current agreement in 2014. Though there has been a reduction in the margin that will be enjoyed by the airline going forward, this was anticipated, and the Royal Mail business will continue to form a valuable, though reducing, proportion of the operating profit of the airline.

As part of its continuous drive to operate more efficiently, Jet2.com continues to improve its fuel consumption by means of its “efficient flying” programme. This programme looks at all aspects of the airline’s operation which can influence or directly impact upon the operational efficiency of its flying activities. The combined effects of all the elements of this scheme are estimated to have saved the airline over 10,135 (2012: 34,000) metric tonnes of greenhouse gas emissions in the year.

At the reporting date, Jet2.com operated a fleet of 46 aircraft with the Group having acquired two Boeing 757-200 aircraft – one of which operated under a lease prior to purchase - three Boeing 737-300s and two Boeing 737-800 aircraft towards the end of the financial year. Two leased 737-300 aircraft were returned at the end of their leases during the year. Jet2.com will continue to add to its owned and leased fleet in line with demand from our Northern based Jet2.com and Jet2holidays customers. As such, seat capacity has been increased by a further 12% for summer 2013, with growth focused on tried and trusted, great value destinations.

Segmental Performance

Package Holidays

Jet2holidays is the Group’s package holiday operator; it is an integral part of the Group’s leisure travel activities, working closely with Jet2.com to provide ATOL protected holidays to a wide range of destinations from our eight Northern UK airports.

The business has achieved considerable growth since its inception in 2007 and is now the third largest tour operator in the United Kingdom. In what was another successful year, revenue increased 114% to £244.8m (2012: £114.5m). This has been predominantly driven by an increase in customer numbers, with 417,390 customers enjoying great value package holidays in the year (2012: 216,520). This growth is a reflection of the successful further development of the Jet2holidays hotel product range and a fully integrated approach with Jet2.com, whose increased capacity has met the demand from Jet2holidays customers for holidays in the Mediterranean, the Canary Islands and great European Leisure cities. Our customers continue to demand great value but are not willing to reduce quality. The Jet2holidays product range has been expanded with over 45% of customers staying at “4 star” or “5 star” hotels, supported by the early success of our “Indulgent Escapes” brand, which has driven further revenue growth in the year.

Despite the challenging economic environment and a highly competitive market place, gross margins per holiday have been maintained through careful management and the further development of our Package Holidays yield management system. The increasing scale has also enabled the business to improve both operating margins and profitability, with profit before tax increasing to £6.8m (2012: £2.5m).

Jet2holidays are sold over the Internet, from the business’s UK based call centre, and through high street and online travel agents; each of these channels is proactively supported and nurtured. The award-winning Jet2holidays.com website is continuously developed to improve the quality of both the customer and the trade booking experience. Website visits are significantly higher than the previous year and conversion rates continue to improve. We doubled the size of our UK-based call centre during the year and will continue to invest in this area to ensure the successful handling of call volume growth which has continued into the summer 2014 booking season. Sales through travel agents remain an important element of the business and Jet2holidays can now be booked through all major travel consortia, key multiples, homeworker companies and independents in the North of the UK.

Looking forward to the year ending 31 March 2014, the business expects further growth in customer numbers as its marketing strategy and focus on customer service excellence continue to build brand resonance in its key markets and generate valuable repeat business. Jet2holidays is benefitting from its family-focused approach, including free child places at hundreds of hotels, which, alongside a low deposit, has proven to be very attractive in the current economic environment. The significant investment in marketing has paid dividends with bookings for summer 2013 already surpassing last year. Furthermore, brand and product awareness continues to be improved by our focus on quality TV advertising, and intelligent use of social media and other online channels of communication. This continued investment in the product offering, together with the opportunity to cross sell to Jet2.com scheduled service customers, means that the business remains confident in delivering its growth plans. Controlling the business’s own supply chain, by means of direct relationships with over 1,500 hotels, and the focus on Jet2holidays as part of Jet2.com’s overall capacity planning, have been fundamental to recent success and the business will continue to ensure that it has the product and capability to meet its predicted increases in demand.

Segmental Performance

Distribution & Logistics

The Group’s distribution business, Fowler Welch, is one the UK’s leading logistics providers to the food industry supply chain, serving retailers, growers, importers and manufacturers across its network of eleven sites, strategically located to meet demand for our services. A full range of added value services is provided including storage, case level picking and an award winning national distribution network.

Revenues rose in the year by 1.8% to £155.2m. The quality of earnings in the year improved as organic volume growth and new business offset any revenue losses. Operational efficiency continued to improve with average miles per gallon increasing to 8.7 (2012: 8.6) and accident damage costs declining. As a result, operating profit was up 9% to £4.7m (2012: £4.3m).

The outlook for the year ahead is positive with new business secured for the first quarter of 2013/14, at our 500,000 sq. ft. Heywood Hub; at the produce and chilled food consolidation centre in Teynham Kent, and a two year extension of a distribution contract with Mars. Additionally, there is an encouraging pipeline of new business opportunities.

Spalding, our key distribution centre in the major growing region of Lincolnshire, had a good year, with gross margins improving on the back of focused cost control. Operating at near capacity, the site continues to provide the highest standard of warehousing and distribution services to key names such as Kerry Foods, Bernard Matthews and Tulip.

A long term lease was entered into for the business’s well located Hilsea site, which is close to Portsmouth International Port and the produce growing regions along the South Coast. The lease covers the whole site which was previously shared with the landlord and following recent investment in this facility, Fowler Welch is now able to offer a broader range of warehousing and picking services as well as high quality distribution.

The Heywood Hub, ideally located in the Greater Manchester region, is now fully established as a quality ambient (non temperature controlled) storage and distribution hub. This was underlined by our operational team being awarded “Primary Carrier of the Year” by ASDA for the second consecutive year. Fowler Welch is bringing its vast experience of short distribution lead times gained from its chill and produce operations to the ambient sector. New business wins with a number of clients and a pipeline of future opportunities will see the site’s performance continue to move forward in the coming year.

The Kent operations in Teynham and Paddock Wood sit in the heart of that county’s produce growing areas and also provide a distribution service for produce imported across the Channel. Loss of a storage and distribution contract with J. Garcia Carrion has been largely mitigated, as volumes with two of our other large customers have grown. A pipeline of other opportunities gives us optimism for growth in the coming year.

Concentration on sales and increasing yield, together with growth within the existing capacity of Fowler Welch, will generate improved gross and net margins in the year ahead.

Principal risks and uncertainities

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, financial results and strategic objectives. This list is not intended to be exhaustive.

Safety and security

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 safety and security of our customers and our colleagues is our key priority. Jet2.com operates a robust Safety Management System based upon a culture of safety designed to proactively assess and mitigate the risks associated with its operation. Through close collaboration with regulatory authorities the Group seeks to achieve the highest standards of compliance and performance. The Group’s Health and Safety Plan seeks to protect customers and colleagues from physical harm.

Jet2holidays operates in accordance with its Safety Management System holding regular internal safety steering committees and managing an audit programme for all accommodation providers and destination management agents.


The Group is impacted by competitor activity in each of its business areas. The Leisure Airline and Package Holidays sectors continue to be intensely competitive marketplaces. Headline price competition remains very strong at every base from which Jet2.com flies. The Group will continue to focus on customer driven scheduling on popular routes to high volume leisure destinations in order to maximise its load factor, yield, and retail revenue on its aircraft. The operation will continue to benefit from non-scheduled flight aircraft utilisation through its passenger and freight charter activities and from a broad distribution base for its scheduled seats via the web, through travel agencies, via tour operator seat allocations and to its in-house tour operator. Jet2holidays competes effectively through the provision of a broad range of great value package holidays accessible from all of our eight Northern bases.

In the distribution business, the market has seen some consolidation as smaller players either exit the market or are taken over. The loss of a substantial customer is the largest financial risk facing the Company. This risk is mitigated by Fowler Welch’s focus on developing a strong pipeline of future opportunities, together with the achievement of high service levels and cost control, both of which are critical to success in this sector.

Exposure to fluctuations in fuel prices and exchange rates

The cost of fuel will continue to be a very significant element of the Leisure Airline and Package Holidays cost bases, and the effective management of fuel price variation will continue to be important to the businesses. The Group’s fuel price risk strategy, by forward hedging, aims to limit the exposure of both businesses to sudden and significant increases in oil prices, whilst ensuring the businesses remain 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 Jet2.com and Jet2holidays, incurs significant operational costs which are US dollar and euro denominated and is therefore exposed to sudden and significant movements in exchange rates. To protect against such fluctuations (as described in note 22), the Group uses forward currency contracts with approved counterparties.

Economic conditions

Ultimately, economic conditions will have an impact on the level of consumer demand for the Group’s Leisure Airline and Package Holidays services. Whilst we believe that UK consumers regard their summer holiday as a very important element of the household budget, it is clear that there has been a reduction in discretionary travel in recent years due to continuing economic uncertainty. To mitigate this risk, the Group will continue to plan its flying programme carefully to take account of trends in demand. Expanding the Jet2holidays offering also enables the Group to increase revenues from our Jet2.com customers.

Political risks

The Leisure Airline and Package Holidays businesses can be impacted by political uncertainty, both directly through reduced demand for travel to countries to which Jet2.com flies and indirectly through the impact of such political uncertainty on fuel prices and exchange rates. This risk is mitigated through careful management of the route network (the Group does not fly to any North African destinations) and through the Group’s approach to hedging fuel and foreign exchange risk.

Environmental risks

As evidenced in recent years, the Leisure Airline and Package Holidays businesses are 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 epidemics, pandemics, acts of terrorism or strike action. The business mitigates against this risk by establishing and regularly updating a carefully planned response to be implemented by a team of experts, should there be significant disruption to our flying activity. The Group maintains prudent levels of liquid funds to enable the business to continue to operate through a period of sustained disruption to the flying programme.

Government policy and regulatory intervention

It is stated UK and EU policy to apply additional taxes to the aviation industry, and it is foreseeable that the tax burden will continue on the road haulage sector also. The EU Emissions Trading Scheme commenced in 2012, as did further increases in Airline Passenger Duty. In addition, the airline industry is heavily regulated, with expected increased regulatory intervention, notably regarding passenger compensation in relation to flight delays and cancellations which are not attributable to extraordinary circumstances. 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 continue to retain its focus on careful management of the route network and on-time performance.

IT system dependency and information security

The Group is dependent on a number of key IT systems, their ongoing development and the Internet to operate its business. In addition, the Leisure Airline and Package Holidays businesses receive significant revenues through online debit and credit card transactions. A loss of systems and access to facilities or a security breach could lead to significant disruption and have an operational, reputational and financial impact. To mitigate these risks, the Group operates and regularly tests a disaster recovery plan regarding its IT infrastructure, which would be activated should a loss of functionality occur. The Group also regularly reviews and updates its IT security process and policies in line with best practice and business requirements.

Treasury management

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 a range of unutilised banking facilities, and had met all banking covenants. 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, whilst securing the continuity and flexibility of funding through the use of committed bank facilities. Additionally, short-term cash flow volatility risk in relation to margin calls in respect of fuel and foreign exchange hedge positions is minimised through diversification of counterparties and 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 covenant compliance and headroom.

Fuel, currency and carbon hedging

The Group utilises foreign exchange and fuel forward contracts to hedge its exposure to movements in US dollar and euro exchange rates, and its exposure to jet fuel price movements arising as a result of its Leisure Airline activities. The Group’s treasury 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.

Details of derivative transactions outstanding at the year end relating to forward currency contracts, cross currency swaps 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 future fuel requirements up to 100% and up to three years in advance. The magnitude of the aviation fuel swaps held is given in note 22 to the consolidated financial statements. As at 31 March 2013, the Group had hedged substantially all of its forecast fuel requirements for the 2013/14 year and a proportion of its requirements for the subsequent year, in line with the Board’s policy.

Foreign currency risk

The Group has significant transactional foreign currency exposure, the most significant being the US dollar and the euro.

Transactional currency exposures primarily arise as a result of purchases in foreign currency undertaken in the ordinary course of business, in particular related to expenditure on aviation fuel, aircraft maintenance, air traffic control, airport charges and hotel accommodation. The Group’s policy is to cover all material transactional risks for a minimum period of six months, using forward
foreign exchange contracts. As at 31 March 2013, the Group had hedged a large proportion of its forecast foreign exchange requirements for the 2013/14 year. The magnitude of the foreign currency exchange risk is given in note 22 to the consolidated financial statements.

Structural currency exposures exist where the Group has a small euro exposure in respect of net overseas investment. However, as these exposures are not material, no hedging has taken place.

The Group also hedges its carbon exposure given the commencement in 2012 of the EU Emissions Trading Scheme. It has acquired its entire requirement for the year ending 31 December 2013 and approximately 60% 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 maintains a conservative approach to dividend policy, ensuring funds are retained to support further business growth. Our multi-year planning process means that we have clear visibility of earnings and liquidity to ensure we continue to operate well within bank covenant levels.

Gary Brown
Group Chief Financial Officer

29 July 2013