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

Dart Group PLC Company Reports

Business and Financial Review

The Group currently comprises three operating businesses, Leisure Airline, Package Holidays and Distribution & Logistics. The Leisure Airline and Package Holidays operations are working progressively closer together to provide a range of Leisure Travel services to our Northern UK customer base.

Group financial performance 2013/14

The Group’s financial performance for the year to 31 March 2014 is reported in line with International Financial Reporting Standards (“IFRS”), as adopted by the EU, which were effective at 31 March 2014.

The Group’s turnover increased 29% from the prior year to £1,120.2m (2013: £869.2m), driven by higher Package Holidays volumes and increased yields in both our Leisure Airline and Package Holidays businesses.

Continued focus on revenue, operational efficiencies and careful investment resulted in operating profit growth of 30% to £49.2m (2013: £37.9m).

Net financing costs of £7.1m comprised £3.3m in relation to mark to market adjustments taken on certain ineffective derivative hedges and £3.8m relating to the revaluation of US dollar currency balances held at year end. The surplus US dollar balances represent the decision taken earlier this year to deliver summer 2014 airline capacity growth by leasing, rather than the original intention of buying, Boeing 737-800 aircraft. Certain hedges were deemed to be ineffective for the purposes of cash flow hedge accounting due to a disparity between the monthly phasing of those transactions and the underlying 2014/15 US dollar and euro requirement being hedged. The Group’s statutory profit before tax increased by 4% to £42.1m (2013: £40.5m).

EBITDA increased by 32% to £109.9m (2013: £83.4m), which was slightly higher than operating profit growth.

The Group’s effective tax rate of 15% (2013: 23%) was lower than the headline rate of corporation tax of 23% as a consequence of legislation enacted in the year. This legislation reduces the UK corporation tax rate to 20% from 1 April 2015, resulting in a reduction of the Group’s deferred tax liability.

Basic earnings per share increased by 13.6% to 24.68p (2013: 21.73p), as profit after taxation increased 15% from £31.2m to £35.9m.

After taking into consideration the liquidity in the business at the end of the financial year, the Board is recommending a final dividend of 2.14p per share (2013: 1.33p). On 22 November 2013 the Board declared an interim dividend of 0.60p per share (2013: 0.54p), equating to a full year dividend of 2.74p per share (2013: 1.87p).

Net cash generated from operating activities was £130.8m (2013: £150.3m). Capital expenditure increased from £79.7m to £83.5m, principally the result of increased expenditure on the long term maintenance of aircraft. The airline also purchased two Boeing 737-300s for summer 2013 and invested in its own flight crew training centre, including three flight simulators. The Group’s capital expenditure as a % of EBITDA reduced to 76% (2013: 96%).

The Group generated net cash inflows(b) of £42.8m in the year (2013: £68.9m), resulting in a year end cash position, including money market deposits, of £263.7m (2013: £220.9m). Total cash received from Jet2holidays and Jet2.com customers in advance of their trips, amounted to £286m (2013: £253m) at that time.

The year end cash position included £140.7m (2013: £145.8m) 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 respective customers have travelled.

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

The Group refinanced its bank facilities in early July 2013 with funding lines incorporating a £50.0m revolving credit facility committed until the end of August 2017 and a £10.0m bank loan facility maturing at the end of August 2017. Further details are provided in note 22(d).

Net assets reduced by £5.0m due to profit after tax of £35.9m (2013: £31.2m) being negated by adverse movements in the cash flow hedging reserve, as a result of mark to market movements on US dollar and jet fuel forward contracts.

Business & Financial Review: Leisure Airline

Leisure Travel – Leisure Airline

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

Total Leisure Airline turnover, including sales of seats to Jet2holidays, increased by 16% to £643.1m (2013: £556.2m). A 14% capacity increase, targeted at high volume Mediterranean and Canary Island leisure destination routes, resulted in a 16% increase in flown passenger sectors to 5.61 million (2013: 4.84 million). Careful capacity management and a growing mix of “Far Sun” flying yielded a 5% increase in net ticket price per passenger to £78.39 (2013: £74.66) and an improved load factor of 91% (2013: 90%). This load factor improvement was in part underpinned by the sale of seats to Jet2holidays which represented 30% (2013: 17%) of the airline’s total seat sales in the year.

Retail revenue (non-ticket revenue) grew to £32.14 per passenger (2013: £30.96), a result of continued focus on pre-departure (primarily hold bags and advanced seat assignment), in-flight (pre-ordered meals, drinks, snacks and perfumes) and ancillary product (car hire and travel insurance) sales. Retail revenue performance continues to be optimised through our customer contact programme and dynamic pricing, ensuring that customers are offered the best products and value for their particular needs.

Although operating expenses grew by 16%, this increase was predominantly activity-related. Operating profit increased by 17% to £31.2m (2013: £26.7m).

During the year, Jet2.com expanded its route network, operating a total of 205 routes (2013: 173). Jet2.com has further increased seat capacity by 13% for summer 2014. The airline will fly 229 routes to 51 destinations in 2014/15.

The delivery of great customer service is at the heart of Jet2.com brand values. To ensure that every employee understands this ethos, a company-wide employee engagement programme called ‘Take Me There’ is delivered, ensuring every colleague in the business has received training on the importance of delivering customer service excellence at every point in our customers’ journey.

Business & Financial Review: Package Holidays

Leisure Travel – Package Holidays

Jet2holidays, the Group’s package holiday brand, 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 once again doubled its customer numbers and, as a result, turnover increased 103% to £496.2m (2013: £244.8m) as 830,019 customers enjoyed a great value package holiday in the year (2013: 417,390).

The focus on high volume, leisure destinations and in particular “Far Sun” destinations such as those in the Canary Islands and the Eastern Mediterranean, has improved gross margin per holiday. This improvement is also in part a reflection of the continued development of the Jet2holidays product which offers packages encompassing flights, transfers and accommodation, ranging from budget selfcatering, to five-star luxury hotels, with all-inclusive and three and four-star packages being particularly popular.

The increasing scale of the business has enabled operating profits to increase by 122% to £14.4m (2013: £6.5m).

Approximately 50% of Jet2holidays are sold over the Internet, 20% from the business’s UK-based call centre, and the balance via high street and online travel agents. Sales through the travel agents remain an important channel and Jet2holidays can be booked through all major travel agent chains, key multiples, homeworker companies and independents in the North of the UK, each being proactively supported and nurtured.

The award-winning Jet2holidays.com website and our new and developing Jet2holidays mobile applications are continuously tailored to improve the quality of both the customer and the travel agents’ booking experience. Website visits are considerably higher than the previous year and conversion rates remain strong. During the year we also moved our Jet2.com call centre back into the UK from South Africa, consolidating it into our Jet2holidays call centre in our new offices in Leeds, enabling a consistent customer experience between the Jet2.com and Jet2holidays brands.

Looking forward to the year ending 31 March 2015, the business will continue to build brand and product awareness in its core markets, underpinned by strong and creative marketing and its focus on excellent customer service. Investment in TV advertising, intelligent use of social media and other online channels of communication, in addition to cross-selling between Jet2holidays and Jet2.com , will attract new customers and, importantly, encourage valuable repeat business.

Business & Financial Review: Distribution & Logistics

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 nine sites, strategically located to meet demand for its services. A full range of added value services is provided including storage, case level picking and an award winning national distribution network.

Revenues reduced in the year by 1.3% to £153.2m (2013: £155.2m) primarily as a result of the decision to close our European operating base in Holland plus a small regional support hub. The business was also adversely affected by an unexpectedly varied profile of seasonal volumes required by its supermarket customers during late July, August and September, which required extra resource to uphold service levels. These factors, together with investment made in people and infrastructure to support future growth, meant that operating profits reduced 23% to £3.6m (2013: £4.7m) which included a £0.4m charge for closure costs.

Fowler Welch is bringing its vast experience of short distribution lead times gained from its chill and produce operations to the ambient (non temperature controlled) sector, with revenues up by over 4% yearon- year at Heywood, its ambient shared user storage and distribution site near Bury, Greater Manchester. New revenues have been secured from a growing customer base and further contracts secured for implementation in the 2014/15 financial year. This operation is now fully established, a fact underlined by the operational team being awarded “Primary Carrier of the Year” by Asda for the third consecutive year.

Spalding, our key distribution centre in the major growing region of Lincolnshire, grew revenues by 2.5% year-on-year. Further growth in the current financial year will stem from new substantial contracted volumes, including a recently secured long term commitment from Tulip, a Danish-owned food producer employing around 8,000 people in the UK. This contract provides a specialist distribution service for hanging meat, supplying processing plants across the UK.

Our recently expanded and refurbished Hilsea depot, which is well located near to Portsmouth International Port, has seen customers take advantage of its full range of warehousing, consolidation and distribution services. Further consolidation and distribution opportunities are being targeted for the year ahead.

Mid-way through the year, new business was introduced at the Company’s Desborough operation in Northamptonshire, balancing flows and increasing two-way vehicle utilisation. Further opportunities to increase the efficiency of the Fowler Welch distribution network are being identified as we gain enhanced operational visibility through Enterprise, our new distribution, planning and transport operating system.

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 also provide distribution services for fruit and produce imported from across the English Channel. Fowler Welch has recently entered into a Memorandum of Understanding for a joint venture to store, ripen and pack stone-fruit, and exotic and organic fruits at Teynham. These services will be performed using the latest technology and marketleading grading, sorting and packing equipment to ensure the highest standards are achieved for the joint venture’s customers. The packed product will then be delivered to customers through the Company’s distribution system.

In view of the planned expansion of activities at Teynham, planning permission has been obtained to extend the distribution centre. This investment will be progressed in line with actual growth of the volumes at the site.

Though the marketplace remains extremely competitive and price-focused, the outlook for Fowler Welch is encouraging. A well positioned national network of sites, focus on its core activities of added value services, a new joint venture and Fowler Welch’s growing reputation in the ambient arena will continue to support the development of a strong revenue pipeline.

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, 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 our 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 Leisure Travel 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.

Occurrence report investigations; flight data management; risk management; health & safety and aviation security inspections; together with quality assurance audits across our operations are all appropriately used to provide compliant and effective Safety Management System oversight.

All safety and security matters are managed by our Safety, Compliance and Assurance group which reports directly to the Accountable Manager and the Safety Management Board. The Board, which 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 customer driven scheduling on popular routes to high volume leisure destinations in order to maximise load factor, yield and retail revenue whilst ensuring that our great value proposition remains attractive to our customers.

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

In the distribution business, 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, in both the chilled and ambient market sectors.

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 fuel and currency hedging, which are our key mitigation to these risks, is contained within the treasury management section on page 17 and in note 22 to the consolidated financial statements.

Economic conditions

Ultimately, economic conditions are likely to have an impact on the level of consumer demand for the Group’s Leisure Travel 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 focus on serving its customers’ demand for package holidays in, and flights to, high volume leisure destinations in the Mediterranean, the Canary Islands and great Leisure Cities across Europe.

Environmental risks

As evidenced in recent years, the Leisure Airline 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 epidemics, pandemics, acts of terrorism or strike action.

The business mitigates this risk by 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.

In addition, the investment in our new commercial office means that we have the ability to run our business from two separate sites, which supports our established Business Continuity Plan.

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 has been considerable interest in an appeal hearing before the Court of Appeal relating to a claim for compensation, made by Mr Ronald Huzar, under EU Regulation 261 in respect of a Jet2.com flight which was delayed due to a technical defect. In line with guidance published by the UK Civil Aviation Authority and other European National Enforcement Bodies, Jet2.com maintained that the technical defect was an “extraordinary circumstance” which relieved it of the obligation to pay compensation. In a judgement given on 11 June 2014, the Court of Appeal held that the technical defect was not an extraordinary circumstance and that compensation is payable. Jet2.com is not leaving the matter there and is seeking ultimate resolution by appealing to the Supreme Court, which may involve, instead or in addition, reference to the Court of Justice of the European Union.

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 careful management of the route network and on-time performance and continue to engage with policy setters and regulators to encourage legislation that is fit for purpose.

IT system dependency and information security

The Group is dependent on a number of key IT systems, their scalability and ongoing development, and the Internet to operate its business. In addition, the Leisure Travel business receives revenues through online debit and credit card transactions. A loss of systems and access to facilities or a security breach could lead to disruption and have an operational, reputational and financial impact. To mitigate these risks, the Group operates and regularly tests a robust 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 processes and policies in line with best practice and business requirements and has in place systems, controls and processes to protect its network from external and internal security threats.

Changes from prior year

In previous years, the Group has disclosed political risks as a significant risk. While discussion and consideration is appropriately held to ensure that political instability is considered when designing and delivering our flying programme, we do not believe that political uncertainty qualifies as a significant risk in the current year, in the context of our destination profile.

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 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 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 US dollar and euro 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, 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 2014, the Group had hedged substantially all of its forecast fuel requirements for the 2014/15 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, primarily relating to the US dollar and the euro.

Transactional currency exposures primarily arise as a result of purchases denominated 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 up to 100% of all material transactional risks for a period of up to 24 months, using forward foreign exchange contracts. As at 31 March 2014, the Group had hedged substantially all of its forecast foreign exchange requirements for the 2014/15 year. The magnitude of the foreign currency exchange risk is given in note 22 to the consolidated financial statements.

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 2014 and a substantial majority 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 adopts a progressive approach to dividend policy, whilst ensuring funds are retained to support further business growth. The Group’s multi-year planning process gives clear visibility of earnings and liquidity to ensure continued operation well within bank covenant levels.

Gary Brown
Group Chief Financial Officer

22 July 2014