Financial review

Total fuel cost amounted to £807.2 million in 2009, an increase of 13.9% compared to 2008, equating to a cost per seat of £15.28, up £1.63 per seat or 11.9%. The average market price for jet fuel during 2009 was $595 per metric tonne (excluding fees and taxes) compared to $1,070 in 2008, driven by the extraordinary spike in fuel prices during that year. However, after taking account of hedging taken out in 2008 during the period of high fuel prices, easyJet’s effective price for 2009 was $951 per metric tonne compared to $948 in 2008.

With the effective US dollar price broadly flat for 2009 compared to 2008, the increase in fuel cost per seat is largely driven by the strengthening of the US dollar against sterling, partly mitigated by US dollar hedging.

Despite the introduction of additional heavier A320 aircraft into the fleet and an increase in the average load factor of 1.4ppt, average fuel burn for the year was 715 US gallons per block hour compared to 717 in 2008, principally reflecting the implementation of fuel conservation initiatives.

The market rate for the US dollar strengthened by 22% from an average rate of 1.99/£ in 2008 to 1.56/£ in 2009; after taking account of hedging, easyJet’s effective rate strengthened from an average of 1.96/£ in 2008 to 1.78/£ in 2009. The business has no US dollar revenues but significant US dollar costs for fuel, aircraft leases, maintenance and some loan interest and consequently the 9% movement in the effective dollar rate had a significant impact on financial performance.

The euro has strengthened by 12% from an average rate of 1.32/£ in 2008 to 1.16/£ in 2009. Approximately 42% of revenues and 31% of costs (principally ground handling, airport and navigation charges and some crew costs) are denominated in euro resulting in a net long position; the strengthening of the euro, therefore, delivers a positive impact to the results. For the first time this year some hedging of the euro surplus has also been undertaken.

The following charts illustrate easyJet’s exposure to foreign currency revenues and costs:

Certain key measures are therefore significantly impacted by exchange rate fluctuations. These measures on a constant currency basis are shown in the adjacent table:

In response to the fuel price situation at the beginning of the year, the level of flying activity during the first six months of 2009 was actively reduced; however, utilisation returned to more normal levels for the summer. So while total aircraft has increased by 16.0% from an average of 150.1 in 2008 to 174.1 in 2009, the number of seats flown has only increased by 1.8%. Average aircraft utilisation, measured in terms of block hours per operated aircraft per day, has fallen from 11.9 hours per day in 2008 to 11.0 hours in 2009.

As a result of this positive decision to reduce utilisation, and therefore capacity flown, to protect profit margins, cost per seat measures are adversely affected as non-variable costs are spread over relatively fewer seats.

*Underlying measures exclude an £11.0 million profit on the sale of three aircraft in 2009 and £12.9 million of costs associated with the integration of GB Airways in 2008 .

Total revenue in 2009 grew by 12.9% to £2,666.8 million which equates to £50.47 per seat, representing a growth of £4.96 per seat or 10.9%. On a constant currency basis, total revenue per seat grew 4.1%; after allowing for the increase in sector length of 2.6%, this represents a strong underlying performance, particularly in light of the difficult external economic conditions. This result has been supported by the continuing strategy to increasingly deploy capacity to the better located but more expensive airports preferred by customers and thereby improve network mix.

Passenger revenue in 2009 grew by 7.8% to £2,150.5 million. Despite the 16.0% increase in average aircraft during the period, capacity in terms of seats flown increased by only 1.8% as a result of the decision to reduce flying activity particularly through the winter. Load factor improved 1.4ppt to 85.5%, the first time since 2005 that the annual load factor has exceeded 85%. This resulted in a 3.4% increase in passenger numbers to 45.2 million demonstrating a flight to value as easyJet increased market share by attracting customers from higher fare competitors.

The shift towards deploying relatively more capacity to European markets continues. Capacity in total rose 1.8% in 2009 versus 2008; of this overall increase, capacity at UK regional bases reduced by 8.4% whilst continental European bases increased by 16.0% with most of this investment being focused in Milan Malpensa, Paris Charles de Gaulle and Lyon. London bases, in aggregate, reduced by 3.1% with Gatwick capacity up by 11.5% but Luton and Stansted reducing by 18.3% and 16.3% respectively. The percentage of revenues denominated in euros in 2009 was 42% with, in aggregate, non-sterling revenues now accounting for 51% of total revenues.

Passenger revenue per seat increased by 5.9% to £40.70 but on a constant currency basis fell by 1.9%. This reduction in revenue per seat in the current economic environment, taking into account the expected dilution from an increase in the checked bag charge, is testament to the strength of the network. Passenger revenue per ASK, on a constant currency basis, fell by 4.4%.

Ancillary revenue increased by 40.6% to £516.3 million in 2009, driven mainly by increases in the checked bag charge. Bag charge revenue delivered £238.1 million in 2009, an increase of £94.0 million or 65.2% compared to the previous year. As expected, this has been accompanied by a small yield dilution, but with approximately 70% of passengers having checked baggage, the net result is positive. Speedy Boarding continues to deliver a strong performance.

*Underlying measures exclude the £11.0 million profit on disposal of assets held for sale in 2009 and £12.9 million of GB Airways integration costs in 2008.

Total cost per seat excluding fuel was up 16.5% or £4.87 per seat to £34.36 in 2009, compared to 2008. In addition to the strengthening of the US dollar and euro, the Swiss franc strengthened by 19%. As a significant proportion of the cost base is denominated in these currencies, this has had a significant impact on unit costs. Excluding the impact of exchange rates, cost per seat excluding fuel was up 6.2% or £1.83 per seat compared to last year.

The impact of the reduction in global interest rates has had a significant impact on interest income in the year; interest income in 2009 at £18.4 million was £30.5 million lower than the £48.9 million reported in 2008. These changes in interest rates are largely out of easyJet’s control so, excluding the impact of this reduction, operating cost per seat (excluding fuel and at constant currency) was up 3.9% compared to 2008. On a cost per ASK basis, excluding fuel, costs increased by 13.6% but on a constant currency basis by just 3.5%. Again, excluding the impact of interest income, this figure falls to 1.3%.

As a result of the reduction in winter flying activity and utilisation, unit cost measures are adversely impacted as non-variable costs are spread over relatively fewer units of production.

Ground handling cost per seat at constant currency was up £0.27 or 6.6% compared to 2008. Approximately 61% of ground handling costs are now denominated in euro, up 6ppt from 2008. The drivers of this increase include airport mix, as presence continues to be increased in the top European airports (estimated impact £0.14 per seat), the full year effect of PRM (Passengers with Reduced Mobility) charges and increased adverse weather related de-icing costs.

Airport cost per seat at constant currency was up £0.59 or 7.8% compared to 2008. Approximately 58% of these costs are denominated in euro, up 7 percentage points from 2008. The key driver of this increase has been over-inflation price rises in airport passenger related charges at a number of locations across the network, increasing costs by approximately £30 million. Significant increases have occurred at Gatwick, Luton, Amsterdam and at all Spanish and Italian airports. Mix continues to impact as we increase our presence in the top European airports. In a specific response to the uneconomic level of charges at Luton, easyJet announced in September 2009 that it would remove some flying for 2010 and redeploy aircraft to more profitable activity elsewhere.

Crew cost per seat at constant currency was up £0.44 or 8.7% compared to 2008. An increasing proportion of these costs are denominated in non-sterling currencies as more overseas contracts are introduced and approximately 25% of these costs are now denominated in euro and 9% in Swiss franc. The increase in unit costs has been driven by last year’s crew pay deal which was linked to August 2008 RPI, the increased costs associated with the introduction of overseas contracts (a necessary part of the expansion strategy into continental Europe) and maintaining higher than required crew numbers over the winter, whilst there was reduced aircraft utilisation, as these crew were required for the summer activity.

Crew costs continue to be a key area of management focus with significant opportunities for efficiency improvement in the medium term.

Maintenance cost per seat at constant currency was down £0.12 or 4.1% compared to 2008. The net reduction in unit cost mainly reflects the benefit of the reduction in the number of leased aircraft as the Boeing 737-700s have started to leave the fleet partly offset by the full year costs of the new in-house maintenance planning function. During the year, 12 leased Boeing 737-700s and four leased (ex GB) A320s were returned to lessors. Approximately 35% of maintenance costs are denominated in US dollar and 21% in euro.

At the end of the year, negotiations were completed with SR Technics on a new maintenance contract which will deliver savings of around £175 million over the 11 year life of the contract.

Other costs per seat at constant currency were up £0.17 or 9.3% compared to 2008. The main drivers of this per seat increase were reduced utilisation and an increase in disruption costs (driven by bad weather in the winter) partially offset by the profit on the Boeing spares optimisation project, as reported in the first half of the financial year.

Net ownership costs, on a per seat basis at constant currency, were up £0.52 or 19.4% compared to 2008. The average number of aircraft during the year was 174.1, up 16.0% compared to the previous year. The number of non-operational aircraft increased by nine compared to last year principally due to aircraft held for sale and an increase in aircraft in maintenance as easyJet prepared aircraft for return to lessors. There were 35 additions during the year, 31 debt financed and four cash financed; 12 Boeing 737-700s and four ex-GB A320s were returned to lessors and three ex-GB A321s were sold.

Net ownership costs include interest income which has fallen from £48.9 million in 2008 to £18.4 million in 2009, a fall of £30.5 million due to the dramatic drop in market interest rates and despite cash balances and money market deposits rising from £863 million at 30 September 2008 to £1,075 million at 30 September 2009. Gross ownership costs i.e. excluding the impact of interest income, on a constant currency basis, improved by £0.13 per seat or 3.5%. This benefit is driven by the exit of higher cost leased Boeing 737-700 aircraft and replacement by lower cost owned Airbus aircraft and lower interest rates feeding into interest payable as rates are re-priced to market.

Unit costs have been impacted by the reduced winter flying activity with costs of the fleet that is, on average, 16.0% larger being spread over a similar amount of seats flown as last year.

The exit of higher cost 737-700 aircraft is well under way and this, together with the exit of higher cost aircraft acquired as part of the acquisition of GB Airways, is expected to deliver the targeted benefits in aircraft ownership.

High level profit per seat bridge

*Underlying number; excludes an £11 million profit on the sale of three aircraft in 2009 and £12.9 million of one-off integration costs for GB Airways in 2008.

Headline profit before tax for 2009 was £54.7 million; after excluding the one-off benefit of the profit on sale of three ex-GB A321s, underlying profit before tax was £43.7 million. This is a fall of £79.4 million in underlying profit before tax compared to 2008, despite the fuel bill rising £98.5 million. With total revenue per seat increasing by 10.9% and total cost per seat increasing by 15.1%, profit margin dropped by 3.6 percentage points to 1.6%.

At the end of 2009, favourable resolution was reached with HMRC on a prior year tax matter resulting in the release of a provision. This release has contributed to an effective tax credit rate for the year of 30.2% compared to an effective tax charge rate of 24.5% in 2008. For 2010 the effective tax rate is expected to be a charge of 25%.

The tax provision release also had a significant impact on the return on equity in 2009. For the year it was 5.5% compared to 6.8% in 2008, a fall of 1.3 percentage points. Although underlying profit before tax fell by 64.5%, retained profit, significantly impacted by the tax provision release, fell by only 14.4%. With shareholders’ funds broadly flat year on year, the resultant return on equity is therefore only down by 1.3 percentage points.

Basic earnings per share, at 16.9 pence, is down 14.6% compared to 2008, reflecting the significant drop in retained profit, being offset, to a large extent, by the tax provision release.

In line with established policy, no dividends have been paid or proposed in the year ended 30 September 2009 or during the comparative accounting period.

As discussed in the Business Review, the industry has faced challenging economic conditions in 2009. However, easyJet continued to generate a strong operating cash flow and ended the year with over £1 billion in cash and short-term liquid deposits, a strong balance sheet and significant undrawn committed financing to fund future aircraft deliveries.

A clear focus on working capital and balance sheet management has put easyJet in a strong position to withstand the current economic climate and to emerge stronger.

Despite a significant tightening of credit in capital markets, easyJet has capitalised on the strength of its business model and financial position to secure additional debt and lease financing to add to that agreed in December 2007.

*Fair value adjustments in respect of GB Airways, see note 23 to the accounts.

Shareholders’ funds increased by £29.1 million in the year, the profit after tax being offset by a reduction in the fair value of the Group’s cash flow hedges net of deferred tax. The strengthening of the US dollar and the euro against sterling in the year has caused a significant reduction in the fair value of the Group’s currency derivative portfolio; this was partially offset by a decrease in the value of the jet fuel derivative liability as fuel prices fell. These fair value gains and losses are deferred in equity and recycled to the income statement in line with the underlying hedged transaction.

Goodwill was £365.4 million at 30 September 2009. Provisional fair values of assets and liabilities acquired through a business combination may be adjusted for 12 months following the acquisition date; for GB Airways this period ended on 31 January 2009. Since 30 September 2008, the fair value of maintenance provisions has been increased reflecting additional liabilities relating to engines on aircraft held under operating leases. After allowing for tax relief, goodwill relating to the GB Airways acquisition increased by £5.6 million to £55.8 million. Comparative balances have been adjusted to reflect that these liabilities were extant at the acquisition date.

The net increase in property, plant and equipment in the year was £509.6 million. Additions in respect of new aircraft delivered, pre-delivery deposits for future deliveries and non-aircraft fixed assets totalled £515.0 million, this was offset by depreciation charged in the year of £55.4 million and disposals of £4.9 million. During the year, easyJet took delivery of an additional 20 A319 aircraft and the first 15 easyJet specification A320 aircraft. Three ex-GB Airways A321 aircraft were sold generating a profit of £11.0 million. These assets had been transferred to assets held for sale in 2008. Four A321 aircraft remain as assets held for sale at 30 September 2009. The five easyJet specification A319 aircraft disclosed as assets held for sale at 30 September 2008 were taken off the market in the year and returned to property, plant and equipment at their book value of £54.9 million. Potential purchasers have found credit hard to obtain in the current market and the Board has agreed to retain these owned aircraft to support the European expansion plans in 2010.

Net working capital improved by £230.8 million in the year. Assets held for sale decreased by £121.7 million with three A321s sold and five A319s returned to property, plant and equipment. Trade and other payables increased by £97.7 million as a result of additional unearned income, the increase in the size of the business and efficient working capital management. Unearned income increased due to the strength of the euro against sterling and as a result of the schedule now being on sale out for up to 11 months. In addition, the fair value of short-term derivative balances decreased £43.6 million year-on-year as the US dollar and euro strengthened against sterling.

The total of cash and cash equivalents and money market deposits was £1,074.9 million at 30 September 2009 up £212.4 million compared to 30 September 2008. Net cash of £134.5 million was generated from operations as a result of cash received in advance from customers and strong working capital management. £90.2 million was received from the sale of three ex-GB A321 aircraft and other fixed assets in the year. The purchase of aircraft in the year was funded predominantly by additional borrowings. Of the 35 A320 family aircraft delivered in the year, 31 were mortgage financed. Money market deposits are held partially in US dollars to provide a match against US dollar denominated borrowings.

Excluded from the above total is £72.3 million of restricted cash disclosed in other non-current assets and net working capital. These amounts relate principally to operating lease deposits and customer payments for holidays. The total of cash and cash equivalents, money market deposits and restricted cash at 30 September 2009 was £1,147.2 million (30 September 2008: £928.7 million).

As detailed above, most aircraft deliveries were funded from additional borrowings. Total borrowings increased by £493.7 million in the year to £1,120.6 million as a result of £468.2 million of new draw downs net of repayments and foreign exchange movements of £25.5 million on the retranslation of debt. Most borrowings are denominated in US dollars; however some facilities were drawn in euros for the first time in the year. The US dollar rate moved from 1.78 at 30 September 2008 to 1.60 at 30 September 2009.

Other non-current liabilities include maintenance provisions for work due to be performed in more than one year of £168.6 million, deferred income relating principally to the excess of sale price over fair value for aircraft subject to sale and leaseback of £52.6 million, deferred tax liabilities of £76.7 million and long-term financial instrument liabilities of £2.6 million.

Maintenance provisions have been impacted by the movement in the US dollar and euro exchange rates in the year. Deferred tax liabilities have decreased by £31.1 million since 30 September 2008 as a result of the reduction in the value of cash flow hedges, reduced accelerated capital allowances and the recognition of a deferred tax asset on losses; offset by a charge for increased short-term operating timing differences.

The net of cash and cash equivalents, money market deposits and borrowings (excluding restricted cash) at 30 September 2009 was a net debt position of £45.7 million (30 September 2008: net funds of £235.6 million) following the funding of capital expenditure through additional borrowings in the year.

Gearing increased in the year from 28.7% to 37.6%. The increase is a result of additional borrowings relating to new owned aircraft and the movement in the US dollar exchange rate. Gearing is consistent with that reported at the half year. Additional debt drawdown in the second half of the year has been offset by improved shareholders’ funds as a result of profits earned in the summer and the reversal of fair value fuel hedge losses deferred in equity at 31 March 2009.

Despite reduced profit levels in 2009, easyJet generated a positive operating cash flow in 2009 of £134.5 million as a result of a strong improvement in working capital.

Capital expenditure in the year was funded from further borrowings and is shown net of the proceeds from the sale of the three A321 aircraft and other assets in the year.

The value of cash holdings benefited from foreign exchange movements following the strengthening of both the US dollar and the euro against sterling.

High level cash flow bridge

*Includes money market deposits but excludes restricted cash.

Of the $937 million aircraft financing facility agreed in December 2007, $52 million was drawn in the year ended 30 September 2008, an additional $607 million was drawn in the current year, leaving $278 million for future deliveries. Seven A320 deliveries in the year were funded from additional mortgage finance secured in September 2009.

In addition to the undrawn December 2007 facilities of $278 million, easyJet has an undrawn revolving credit facility in place for $250 million, giving total undrawn facilities at 30 September 2009 of $528 million.

Subsequent to the year end in November 2009, easyJet secured $222 million of additional sale and leaseback finance bringing total undrawn facilities to $750 million. Future aircraft deliveries will be funded through a combination of undrawn committed facilities and surplus cash.

In adopting the going concern basis for preparing the accounts, the Directors have considered the business activities as set out here as well as easyJet’s principal risks and uncertainties as set out below. Based on easyJet’s cash flow forecasts and projections, the Board is satisfied that easyJet will be able to operate within the level of its facilities and available cash for the foreseeable future. For this reason, easyJet continues to adopt the going concern basis in preparing its accounts.

easyJet operates a fleet constituted mainly of Airbus* aircraft with some Boeings which are being phased out. Engines are provided by CFM and IAE and maintenance of aircraft and engines is undertaken by SRT, Virgin*, Aerotron*, GE, MTU and Lufthansa. The major lessors of aircraft to easyJet are AWAS*, BOC Aviation*, GECAS*, Nomura Babcock & Brown*, Royal Bank of Scotland* and Sumisho*. The major lenders to easyJet for aircraft purchase are Alliance & Leicester*, Bank of Tokyo-Mitsubishi*, BNP Paribas*, Calyon*, HSH Nordbank*, KfW*, Natixis*, PK AirFinance*, Royal Bank of Scotland*, Sumitomo Mitsui Banking Corporation* and WestLB*.

Our main insurers are Global, AIG, Kiln, Canada Life, QBE, Chubb, Ace and Allianz.

One of our biggest costs is fuel and our main suppliers are Shell, Air BP, Exxon and Q8. Our IT systems include agreements with AIMS, who provide crew, aircraft and flight management control and operation software; SAVVIS who provide data centre hosting facilities; Lufthansa who provide flight planning systems; SOPRA who develop our reservations system; and Agresso who provide our accounting system.

On 30 September 2009 the Company had 20 bases and they were operated by:

BAA
AdP
Saint Louis – EuroAirport Basel-Mulhouse-Freiburg
Manchester Airports Group
South West Airports
Abertis
Peel Holdings
Aeroports de Lyon
Flughafen Berlin-Schoenefeld
Aeroporti Di Milano
Newcastle Airport
Geneva International Airport
AENA

At these airports our ground handling was carried out by:

Menzies Aviation
Servisair
Group Europe Handling
Aviapartner
Swissport
SEA Handling
Globeground Berlin

Our main ancillary partners are Gate Gourmet, who provide our in-flight merchandise, Europcar, who provide car rental, Hotelopia and Laterooms who broker hotels and Alvia who, through the Mondial brand, provide insurance.

Our credit card acquirers are Elavon, Lloyds TSB, Euroconnect, Barclays Merchant Services and American Express. Our payment service providers are CyberSource and Bibit.

The Company is regulated by the CAA and easyJet Switzerland is regulated by FOCA. We have important relationships with NATS and Eurocontrol in relation to air traffic services.

The main unions we deal with in the UK are BALPA, UNITE and ALAE; in France they are SNPL and UNAC/CFTC; in Spain they are SEPLA and CCOO; in Italy ANPAC CISL; and in Switzerland BALPA and ESPA.

We use training services from CTC and flight simulation services from CAE.

We have a key relationship with easyGroup IP Licensing who own the easyJet brand.

*These contracts contain provisions giving the other party the right to terminate if there is a change in control in easyJet.

easyJet aims to have partnership agreements with suppliers, which stresses the importance of strong suppliers aligned to the success of easyJet as a business. Many of our supply agreements are unique and tailored to the needs of the business, to make sure that suppliers are rewarded appropriately for delivering services which meet pre-agreed performance targets and align with easyJet’s own internal performance goals. Our practice is to:

• agree the terms of payment at the start of business with the supplier
• ensure that those suppliers are made aware of the terms of payments
• pay in accordance with contractual and other legal obligations

At 30 September 2009, the number of creditor days outstanding for the Group was 15 days (2008: ten days), and for the Company was nil days (2008: nil days).

This section describes the principal risks and uncertainties which may affect easyJet’s business, financial results and prospects.