REG - easyJet PLC - Annual Report and Accounts 2015 <Origin Href="QuoteRef">EZJ.L</Origin> - Part 2
04/12/2015 10:10
- Part 2: For the preceding part double click ID:nRSD0305Ia
event of switching suppliers to enable an acceptable level of service to be maintained.
Industrial action easyJet, and the aviation industry in general, has a significant number of employees who are members of trade unions. Industrial action taken by easyJet employees, or by the employees of key third-party service providers, could impact on easyJet's ability to maintain its flight schedules. This could adversely affect easyJet's reputation and its operational and financial performance. Link to strategy:2 3 5 As easyJet operates across Europe there are 18 unions and nine representative bodies across eight countries of which crew are members. easyJet seeks to maintain positive
working relationships with all trade unions and other representative bodies. Each of the countries in which easyJet operates has localised employment terms and
conditions. This mitigates the risk of large-scale internal industrial action occurring at the same time. Processes are in place to adapt to disruptions as a result of
industrial action.
Senior management succession easyJet's current and future success is reliant on having the right people with the right capabilities in key leadership positions. Failure to develop and grow the capabilities and behaviours required of senior management so that there are clear successors for all key business roles, could adversely affect easyJet's ability to deliver its strategic objectives. Link to strategy:5 easyJet's aim is to develop talent from within. There are several talent development programmes in place for individuals who have been identified for fast-tracking into
more senior roles as vacancies arise. In addition, a management development programme is in place to develop people management and senior leadership capabilities. These
programmes operate at various levels within the organisation. There is an annual succession planning process.
Single fleet risk easyJet is dependent on Airbus as its sole supplier for aircraft. There are significant cost and efficiency advantages of a single fleet, however, there are two main associated risks: · technical or mechanical issues that could ground the full fleet, or part of the fleet, which could cause negative perception; and · valuation risks which crystallise when aircraft exit the fleet. The main exposure at this time is with the ageing A319 fleet, where easyJet is reliant on the future demand for second- hand aircraft. Link to strategy:3 4 The Board considers that the efficiencies achieved by operating a single fleet type outweigh the risks associated with easyJet's single fleet strategy. The Airbus A320
family (which includes the A319) is one of the two primary fleets used for short-haul travel. There are approximately 6,000 A320 family aircraft operating with a proven
track record for reliability. easyJet operates a rigorous established aircraft maintenance programme. To mitigate the potential valuation risks, easyJet regularly
reviews the second-hand market and has a number of different options when looking at fleet exit strategies. Leasing facilitates the exit of A319 aircraft from the fleet
by transferring residual value risk, and also provides flexibility in managing the fleet size.
STRONG BALANCE SHEET
Risk description Mitigation
Financial risk easyJet is exposed to a variety of financial risks which could give rise to adverse pressure on the financial performance of the Company, e.g. costs, revenue. · Market risks - significant/sudden increases in jet fuel prices, currency fluctuations or interest rates which have not been adequately protected through hedging · Counterparty risk - non-performance of counterparties used for depositing surplus funds (e.g. money market funds, bank deposits) · Liquidity risk - misjudgement in the level of liquidity resulting in inability to meet contractual/contingent financial obligations or the inability to fund the business when needed. Link to strategy:3 4 The Finance Committee (a committee of the Board) oversees the Group's treasury and funding policies and activities.
Turn to page: 59 for further details This includes: · treasury policy setting out Board approved strategies for foreign exchange and fuel hedging, along with liquidity, interest rate management, counterparties and cash deposit limits; and · reviewing and reporting on compliance with Board treasury policies. The policy is to hedge within a percentage band for a rolling 24-month period. Board policy is to maintain target liquidity at £4 million per aircraft, which is supported by a $500 million (five-year) revolving credit facility provided by a group of 12 relationship banks. This allows the Group to better manage the impact of downturns in business or temporary curtailment of activities. A strong balance sheet supports the business through fluctuations in economic conditions.
REPUTATIONAL RISKS
Risk description Mitigation
Major shareholder and brand owner relationship easyJet has two major shareholders (easyGroup Holdings Limited and Polys Holding Limited) which, as a concert party, control 33.73% of its ordinary shares. Shareholder activism could adversely impact the reputation of easyJet and cause a distraction to management. easyJet does not own its Company name or branding, which is licensed from easyGroup Ltd. The licence includes certain minimum service levels that easyJet must meet in order to retain the right to use the name and brand. The easyJet brand could also be impacted through the actions of easyGroup or other easyGroup licensees. Link to strategy:4 easyJet has an active shareholder engagement programme led by its investor relations team. As part of that programme easyJet engages with easyGroup Holdings Limited on a
regular basis alongside its other major shareholders. In addition to engaging with easyGroup as part of the shareholder engagement programme, the Company has a
relationship agreement with easyGroup and Polys Holdings in line with the controlling shareholder regime as set out in the Financial Conduct Authority's Listing Rules.
Turn to page: 83 for further details Representatives from the Board and senior management take collective responsibility for addressing issues arising from any activist approach adopted by the major shareholder. The objective is to proactively address issues before they arise and anticipate and plan for potential future activism. The brand licence agreement with easyGroup Ltd provides for the regular meeting of senior representatives from both sides to actively manage brand- related issues as they arise. Such meetings occur on a quarterly basis and have proven effective. easyJet also monitors compliance with brand licence service levels and has a right to take steps to remedy any instance of non-compliance.
Cyber threat and information security easyJet receives most of its revenue through credit card transactions and operates as an e-commerce business. It faces both external cyber threats and internal risks to its data and systems. A security breach could negatively impact easyJet's reputation and have an adverse operational and financial impact. Link to strategy:2 3 5 An Information Security Steering Group, chaired by the General Counsel, oversees any developments in data threats and controls and determines whether appropriate
responses are being taken to them. There is a dedicated information security team to monitor and manage information security risk. The following controls are in place: ·
monitoring of secure systems against unauthorised access; · reviewing the security of internal systems and easyJet.com through quarterly vulnerability scanning; ·
periodic mandatory employee security training to maintain staff awareness; · considering information security risks within procurement processes and the introduction of
new systems and IT services; · monitoring and control of scanning software for fraudulent customer activity by the revenue protection team; and · providing robust
physical security at head office buildings. Given the nature of this risk the appropriateness of the controls is under continuous review.
Competition and industry consolidation easyJet operates in competition with both flag carriers and other low-cost airlines. easyJet's key competitive advantages include its network, cost base, digital innovation and efficient and robust capital structure. Failure to retain these advantages or react quickly to competitor changes could have an adverse financial impact. Industry consolidation could also affect the competitive environment in a number of markets. This could cause a loss of market position and erosion of revenue. Link to strategy:1 2 3 easyJet seeks to have a rapid response to any such activity that may impact easyJet's ability to grow the business. Competitor and consolidation activity is monitored,
enabling key routes/positions to be readily defended. The Network Development Forum, a cross-functional panel of senior executives, approves new bases and the allocation
of assets around the network. Fleet framework arrangements, together with the Group's leasing policy, provide easyJet with significant flexibility in respect of scaling
the fleet according to business requirements. Strong cost control is a key behaviour across the Company, with initiatives to drive cost reduction and improve efficiency
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