easyJet plc announces fleet plans

RNS Number : 2459H

easyJet PLC

18 June 2013

Following a highly competitive fleet selection process, easyJet plc ("easyJet" or the "Company") announces that, subject to shareholder approval, it has entered into arrangements (the "New Framework Arrangements") with Airbus S.A.S. ("Airbus") to acquire 35 Current Generation A320 Aircraft for delivery between 2015 and 2017 under its existing agreement and 100 New Generation A320neo Aircraft for delivery from 2017 until 2022, under a new agreement. Under this new agreement, Airbus has also granted the Company the right, but not the obligation, to acquire up to 100 further New Generation A320neo Family Aircraft.

Key highlights of the transaction:

· Allows easyJet to continue to execute its successful strategy.

· New generation aircraft sourced at highly attractive prices and at a greater percentage discount to list price than the Company's existing Airbus contract.

· Enhances easyJet's cost advantage and mitigates against inflationary increases; the 180 seater New Generation A320neo Aircraft is expected to deliver a cost per seat saving of between 11% and 12%, compared to a 156 seater Current Generation A319 Aircraft.

· 85 of 135 ordered aircraft will be used to replace ageing aircraft as they leave the fleet and return to lessors, with the remaining aircraft used to continue easyJet's existing strategy of capacity seat growth of between 3% to 5% per annum.

· Continues the high level of fleet flexibility provided by the current arrangements. Whilst the announcement today will deliver a fleet of 276 aircraft by 2022, as of today, the new arrangements also give easyJet the ability to manage the fleet size to between 165 and 298 aircraft in 2022 depending on economic conditions and opportunities available.

· Total expected fleet acquisition and overhaul expenditure as a percentage of revenue is expected to fall from 18% in the period 2005 to 2012, to 10% to 12% in the period 2018 to 2022.

Carolyn McCall, easyJet Chief Executive, commented:

"I am delighted that easyJet is able to announce its fleet plans today.

"All manufacturers competed hard for the easyJet business. Both Airbus and Boeing offered us new generation aircraft that met our requirements and offered greatly improved fuel efficiency.

"Ultimately, Airbus offered us the best deal, and at a price with a greater discount to the list price than their landmark fleet purchase with easyJet in 2002.

"These arrangements combined with easyJet's cost advantage, leading network and compelling customer proposition mean that easyJet is uniquely positioned to be a structural winner in European aviation.

"This is a great outcome for easyJet, our shareholders and our passengers, and will ensure that easyJet is able to continue its successful strategy of delivering profitable growth and returns to shareholders."

John Barton, easyJet Chairman, commented:

"Since joining the easyJet Board, I have spent a significant amount of time reviewing the rationale for ordering new aircraft and have been actively involved in the selection process, which I am sure has been robust and thorough. We have planned that the new fleet arrangements will be financed without recourse to shareholders and believe that the arrangements will enhance returns and dividends to shareholders.

"The new fleet arrangements will enable easyJet to continue its successful strategy of offering customers low fares to convenient airports and efficient and friendly service"

A circular is expected to be sent to shareholders later today giving details of the New Framework Arrangements and containing notice of a general meeting to be held on or around 11 July 2013 at which a resolution to approve the New Framework Arrangements will be proposed.

Notes to editors

1 The table below sets out the aircraft list price (being the sum of the airframe list price, engine option list price and the price of certain assumed specification change notices) against which the price concessions are made, based on the relevant price catalogue in January 2012 at the economic conditions at that date. easyJet has negotiated a very substantial discount from the list price, as set out below:

Current Generation A320 Aircraft US$76,260,569

New Generation A320neo Aircraft* US$92,346,946

*Applicable to both the firm aircraft orders and the purchase right aircraft.

2 Credit Suisse Securities (Europe) Limited is acting as sponsor and joint broker, and Nomura is acting as joint broker to the Company.

For further information:

easyJet plc

Investor and analyst:

Rachel Kentleton +44 (0) 7961 754 468

Will MacLaren +44 (0) 7961 879 763

Tom Oliver +44 (0) 7950 996 262

Media:

Paul Moore +44 (0) 7860 794444

Ed Simpkins RLM Finsbury +44 (0) 20 7251 3801

+44 (0) 7947 740 551

There will be an analyst presentation at 9.30am BST on 18 June 2013 at Nomura, One Angel Lane, London, EC4R 3AB.

Capitalised terms in this release not otherwise defined shall have the meaning ascribed to them in the Circular.

Credit Suisse Securities (Europe) Limited, which is regulated in the United Kingdom by the Financial Conduct Authority, is acting for easyJet plc and no-one else in connection with the New Framework Arrangements and will not be responsible to anyone other than easyJet plc for providing the protections afforded to the clients of Credit Suisse Securities (Europe) Limited or for providing advice in relation to the New Framework Arrangements.

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18 June 2013

easyJet's New Framework Arrangements

Today, the Company announces that it has entered into conditional arrangements with Airbus under which Airbus has agreed to supply to the Company 35 Current Generation A320 Aircraft for delivery between 2015 and 2017 (the "Bridge Period") and 100 New Generation A320neo Aircraft which are planned for delivery from 2017 until 2022. In addition, Airbus has granted the Company additional purchase rights to acquire up to 100 further New Generation A320neo Family Aircraft. These arrangements, together with Engine Supply Commitment Letters and the PLC Guarantee, are referred to in this announcement as the "New Framework Arrangements".

1 Summary

1.1 The Board considers that the terms of the New Framework Arrangements are in the best interests of the Company and its Shareholders as a whole and are expected to deliver improved and sustainable returns for Shareholders. The Board has also set out why it unanimously recommends its Shareholders vote in favour of the Resolution to be proposed at the General Meeting.

1.2 Assuming a fuel price of US$1,100 m/t, the 180 seat New Generation A320neo Aircraft is expected to deliver a cost per seat saving of around 11% to 12% compared to the 156 seat Current Generation A319 Aircraft, comprising a 7% to 8% saving from up gauging (increasing the number of seats in an aircraft) from a Current Generation A319 Aircraft to a Current Generation A320 Aircraft and 4% to 5% from moving from a Current Generation A320 Aircraft to New Generation A320neo Aircraft[A].At recent fuel prices of around US$900 m/t, the expected overall cost per seat saving is 10% to 11%, comprising a 7% to 8% saving from up gauging, and 3% to 4% from moving from a Current Generation A320 Aircraft to a New Generation A320neo Aircraft.

1.3 Of the 135 aircraft to be delivered under the New Framework Arrangements, 85 aircraft will be for the planned replacement of the existing fleet as it ages over the next 9 years and aircraft are returned to lessors or sold. The New Framework Arrangements will also enable, but not require, easyJet to grow over the next 9 years. The Board of easyJet believes that there are profitable opportunities for easyJet to grow seats flown at around 3% to 5% a year. This comprises 2% to 4% seat growth from the introduction of new routes and/or increased frequencies and approximately 1% seat growth from flying 180 seat aircraft on routes currently operated by 156 seat A319 aircraft.

1.4 The Board has negotiated a significant amount of flexibility in the New Framework Arrangements to protect the Company in the event of negative changes in the external environment. This would allow the Company to reduce the fleet size to 165 aircraft by 2022 compared to the current fleet size of 211 aircraft, taking into account planned returns to lessors and sales. However, there is also flexibility within the New Framework Arrangements and existing fleet arrangements for the Board to increase the fleet size to 298 by 2022.

1.5 The New Framework Arrangements are expected to be funded through a combination of easyJet's internal resources, cashflow, sale and leaseback transactions and debt. The New Framework Arrangements are not expected to impact the Company's ability to pay its dividend in line with its increased payout of 3 times cover. The Board expects the New Framework Arrangements will enhance easyJet's ability to deliver cash returns to Shareholders.

1.6 If the New Framework Arrangements are not approved then the Board believes that easyJet's competitive advantage will be eroded. By 2023, without the New Framework Arrangements, easyJet's cost per seat would be around £2.98 higher than it would otherwise have been, in the view of the Board[B]. In the 2012 Financial Year, easyJet reported profit before tax per seat of £4.81[C].

1.7 Furthermore, if the New Framework Arrangements are not approved, it will limit easyJet's ability to take advantage of profitable opportunities to grow and the ability of the Company to deliver sustained growth and returns to Shareholders will be negatively impacted.

1.8 The New Framework Arrangements are the result of a highly competitive, rigorous and thorough process over the last 18 months which has involved a detailed review of the technology of new generation aircraft and a thorough evaluation of the technical and financial benefits of placing this aircraft order.

1.9 easyJet has applied the highest standards of governance, control and ethical behaviour to the fleet selection process, and has sought assurance that these standards have been maintained throughout.

2 Actions for Shareholders

2.1 The principal terms and conditions of the New Framework Arrangements are summarised in section 10 of this announcement and in Part 3 of the circular to Shareholders.

2.2 Given the size of commitments under the New Framework Arrangements relative to the Company, such arrangements are conditional upon the Company obtaining Shareholder approval. This approval will be sought at a General Meeting expected to be held at 10 a.m. on 11 July 2013 at Hangar 89, London Luton Airport, Luton, Bedfordshire LU2 9PF.

2.3 Notice of the General Meeting will be set out in Part 7 of the circular to Shareholders. The Resolution being proposed seeks approval for the New Framework Arrangements.

2.4 The Directors, who beneficially hold in aggregate 196,701 Shares representing approximately 0.05% of the Company's issued share capital as at 16 June 2013, being the latest practicable date prior to the publication of this announcement, intend to vote in favour of the Resolution.

3 Consequences of the New Framework Arrangements not becoming effective

3.1 If the Resolution is not passed and the New Framework Arrangements do not become effective, then the Company risks not being able to deliver sustainable returns to Shareholders over the long term.

3.2 easyJet's cost advantage would be eroded as the age of the fleet increases materially and other airlines benefit from the cost efficiency expected to be provided by new generation aircraft. An ageing fleet would mean that easyJet would incur increased maintenance spend and encounter reliability issues which would increase the cost base and adversely affect the high asset utilisation of the fleet. The Board estimates that if no new aircraft were ordered, by 2023 easyJet's total cost per seat at recent fuel and exchange rates would be £2.98 per seat higher than if more cost efficient aircraft were brought into the fleet. This would result in a material impact on profitability given that easyJet's profit before tax per seat for the 2012 Financial Year was £4.81.

3.3 The impact on easyJet's competitive position would be further exacerbated over time as a result of reductions in the operating cost base of other airlines operating new generation aircraft with the benefit of an expected material advantage in fuel efficiency.

3.4 Additionally, as aircraft age they become less reliable which impacts on-time performance, this would inevitably affect easyJet's ability to drive revenue. Based on the 2012 Financial Year, a 1% change in revenue per seat impacts profit before tax by approximately £40 million.

3.5 easyJet would also be exposed to the risk of decreasing residual values of an ageing fleet and out of date technology if the Company did not enter into the New Framework Arrangements.

3.6 Finally, easyJet would not be able to take advantage of profitable opportunities to grow and its ability to generate cash returns for Shareholders would be negatively impacted.

3.7 If easyJet did not enter into the New Framework Arrangements, the average age of the fleet in 2022 would be 13.8 years and there would be 218 aircraft in the fleet, compared to 4.9 years and 211 aircraft, respectively as at 31 May 2013.

4 Risks

The Board has considered and put in place mitigants for the key risks of the Company entering into the New Framework Arrangements which are set out in Part 2 of the circular to Shareholders. The Board also recognises that as a result of the New Framework Arrangements easyJet will enter into a significant capital commitment over the next 9 years. The forms of financing available to the Company are set out in section 11 of this announcement. It is the nature of the aviation industry that airlines are exposed to external risks, for example fuel price fluctuations, currency fluctuations, catastrophic loss or other macroeconomic factors which can cause significant harm to the Company's financial and operational performance. However, the Board believes that easyJet's business model, and the cost savings and fleet flexibility provided by the New Framework Arrangements should mitigate these risks.

5 Industry landscape and easyJet's position

5.1 There are approximately 3,000 single aisle aircraft in operation in Europe and around half of overall capacity is flown by the top five airlines: Ryanair, IAG, Lufthansa, Air France-KLM and easyJet. In recent years, the sustained high price of aviation fuel combined with reduced European economic growth and consumer spending, rising aviation taxes and scarcity of financing has led to a difficult operating environment for airlines. As a result, several airlines have exited the market, such as Spanair and Malev; other carriers have changed ownership or required refinancing, such as BMI and airberlin; and some large charter operators and legacy network carriers have seen continued declines in their market share and profitability. In contrast, easyJet has delivered returns in excess of its cost of capital, generated strong cash flows and returned £281 million through dividends to Shareholders whilst growing modestly and cautiously. easyJet has been able to deliver these returns to Shareholders through its strong network positions, competitive cost advantage and strong balance sheet.

5.2 Capacity within Europe has grown at an average annual rate of 4.2% from 2003 to 2012. easyJet has grown profitably at a higher rate over the same time period and now has a market share of just over 8% of the European short haul market. Approximately 67% of easyJet's annual capacity, which equates to around 46 million seats, touches the Company's top 20 airports. The total capacity at these airports is around 208 million seats (excluding long haul) and easyJet has approximately a 22% share of these seats. The Company estimates around 86 million seats at these airports are currently flown by legacy carriers to cater for point-to-point demand and these operators are typically less efficient than easyJet. Consequently these areas are easyJet's focus for continued profitable growth. The New Framework Arrangements would support easyJet's planned seat growth of 3% to 5% per annum; slightly ahead of the market.

5.3 Over the last three financial years, easyJet has a strong track record of delivering returns and growth for shareholders and is structurally positioned as one of the strongest pan European airlines due to its cost advantage, leading market positions at convenient airports and attractive customer proposition of low fares with friendly and efficient service, supported by one of the strongest balance sheets in the European airline industry.

	easyJet's recent financial and operational performance
	2009 Financial Year	2010 Financial Year	2011 Financial Year	2012 Financial Year
Aircraft	181	196	204	214
Passengers (m)	45.2	48.8	54.5	58.4
Cost per seat (ex-fuel) (£)	34.16	37.23	36.62	36.25
Profit before tax (£m)	55	154	248	317
Profit margin* (%)⁽¹⁾	2.1	5.2	7.2	8.2
Net Debt (Cash)⁽²⁾	46	40	(100)	74
EPS-basic (p)⁽³⁾	16.9	28.4	52.5	62.5
ROCE-including operating leases (%)⁽⁴⁾	3.6	6.9	9.8	11.3
Ordinary DPS (p)	-	-	10.5	21.5
Special DPS (p)	-	-	34.9	-
Load factor (%)	85.5	87.0	87.3	88.7
On-Time Performance (%)	80	66	79	88

* Calculated using figures which have been extracted without adjustment from the Company's 2008/09, 2009/10, 2010/11 and 2011/12 Annual Report and Accounts.

(1) Profit margin is profit before tax divided by total revenue.

(2) Net debt is borrowings less money market deposits and cash and cash equivalents.

(3) Basic earnings per share is profit for the year divided by the weighted average number of Shares in issue during the year after adjusting for Shares held in employee share trusts.

(4) Return on capital employed (ROCE)-Normalised profit after tax divided by average capital employed. Normalised profit after tax comprises operating profit adjusted for implied interest on operating leases (calculated at one‑third of the charge for aircraft dry leasing for the year), less tax calculated at the standard rate of corporation tax ruling at the year end. Average capital employed comprises the average of the sum of Shareholders' equity and adjusted net debt (as defined in "gearing") at the start of the year.

6 Fleet plan flexibility

6.1 easyJet has benefited from the flexibility which it has within the Existing Airbus Contract, enabling the Company to adjust the fleet size to market conditions. easyJet is able to increase the fleet size through lease extensions and the exercise of options and is able to reduce the planned fleet size through the early termination of leases and through deferrals of existing orders.

6.2 The New Framework Arrangements provide easyJet with similar levels of flexibility, with the ability to downsize the fleet size to a minimum of 165 aircraft by 2022 compared to the current fleet size of 211 aircraft taking into account planned fleet exits. In the event easyJet does reduce the fleet size to 165 aircraft by 2022, then the Company would still be obliged under the New Framework Arrangements to take delivery of a further 23 aircraft by August 2024. The current fleet plan is summarised below. However, there is also flexibility within the New Framework Arrangements for easyJet to increase the fleet size to 298 by 2022. easyJet intends to maintain its policy of targeting of an owned:leased split of around 70:30 which further contributes to flexibility in fleet planning arrangements. Under the New Framework Arrangements, Airbus has granted easyJet the right to convert any New Generation A320neo Aircraft (180 seats) to either a New Generation A319neo Aircraft (156 seats) or a New Generation A321neo Aircraft (220 seats), provided appropriate notice is given to Airbus. Following the Exercise of Option over the 35 Current Generation A320 Aircraft, the Company has 6 options in respect of Current Generation A320 Family Aircraft, exercisable by 30 September 2013, and purchase rights in respect of 29 Current Generation A320 Family Aircraft remaining under the Existing Airbus Contract.

			Bridge Period
	2013 Financial Year	2014 Financial Year	2015 Financial Year	2016 Financial Year	2017 Financial Year
Maximum fleet⁽¹⁾⁽²⁾	217	226	237	247	262
Minimum fleet⁽¹⁾	217	226	215	217	223
Fleet plan-base case⁽¹⁾	217	226	231	241	256
Fleet plan-base case deliveries⁽¹⁾	10	9	11	10	16
Fleet plan-base case exits⁽¹⁾	7	0	6	0	1
% of Current Generation A320 Aircraft⁽¹⁾⁽³⁾	29%	32%	36%	39%	42%
% of Current Generation A319 Aircraft⁽¹⁾⁽³⁾	71%	68%	64%	61%	57%
% of New Generation A320neo Aircraft in fleet⁽¹⁾⁽³⁾	-	-	-	-	1%
Total	100%	100%	100%	100%	100%
Seats flown growth (%)	-	4.7%	4.6%	5.4%	4.8%
Average age of fleet (years)-base case⁽¹⁾	5.1	5.8	6.4	7.2	7.6

(1) At the end of the relevant financial year.

(2) Does not include the purchase rights.

(3) Based on fleet plan-base case.

	2018 Financial Year	2019 Financial Year	2020 Financial Year	2021 Financial Year	2022 Financial Year
Maximum fleet⁽¹⁾⁽²⁾	279	300	301	306	298
Minimum fleet⁽¹⁾	185	167	177	162	165
Fleet plan-base case⁽¹⁾	261	264	269	276	276
Fleet plan-base case deliveries⁽¹⁾	17	21	11	25	24
Fleet plan-base case exits⁽¹⁾	12	18	6	18	24
% of Current Generation A320 Aircraft⁽¹⁾⁽³⁾	41%	41%	40%	39%	39%
% of Current Generation A319 Aircraft⁽¹⁾⁽³⁾	52%	44%	41%	33%	25%
% of New Generation A320neo Aircraft in fleet⁽¹⁾⁽³⁾	7%	15%	19%	28%	36%
Total	100%	100%	100%	100%	100%
Seats flown growth (%)	3.0%	3.0%	3.0%	2.8%	3.1%
Average age of fleet (years)-base case⁽¹⁾	7.7	7.8	8.3	8.0	7.9

(1) At the end of the relevant financial year.

(2) Does not include the purchase rights.

(3) Based on fleet plan-base case.

6.3 The graph in section 6.4 of this announcement demonstrates the flexibility under the New Framework Arrangements and the Existing Airbus Contract to reduce the fleet size; with each line representing the minimum fleet possible if all options to decrease aircraft are exercised on or after the first day of the financial year represented by such line.

6.4 The mechanisms by which the Company can reduce the fleet size are through the early termination of leases and through deferral of existing orders. In addition, the Board has additional flexibility to reduce the fleet size by selling aircraft owned by the Company; however this mechanism is not reflected in the graph in this section of the announcement.

Graph demonstrating fleet plan flexibility

http://www.rns-pdf.londonstockexchange.com/rns/2459H_-2013-6-18.pdf

7 Capital allocation and expenditure

7.1 The Board is focused on driving returns for Shareholders and, consistent with this focus, has outlined a clear set of financial objectives and measures as set out in the table below.

	Objectives	Measures	Progress in 2012 Financial Year
Return Targets	Earn returns in excess of cost of capital through the cycle.	Improve profit before tax per seat to £5.	Profit before tax per seat improved by 84p to £4.81.
	Invest in growth opportunities where returns are attractive.	ROCE including operating leases.*	ROCE of 11.3%.
Capital Structure and Liquidity	Ensure robust capital structure.	Maximum gearing of 50%.	Gearing of 29%.
	Return excess capital to Shareholders.	Target £4m cash per aircraft.	£4.1m cash per aircraft.
	Maintain sufficient level of liquidity to manage through the cycle and industry shocks.	Cap of £10 million adjusted net debt per aircraft.
Dividend Policy	Target consistent and continuous payouts.	3 times cover, subject to meeting gearing and liquidity targets.	Dividend changed to 3 times cover from 5 times cover.
		Annual payments based on full year profit after tax.	Increased dividend payment.
		Consider returns over 3 times cover to reduce excess capital.	£150m special dividend paid in March 2012.
Aircraft Ownership	Maintain flexibility around fleet deployment and size.	Target of approximately 70% owned aircraft, approximately 30% leased aircraft.	74% owned, 26% leased.
Hedging	Insulate short term operating performance against adverse movements in fuel price and exchange rates.	65% to 85% of the next 12 months' anticipated requirements. 45% to 65% of the following 12 months' anticipated requirements.	In line with hedging policy.

* For a full definition refer to the glossary section of the circular to Shareholders.

7.2 The Board's objectives are to achieve returns in excess of the cost of capital measured by ROCE, to allocate capital efficiently to provide appropriate returns for Shareholders and to support the network. Capital expenditure will be principally allocated to the following activities:

(a) maintaining an efficient fleet size through the replacement of leased aircraft as they exit the fleet;

(b) maintenance, repair and overhaul of engines and aircraft (an engine overhaul being required when an aircraft has operated for between eight and nine years in easyJet service in accordance with the manufacturer's maintenance programme); and

(c) new network opportunities and adding capacity to existing routes where the Board is satisfied that they can deliver on-target returns within a defined timescale.

7.3 easyJet has built up key positions in slot constrained airports over a number of years which provide the Company with a very competitive and resilient network platform for its operations. easyJet's strategy is to continue to build positions of strength in its key markets and to reallocate aircraft to the routes and bases which will deliver the highest returns. Seabury Airline Planning Group LLC ("Seabury APG"), an external airline industry leader in network, fleet and alliance advisory services, has advised easyJet on the efficiency and robustness of its network. The network will continue to be externally reviewed regularly as part of the Company's strategy process. easyJet regularly publishes as part of its financial results details of route profitability, this has demonstrated that new routes can be as profitable as old routes and that the Board has improved the return on capital employed from the network over the last 3 years.

7.4 The Board believes that throughout the Bridge Period and the period in which new generation aircraft will be delivered that, in the absence of external shocks, the Company is expecting to deliver returns in excess of its current cost of capital. The Company is expecting to pay dividends to Shareholders in line with its 3 times cover policy through the period.

Fleet acquisition and overhaul expenditure

7.5 Fleet acquisition and overhaul expenditure includes pre-delivery payments, final delivery payments and other on-going maintenance expenditure requirements and is stated before the proceeds from the sale and leaseback of aircraft. easyJet's policy is that around 30% of aircraft will be leased.

7.6 The table below shows the fleet acquisition and overhaul expenditure on aircraft as a percentage of revenue both historically and for the period of the New Framework Arrangements. From the period 2005 to 2012 total fleet acquisition and overhaul expenditure was approximately 18% of revenue. Approximately 50% of this fleet acquisition and overhaul expenditure was on new aircraft, and maintenance spend in this period was low due to a young fleet and low levels of overhaul expenditure. Over the Bridge Period, new aircraft entering the fleet will still account for approximately 50% of fleet acquisition and overhaul expenditure. Maintenance expenditure will increase during the Bridge Period as the fleet ages and more heavy maintenance is undertaken. However, fleet acquisition and overhaul expenditure as a percentage of revenue in the Bridge Period will be approximately 8%. In the period between 2018 and 2022, the majority of fleet acquisition and overhaul expenditure is planned to be on replacement aircraft as older current generation aircraft exit the fleet and maintenance expenditure decreases due to younger aircraft entering the fleet. The Board believes that fleet acquisition and overhaul expenditure for the period between 2018 Financial Year and 2022 Financial Year will be between 10% to 12% of expected revenue.

	Financial Years
Percentage of fleet acquisition and overhaul expenditure spent on:	2005 - 2012⁽¹⁾	2013 ‑ 2014⁽²⁾	2015 - 2017⁽²⁾	2018 - 2022⁽²⁾
Additional aircraft	49%	37%	48%	16%
Replacement aircraft	42%	39%	12%	54%
Maintenance	9%	24%	40%	30%
Total	100%	100%	100%	100%
Total expected fleet acquisition and overhaul expenditure as a % of easyJet revenue	18%⁽¹⁾	10%	c.8%	10% ‑ 12%

(1) Based on actual revenue for the 2005-2012 Financial Years.
(2) Based on estimated revenue.

7.7 In summary, of the 135 aircraft to be ordered under the New Framework Arrangements between 2015 and 2022, 85 aircraft are for the planned replacement of the existing fleet as it ages over the next 9 years and aircraft are returned to lessors or sold, and 50 aircraft are for growth.

8 Background to new generation aircraft and engines

8.1 As a result of advances in engine technology and in response to the expectation that the high oil prices which have prevailed in recent years will continue, the major aircraft and engine manufacturers have launched new aircraft programmes intended to deliver a significant reduction in operating costs when compared to the current generation of single aisle aircraft.

8.2 In December 2010, Airbus launched an updated version of its single aisle family, known as the A320neo. The major change has been the introduction of new engines, with a choice of the CFM Leap or the Pratt & Whitney PurePower PW1000G engines, together with the inclusion of fuel efficient "Sharklets" as a standard feature which are designed to enhance eco-efficiency and payload range performance. Airbus states that as a result of the new technology nitrogen oxides, emissions will be 50% below the CAEP/6 standard and that noise levels will be up to 15dB below the ICAO chapter 4 standard. The new generation A320neo is due to enter service in 2015 and has attracted 1,734 firm orders from 36 customers as of 31 December 2012.

8.3 In August 2011, Boeing launched an updated version of their single aisle family, known as the B737 MAX. This incorporates the CFM LEAP engine, a new winglet design to improve fuel efficiency and various other design and system changes. Boeing states that the B737 MAX will incorporate the latest quiet engine technology to reduce the operational noise footprint of the airplane by 40% and that emissions will be reduced by 50% below the CAEP/6 standard for nitrogen oxides. It is due to enter service in 2017 and has attracted 1,381 orders from over 18 customers as at May 2013.

8.4 In July 2008, Bombardier launched an all-new aircraft program, the CSeries, through which it entered the market for single aisle aircraft with more than 100 seats for the first time. The CSeries family consists of two aircraft, the CS100 seating between 100 to 200 passengers, and the CS300 seating between 120 to 160 passengers. The CSeries is an all-new family of aircraft with new engines, a composite wing and various other technological advances. It is due to enter into service in 2014 and has attracted 138 orders from 11 customers as of 30 September 2012.

8.5 Within the markets in which easyJet operates, airlines have placed orders for over 430 A320neo/ B737 MAX new generation aircraft as of March 2013, most notably Lufthansa (100), Norwegian (222) and Pegasus (100). Airlines in the markets in which easyJet operates also have over 500 current generation A320 / B737 aircraft orders already in place. In addition to this, aircraft lessors have placed orders for 690 A320neo / B737 MAX aircraft and 520 A320 / B737 aircraft, as of March 2013, some of which could be placed with airlines in Europe.

8.6 The manufacturers expect these new generation aircraft to deliver between 13% to 15% savings in fuel consumption and they are planning to cease production of the current generation aircraft and transition completely to the new generation aircraft types by 2022. As part of the fleet selection process, easyJet has carried out an extensive evaluation of the new generation aircraft and engines and concluded the new generation aircraft offer a significant economic advantage over current generation aircraft.

9 Fleet selection process

9.1 The fleet selection process is the culmination of a detailed review of easyJet's strategy including a thorough examination of the Company's sources of competitive advantage. easyJet has been successful in growing its presence in the European aviation market and creating Shareholder value thanks to its key competitive advantages including: a relative cost advantage against key competitors, partly derived from the Existing Airbus Contract; low fares, which are the primary driver of bookings; the strength of its brand and digital presence through easyJet.com; a strong no.1 or no.2 market presence, particularly at slot constrained primary airports; and the Company's financial strength. easyJet undertook a process to select the most suitable fleet to enable the Company to maintain or improve these sources of competitive advantage.

9.2 easyJet has undertaken a rigorous technical evaluation and commercial selection process over the last 18 months. Visits to aircraft and engine manufacturers began in the first half of 2012 and Requests for Proposals ("RFPs") were sent out in August 2012. The process then involved a comprehensive technical review which focused on airframe and engine technical suitability, risk assessment, fuel burn analysis and the ability to meet future environmental standards. The commercial process assessed manufacturers on pricing, economic benefits, support packages and guarantees. As a consequence, it was decided not to proceed with the evaluation of the Bombardier CSeries, the aircraft being too small for the Company's 180 seater requirements, but to reconsider this aircraft type for the Company's potential 150 seater replacement requirement from 2021.

9.3 easyJet has applied the highest standards of governance, control and ethical behaviour to the fleet selection process, and has sought assurance that these standards have been maintained throughout. The Board constituted a special committee, chaired by Charles Gurassa, to specifically oversee the governance of the fleet selection process. A tightly controlled procurement process has been conducted to ensure that all suppliers have been treated fairly and all easyJet staff involved in the process have been subject to mandatory ethical training and have signed confirmation of their compliance with relevant policies. This includes compliance with the gifts and hospitality policy which mandates enhanced compliance controls for employees during supplier tender processes and any other times when a decision relating to a supplier relationship is pending. Furthermore, contact with shortlisted suppliers has been subject to enhanced record keeping and visits to all those suppliers by easyJet's Risk and Legal teams have given comfort that the suppliers have applied appropriate anti-bribery and ethical controls in relation to their dealings with easyJet.

9.4 easyJet has appointed accountants BDO LLP to carry out an on-going review of the controls surrounding the process, which has covered controls over procurement procedures, anti-bribery training and ethical awareness and the overall governance applied to the fleet selection process. This work builds on an extensive review carried out by easyJet's Internal Audit function which together gives the Board assurance that the process has been appropriately controlled. In addition, easyJet has developed financial models to underpin the selection process and engaged Ernst & Young LLP to review the construction of those models on the basis of the assumptions agreed by the Board.

9.5 In assessing the commercial benefits of a new fleet order the Board has based its analysis on some key assumptions:

(a) a maximum aircraft age of 16 years in the period 2014 to 2022;

(b) an average aviation fuel cost of US$1,100 per m/t; and

9.6 Furthermore the Board has assessed that the business case for the New Framework Arrangements remains robust based on a comprehensive sensitivity analysis around the changes in revenue per seat, fuel prices and exchange rates. The cost savings generated by the move from Current Generation A320 Aircraft to New Generation A320neo Aircraft are more sensitive to movements in US$ and fuel price than the savings delivered by upgauging from A319 to A320 aircraft.

9.7 At the conclusion of its technical evaluation process easyJet was satisfied that all manufacturers, Airbus, Boeing, Bombardier, CFM and Pratt & Whitney, could offer aircraft and engines to meet easyJet's performance requirements. The subsequent thorough negotiation process has resulted in the Company selecting Airbus based on the superior economics it offered. In addition, Airbus demonstrated that it has the flexibility and delivery capacity to support easyJet's fleet plan and easyJet has secured favourable aircraft delivery times in line with that plan with flexibility built into the contractual arrangements. It is currently expected that Airbus will progressively transition its production of current generation aircraft to new generation aircraft between 2016 and 2018 with the aim to achieve full production rate of new generation aircraft by mid 2018. Following an extensive technical review easyJet has evaluated CFM and Pratt & Whitney and their ability to minimise fuel burn and to meet future environmental standards. CFM and Pratt & Whitney conformed to easyJet's technical risk assessment and demonstrated airframe and engine suitability. CFM and Pratt & Whitney have also indicated that they are able to provide easyJet with the necessary support and performance guarantees for the duration of the New Framework Arrangements. The Company is in on-going negotiations with both CFM and Pratt & Whitney regarding the supply of engines. However, both potential engine suppliers have committed to grant certain substantial credits which may be applied against the purchase price for aircraft under the New Framework Arrangements if selected. The selection of the preferred engine supplier will follow Shareholder approval of the New Framework Arrangements. Depending on the finalisation of negotiations with the engine suppliers, there may be an opportunity to accelerate cost savings to be delivered by the New Framework Arrangements by taking delivery of New Generation A320neo Aircraft in 2015.

9.8 The price to be paid for the aircraft reflects a rigorous and extensive financial analysis which confirmed that the New Framework Arrangements will deliver an operating cost per seat advantage to easyJet which will help the Company to maintain its competitive cost advantage.

9.9 I, John Barton, joined easyJet on 1 May 2013 and have spent a significant amount of time in the last two months meeting with Boeing, Airbus and some of the Company's largest Shareholders and reviewing the rationale for easyJet placing an aircraft order. I have been actively involved in the latter stages of the fleet selection process and ensuring that this is the correct decision for easyJet to recommend to Shareholders. The Company has undertaken a thorough and rigorous fleet selection process and the New Framework Arrangements which easyJet has secured are expected to provide the platform for it to continue to deliver sustainable growth and returns for Shareholders.

10 The New Framework Arrangements

General

10.1 The Company entered into the New Framework Arrangements on 17 June 2013. The New Framework Arrangements comprise the Exercise of Option under which the Company has agreed to purchase 35 Current Generation A320 Aircraft and the New Generation Contract under which the Company has agreed to purchase 100 New Generation A320neo Aircraft and has been granted purchase rights in respect of a further 100 New Generation A320neo Aircraft. The Exercise of Option and the New Generation Contract are both conditional upon Shareholder approval at the General Meeting.

10.2 Further details of the New Framework Arrangements will be contained in Part 3 of the circular to Shareholders.

Price

10.3 The New Framework Arrangements were negotiated and entered into with adherence to customary business and industry practice. The aggregate actual price for the Airbus aircraft, determined after an arm's length negotiation between the parties, is very substantially lower than the list price as provided by Airbus because of certain price concessions with regard to the aircraft. These will take the form of credit memoranda to the Company for the amount of such concessions, which easyJet may apply toward the purchase of goods and services from Airbus or toward payments in respect of the purchase of the aircraft.

10.4 The New Framework Arrangements contain confidentiality provisions restricting, among other things, disclosure of the actual price of the aircraft. In addition, consistent with the customary practice of the global aviation industry, the price for the acquisition of the aircraft is not customarily disclosed to the public. Disclosure of the price would result in the loss of the significant price concessions and hence would have a significant negative impact on the Company's cost incurred in entering into the New Framework Arrangements and would therefore not be in the interest of the Company and Shareholders as a whole.

10.5 The table below sets out the aircraft list price (being the sum of the airframe list price, engine option list price and the price of certain assumed specification change notices) based on the relevant price catalogue in January 2012.

Aircraft	Total (US$) based on January 2012 economic conditions
Current Generation A320 Aircraft	US$76,260,569
New Generation A320neo Aircraft*	US$92,346,946

* Applicable to both the firm aircraft orders and the purchase right aircraft.

10.6 The final list price of each Current Generation A320 Aircraft and each New Generation A320neo Aircraft is subject to increases including: (i) the cost of "Buyer‑furnished" equipment which the Company has asked Airbus to install on the aircraft (which is estimated to be US$778,100 for each of the Current Generation A320 Aircraft and US$618,100 for each of the New Generation A320neo Aircraft); (ii) price escalation will be applied to the airframe list price, the engine option list price and the price of specification change notices, by applying a formula reflecting increases in the published relevant labour and material indices between the time the aircraft list price was set and the delivery of such aircraft; and (iii) taxes. The Company is responsible for the payment of any taxes (including VAT) except for taxes relating to the manufacture of the aircraft in, inter alia, France and/or Germany, which will be payable by Airbus.

10.7 The Directors confirm that the price represents a very substantial discount from the list price and will continue to give easyJet a strong competitive advantage through its aircraft ownership costs. The level of discounts applicable to the Current Generation A320 Aircraft is in line with the price concessions applicable to aircraft previously delivered under the Existing Airbus Contract. The level of discounts with regard to the New Generation A320neo Aircraft is greater than the level of discount, in percentage terms relative to the relevant list price, granted under the Existing Airbus Contract. The Company has also taken into account the current economic environment, the industry performance and the Company's financial position, and considers that the extent of the price concessions granted to the Company under the New Framework Arrangements are highly advantageous and in the best interests of the Company and Shareholders as a whole.

10.8 In respect of the New Framework Arrangements, the Company understands its disclosure obligations under the Listing Rules, and has therefore on separate occasions requested all manufacturers' consent to the Company disclosing required information (including the relevant price involved) in the relevant announcements and circulars. Nonetheless, Airbus and all other manufacturers invited to tender in the fleet process, for business and commercial reasons, did not accede to the Company's request and insisted on preserving the confidentiality of such information.

11 Financing of the New Framework Arrangements

11.1 easyJet presently finances its fleet through a mix of sale and leaseback transactions, internal resources, cashflow and bank borrowing. As at 31 March 2013, 30% of the Company's fleet were financed under operating leases, 5% were financed under finance leases, 40% were owned outright by the Company and 25% were subject to mortgage.

11.2 The Company will retain flexibility in determining methods of financing additional aircraft. easyJet may use forms of debt, sale and leaseback transactions or other financing structures, which may include the sale or securitisation of aircraft, public debt offers or easyJet's internal resources and cashflow where the Board considers these sources of financing more favourable to easyJet. It is anticipated that payments under the New Framework Arrangements will be financed through a combination of easyJet's internal resources, cashflow, sale and leaseback transactions and debt.

11.3 While the Board will regularly review optimal sources of financing, there is no expectation that Shareholders will be asked to fund any aspect of the New Framework Arrangements and the Board does not expect these arrangements will impact easyJet's ability to pay dividends in line with the increased payout of 3 times cover announced in November 2012.

12 Financial effects of the New Framework Arrangements

12.1 In the opinion of the Directors, the New Framework Arrangements are consistent with easyJet's continued strategy and objective of continuing to pay dividends to Shareholders. The New Framework Arrangements will secure delivery of aircraft until 2022; they are expected to result in capital expenditure, as a percentage of revenue, being significantly lower than in the period 2005 to 2012 and the New Generation A320neo Aircraft is expected to deliver a cost per seat saving of around 11% to 12% compared to the Current Generation A319 Aircraft. The effect on easyJet's assets and liabilities will depend on the ownership structure of the aircraft which the Board at the time decides to undertake. The Board currently targets an owned:leased split of approximately 70%:30% in order to maintain flexibility around fleet deployment and size and expects this policy to continue.

12.2 The aircraft will be financed over a number of years and the financing is underpinned by the highly cash generative nature of easyJet's business model.

12.3 The total operating cost per seat of an aircraft purchased under the New Framework Arrangements will be less than an aircraft purchased under the Existing Airbus Contract, and the lower operating cost per seat will contribute to easyJet maintaining its cost advantage over its competitors.

13 Current trading and prospects

13.1 With around 50% of seats booked for the second half of the 2013 Financial Year as at 15 May 2013, being the date on which the Company issued its results for the six months ended 31 March 2013, trading in the second half of the year continues to be in line with management's expectations. The timing of Easter in 2013 into the first half of the financial year is expected to reduce revenue per seat growth in the second half of the year by one percentage point. Consequently, revenue per seat growth at constant currency for the six month period to 30 September 2013 is expected to be around 4%.

13.2 The impact of increased airport charges, particularly in Spain and Italy, means that easyJet expects cost per seat (excluding fuel and currency movements) to increase by around 4% in the second half of the 2013 Financial Year, as compared with the second half of the 2012 Financial Year, assuming normal levels of disruption and similar load factors.

13.3 It is estimated that at recent exchange rates and with fuel remaining within its US$900 m/t to US$1,000 m/t trading range, easyJet's unit fuel bill for the second half of the financial year will be up to £10 million favourable year on year. Using recent rates[D], it is estimated that year on year exchange rate movements (including those related to fuel) will have an adverse impact of up to £5 million to £10 million in the second half of the financial year.

13.4 Whilst there is always the potential for unexpected events to impact short term financial performance, the outlook for the second half of the 2013 Financial Year combined with the strong reduction in first half losses means that easyJet expects to deliver improved returns and profitability for the year ending 30 September 2013.

13.5 The above statement constitutes a profit forecast for the purposes of the Listing Rules. The basis of preparation of the forecast and the assumptions used in preparing this forecast will be set out in section 8 of Part 4 of the circular to Shareholders.

13.6 Shareholders should read the whole of the circular to Shareholders and should not rely on the key or summarised financial information set out in Part 1 of the circular to Shareholders.

14 Recommendation

14.1 The Board considers that the New Framework Arrangements are in the best interests of the Company and Shareholders as a whole and, accordingly, unanimously recommends that Shareholders vote in favour of the Resolution to be proposed at the General Meeting.

14.2 The Directors have indicated their intention to vote in favour of the Resolution in respect of their beneficial holdings amounting at the date of this announcement to an aggregate of 196,701 Shares, representing approximately 0.05%, of the existing share capital of the Company as at 16 June 2013, being the latest practicable date prior to the publication of this announcement.

[A] The basis of the belief that such benefits will arise, together with other information on this cost per seat saving, will be set out in section 9 of Part 4 of the circular to Shareholders.

[B] The basis of the belief for such statement together with other information on this statement, will be set out in section 9 of Part 4 of the circular to Shareholders.

[C] This figure is extracted without adjustment from the Company's 2011/12 Annual Report and Accounts

[D] Rates at 11.00hrs 13 May 2013: Euro to sterling, €1.18:£1; US$ to sterling, US$1.54:£1; and fuel cost of US$912 m/t.

This information is provided by RNS

The company news service from the London Stock Exchange

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