Final Results

easyJet PLC 23 November 2004 Preliminary results for the 12 months to September 2004 23 November 2004 REPORTED PROFIT UP 21%, PASSENGERS UP 20% RESILIENT BUSINESS MODEL â€¢ Reported PBT up 21% to Â£62.2m on revenues increased by 17% to Â£1,091m â€¢ Reported earnings per share up 25% to 10.3p â€¢ Passenger numbers up 20% to 24.3m and load factor improved to 84.5% from 84.1% â€¢ Total revenue per passenger down 2% to Â£44.82p reflecting increased competition â€¢ Strengthened balance sheet with gross cash of Â£510m to support future growth â€¢ Expansion to 92 aircraft, 153 routes and 44 airports while delivering excellent operational performance â€¢ Move to modern fleet, with retirement of older less efficient 737-300 aircraft Commenting on the results and prospects, Ray Webster, Chief Executive, said: 'These are creditable results in challenging market conditions which have affected all airlines. They reflect the resilience of the easyJet business model and have strengthened our position in the European airline market. Both financially and operationally we are stronger than we have ever been before and despite the high fuel price and degree of competition in the market we are well placed for the coming year. 'There are good opportunities for us in 2005. We expect to grow our sales through further enhancing our network and growing ancillary revenues. A strong focus on costs and higher aircraft utilisation will improve the business and will partly mitigate the impact of fuel and foreign exchange, which are beyond our control. 'In this first quarter, we expect to see the load factor and total revenue per passenger broadly the same as last year. We continue to have limited visibility in regard to future fares, however we expect the remaining months of winter to be challenging and that competition will be intense. In addition, fuel prices and foreign exchange remain unknown factors. 'Nevertheless, we have a resilient business, operating in a growth market, which we can readily tailor to a variety of market conditions. As such we have considerable confidence in what can be achieved. For further details please contact: easyJet plc Press: Toby Nicol, Corporate Communications +44 (0) 1582 525 339 Analysts: Chris Walton, Finance Director +44 (0) 1582 525 336 Cliff Hide, Investor Relations +44 (0) 1582 525 274 There will be an analyst presentation at 9:30 hours GMT on 23 November 2004 at ABN AMRO, 250 Bishopsgate, EC2M 4AA. A live webcast of the presentation will be available at www.easyJet.com. There will be an analyst and investor conference call at 14:30 hours GMT on 23 November 2004. For further details, contact Sara Freeman at Financial Dynamics on 020 7269 7134. Chairman's statement During a year when most airline companies suffered a fall in returns or in some cases registered losses, easyJet was one of the very few which increased profit before tax and earnings per share by 20.8% and 25.5% respectively. Passenger numbers and load factors also increased, as the Chief Executive's report shows. At a time of intensifying competition, this performance serves to underline the inherent strength of easyJet's business model. Despite these results, complacency can never be a feature of our business and we are dealing with five key challenges. The first of these, affecting all airlines, is the price of oil, which constituted some 14% of our costs for the year ended 30 September 2004. To offset this, we are concentrating both on operating the most fuel efficient aircraft and reducing costs elsewhere. However, easyJet's returns will be adversely affected if there is not some abatement of the price of oil during the coming year. Increased competition, the second challenge, continues and all of our planning assumes that this will be sustained for the foreseeable future. We will continue to offer an attractive product to our market place and, as these results have demonstrated, many people have a preference for our combination of price, frequency, on time performance, convenient airports for both departure and destination, modern equipment and courteous and efficient staff. easyJet has benefited from remarkable rates of growth since its beginnings. The Chief Executive's report emphasises our attention to developing new destinations and intensifying operations in these. Aligning the rate of growth of our capacity to the clear market opportunities is the third of our major challenges. Our fourth key issue is volume. With the number of passengers we now fly, any small movement in revenue per passenger can have a significant effect on our results. Unrelenting attention to cost reduction and revenue enhancement are the watchwords of easyJet in meeting this challenge. Judging the levels of external influences, which are out of our control, can be difficult and as a consequence while easyJet's performance showed a clear improvement on last year, it was not as good as we had originally hoped for. We strive to keep shareholders informed of change and believe this is our fifth challenge. There have been two notable changes in the composition of the Board of Directors in this financial year. Nick Hartley decided to step down from the Board in August having served easyJet from its inception. Nick was a significant contributor to the Board's deliberations and we miss his experience and wise counsel. We were delighted to welcome Dawn Airey, the Managing Director of BSkyB Networks as a non-executive director. Dawn's creative talent and consumer understanding are already evident and fit well with a board whose members have a balance of expertise and experience relevant to easyJet. Despite the trading conditions faced by all airlines, easyJet has performed creditably and this would not have been possible without the efforts of our hard-working and committed staff. To all of them, I offer many thanks from the Board - you are much appreciated. Looking ahead, the fundamental task is to continue to develop and maintain a growth business. I have great confidence that this will be achieved Sir Colin Chandler Chairman 22 November 2004 Chief Executive's review Overview In the year ended 30 September 2004, easyJet made a profit before tax of Â£62.2 million, an increase of 20.8 per cent on the prior year. The underlying profit before tax was Â£85.4 million (2003: Â£96.3 million). Details of underlying items may be found in the footnote below. Fully-diluted earnings per share for the year were 10.34 pence (8.24 pence in 2003). The year demonstrated the resilience of easyJet's business model, particularly in a challenging environment for the airline industry. Despite difficult market conditions, easyJet's point-to-point, low cost short haul network, connecting major and convenient European airports, has continued to attract leisure and business travellers alike, with our load factor rising from 84.1% in 2003 to 84.5% in 2004. During the year, there have been increasing numbers of entrants into the low cost airline marketplace in Europe. There are now at least 47 low cost airlines in Europe, compared to only seven three years ago. This is clearly not sustainable in the longer term, and we expect consolidations and liquidations - indeed these have started to appear in recent months. The key success criteria will be to have the lowest cost base between any two airports and to repeat this again and again. Our strategy ensures that our cost base is amongst the lowest in the industry. Increasing levels of overall competition have led to falls in yield from Â£43.28 in 2003 to Â£42.28 in 2004. However, costs have been kept under control through careful management and identification of strategic cost reduction opportunities. Cost per Available Seat Kilometre ('ASK') fell from 4.19 pence in 2003 to 4.04 pence in 2004 or, on an underlying basis, was level year-on-year (3.97 pence in 2003 to 3.95 pence in 2004) With the increasing load factor offset by the decline in average fare, total revenues grew 17.1 per cent to Â£1,091.0 million. The number of passengers rose 19.7 per cent to 24.3 million. Over the year, ASKs were 25,448 million (21,024 million in 2003), with the average sector length up 1.7 per cent to 884 km. Revenue per ASK was down 3.2 per cent to 4.29 pence. Strategy and business model During the year, the management reviewed with the Board the implementation of easyJet's strategy and made changes to ensure that the business remains well positioned in an increasingly competitive marketplace. The business model however required no change. It is tried and tested and has withstood the challenges of this difficult year. Capacity growth is a lever that we can use to influence our profitability in the face of increased competition. We have announced that our 2005 capacity growth rate, measured by the number of aircraft in the fleet at year-end, has been reduced to 17% (an increase of 16 aircraft). It is likely that the growth rates for 2006 and 2007 will also be lower, reflecting our ability to flex capacity according to market conditions. Being mindful of the business environment, our strategy has three cornerstones: 'focus on our customers', 'own our markets' and 'reduce our costs'. Focus on our customers We know what our customers value, and we design our core product and ancillary services accordingly. Every year, we aim to create better value for our customers, whilst decreasing our costs to maintain or improve competitiveness. Footnote The adjusting items are goodwill amortisation charge of Â£17.1 million (2003: Â£17.6 million), accelerated depreciation of certain owned aircraft of Â£6.1 million (2003: Â£10.2 million), the committed contribution to Deutsche BA of Â£nil (2003: Â£1.3 million), the write off of investments of Â£nil (2003: Deutsche BA totalling Â£7.8 million) and the costs of integrating the businesses of Go Fly and easyJet of Â£nil (2003: Â£7.9 million). Own our markets We will develop and aggressively defend our chosen markets against competitors. This means quickly establishing a strong base, offering numerous routes with multiple frequencies to existing and new points on the network, and establishing a strong brand in the market. Reduce our costs Management is focussed on increasing the operating margin. We will continue to challenge industry norms and further reduce our cost base through being highly productive, innovative and taking advantage of our scale and local knowledge in procuring goods and services. For example, in the coming year we will see benefit from the increasing number of Airbus A319s in the fleet; and an increase in both fleet utilisation and crew productivity. We will withdraw capacity from any existing markets that are poorly performing or airports which are over-priced and do not meet our strategy. We have already taken action in this regard by removing Zurich from our network and reducing capacity at Copenhagen and Amsterdam. I am confident that this strategy will bring clarity and focus to the efforts of our people and will provide easyJet with its unique strength to remain best in class, with a leading position in the growing European air travel market. Network We have continued to develop the network during the year in a manner that absorbed the 18.4% growth in new capacity, measured by sectors operated, without affecting operational performance. At 30 September 2004, the easyJet network covered 153 routes and 44 airports, compared to 105 and 38 at the same time last year. Three routes ceased operations in the year due to excessive airport costs. During the year, we have added 6 new cities to the easyJet network: Basle, Berlin Schonefeld, Budapest, Dortmund, Cologne-Bonn and Ljubljana. Berlin and Dortmund are new bases and demonstrate our commitment to the German market. From Berlin we have started 13 routes during the year. In addition at Berlin, we have worked closely with airport management and now have a dedicated easyJet branded terminal, which will become a model for our future development across Europe. We started eight routes from Dortmund and four from Budapest in the year, which we expect to generate more than 1.5 million extra passengers during the first year of operation. Other locations where we grew during the year included Belfast with new routes to Paris, Alicante and Malaga. Further growth is planned for the Winter and we have already announced 12 new cities: Almeria, Bratislava, Cork, Grenoble, Knock, Krakow, Murcia, Riga, Shannon, Tallinn, Valencia and Warsaw. These reflect the expansion of the European Union during the year. We have now announced services to six of the new accession states. Further growth is taking place from Geneva, Berlin, Budapest, Dortmund and London Luton. Fleet At the end of the financial year, the fleet comprised 71 Boeing 737s and 21 Airbus 319s, giving a total of 92 aircraft; up from the 73 Boeing 737s and one Airbus A319 at the start of the year. A further 99 Airbus 319 aircraft are planned to be delivered through to December 2007. This will give us a modern fleet of aircraft that will underpin our high levels of asset utilisation, increase our operational efficiency and reduce our unit cost base. The average fleet age, currently 4.5 years, is expected to fall to approximately 3 years by 30 September 2006. Planned fleet changes - additions/(retirements): The planned composition of the fleet over the period to 30 September 2007 is as follows: Airbus 319s Boeing Boeing 737-300s Total 737-700s At 30 September 2003 1 27 46 74 Year ending 30 September 2004 21 33 38 92 Year ending 30 September 2005 55 32 21 108 Year ending 30 September 2006 86 32 8 126 Year ending 30 September 2007 117 32 - 149 Whilst we are very confident of growing the business at this rate, we have negotiated with Airbus flexibility that allows us to moderate, or accelerate, our capacity growth should the external environment necessitate any changes. We have already used this flexibility by deferring three A319 aircraft into the 2008 financial year at no cost. During the year, the first five Airbus aircraft were introduced into Geneva, which became our first dedicated Airbus base, enabling us to establish and test operations with the new type of aircraft before rolling out the subsequent deliveries to other bases. This was done successfully and new Airbus aircraft have now been introduced to our London Gatwick, Paris and Berlin crew bases. Although Airbus is assisting with some of the costs of introducing the latest aircraft, easyJet will also incur some introductory costs in the current year. In the last financial year, additional costs of Â£6.4 million were incurred, primarily due to the need to hire extra crew during the training period. Available seat kilometres are expected to increase by approximately 25% during fiscal 2004. The full-year effect of aircraft added during 2004 means that the growth is weighted towards the first half. Aircraft financing Of the 26 aircraft that were delivered to easyJet during the year, 21 were sold to lessors and leased back under operating leases, and five were financed by debt. At the year-end, 12 aircraft were owned and 80 were under operating lease. During the year, we have secured financing for the majority of the Airbus delivery stream. 82 of the 120 Airbus aircraft ordered have now been financed. The arrangements included almost all deliveries for 2004 and 2005, and a proportion of those in 2006 and 2007. Operations Safety is our primary concern, and our internal procedures and processes ensured that there were no significant incidents during the year. The operation has run superbly during the year - with on-time performance increasing from 74.3% to 80.5% of flights within 15 minutes of scheduled arrival time. This improved performance was achieved alongside the addition of 51 new routes and the introduction of a new aircraft type. Our people At 30 September 2004 there were 3,727 employees in easyJet, an increase of 355 during the year, well below the overall growth rate in the business. To maintain the rate of growth, particularly whilst dealing with a difficult operating environment and a number of other significant challenges, and still keep the downward pressure on our unit costs, is testament to the focus of all of our staff. It has been a challenging year for many of easyJet's people and I am grateful to them for their professionalism and dedication to our values and customer service. Our success is rooted in them and their ability to adapt, innovate and act, and we look forward to many more years of continued growth. Trading outlook In this first quarter, we expect to see the load factor and total revenue per passenger broadly the same as last year. We continue to have limited visibility in regard to future fares, however we expect the remaining months of winter to be challenging and that competition will be intense. In addition, fuel prices and foreign exchange remain unknown factors. Nevertheless, we have a resilient business, operating in a growth market, which we can readily tailor to a variety of market conditions. As such we have considerable confidence in what can be achieved. Ray Webster Chief Executive 22 November 2004 The following tables set forth certain consolidated operating and profit and loss account data Selected consolidated operating data Year ended 30 September (unaudited) 2004 2003 Number of aircraft owned/leased at end of year(1) 92 74 Average number of aircraft owned/leased during year(2) 85.0 67.8 Number of aircraft operated at end of year(3) 90 71 Average number of aircraft operated during year(4) 79.9 66.0 Sectors(5) 192,742 162,758 Block hours(6) 328,074 274,567 Number of routes operated at end of year 153 105 Number of airports served at end of year 44 38 Owned/leased aircraft utilisation (hours per day)(7) 10.5 11.1 Operated aircraft utilisation (hours per day)(8) 11.2 11.4 Available seat kilometres ('ASK')(millions)(9) 25,448 21,024 Passengers (millions)(10) 24.3 20.3 Load factor(11) 84.5% 84.1% Revenue passenger kilometres ('RPK')(millions)(12) 21,566 17,735 Average internet sales percentage during the year(13) 95.7% 93.8% Internet sales percentage during final month of financial year 96.9% 96.3% (14) Average sector length (kilometres) 884 869 Average fare(15) Â£42.28 Â£43.28 Revenue per ASK (pence)(16) 4.29 4.43 Cost per ASK (pence)(17) 4.04 4.19 Cost per ASK before goodwill and non-recurring items (pence)(18) 3.95 3.97 Footnotes can be found at the end of this section. Results of operations Year ended 30 September (unaudited) 2004 2003 Year on year change Â£ million % Â£ million % % Passenger revenue 1,029.3 94.3 880.0 94.4 17.0 Non ticket revenue(19) 61.7 5.7 51.8 5.6 19.1 Revenue(20) 1,091.0 100.0 931.8 100.0 17.1 Ground handling charges, including salaries (111.3) 10.2 (95.2) 10.2 16.9 Airport charges (191.4) 17.5 (149.3) 16.0 28.2 Fuel (146.9) 13.5 (120.6) 12.9 21.8 Navigation charges (87.7) 8.0 (72.0) 7.7 21.8 Crew costs, including training and initial costs of Â£6.4m (126.8) 11.6 (96.8) 10.4 31.0 Maintenance (102.0) 9.3 (89.1) 9.6 14.5 Advertising (30.5) 2.8 (27.7) 3.0 10.1 Merchant fees & incentive pay (13.6) 1.2 (13.7) 1.5 (0.7) Aircraft insurance (19.8) 1.8 (21.2) 2.3 (6.6) Costs of integrating businesses of easyJet and Go Fly - - (7.9) 0.8 (100.0) Other costs(21) (71.7) 6.6 (57.4) 6.2 24.9 EBITDAR(22) 189.3 17.4 180.9 19.4 4.6 Depreciation (19.2) 1.8 (19.9) 2.2 3.5 Accelerated depreciation of 737-300 aircraft (6.1) 0.6 (10.2) 1.1 40.2 Goodwill amortisation (17.1) 1.6 (17.6) 1.9 (2.8) Aircraft dry lease costs (96.4) 8.8 (82.7) 8.8 16.6 Aircraft long-term wet lease costs - - (2.1) 0.2 (100.0) Group operating profit (EBIT) 50.5 4.6 48.4 5.2 4.3 Share of operating profit of The Big Orange Handling Company 0.2 - - - 100.0 Net interest receivable 11.5 1.1 12.2 1.3 (5.7) Committed contribution to Deutsche BA - - (1.3) 0.1 (100.0) Amounts written off investments - - (7.8) 0.9 (100.0) Income before tax 62.2 5.7 51.5 5.5 20.8 Tax (21.1) 1.9 (19.1) 2.0 10.5 Retained profit for the year 41.1 3.8 32.4 3.5 26.9 Earnings per share (pence) Basic 10.34 8.24 Diluted 10.11 8.04 Basic, before goodwill amortisation 14.64 12.72 Diluted, before goodwill amortisation 14.33 12.40 Basic, before goodwill amortisation, accelerated depreciation of certain owned aircraft, committed contribution to Deutsche BA, amounts written off investments, and costs of integrating businesses of easyJet and Go Fly. 15.71 18.01 Diluted, before goodwill amortisation, accelerated depreciation of certain owned aircraft, committed contribution to Deutsche BA, amounts written off investments, and costs of integrating businesses of easyJet and Go Fly. 15.38 17.56 Footnotes (1) Represents the number of aircraft owned (including those held on lease arrangements of more than one month's duration) at the end of the relevant financial year. (2) Represents the average number of aircraft owned (including those held on lease arrangements of more than one month's duration) during the relevant financial year. (3) Represents the number of owned/leased aircraft in service at the end of the relevant financial year. Owned/leased aircraft in service exclude those in maintenance and those which have been delivered but have not yet entered service or those out of service prior to disposal or return. (4) Represents the average number of owned/leased aircraft in service during the relevant financial year. Owned/leased aircraft in service exclude those in maintenance and those, which have been delivered but have not yet entered service or those out of service prior to disposal or return. (5) Represents the number of one-way revenue flights. (6) Represents the number of hours that aircraft are in actual service, measured from the time that each aircraft leaves the terminal at the departure airport to the time that such aircraft arrives at the terminal at the arrival airport. (7) Represents the average number of block hours per day per aircraft owned/leased during the relevant financial year. (8) Represents the average number of block hours per day per aircraft operated during the relevant financial year. (9) Represents the sum by route of seats available for passengers multiplied by the number of kilometres those seats were flown. (10) Represents the number of earned seats flown by easyJet. Earned seats include seats that are flown whether or not the passenger turns up, because easyJet is generally a no-refund airline and once a flight has departed a no-show customer is generally not entitled to change flights or seek a refund. Earned seats also include seats provided for promotional purposes and to easyJet staff for business travel. (11) Represents the number of passengers as a proportion of the number of seats available for passengers. No weighting of the load factor is carried out to recognise the effect of varying flight (or 'stage') lengths. (12) Represents the sum by route of passengers multiplied by the number of kilometres those passengers were flown. (13) Represents the number of seats initially sold over the internet divided by the total number of seats initially sold, during the relevant financial year. Sales that are originally made via the internet, but are later amended by phone, are included. (14) Represents the number of seats initially sold over the internet divided by the total number of seats initially sold, during the final month of the relevant financial year. Sales that are originally made via the internet, but are later amended by phone, are included. (15) Represents the passenger revenue divided by the number of passengers carried. (16) Represents the total revenue divided by the total number of ASK's. (17) Represents the difference between total revenue and profit before tax, divided by the total number of ASK's. (18) Represents the difference between total revenue and profit before tax less the amounts charged in respect of goodwill amortisation, committed contribution to Deutsche BA, amounts written off investments, costs of integrating the businesses of easyJet and Go Fly and accelerated depreciation of owned aircraft. (19) Includes revenue from in flight sales, excess baggage charges, booking charge fees, credit card booking fees and commissions received from products and services sold such as hotel and car hire bookings and travel insurance. (20) When easyJet makes refunds to customers, it records refunds made in the pre-flight period as reductions in revenue and any refunds made post-flight as marketing expenses, included in 'Other costs', above. (21) Includes principally administrative and operational costs not included elsewhere, the costs associated with short-term aircraft wet leases, insurance and any post-flight refunds, together with certain other items, such as currency exchange gains and losses and profit or loss on the disposal of fixed assets. (22) EBITDAR is defined by the company as earnings before interest, taxes, depreciation, amortisation and lease payments (excluding the maintenance reserve component of operating lease payments). Maintenance reserve costs are charged to the cost heading, 'Maintenance'. Consolidated profit and loss account for the year ended 30 September Notes 2004 2003 Â£ million Â£ million Turnover : group and share of joint ventures 1,092.4 931.8 Less: share of turnover of joint ventures (1.4) - Group Turnover 2 1,091.0 931.8 Cost of sales (929.3) (775.0) Gross profit 161.7 156.8 Distribution and marketing expenses (55.7) (61.0) Administrative expenses (55.5) (47.4) Group operating profit 50.5 48.4 Share of operating profit of joint venture 0.2 - Loss from interest in associated undertaking: - committed contribution to Deutsche BA - (1.3) Total operating profit: group and share of joint ventures and 50.7 47.1 associates Interest receivable and similar income 14.2 13.7 Amounts written off investments - (7.8) Interest payable (2.7) (1.5) Profit on ordinary activities before taxation 62.2 51.5 Tax on profit on ordinary activities 3 (21.1) (19.1) Retained profit for the financial year 11 41.1 32.4 Pence Pence Earnings per share Basic 4 10.34 8.24 Diluted 4 10.11 8.04 Basic, before goodwill amortisation 4 14.64 12.72 Diluted, before goodwill amortisation 4 14.33 12.40 Basic, before goodwill amortisation, accelerated depreciation 4 15.71 18.01 of certain owned aircraft, committed contribution to Deutsche BA, amounts written off investments and costs of integrating the businesses of easyJet and Go Fly Diluted, before goodwill amortisation, accelerated 4 15.38 17.56 depreciation of certain owned aircraft, committed contribution to Deutsche BA, amounts written off investments and costs of integrating the businesses of easyJet and Go Fly All activities relate to continuing operations in the current and previous year. Consolidated balance sheet as at 30 September Notes 2004 2003 (restated) Â£ million Â£ million Â£ million Â£ million Fixed assets Intangible assets 5 309.6 329.8 Tangible assets 6 330.4 320.8 Investments Joint venture arrangements: Share of gross assets 0.6 - Share of gross liabilities (0.4) - 0.2 - 640.2 650.6 Current assets Debtors 174.4 141.2 Cash at bank and in hand 510.3 335.4 684.7 476.6 Creditors: amounts falling due within one year 7 (314.7) (260.9) Net current assets 370.0 215.7 Total assets less current 1,010.2 866.3 liabilities Creditors: amounts falling due after more than one year 8 (157.7) (65.3) Provisions for liabilities and 10 (63.1) (42.9) charges Net assets 789.4 758.1 Capital and reserves Called up share capital 11 99.8 98.5 Share premium account 11 554.2 539.6 Profit and loss account 11 135.4 120.0 Shareholders' funds - equity 789.4 758.1 These financial statements were approved by the board of directors on 22 November 2004 and were signed on its behalf by: R Webster Director C Walton Director Cash flow information for the year ended 30 September Reconciliation of operating profit to net cash flows from operating activities Notes 2004 2003 Â£ million Â£ million Group operating profit 50.5 48.4 Goodwill amortisation 17.1 17.6 Depreciation of tangible fixed assets 25.3 30.1 Increase in debtors (36.1) (43.4) Increase in creditors and provisions 103.7 24.5 Cash flow from operating activities 160.5 77.2 Consolidated cash flow statement 2004 2003 Â£ million Â£ million Cash flow from operating activities 160.5 77.2 Committed contribution to associate - (1.9) Returns on investments and servicing of 13 12.6 11.8 finance Taxation (6.2) (16.5) Capital expenditure 13 (61.9) (175.3) Acquisitions and disposals 13 3.4 1.1 Cash outflow before management of liquid resources and financing 108.4 (103.6) Management of liquid resources 4.8 68.6 Financing 13 66.5 11.1 Increase/(decrease) in cash in the year 179.7 (23.9) Financing cash flow includes Â£8.8 million (2003: - Â£3.8 million) in respect of the exercise of employee share options. Reconciliation of net cash flow to movements in net funds Notes 2004 2003 Â£ million Â£ million Increase/(decrease) in cash in the year 179.7 (23.9) Cash inflow from the increase in debt 13 (57.5) (7.3) Cash inflow for the decrease in liquid (4.8) (68.6) resources Change in net funds resulting from cash 117.4 (99.8) flows Exchange difference on loans 10.5 4.2 Increase/(decrease) in net funds for the 127.9 (95.6) year Net funds at the start of the year 262.6 358.2 Net funds at the end of the year 390.5 262.6 Net funds at the end of the year comprises: 2004 2003 Â£ million Â£ million Cash at bank and in hand 510.3 335.4 Bank loans (119.8) (72.8) 390.5 262.6 Â£14.3 million (2003 - Â£19.1 million) of the cash at bank and in hand is subject to restrictions governing its use. Consolidated statement of total recognised gains and losses for the year ended 30 September 2004 2003 Â£ million Â£ million Retained profit for the year 41.1 32.4 Foreign currency translation differences (18.8) (5.5) Total recognised gains and losses for the 22.3 26.9 year Consolidated reconciliation of movements in shareholders' funds for the year ended 30 September 2004 2003 (restated) Â£ million Â£ million Retained profit for the year 41.1 32.4 Foreign currency translation differences (18.8) (5.5) Shares issued by easyJet plc 15.9 7.0 Movement in shares held by easyJet 0.2 - trustees Movement in reserves for employee share (7.1) (3.1) scheme Net addition to shareholders' funds 31.3 30.8 Opening shareholders' funds (restated) 758.1 727.3 Closing shareholders' funds (restated) 789.4 758.1 Shareholder's funds at the beginning of the year, as previously reported, were Â£758.5 million (2003: Â£727.7 million) before the prior year adjustment for the adoption of UITF Abstract 38 'Accounting for ESOP Trusts' of Â£0.4 million (2003: Â£0.4 million). For further information, see note 1. Operational and financial review Financial year 2004 compared with financial year 2003 Revenue easyJet's revenue increased 17.1 per cent from Â£931.8 million to Â£1,091.0 million, from financial year 2003 to financial year 2004. Passenger revenue, the largest component, increased by 17.0 percent from Â£880.0 million to Â£1,029.3 million, driven by a 19.7 per cent growth in passenger numbers from 20.3 million to 24.3 million, partly offset by a 2.3 per cent decline in average fares. The number of passengers carried reflected an increase in the size of the easyJet fleet in operation from an average of 66.0 aircraft to an average of 79.9 aircraft and a small increase in the average load factor achieved from 84.1 per cent to 84.5 per cent. Revenue from non-ticket sources, within ongoing operations, includes in-flight sales of food and beverages, excess baggage charges, change fees, credit card booking fees and commissions received from products and services sold such as hotel and car hire bookings and travel insurance. In financial year 2004, Â£61.7 million was earned from non-ticket sources, up 19.1 per cent from the prior year. Ground handling charges, including salaries easyJet's ground handling charges increased by 16.9 per cent from Â£95.2 million to Â£111.3 million, from financial year 2003 to financial year 2004. The increase in ground handling charges reflects the 18.4 per cent increase in the number of sectors flown, and the reduction in unit costs at London Luton airport due to increased throughput and the migration of the operations into a joint venture. Airport charges easyJet's external airport charges increased by 28.2 per cent from Â£149.3 million to Â£191.4 million from financial year 2003 to financial year 2004. This increase was attributable to the increase of 18.4 per cent in the number of sectors flown, and the higher rates charged at certain primary airports where much of easyJet's organic growth was centred in 2004. Fuel easyJet's fuel costs increased by 21.8 per cent from Â£120.6 million to Â£146.9 million from financial year 2003 to financial year 2004. The increase was higher than the 19.5 per cent increase in number of block hours flown. This change is primarily due to approximately a 14.7 per cent increase in easyJet's average unit US dollar fuel cost, compared with the previous year, resulting in additional costs to easyJet of approximately Â£21.3 million. The strengthening of the value of sterling against the US dollar, the currency in which fuel prices are denominated, over the course of financial year 2004 provided a set off benefit of approximately Â£17.0 million. In addition, a 1.7% increase in sector length, the introduction of new aircraft and increased optimisation of route planning aided the efficiency of easyJet's fuel consumption. Benefits obtained from Group hedging activities were approximately Â£11 million. Navigation charges easyJet's navigation charges increased by 21.8 per cent from Â£72.0 million to Â£87.7 million from financial year 2003 to financial year 2004. This increase was principally attributable to a 21 per cent increase in the ASKs flown in financial year 2004. Crew costs, including training easyJet's crew costs increased by 31.0 per cent from Â£96.8 million to Â£126.8 million from financial year 2003 to financial year 2004. The increase in crew costs resulted from an increase in headcount during the financial year 2004 to service the additional sectors and aircraft operated by easyJet during the year, the increase in salaries, and the costs of recruitment and crew in training necessary for aircraft not yet delivered. It also resulted from the need to hire additional crew during the migration of certain operations from Boeing to Airbus aircraft. These costs amounted to some Â£6.4 million in the financial year 2004. Maintenance Maintenance expenses increased by 14.5 per cent from Â£89.1 million to Â£102.0 million from financial year 2003 to financial year 2004. easyJet's maintenance expenses consist primarily of the cost of routine maintenance and spare parts and provisions for the estimated future cost of heavy maintenance and engine overhauls on aircraft operated by easyJet pursuant to dry operating leases. The extent of the required annual maintenance reserve charges is determined by reference to the number of flight hours and cycles permitted between each engine shop visit and heavy maintenance overhaul on aircraft airframes. The increase in maintenance costs was largely due to the addition of further leased aircraft to the fleet during the year. Aircraft financed by operating lease incur reserves for maintenance, while the corresponding maintenance effect for owned aircraft is dealt with through a depreciation charge of the capitalised maintenance costs under aircraft ownership. Advertising Advertising costs increased by 10.1 per cent per cent from Â£27.7 million to Â£30.5 million from financial year 2003 to financial year 2004. Spend per passenger was approximately 8 per cent lower than the previous year which is principally due to market maturation and the synergistic benefits of the integration of the businesses of Go Fly and easyJet. In 2004, a number of new markets were entered into, such as Berlin and Dortmund, which resulted in additional advertising expenditure to create brand awareness. Merchant fees and incentive pay Merchant fees and incentive pay reduced by 0.7 per cent from Â£13.7 million to Â£13.6 million from financial year 2003 to financial year 2004. Merchant fees and incentive pay includes the costs of processing fees paid to credit card companies on all of easyJet's credit and debit card sales and the per-seat sold/ transferred commission paid as incentive pay to easyJet's telesales staff. In financial year 2004, approximately 75 per cent of bookings were made using credit cards, the same as in financial year 2003. Incentive pay paid to telesales personnel remained flat year-on-year due to the rise in initial sales made over the internet, from 93.8 per cent of initial seats sold during financial year 2003 to 95.7 per cent of initial seats sold during financial year 2004, and the increase in on line change transactions from 6 percent in financial year 2003 to 73 percent in financial year 2004. Cost of integrating businesses of easyJet and Go Fly Costs of integrating the businesses of Go Fly and easyJet were Â£nil in financial year 2004 (2003: - Â£7.9 million). Integration, which was substantially complete at 30 September 2003, was considered to have been finalised by the Board in March 2004. Aircraft insurance costs Aircraft insurance costs reduced from Â£21.2 million in financial year 2003 to Â£19.8 million in financial year 2004. This was as a result of lower rates being negotiated and also due to the exchange rate between GBP and the US $. Other costs Other costs increased by 24.9 per cent from Â£57.4 million to Â£71.7 million from financial year 2003 to financial year 2004. Items in this cost category include administrative and operational costs (not included elsewhere) including some salary expenses. Also this cost category includes short-term aircraft wet leases, compensation paid to passengers, certain other items, such as currency exchange gains and losses and the profit or loss on the disposal of fixed assets. The major influence of this category of costs was the growth in the scope of the operation. Depreciation Depreciation charges decreased by 3.5 per cent from Â£19.9 million to Â£19.2 million from financial year 2003 to financial year 2004. The depreciation charge reflects depreciation on owned aircraft and capitalised aircraft maintenance charges, and also includes depreciation on computer systems and other assets. easyJet has owned an average of 8.0 B737-300 aircraft and 4.9 A319 aircraft during the financial year 2004 (2003: 10.0 B737-300 aircraft and 0.02 A319 aircraft). The decrease in depreciation reflects the additional number of owned aircraft set off against the 9.1 per cent improvement in the value of sterling against the US dollar, the currency in which the majority of easyJet's assets are denominated, and the additional depreciation of other assets such as spares and leasehold improvements. Accelerated depreciation of 737-300 aircraft In 2003, management provided Â£10.2 million additional depreciation in respect of the four oldest owned Boeing 737-300 aircraft, due to the distressed nature of the second hand aircraft market. In 2004, a further Â£3.4 million was charged in respect of accelerated deprecation, to align the aircraft carrying value with the residual value. The residual values of six owned Boeing 737-300 aircraft held in easyJet Hamburg Limited and easyJet Aircraft Limited have also been reassessed. This has lead to an additional Â£2.7 million of accelerated depreciation being recognised on these aircraft during the financial year. Goodwill amortisation Goodwill amortisation charges reduced slightly from Â£17.6 million to Â£17.1 million from financial year 2003 to financial year 2004. The decrease reflects the reduction in the goodwill balance as the result of the return of certain retention monies during the financial year in relation to the purchase Go Fly in 2002. Aircraft dry lease costs easyJet's aircraft dry lease costs comprise the lease payments paid by easyJet in respect of those aircraft in its fleet operated pursuant to dry operating leases. Aircraft dry lease costs increased by 16.6 per cent from Â£82.7 million to Â£96.4 million from financial year 2003 to financial year 2004. During the period 6 new Boeing 737-700 aircraft, and 15 new Airbus A319 aircraft were added to the fleet on lease agreements. Over the period, easyJet has benefited from the strengthening of the value of sterling against the US dollar, the currency in which lease costs are denominated, low dollar interest rates, and the benefit of the lower cost of the new Airbus A319 aircraft. As a consequence, easyJet has seen its average leasing cost per aircraft fall by around 9 per cent, year-on-year. Aircraft long-term wet lease costs easyJet's aircraft wet lease costs comprise the lease payments paid by easyJet in respect of those aircraft in its fleet operated pursuant to 'ACMI' leases (that is, leases of an aircraft plus crew, maintenance and insurance) of a duration of more than one month. The Â£2.1 million charge in financial year 2003 relates to the costs incurred leasing two aircraft for 2.5 months under wet leases for part of the summer 2003 season. One aircraft was procured in order to be able to commence new routes from Paris Orly earlier than would otherwise have been possible. The other aircraft was procured to cover for the long term unavailability of an aircraft which was subject to hail damage. Share of operating profit of The Big Orange Handling Company In January 2004, easyJet announced that it had sold 74% of its ground handling operations at London Luton Airport to Menzies Aviation Limited. The joint venture company to manage this is called The Big Orange Handling Company Limited. During the financial year 2004, the share (26%) of the turnover attributable to easyJet was Â£1.4 million, and the share of operating profit was Â£0.2 million. Net interest Net interest reflects interest paid or payable by easyJet net of interest received or receivable. easyJet's net interest receivable decreased from Â£12.2 million in financial year 2003 to Â£11.5 million in financial year 2004. This reflects the increase in loans (due to the financing of new Airbus aircraft) from Â£72.8 million to Â£119.8 million, set off against the increase in the cash balance during the year from Â£335.4 million to Â£510.3 million and also increasing interest rates, principally in the UK, since easyJet's cash surplus is predominantly held in sterling. Committed contribution to result of Deutsche BA In August 2002, easyJet and British Airways entered into an Option agreement under which the group was granted an option to acquire 100 per cent of the share capital of British Airways' wholly owned subsidiary Deutsche BA Holding GmbH (' Deutsche BA'). The group was obliged to make monthly capital contributions to British Airways whilst the option remained unexercised. Although the decision to terminate the option was made in March 2003, a total of â‚¬3.0 million (Â£1.9 million) was paid. After a release of accruals made in 2002 not required, Deutsche BA related costs were Â£1.3 million in 2003. No costs were incurred in financial year 2004. Amounts written off investments In the financial year 2003, easyJet wrote off its investment in Deutsche BA after deciding not to exercise its option to purchase. The total amount written off of Â£7.8 million included Â£3.1 million for the cost of the option, plus Â£4.7 million of related professional costs. No costs were incurred in financial year 2004. Taxation In financial year 2004, easyJet incurred a tax charge of Â£21.1 million, an effective tax rate of 34 per cent (2003: - Â£19.1 million charge, being 37 per cent effective tax rate). The effective tax rate is higher than the UK standard rate of tax which is principally due to purchased goodwill not being tax deductible. A more detailed explanation may be found in note 7 to the accounts. Retained profit for the year For the reasons described above, easyJet's retained profit after interest and taxes increased by 26.9 per cent from Â£32.4 million in financial year 2003 to Â£41.1 million in financial year 2004. Earnings per share The basic earnings per share increased by 25.5 per cent from 8.24 pence in the financial year 2003 to 10.34 pence in the financial year 2004. The basic earnings per share, before goodwill amortisation, increased by 15.1 per cent from 12.72 pence in the financial year 2003 to 14.64 pence in the financial year 2004. The basic earnings per share, before goodwill amortisation, accelerated depreciation of certain owned aircraft committed contribution to Deutsche BA, amounts written off investments and costs of integrating the businesses of easyJet and Go Fly and reduced by 12.8 per cent from 18.01 pence in the financial year 2003 to 15.71 pence in the financial year 2004. Other Matters Critical accounting policies easyJet's consolidated financial statements have been prepared in accordance with UK GAAP. Significant accounting policies are described in note 1 to the consolidated financial statements. The preparation of financial statements in accordance with the stated accounting policies requires easyJet's management to make estimates and assumptions that will affect the amounts reported in the consolidated financial statements. easyJet's estimates and assumptions are based on management's historical experiences, changes in the business environment and advice from specialists. However, actual results may differ from these estimates if actual conditions are different. The differences may be material. Critical accounting policies are defined as those which are material to easyJet's financial statements, but yet require a significant amount of judgment from management. The policies used in determining the carrying value of aircraft, aircraft maintenance liabilities, and corporation tax are deemed to be the most critical accounting policies. Carrying value of aircraft easyJet typically holds its owned aircraft for a period of seven years, and depreciates aircraft to an estimated residual value over this period. As aircraft have a useful life beyond 20 years, there is usually a substantial residual value at seven years. The residual value relates to the expected net sale proceeds which easyJet estimates it could obtain when it sells the aircraft. In estimating the residual values, easyJet management will consult a range of external valuers, and take into account its own knowledge and experience. Nevertheless, there can be significant variations between expected and actual residual values, as a result of factors such as the general strength of the global aviation market, the supply of aircraft suitable for low cost airlines, the supply of the specific aircraft type being sold, and the supply of aircraft generally. Variations may result in changes to the depreciation estimate or impairment charges, and as this is a significant component of the cost base of the group, this may cause significant variations in the profitability of the group. Aircraft maintenance costs easyJet incurs liabilities for maintenance costs in respect of its leased aircraft during the course of the lease term. These are as a result of legal and constructive obligations in the lease contract in respect of the return conditions applied by lessors, which require aircraft airframes, engines, landing gear and auxillary power units to reach at least a specified condition on their return at the end of the lease term. In most instances, to reach the specified conditions, easyJet will need to carry out a heavy duty maintenance check on each of the engines and the airframe once during the lease term, usually towards the end of the lease. Other work may be required on landing gear and auxillary power units. The cost of heavy duty maintenance checks for airframe and engines are substantial (airframe checks may cost between $1.0 million and $2.2 million, and engine shop visits may cost between $1.0 million and $2.4 million). In accordance with FRS12, as there is a legal and constructive obligation to return the aircraft in a specified condition, a charge is made in the profit and loss account each month based on the number of flights hours or cycles used to allow the creation of a provision which is designed to cover the cost of heavy duty maintenance checks when they occur. The cost of each heavy duty maintenance check is subject to uncertainty. Management is required to make numerous estimates in calculating the provision required. These include the expected date of the check (since costs generally rise over time), market conditions for heavy duty maintenance checks pertaining at the expected date of check, the condition of asset at the time of the check (this is particularly true of engines, whose true condition can only be established once it is off wing), the likely utilisation of the asset in terms of either flying hours or cycles, and the regulations in relation to extensions to lives of life limited parts, which form a significant proportion of the cost of heavy duty maintenance costs of engines. In arriving at these estimates, management uses its historic experience, its assessment of future operational performance and market conditions, and also examines advice from industry specialists. The group is also required to pay maintenance reserves to certain lessors on a monthly basis, based on usage, to provide a security deposit for the lessor should the aircraft be returned without meeting its return conditions. These maintenance reserves are then returned to the group on production of evidence that qualifying maintenance expenditure has been incurred. Maintenance reserves paid are deducted from the provision made. In some instances, not all of the maintenance reserves paid can be recovered by the group and therefore are retained by the lessor at the end of the lease term. If management considers this is likely to occur, then an additional provision is made (again either on a flying hours or cycles basis) to cover the expected liability. Assumptions made in respect of the basis of the provisions are reviewed for all aircraft once a year. In addition, when further information becomes available which could materially change an estimate made, such as a heavy duty maintenance check taking place, utilisation assumptions changing, or return conditions being renegotiated, then specific estimates are reviewed immediately, and the provision is reset accordingly. Corporation tax In the ordinary course of easyJet's business, there are many transactions and calculations where the ultimate tax determination is uncertain at the time the accounts are prepared. As part of the process of preparing our consolidated financial statements, we are required to estimate our corporation tax liabilities in each of the jurisdications in which we operate. This process involves estimating our current tax exposures on a jurisdiction by jurisdiction basis. Included in the estimation process is making judgements on the recoverability of deferred tax assets. Tax exposures can involve complex issues and can take an extended period to resolve. The effective tax rate of the group is derived from the effective tax rate of the weighted earnings in each jurisdiction that we operate. Changes in the geographic mix of earnings can affect the group effective tax rate. Liquidity and investments The group holds significant cash or liquid funds as a form of insurance to mitigate the impact of potential business disruption events. The cash and liquid investment balances at 30 September 2004 totalled Â£510 million (2003 - Â£335 million). The robust increase in cash and liquid investment balances from the prior year represents continued cash inflows generated from the operation of the business together with cash inflows generated from aircraft financing activities. group cash resources are used to fund payments made to Airbus in advance of taking delivery of aircraft, and drawdown of the full committed aircraft financing is made only when the aircraft is delivered. As a result aircraft deliveries are cash generative for the group. The group has committed financing in place for 82 of the 120 Airbus aircraft on order, stretching through September 2007. Surplus funds are invested, in line with Board-approved policy, in high quality short-term liquid instruments, usually money market funds or bank deposits. Credit risk is managed by limiting the aggregate exposure to any one individual counterparty, taking into account its credit rating. Such counterparty exposures are regularly reviewed and adjusted as necessary. Accordingly, the possibility of material loss arising in the event of non-performance by counterparties is considered to be unlikely. Management of financial and fuel price risks The Board of Directors is responsible for setting treasury policy and objectives, and approves the parameters within which the various aspects of treasury risk management are operated. Approved treasury policy outlines the group's approach to corporate and asset financing, interest rate risk, fuel price risk, foreign exchange risk and cash and liquidity management. The policy also lists the financial instruments and time periods which the group's treasury function is authorised to use in managing financial risks. The policy is under on-going review to ensure best practice in the light of developments in the trading and financial markets. A special financing sub committee of the Board is responsible for approving policy amendments. Group Treasury implements the agreed policies on a day-to-day basis to meet the treasury objectives. These objectives include ensuring that the group has sufficient liquidity to meet its day-to-day needs and to fund its capital commitments; deploying any surplus liquidity in a prudent and profitable manner; managing currency, fuel, interest rate and credit exposures; and managing the group's worldwide relationship with banks and financial institutions. Financing and interest rate risk All of the group's debt is asset related, reflecting the capital intensive nature of the airline industry and the attractiveness of aircraft as security to lenders and other financiers. These factors are also reflected in the medium term profile of the group's loans and operating leases. The group demonstrated its continued ability to raise new committed financing by financing 82 of the 120 Airbus aircraft to be delivered through September 2007. Group interest rate management policy aims to provide certainty in a proportion of it's financing; all group loans are at floating interest rates (repricing every three to six months) while a minimum of 40% of operating leases are fixed at time of aircraft delivery. At 30 September 2004 the group had a net cash balance, however 100 per cent of the group's gross loan borrowings were at floating rates of interest; this proportion is unchanged from prior year. Of the operating leases in place at 30 September 2004 approximately 58 per cent were based on fixed interest rates and 42 per cent were based on floating interest rates. The group's loan borrowings and operating leases are denominated in US Dollars. The group's aircraft are priced in and transacted in US Dollars and therefore all financing transactions to 30 September 2004 have been transacted in US Dollars. Fuel price risk The group fuel risk management policy aims to provide protection against sudden and significant increases in jet fuel price while ensuring that the group may also benefit from price reductions. In order to provide protection the group uses a limited range of hedging instruments traded on the Over The Counter markets (principally zero-cost collars), with approved counterparties and within approved limits. Group policy at 30 September 2004 is to hedge a maximum of 80% of estimated exposures up to 12 months in advance, and to hedge a smaller percentage of estimated expense up to 36 months in advance. Derivative financial instruments The group uses derivative financial instruments ('derivatives') with off-balance sheet risk selectively for currency and fuel risk management purposes. The group's policy is not to trade in derivatives but to use these instruments to hedge anticipated exposures. Forward foreign exchange and fuel contracts and zero-cost collars are used to cover currency and jet fuel exposures. The group does not permit selling of currency and jet fuel options, except as part of a fully matched options collar hedging structure. International Financial Reporting Standards European legislation, introduced in June 2002, requires that easyJet adopts International Financial Reporting Standards ('IFRS') from 1 October 2005. This means that both its interim financial statements at 31 March 2006 and its group report and accounts at 30 September 2006 will be prepared under IFRS, rather than UK Generally Accepted Accounting Principles ('UK GAAP'). These financial statements will also include comparatives for the prior year. The change from UK GAAP to IFRS will require substantial change to both easyJet's published financial statements and its underlying financial reporting processes and procedures. A comprehensive programme has been formulated by easyJet to facilitate a timely transition. A project team was created in November 2003, with a full time dedicated project manager. Representatives from all relevant areas of the business have been formed into a team to oversee the transition. A series of workstreams have been initiated which cover the areas of financial accounting, management accounting, taxation, treasury, contracts, business planning, IT systems, training, human resources and investor relations. The project team has its own budget and is adequately resourced to meet its objectives. Regular meetings are held between key personnel. Throughout the transition, regular consultation has occurred with KPMG Audit Plc, the group's auditor. Regular updates have also been given to the Audit Committee. The project has been subdivided into three main time periods: â€¢ Phase one - November 2003 to 30 September 2004 - Planning phase. Diagnostic assessment of the impact of IFRS, with planning and preparation for production of the IFRS opening balance sheet, and resolution of most of the key technical issues. â€¢ Phase two - 1 October 2004 to 30 September 2005 - Transition phase. Dual reporting in both IFRS and UK GAAP; finalisation of technical issues. â€¢ Phase three - post 1 October 2005 - Completion phase. Full IFRS accounting and monthly reporting, to produce first interim and full year IFRS financial statements. Significant progress has been made to date, with the following key milestones from phase one of the project having already been met: â€¢ Assessments have been made of the effect of each IFRS on easyJet. Detailed technical accounting papers have been written for each standard, summarising the effect of the new IFRS compared to UK GAAP, and easyJet's proposed accounting treatment. Systems, resource and logistical issues associated with the implementation of the IFRS have also been considered; â€¢ Formulation of the first draft of the new IFRS accounting policies and procedures manual, a summary of which has been presented to the Audit Committee; â€¢ Amendment of internal systems to allow for collection of data suitable for use in preparing IFRS financial statements from the transition date of 1 October 2004; â€¢ Dry runs of monthly reporting systems to ensure that an IFRS compliant balance sheet could be produced at 1 October 2004; â€¢ Communicating the effect of IFRS to relevant finance department personnel. All qualified and part qualified accounting staff have undergone both general IFRS technical training, and training that is specific to their own area of expertise; â€¢ A detailed review has been carried out of easyJet's material contractual arrangements to search for hybrid financial instruments. Phase one of the project ended on 30 September 2004. There are no material incomplete issues. A detailed project plan for phase two of the project has been prepared and is operational. Based upon standards issued to date, easyJet has identified a number of significant divergences between IFRS and UK GAAP, which are set out below. In phase two of the project, as expected, the project team is still evaluating certain issues, so it is possible that further significant divergences may become apparent. In addition, the International Accounting Standards Board (' IASB') has a number of ongoing projects which could affect the divergences set out below between IFRS and UK GAAP. The full population of divergences will only be known after 1 October 2005, the date that easyJet is to adopt IFRS. Key divergences IAS 32 and 39 - Financial Instruments IAS 32 and 39 specifies accounting treatments for financial instruments which are radically different from UK GAAP. The current rules for the introduction of IFRS allow for IAS 32 and 39 to be adopted only on 1 October 2005 rather than 1 October 2004, for all other IFRS. easyJet has no plans to adopt IAS 32 and 39 early. However, the project team is continuing with its work on the assumption that easyJet will need to be ready to adopt these standards from 1 October 2005. Under UK GAAP, gains and losses on derivative financial instruments are recognised in the profit and loss account when realised as an offset to the related income or expense. Under IAS 39, financial instruments will be valued on the balance sheet at fair value. Such hedges will be subject to strict tests in terms of both their effectiveness and documentation. If these tests are not satisfied, then movements in the fair value of financial instruments will be taken to the profit and loss account. Included within financial instruments under IAS 39 is also the requirement that certain purchase options should be valued on the balance sheet. At present the company has options to purchase aircraft in the future at a price that has already been determined. To the extent that these options remain at the date at which the group implements IAS 39 they will be valued and included within the group balance sheet under IFRS. IFRS 3 - Business Combinations Purchased goodwill is being held in the UK GAAP consolidated balance sheet of easyJet in respect of the acquisitions of both Go Fly and easyJet Switzerland. The goodwill is being amortised over a period of 20 years. Under IFRS 3, regular amortisation of goodwill is prohibited. Instead, an annual impairment test is required to support the carrying value of goodwill. Any impairment charge will be reflected in the profit and loss account. The format of the impairment test is different from that used under UK GAAP. IFRS 2 - Share based payments Under UK GAAP, no charge is reflected in the profit and loss account for easyJet's share options. However, easyJet has been disclosing (by way of a note to the financial statements) the value of all options issued since the inception of the group, under the terms of FRED 31, a proposed UK accounting standard. FRED 31 has been superceeded by UK accounting standard FRS 20 - 'Share-Based Payment', which is effective for schemes issued after 7 November 2002 which have not vested prior to 1 January 2005. This year's footnote disclosure meets FRS 20 requirements. The requirements of IFRS 2 are identical to those of FRS 20, except that the charge will be recognised in the profit and loss account rather than by way of a footnote. IAS 12 - Income taxes Under UK GAAP, deferred tax assets and liabilities are calculated on a timing difference basis, with the calculation having a predominantly profit and loss account focus. Under IAS 12, deferred tax will be calculated on a temporary difference basis with a more balance sheet focus, with provision for many more timing differences. In particular, there are differences in the provision requirements for revaluations of non monetary items, sale of assets where rollover relief may be available and unremitted earnings from subsidiaries and associates. At the date of this report, easyJet has reviewed the guidance issued thus far by the Inland Revenue (including that in Finance Act 2004) as to the basis on which they will tax companies using IFRS. easyJet is working closely with its advisors to ensure that the taxation impact of this new regime is fully understood and managed. Other information Given the date of easyJet's year end (September), which makes it a relatively late adopter of IFRS, the project team will be analysing in detail actual published financial statements to determine the extent to which a 'best practice' emerges. The project team will then make recommendations to amend proposed accounting treatments and disclosures, should it consider this to be necessary. Notes (forming part of the financial statements) Accounting policies The financial information set out does not constitute the statutory accounts for easyJet plc ('easyJet') for the two years ended 30 September 2004 but is derived from those accounts. Statutory accounts for 2003 have been delivered to the Registrar of Companies, and those for 2004 will be delivered following easyJet's annual general meeting. The auditors have reported on those accounts: their reports were unqualified and did not contain a statement under section 237(3) of the Companies Act 1985. The consolidated financial statements comply with applicable accounting standards (UK GAAP) and have been prepared on the basis of accounting policies set out in easyJet's Report and Accounts. Implementation of UITF 38 The Accounting Standards Board issued UITF Abstract 38 - 'Accounting for ESOP trusts' in December 2003. The abstract is effective for accounting periods ending on or after 22 June 2004. The abstract requires that shares which have been issued, but which are held by the employee share trusts, are deducted from equity rather than shown as an asset on the balance sheet. As a result, an adjustment of Â£0.4 million has been made in the prior year to re-state 195,737 shares previously disclosed within debtors. There is no impact on the profit and loss account in either the current or prior financial year. 2 Segmental information All revenues derive from the group's principal activity as an airline and include scheduled services, in-flight and related sales. Substantially all of the group's external revenues are earned by companies incorporated in the United Kingdom. The geographical analysis of turnover is as follows: 2004 2003 Â£ million Â£ million Within the United Kingdom 224.1 206.3 Between the United Kingdom and the Rest of Europe 728.5 646.1 Within the Rest of Europe 138.4 79.4 1,091.0 931.8 All revenue from easyJet's joint venture (share: Â£1.4 million in 2004) was derived within the United Kingdom. All the group's operating profit arises from airline-related activities. The only revenue earning assets of the group are its aircraft fleet. Since the group's aircraft fleet is employed flexibly across its route network, there is no suitable basis of allocating such assets and related liabilities to geographical segments. 3 Taxation The taxation charge is made up as follows: 2004 2003 Â£ million Â£ million Current taxation: UK corporation tax 9.2 11.7 Overseas taxation 1.2 0.5 Total current taxation 10.4 12.2 Deferred taxation Capital allowances in advance of depreciation 11.1 6.9 Future credits not taxable 1.8 (1.8) Other fixed asset timing differences (2.2) 1.8 Total deferred taxation 10.7 6.9 Total taxation 21.1 19.1 Effective tax rate 33.9% 37.1% The standard rate of current tax for the year, based on the UK standard rate of corporation tax is 30%. The actual current tax charge for the current and the previous year differs from the standard rate for the reasons set out in the following reconciliation: 2004 2003 Â£ million Â£ million Profit on ordinary activities before tax 62.2 51.5 Tax charge at 30% (2003 - 30%) 18.6 15.4 Expenses not deductible for tax purposes 1.8 - Income not taxable - (1.7) Lower tax rates in certain overseas jurisdictions (2.3) (3.5) Movement in share option scheme deduction 2.0 2.1 Purchased goodwill not deductible 5.1 5.3 Fixed asset timing differences (10.1) (6.4) Capital gains in excess of profit realised - 3.8 Adjustments in respect of prior periods (4.7) (2.8) Total current taxation 10.4 12.2 Deferred tax 10.7 6.9 Total taxation 21.1 19.1 3 Taxation (continued) Tax losses There are no UK tax losses available for use in future periods. The amount of foreign tax losses available for use was less than Â£0.1 million in both the current and previous financial years. Share options The introduction of new UK legislation governing corporate tax deductions for share options schemes means that for accounting periods commencing after 31 December 2002 a deduction is no longer available, on an accruals basis, for the difference between the market value of the shares and the share option price. Instead this difference will be deductible when the share options are exercised. The accounting period to 30 September 2004 is the first period to fall under the new rules. These changes will lead to a deferred tax timing difference in respect of the accrual for the share option costs and hence the effective tax rate will not be affected by the new legislation. As before, a tax deduction is available for Swiss employees upon exercise. The closing share price at 30 September 2004 was Â£1.27 (2003: Â£2.1975). easyJet Switzerland, a group member, has the benefit of an exemption from communal and cantonal taxes in Switzerland until 1 January 2004, subject to meeting certain conditions. The effective tax rate in Switzerland at present is 7.6%, but will rise to 27.5% from 1 January 2008 assuming that tax rates remain unchanged. 4 Earnings per share Basic earnings per share has been calculated by dividing the profit for the year retained for equity shareholders by the weighted average number of shares in issue during the year after adjusting for changes to the capital structure of the group. The calculation for diluted earnings per share uses the weighted average number of ordinary shares in issue adjusted by the effects of all dilutive potential ordinary shares. The dilution effect is calculated on the full exercise of all ordinary share options granted by the group including other share schemes, which the group considers to have been earned. The calculation compares the difference between the exercise price of exercisable share options, weighted for the period over which they were outstanding during the year, with the average daily mid-market closing price over the period when they were in existence as options. The earnings per share are based on the following: Year ended Year ended 30 September 30 September 2004 2003 Profit for the year retained for equity shareholders (Â£ million) 41.1 32.4 Number Number Weighted average number of ordinary shares in issue during 397.7 393.2 the year used to calculate basic earnings per share (millions) Weighted average number of dilutive share options used to 8.7 10.1 calculate dilutive earnings per share (millions) The derivation of profit for the calculation of adjusted EPS before goodwill amortisation is as follows. This measure has been chosen to show the performance excluding goodwill amortisation, which is a significant non cash balance in the profit and loss account: Year ended Year ended 30 September 30 September 2004 2003 Â£ million Â£ million Profit for the year retained for equity shareholders 41.1 32.4 Add back: goodwill amortisation 17.1 17.6 58.2 50.0 4 Earnings per share (continued) The derivation of profit for the calculation of adjusted EPS before goodwill amortisation, accelerated depreciation of certain owned aircraft, committed to contribution to Deutsche BA, amounts written off investments, costs of integrating the businesses of easyJet and Go Fly and is as follows. This measure has been chosen because it removes the effects of non-recurring items, significant non-cash items and items which have had a disproportional effect on the earnings of the business during the year: Year ended 30 September 2004: Pre-tax Post-tax amount Tax effect amount Â£ million Â£ million Â£ million Profit for the year retained for equity 62.2 (21.1) 41.1 shareholders Add back: Goodwill amortisation 17.1 - 17.1 Accelerated depreciation of certain owned aircraft 6.1 (1.8) 4.3 85.4 (22.9) 62.5 Year ended 30 September 2003: Pre-tax Post-tax amount Tax effect Amount Â£ million Â£ million Â£ million Profit for the year retained for equity 51.5 (19.1) 32.4 shareholders Add back: Goodwill amortisation 17.6 - 17.6 Committed contribution to Deutsche BA 1.3 - 1.3 Amounts written off investments 7.8 (0.9) 6.9 Costs of integrating the businesses of easyJet and 7.9 (2.4) 5.5 Go Fly Accelerated depreciation of certain owned aircraft 10.2 (3.1) 7.1 96.3 (25.5) 70.8 5 Intangible fixed assets Goodwill Â£ million Cost At 1 October 2003 350.9 Additions - adjustments to purchase consideration (see below) (3.1) At 30 September 2004 347.8 Amortisation At 1 October 2003 21.1 Charge for the year 17.1 At 30 September 2004 38.2 Net book value At 30 September 2004 309.6 At 30 September 2003 329.8 Goodwill, which arose on the initial investment in easyJet Switzerland SA and the subsequent acquisition of that undertaking, is amortised to the consolidated profit and loss account over its estimated useful life of 20 years. On 31 July 2002, the group acquired Newgo1 Limited, the ultimate holding company of Go Fly Limited, an operator of low cost airline services. Adjustment has been made to the goodwill arising on the basis that additional cashflows occurred during the year relating to the acquisition of Go Fly which had not been provided for at 30 September 2002. In particular, during the year, a further Â£3.1 million of retention monies were received, reducing the cost of the investment. The fair value of the net assets acquired has not changed. Goodwill on this acquisition is amortised to the consolidated profit and loss account over its estimated useful life of 20 years. 6 Tangible fixed assets Aircraft Payments on Leasehold Fixtures, Total account-aircraft improvements - fittings and deposits buildings equipment Â£ million Â£ million Â£ million Â£ million Â£ million Cost At 1 October 2003 222.0 176.8 3.6 12.7 415.1 Exchange differences (14.9) (17.8) - - (32.7) Additions 262.3 103.7 0.5 3.9 370.4 Disposals (261.8) (97.3) (0.1) (1.8) (361.0) At 30 September 2004 207.6 165.4 4.0 14.8 391.8 Depreciation At 1 October 2003 85.0 - 1.8 7.5 94.3 Exchange differences (6.0) - - - (6.0) Charge for year 21.3 - 0.6 3.4 25.3 Disposals (52.0) - (0.1) (0.1) (52.2) At 30 September 2004 48.3 - 2.3 10.8 61.4 Net book value At 30 September 2004 159.3 165.4 1.7 4.0 330.4 At 30 September 2003 137.0 176.8 1.8 5.2 320.8 At 30 September 2004, aircraft with a net book value of Â£120.7 million (2003: Â£74.4 million) were mortgaged to lenders as security for loans. easyJet reviewed the carrying and residual value of its aircraft at 30 September 2003 and concluded that the four oldest owned Boeing 737-300 aircraft required an acceleration in depreciation. The aircraft were retired in 2004, earlier than originally planned. Given the distressed nature of the second hand aircraft market at the time, the residual values were reassessed. As a result, management provided Â£10.2 million additional depreciation in the financial year 2003 and Â£3.4 million additional depreciation in the financial year 2004 prior to their disposal. easyJet performed a similar residual value review of its aircraft during the year ended 30 September 2004 and concluded that the six remaining owned Boeing 737-300 aircraft required an acceleration in depreciation. This has lead to an additional charge of Â£2.7 million in the current financial year. 7 Creditors: amounts falling due within one year 2004 2003 Â£ million Â£ million Bank loans 9.7 7.5 Trade creditors 17.6 20.6 Other taxes and social security 3.6 2.8 Other creditors 9.8 7.1 Corporation tax 18.0 13.8 Unearned revenue (including Government taxes) 143.0 105.0 Accruals 111.2 96.8 Deferred income 1.8 7.3 314.7 260.9 8 Creditors: amounts falling due after more than one year 2004 2003 Â£ million Â£ million Bank loans 110.1 65.3 Deferred income 47.6 - 157.7 65.3 Deferred income represents the excess of sales price over fair value of certain assets that were subject to sale and operating leaseback transactions. These amounts will be released to the profit and loss account over the respective asset's lease term. 9 Loans 2004 2003 Â£ million Â£ million Amounts falling due: Within one year 9.7 7.5 Due within one to two years 10.1 5.9 Due in two to five years 37.2 25.3 Due after five years 62.8 34.1 119.8 72.8 Included within amounts falling due within than one year (9.7) (7.5) 110.1 65.3 The bank loans financed the acquisition of certain aircraft by the group. The aircraft acquired with the loans are provided as security against the borrowings. The bank loans are subject to certain financial and operating covenants on loans that were taken out prior to flotation. 10 Provisions for liabilities and charges 2004 2003 Â£ million Â£ million Maintenance liabilities 42.9 31.6 Deferred taxation 20.2 11.3 63.1 42.9 11 Share capital and reserves Share Share Profit and Total capital premium loss account Â£ million Â£ million Â£ million Â£ million At 1 October 2003 98.5 539.6 120.4 758.5 Prior year adjustment (see note 1) - - (0.4) (0.4) At 1 October 2003 (restated) 98.5 539.6 120.0 758.1 Issue of ordinary share capital: Share option schemes 1.3 14.6 - 15.9 Loss in value of shares held by - - 0.2 0.2 trustees Movement in profit and loss account for employee share schemes - - (7.1) (7.1) Retained profit for the year - - 41.1 41.1 Foreign currency translation - - (18.8) (18.8) differences At 30 September 2004 99.8 554.2 135.4 789.4 As described in note 1, in accordance with UITF 38, 194,842 shares issued (2003: 195,737 shares) but which have not vested unconditionally with the employees, have been excluded from equity. These shares are held by easyJet Trustees, the trust managing employee share schemes. 12 Contingent liabilities The group is involved in various disputes or litigation in the normal course of business. Whilst the result of such disputes cannot be predicted with certainty, the company believes that the ultimate resolution of these disputes will not have a material affect on the group's financial position or results. In 2002, Navitaire Inc. ('Navitaire'), a former supplier of airline reservation software to easyJet Airline Company Limited, a group company, issued proceedings against that group company alleging copyright infringement in relation to airline reservations software. easyJet Airline Company Limited vigorously defended the claims. In July 2004, judgment was given on the proceedings in the UK, which found that in all material respects, easyJet had not infringed any copyrights. However, Navitaire may take leave to appeal, or refer the case to the European Court of Justice. Proceedings have also been brought in the United States. The directors consider that, in the event of Navitaire being successful in any claim, any award of damages is unlikely to be material to the group. 13 Notes to the cash flow statement Analysis of amounts summarised in the cash flow statement 2004 2003 Â£ million Â£ million Returns on investment and servicing of finance Interest received 15.2 13.3 Interest paid on bank and all other loans (2.6) (1.5) Net cash inflow from returns on investment and servicing of finance 12.6 11.8 Capital expenditure Purchase of tangible fixed assets (370.4) (233.9) Sale of tangible fixed assets 308.5 58.6 Net cash outflow for capital expenditure (61.9) (175.3) Acquisitions and disposals Retention monies released on purchase of Go 3.1 2.3 Fly (see note 5) Investment in Deutsche BA - (1.2) Investment in Big Orange Handling Company 0.3 - Net cash inflow for acquisitions 3.4 1.1 Financing New loans taken out 65.8 13.9 Decrease in loans (8.3) (6.6) Issue of share capital 9.0 3.8 Net cash inflow from financing 66.5 11.1 14 Post balance sheet events During October 2004 easyJet has indicated its intention to invoke certain rights under its lease agreements to reduce the lease term by three years of six leased aircraft previously due to return in 2009 and 2010. It has also made adjustments to the arrival date of three Airbus aircraft. easyJet Airline Company Limited, a group company, has signed an agreement with Amir Eilon, a non executive director, to provide consulting services to easyJet in the six months ending 31 March 2005 in respect of a specific business development project. Payment for services is based on a daily rate of Â£1,500. Total remuneration is not expected to exceed Â£100,000. This information is provided by RNS The company news service from the London Stock Exchange R IFFIVLSLFFIS

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