«As filed with the United States Securities and Exchange Commission on July 26, 2016 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. ...»
2011 0.645 0.624 — — 2012 0.615 0.628 — — 2013 0.603 0.639 — — 2014 0.642 0.607 — — 2015 0.678 0.656 — —
(a) Based on the Federal Reserve Rate for euro.
(b) The average of the relevant exchange rates on the last business day of each month during the relevant period.
(c) Based on the composite exchange rate as quoted at 5 p.m., New York time, by Bloomberg/Reuters.
(d) Based on the Federal Reserve Rate for U.K. pound sterling.
As of July 21, 2016, the exchange rate between the U.S. dollar and the euro was €1.00 = $1.102, or $1.00 = €0.908; the exchange rate between the U.K. pound sterling and the euro was U.K. £1.00 = €1.200, or €1.00 = U.K.
£0.833; and the exchange rate between the U.K. pound sterling and the U.S. dollar was U.K. £1.00 = $1.322, or $1.00 = U.K. £0.757. For a discussion of the impact of exchange rate fluctuations on the Company’s results of operations, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
SELECTED OPERATING AND OTHER DATA
The following tables set forth certain operating data of Ryanair for each of the fiscal years shown. Such data are derived from the Company’s consolidated financial statements prepared in accordance with IFRS and from certain other data, and are not audited. For definitions of the terms used in this table, see the Glossary in Appendix A.
Changes in Fuel Costs and Availability Affect the Company’s Results. Jet fuel costs are subject to wide fluctuations as a result of many economic and political factors and events occurring throughout the world that Ryanair can neither control nor accurately predict, including increases in demand, sudden disruptions in supply and other concerns about global supply, as well as market speculation. While oil prices increased substantially in fiscal years 2012, 2013 and 2014, they declined significantly in the second half of fiscal 2015 and in fiscal 2016 remained at lower levels. As international prices for jet fuel are denominated in U.S. dollars, Ryanair’s fuel costs are also subject to certain exchange rate risks. Substantial price increases, adverse exchange rates, or the unavailability of adequate fuel supplies, including, without limitation, any such events resulting from international terrorism, prolonged hostilities in the Middle East or other oil-producing regions or the suspension of production by any significant producer, may adversely affect Ryanair’s profitability. In the event of a fuel shortage resulting from a disruption of oil imports or otherwise, additional increases in fuel prices or a curtailment of scheduled services could result.
Ryanair has historically entered into arrangements providing for substantial protection against fluctuations in fuel prices, generally through forward contracts covering periods of up to 18 months of anticipated jet fuel requirements. As of July 21, 2016, Ryanair had entered into forward jet fuel (jet kerosene) contracts covering approximately 95% of its estimated requirements for the fiscal year ending March 31, 2017 at prices equivalent to approximately $622 per metric ton. In addition, as of July 21, 2016, Ryanair had entered into forward jet fuel (jet kerosene) contracts covering approximately 55% of its estimated requirements for the fiscal year ending March 31, 2018 at prices equivalent to approximately $496 per metric ton. Ryanair is exposed to risks arising from fluctuations in the price of fuel, and movements in the euro/U.S. dollar exchange rate because of the limited nature of its hedging program, especially in light of the recent volatility in the relevant currency and commodity markets. Any further movements in fuel costs could have a material adverse effect on Ryanair’s financial performance. In addition, any further strengthening of the U.S. dollar against the euro could have an adverse effect on the cost of buying fuel in euro.
As of July 21, 2016, Ryanair had hedged approximately 95% of its forecasted fuel-related dollar purchases against the euro at a rate of approximately $1.18 per euro for the fiscal year ending March 31, 2017 and approximately 77% of its forecasted fuel related dollar purchases against the euro at a rate of approximately $1.12 per euro for the fiscal year ending March 31, 2018.
No assurances whatsoever can be given about trends in fuel prices. Average fuel prices for future years may be significantly higher than current prices. As of July 21, 2016, management estimated that every $10 movement in the price of a metric ton of jet fuel will impact Ryanair’s costs by approximately €1.4 million, taking into account Ryanair’s hedging program for the 2017 fiscal year. However, there can be no assurance in this regard, and the impact of fuel prices on Ryanair’s operating results may be more or less pronounced. There also cannot be any assurance that Ryanair’s current or any future arrangements will be adequate to protect Ryanair from increases in the price of fuel or that Ryanair will not incur losses due to high fuel prices, either alone or in combination with other factors. Because of Ryanair’s low fares and its no-fuel-surcharges policy, as well as Ryanair’s expansion plans, which could have a negative impact on yields, its ability to pass on increased fuel costs to passengers through increased fares or otherwise is somewhat limited. The expansion of Ryanair’s fleet from September 2014 onwards has resulted and will likely continue to result in an increase in Ryanair’s aggregate fuel consumption.
Additionally, ongoing declines in the price of oil may expose Ryanair to some risk of hedging losses that could lead to negative effects on Ryanair’s financial condition and/or results of operations. Also, a rapid decline in the projected price of fuel at a time when we have fuel hedging contracts in place could adversely impact Ryanair’s shortterm liquidity, because hedge counterparties could require that we post collateral in the form of cash or letters of credit.
Ryanair Has Seasonally Grounded Aircraft. In recent years, in response to high fuel prices, typically lower winter traffic and yields and higher airport charges and/or taxes, Ryanair has adopted a policy of grounding a certain portion of its fleet during the winter months (from November to March). In the winter of fiscal year 2016, Ryanair grounded approximately 40 aircraft (compared to 50 in fiscal 2015) and the Company intends to again ground a similar number of aircraft in fiscal 2017. Ryanair’s policy of seasonally grounding aircraft presents some risks. While Ryanair seeks to implement its seasonal grounding policy in a way that will allow it to reduce the negative impact on operating income by operating flights during periods of high oil prices to high cost airports at low winter yields, there can be no assurance that this strategy will be successful.
While seasonal grounding does reduce Ryanair’s variable operating costs, it does not avoid fixed costs such as aircraft ownership costs, and it also decreases Ryanair’s potential to earn ancillary revenues. Decreasing the number and frequency of flights may also negatively affect Ryanair’s labor relations, including its ability to attract flight personnel only interested in year round employment. Such risks could lead to negative effects on Ryanair’s financial condition and/or results of operations.
Ryanair May Not Achieve All of the Expected Benefits of its Recent Strategic Initiatives. Ryanair is in the process of implementing a series of strategic initiatives under its “Always Getting Better” (“AGB”) customer experience program that are expected to have a significant impact on its business. Among other things, these initiatives include scheduling more flights to primary airports, selling flights via corporate travel agents on global distribution systems (“GDS”), a higher marketing spend, and adjusting the airline’s yield management strategy with the goal of increasing load factors. In fiscal years 2014, 2015 and 2016, Ryanair announced a series of customer-experience related initiatives under its “AGB” customer experience program, including a new easier-to-navigate website with a fare finder facility, a mobile app, reduced penalty fees, more customer-friendly baggage allowances, 24 hour grace periods to correct minor booking errors, the introduction of allocated seating for all passengers, family, business traveler and group booking facilities, new crew uniforms, new cabin interiors, an improved inflight menu, and the introduction of additional routes. For additional information on these initiatives, see “Item 4. Information on the Company —Strategy”. Although customer reaction to the measures has so far been positive and management expects these initiatives to be accretive to the Company’s results over time, no assurance can be given that the financial impact of the initiatives will be positive, particularly in the short to medium term. In particular, certain of the strategic initiatives may have the effect of increasing certain of the Company’s costs (including airport fees and marketing expenses) while reducing ancillary revenues previously earned from website sales and from various penalty fees and charges. Although the Company expects that revenues from allocated seating will offset the reduction in ancillary revenues, there can be no assurance that this will occur. Factors beyond Ryanair’s control, including but not limited to customer acceptance, competitive reactions, market and economic conditions and other challenges described in this report could limit Ryanair’s ability to achieve some or all of the expected benefits of these initiatives. A relatively minor shortfall from expected revenue levels (or increase in expected costs) could have a material adverse effect on the Company’s growth or financial performance.
Currency Fluctuations Affect the Company’s Results. Although the Company is headquartered in Ireland, a significant portion of its operations are conducted in the U.K. Consequently, the Company has significant operating revenues and operating expenses, as well as assets and liabilities, denominated in U.K. pounds sterling. In addition, fuel, aircraft, insurance, and some maintenance obligations are denominated in U.S. dollars. The Company’s operations and financial performance can therefore be significantly affected by fluctuations in the values of the U.K.
pound sterling and the U.S. dollar. Ryanair is particularly vulnerable to direct exchange rate risks between the euro and the U.S. dollar because a significant portion of its operating costs are incurred in U.S. dollars and substantially none of its revenues are denominated in U.S. dollars.
Although the Company engages in foreign currency hedging transactions between the euro and the U.S.
dollar, between the euro and the U.K. pound sterling, hedging activities cannot be expected to eliminate currency risks.
See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.” The “Brexit” Referendum and the resulting uncertainty about the status of the U.K. could adversely affect our business. In a referendum held on June 23, 2016 in the U.K. (the “Referendum”), a majority voted in favor of the U.K. leaving the EU (“Brexit”). The Referendum was non-binding and the U.K. government has yet to make the declaration required by Article 50 of the Lisbon Treaty necessary in order to begin the process by which the U.K.
would leave the EU. If such a notification is made, negotiations would commence to determine the future terms of the U.K.’s relationship with the EU. This would include the renegotiation, either during a transitional period or more permanently, of a number of arrangements between the EU and the U.K. that directly impact our business. These arrangements include, inter alia, freedom of movement between the U.K. and the EU, employment rules governing the relationship between the U.K. and the EU, the status of the U.K. in relation to the EU’s open aviation market and the tax status of EU member state entities operating in the U.K. Adverse changes to any of these arrangements, and even uncertainty over potential changes during any period of negotiation, could potentially materially impact on Ryanair’s financial condition and results of operations in the U.K. or other markets Ryanair serves.
Ryanair is exposed to Brexit-related risks and uncertainties, as approximately 28% of revenue in fiscal 2016 came from operations in the U.K., although this was offset somewhat by 21% of our non-fuel costs in fiscal 2016 which were related to operations in the U.K.
Brexit could also present Ryanair with a number of potential regulatory challenges. Brexit could lead to potentially divergent national laws and regulations as the U.K. determines which EU laws to replace or replicate. It could also require special efforts to ensure our continuing compliance with EU Regulation No. 1008/2008, which requires that air carriers registered in EU member states be majority-owned and effectively controlled by EU nationals.
If U.K. holders of the Company’s shares are no longer designated as EU nationals, the Board of Directors may have to take action to ensure continuing compliance with EU Regulation No. 1008/2008. For additional information, please see “Item 3 – Risks Related to Ownership of the Company’s Ordinary Shares or ADRs”.
The Referendum has also caused, and Brexit may continue to cause, both significant volatility in global stock markets and currency exchange rate fluctuations, as well as creating significant uncertainty among U.K. businesses and investors. In particular, the pound sterling has lost approximately over 10% of its value against the U.S. Dollar and the euro since the Referendum, and The Bank of England and other observers have warned of a significant probability of a Brexit-related recession in the U.K. We earn a significant portion of our revenues in pounds sterling, and any significant decline in the value of the pound and/or recession in the U.K. would materially impact our financial condition and results of operations. For the remainder of fiscal 2017, taking account of timing differences between the receipt of sterling denominated revenues and the payment of sterling denominated costs, Ryanair estimates that every 1 pence sterling movement in the EUR/GBP exchange rate will impact income by approximately €8 million.
For additional information, please see “Item 3 – Currency Fluctuations Affect the Company’s Results”.