easyJet plc – Annual report – 30 September 2020
1A. SIGNIFICANT ACCOUNTING POLICIES (extract)
When a contractual arrangement contains a lease easyJet recognises a lease liability and a corresponding right of use asset at the commencement of the lease.
At the commencement date the lease liability is measured at the present value of the future lease payments, discounted using the Group’s incremental borrowing rate where the interest rate in the lease is not readily determined. Subsequently, the lease liability is adjusted by increasing the carrying amount to reflect interest on the lease liability, reducing the carrying amount to reflect the lease payments made and remeasuring the carrying amount to reflect any reassessment or lease modifications.
The lease term is determined from the commencement date of the lease and covers for the non-cancellable term. If easyJet has an extension option, which it considers it reasonably certain to exercise, then the lease term will be considered to extend beyond that non-cancellable period. If easyJet has a termination option, which it considers it reasonably certain to exercise, then the lease term will be considered to be until the point the termination option will take effect.
At the commencement date the right of use asset is measured at an amount equal to the lease liability plus any lease payments made before the commencement date and any initial direct costs, less any lease incentive payments. An estimate of costs to be incurred in restoring an asset, in accordance with the terms of the lease, is also included in the right of use asset at initial recognition. Subsequently, the right of use asset is measured in accordance with the accounting policy for property, plant and equipment. Adjustment is also made to the right of use to reflect any remeasurement of the corresponding lease liability. The right of use assets are also subject to impairment testing under IAS 36.
Short-term leases and low value leases are not recognised as lease liabilities and right of use assets, but are recognised as an expense straight line over the lease term.
easyJet enters into sale and leaseback transactions whereby it sells either new or mid-life aircraft to a third party and immediately leases them back. Where sale proceeds received are judged to reflect the aircraft’s fair value, any gain or loss arising on disposal is recognised in the income statement, to the extent that it relates to the rights that have been transferred. Gains and losses that relate to the rights that have been retained are included in the carrying amount of the right of use asset recognised at commencement of the lease. Where sale proceeds received are not at the aircraft’s fair value, any below market terms are recognised as a prepayment of lease payments, and above market terms are recognised as additional financing provided by the lessor.
easyJet have applied the practical expedient under COVID-19 Related Rent Concessions – Amendment to IFRS 16 Leases to account for all rent concessions agreed with lessors as a result of COVID-19. Concessions took the form of delayed payments for leased aircraft. The impact of deferring rental payments on the interest expense in the income statement was not material.
easyJet incurs liabilities for maintenance costs in respect of aircraft leased during the term of the lease. These arise from legal and constructive contractual obligations relating to the condition of the aircraft when it is returned to the lessor. On recognition of a right of use asset under IFRS 16 a provision is made in full for maintenance not dependent on use of the aircraft, plus maintenance relating to previous use, based on hours or cycles flown, to provide for the cost of these obligations. Contractual obligations which are dependent on the ongoing use of the aircraft will be provided over the term of the lease based on the estimated future costs, discounted to present value. This will be capitalised to the right of use asset rather than recognised in maintenance in the income statement. This asset will be depreciated immediately as the obligation has arisen as a result of flying hours already undertaken.
1C. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (extracts)
1C.(I) CRITICAL ACCOUNTING JUDGEMENTS (extract)
SALE AND LEASEBACK TRANSACTIONS
Judgement is required when determining if sale and leaseback proceeds and lease rentals are at fair value. The sale and leaseback transactions completed in the year have been assessed with reference to external valuations specific to the easyJet fleet and deemed to be at fair value. The accounting treatment would have been different if the transactions had not been at fair value (see leases accounting policy).
1C.(II) CRITICAL ACCOUNTING ESTIMATES (extract)
AIRCRAFT MAINTENANCE PROVISIONS – £597 MILLION (NOTE 18)
easyJet incurs liabilities for maintenance costs in respect of aircraft leased during the term of the lease. These arise from legal and constructive contractual obligations relating to the condition of the aircraft when it is returned to the lessor. To discharge these obligations, easyJet will also normally need to carry out one heavy maintenance check on each of the engines and the airframe during the lease term.
The most critical estimates required for the provision are considered to be the utilisation of the aircraft, the expected costs of the heavy maintenance checks at the time which they are expected to occur, the condition of the aircraft, the lifespan of life-limited parts and the rate used to discount the provision.
The bases of all estimates are reviewed at least annually, and when information becomes available that is capable of causing a material change to an estimate, such as renegotiation of end of lease return conditions, increased or decreased utilisation, or changes in the cost of heavy maintenance services. Given the much increased uncertainty in forecasting future maintenance requirements, and the associated judgemental nature of the assumptions applied in determining the maintenance provision, management believe that a reasonable combination of changes to these estimates could result in a material movement to the carrying value of the provision. A 5% movement in the estimated cost of final maintenance events would result in a £15 million movement to the provision.
AIRCRAFT CARRYING VALUES – (NOTE 11)
As a result of the reduced customer demand, 34 leased aircraft were permanently stood down from commercial service and will be returned to the lessors at the end of the lease term. The recoverable value of the right-of-use assets related to these aircraft have been assessed as nil and the assets impaired on this basis. No goodwill has been allocated to these impaired aircraft as they are not able to operate independently.
The remaining aircraft asset recoverable amounts have been tested for impairment based on value in use at the airline route network cash generating unit level as described in the goodwill section above. Strategic plans include estimations of the future impact of climate change on easyJet to the extent these can be reliably estimated. The recoverable amounts exceed the carrying values as at 30 September 2020.
Aircraft are depreciated over their useful economic life to their residual values in line with the property plant and equipment accounting policy. A review has been performed and the existing residual value amounts have been determined to be appropriate.
However, in light of the global pandemic, the longer-term impact on the airline industry is currently uncertain and the market for aircraft transactions has also slowed. Should future demand fall significantly below current expectations there could be a risk that the recoverable amount for some aircraft assets falls below their current carrying value or that residual values are subject to significant deterioration.
2. NET FINANCE CHARGES
1. Included within Other interest payable is a £5 million loss relating to fair value loss on jet fuel derivatives entered into to offset fair value movements on discontinued hedges.
2. Included within net exchange gains on monetary assets and liabilities is a £13 million loss (2019: £24 million gain) relating to the fair value loss on USD foreign exchange derivatives designated as fair value through profit and loss. There is also a £1 million loss relating to other FX derivatives designated as fair value through profit and loss entered into to offset fair value movements on discontinued hedges. See Note 24 for details.
3. LOSS / PROFIT BEFORE TAX (extract)
The following have been included in arriving at loss / profit before tax:
5. NON-HEADLINE ITEMS (extracts)
SALE AND LEASEBACK GAIN
During the period, easyJet completed the sale and leaseback of 17 A319 (2019: 10), 9 A320 (2019: nil) and 7 A321 (2019: nil). The net Income Statement impact of the 33 sale and leasebacks was a £38 million gain (2019: £2 million gain).
Due to lower forecasted customer demand, the Group have reassessed the fleet capacity and utilisation requirements leading to 34 leased aircraft being permanently removed from commercial service. These assets will not be utilised again before being returned to the lessor at the end of their existing lease term and therefore will not generate any further economic benefit. As a result, an impairment charge of £37 million for these aircraft has been categorised as non-headline in the income statement, along with an equivalent reduction within Right of Use assets.
11. PROPERTY, PLANT AND EQUIPMENT
The net book value of aircraft includes £281 million (2019: £286 million) relating to advance and option payments for future deliveries. This amount is not depreciated.
As at 30 September 2020, easyJet was contractually committed to the acquisition of 101 (2019: 110) Airbus 320 family aircraft, with a total estimated list price* of US$12.16 billion (2019: US$ 13.0 billion) before escalations and discounts for delivery in financial years 2021 (zero aircraft), 2022 (13 aircraft), 2023 (29 aircraft) and 2024 (13 aircraft).
The ‘Other’ categories comprise of leasehold improvements, computer hardware, leasehold property and fixtures, fittings and equipment and work in progress in respect of tangible and intangible projects.
Included in additions in the period is £15 million previously recognised in prepayments, which has been reclassified to property, plant and equipment.
Assets of £1.066 million are pledged as security for the Revolving Credit Facility and term loans listed in note 16.
Refer to note 5 for details on the right of use asset impairment recognised in the year for leased aircraft no longer in commercial service.
* Airbus no longer publishes list prices. The estimated list price is based on the last available list price published in January 2018 and escalated by Airbus’ standard escalation from January 2018 to January 2019 of 3.7% and from January 2019 to January 2020 of 2.96%
easyJet holds aircraft under leasing arrangements that are recognised as right of use assets and lease liabilities, with remaining lease terms ranging up to nine years. easyJet is contractually obliged to carry out maintenance on these aircraft, and the cost of this is provided based on the number of flying hours and cycles operated. Further details are given in note 1.
Information in respect of right of use assets, including the carrying amount, additions and depreciation, are set out in note 11 to these financial statements. Information in respect of the carrying value and interest arising on lease liabilities is set out in note 24 and note 2 respectively. A maturity analysis of lease liabilities is set out below.
easyJet also enters into short term leases and low value leases which are not recognised as right of use assets and lease liabilities. The expense recognised in the period in relation to these leases is disclosed in note 3.