easyJet plc – Annual report – 30 September 2023
Industry: transport
1A. SIGNIFICANT ACCOUNTING POLICIES (extract)
Leases
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. Lease payments include fixed payments and variable payments which are dependent on an index or rate. Where an index or rate is used this is initially measured using the index or rate at commencement. 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 the duration of the non-cancellable term. If easyJet has an extension option, which it considers it is reasonably certain to exercise, then the lease term will be considered to extend beyond that non-cancellable period to the end of the extension period available. Where easyJet has previously assessed that there is no intention to exercise an extension option but subsequently opts to exercise the option, then a modification would be carried out. If easyJet has a termination option, which it considers it is reasonably certain to exercise, then the lease term will be accounted for until the point when 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 before return to the lessor, in accordance with the terms of the lease, is also included in the right of use asset at initial recognition. Subsequently, for leased aircraft, the right of use asset attracts maintenance work in accordance with the contractual obligations of the lease, and a provision for the maintenance work is built up as the aircraft is flown, with the offset being against the right of use asset. The maintenance asset created is immediately fully depreciated as the liability is incurred as the aircraft is flown. Adjustment is also made to the right of use asset to reflect any remeasurement of the corresponding lease liability. The right of use assets form part of the Airline CGU and are therefore subject to review for impairment annually or when there is an indication of impairment within the Airline CGU.
Short-term leases less than 12 months in length and low-value leases are not recognised as lease liabilities and right of use assets but are recognised as an expense on a straight-line basis over the lease term.
In the consolidated statement of cash flows, payments for the interest element of recognised lease liabilities are included in interest and other financing charges paid within cash flows from operating activities. Payments for the principal element of recognised lease liabilities are presented within cash flows from financing activities.
easyJet periodically enters into sale and leaseback transactions whereby it sells either new or mid-life aircraft or engines to a third-party and immediately leases them back. Where the transaction is 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. If sale proceeds received were determined to not be at the aircraft’s fair value, any below market terms would be recognised as a prepayment of lease payments, and above market terms recognised as additional financing provided by the lessor. Gains on sale and leaseback transactions are recognised in other income, with losses on sale and leaseback transactions recognised in other costs. Proceeds received for the sale of the fair value of the asset are recognised in the statement of cash flows within investing activities as it relates to property, plant and equipment.
Provisions (extract)
Maintenance
easyJet incurs liabilities for maintenance and restoration costs in respect of leased aircraft 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 or when heavy maintenance events are expected to occur during the period of the lease. Contractual maintenance obligations arising from the ongoing use of the aircraft are provided for over the term of the lease based on the estimated future costs of the maintenance events, or forecast penalty charges, discounted to present value. The provision is built as the aircraft are flown, and recognised against the right of use asset, where it is immediately fully depreciated as the flying hours that determine the provision have taken place. The restoration cost obligation is described in the lease section.
1B. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (extract)
1B. (II) CRITICAL ACCOUNTING ESTIMATES (extract)
Owned aircraft carrying values – £3,846 million (2022: £3,598 million) (note 11)
The key estimates used in arriving at aircraft carrying values are the UELs and residual values of the owned aircraft.
Aircraft are depreciated over their UEL to their residual values in line with the Property, Plant and Equipment Accounting Policy. The UEL is based on easyJet’s long-term fleet plan and intended utilisation of the current fleet, which include long-term assumptions of market conditions and customer demands, which by their nature are inherently uncertain.
Residual value estimates for aircraft are based on independent aircraft valuations. The valuations are based on an assessment of the current and future state of the global marketplace for specific aircraft assets. Should the marketplace for an asset class deteriorate unpredictably, there could be a risk that the recoverable amount for some aircraft assets would fall below their current carrying value or that residual values are subject to downward adjustment. If the market expectation of residual value of the easyJet aircraft varied by +/- 10% this would result in an approximate +/- £7 million impact on annual depreciation rates.
Owned and leased aircraft asset recoverable amounts are included in the Airline CGU and are therefore subject to review for impairment annually or when there is an indication of impairment within the Airline CGU. Further details of the impairment testing applied are included in note 10.
Aircraft maintenance provisions – £753 million (2022: £636 million) (note 19)
easyJet incurs liabilities for maintenance costs arising during the lease term of leased aircraft. These costs 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, it is usual for easyJet to carry out at least one heavy maintenance check on each of the engines and the airframe of the aircraft during the lease term. A material provision representing the estimated cost of this obligation is built up over the course of the lease. The estimates and assumptions used in the calculation of the provision are reviewed at least annually, and when information becomes available that is capable of causing a material change to an estimate, such as the renegotiation of end of lease return conditions, increased or decreased aircraft utilisation, or changes in the cost of heavy maintenance services and the expected uplift in future prices.
A significant portion of the future maintenance costs and cost increases are under contract and provide certainty to the provision. Where cost increases are not under contract, an estimation of the likely future increases are made in the calculation of the provision. Given the significant value of the provision, the provision is sensitive to changes in the future increase of uncontracted costs. An additional 4% cost uplift on uncontracted costs over the future years used in the provision would result in a £28 million increase in the provision. Additionally, with many maintenance costs incurred in US dollars, the provision remains sensitive to changes in the GBP/USD exchange rate. A significant +/- 10 cent change in the GBP/USD exchange rate would impact the provision by -£48 million/+£56 million respectively.
The rates used to discount the provision to arrive at a present value are based on observable market rates as an estimate of the relevant risk free rate.
The provision can also be materially influenced by the maintenance status of aircraft when they enter the easyJet fleet. To give flexibility to the fleet plan easyJet may lease ‘mid-life’ aircraft. When mid-life aircraft enter the fleet, a ‘catch-up’ maintenance provision is created to reflect the maintenance obligation for the flying cycles undertaken before the aircraft entered the easyJet fleet. The trigger for such increases to the provision is the lease contract and as such any future mid-life lease events are not reflected in the current provision. It is of note that where contractually agreed a mid-life delivery asset is also created when the mid-life leased aircraft enter the fleet, creating a separate related asset on the statement of financial position.
2. NET FINANCE CHARGES
1) See note 26 for details.
2) Included within net exchange (gain)/loss on monetary assets and liabilities is an £84 million loss (2022: £127 million gain) relating to the fair value gain on US dollar foreign exchange derivatives designated as fair value through profit or loss.
3. PROFIT/(LOSS) BEFORE TAX (extract)
The following have been included in arriving at profit/(loss) before tax:
5. NON-HEADLINE ITEMS (extract)
Sale and leaseback loss
During the year, easyJet completed the sale and leaseback of eight A319 aircraft (2022: ten). There was a £nil million impact in the income statement (£6 million loss recognised in other costs offset by £6 million gain recognised in other income) for the sale and leaseback of the eight aircraft during the year (2022: £21 million loss recognised in other costs).
11. PROPERTY, PLANT AND EQUIPMENT
The net book value of aircraft includes £569 million (2022: £414 million) relating to advance payments for future deliveries and life limited parts not yet in use. This amount is not depreciated.
The net book value of aircraft spares is £112 million (2022: £81 million).
The ‘Other’ categories are principally comprised of leasehold improvements, computer hardware, leasehold property, fixtures, fittings and equipment, and work in progress in respect of property, plant and equipment projects. The work in progress as at 30 September 2023 was £14 million (2022: £20 million).
As at 30 September 2023, easyJet was contractually committed to the acquisition of two CFM LEAP engines (2022: four), and 158 (2022: 168) Airbus 320 family aircraft, with a total estimated list price3 of $18.1 billion (2022: $19.2 billion) before escalations and discounts, for delivery in financial years 2024 (16 aircraft), 2025 (19 aircraft) and 2026 to 2029 (123 aircraft).
At the year end date easyJet had a commitment for six aircraft lease contracts, where the aircraft had not been delivered, with a combined value of £67 million. Subsequent to 30 September 2023 two aircraft have been delivered reducing the commitment to £45 million.
1) Right of use asset disposals includes the transactions to remove the fully depreciated assets from the statement of financial position when the leased assets are returned. The gross value of the cost and associated accumulated depreciation was £100 million.
2) £(14) million Other asset values previously recorded as transfers have been reclassified as additions.
3) As Airbus no longer publishes list prices, the last available list price published in January 2018 has been used for the estimated list price, and the prior year comparator has been restated to be on the same basis.
18. LEASES
easyJet holds aircraft under leasing arrangements that are recognised as right of use assets and lease liabilities, with remaining lease terms ranging up to seven 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, days and cycles operated and the estimated cost of the maintenance events. Further details are given in note 1.
Information in respect of right of use assets, including the carrying amount, additions and depreciation, is set out in note 11. Information in respect of the carrying value and interest arising on lease liabilities is set out in note 25 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 year in relation to these leases is disclosed below.
Accounts examples 