easyJet plc – Annual report – 30 September 2022
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 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. If easyJet has a termination option, which it considers it reasonably certain to exercise, then the lease term will be accounted for 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 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, the right of use asset attracts maintenance work in accordance with the lease contractual obligations; a provision for the maintenance work is built up as the aircraft is flown, with the offset being against the right of use asset. This asset is immediately 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.
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.
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 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, 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 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.(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 evaluated with reference to external valuations specific to the easyJet fleet and assessed 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).
1b.(ii) Critical accounting estimates (extract)
Owned aircraft carrying values — £3,598 million (2021: £3,559 million) (note 11)
The key estimates used in arriving at aircraft carrying values are the useful economic lives and residual values of the owned aircraft.
Aircraft are depreciated over their useful economic life to their residual values in line with the property, plant and equipment accounting policy. The useful economic life 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 +/- £6 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 – £636 million (2021: £550 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 renegotiation of end of lease return conditions, increased or decreased aircraft utilisation, or changes in the cost of heavy maintenance services and expected uplift in future prices. Given the 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. The most critical estimates in the calculation of the provision are considered to be the future utilisation of the aircraft and the expected increase in the cost of the heavy maintenance checks. Should inflation rates be c.2% higher than the currently estimated rates in all periods for which they are not yet contractually fixed or currently under negotiation, this would increase the provision by c.£6 million.
The rates used to discount the provision to arrive at a present value are based on observable market rates and are therefore at less risk of management estimation.
2. Net finance charges
1. See note 26 for details.
2. Included within net exchange loss/(gains) on monetary assets and liabilities is a £127 million gain (2021: £15 million loss) relating to the fair value gain on US dollar foreign exchange derivatives designated as fair value through profit or loss.
3. Loss before tax (extract)
The following have been included in arriving at loss before tax:
5. Non-headline items (extract)
Sale and leaseback loss/(gain)
During the year, easyJet completed the sale and leaseback of 10 A319 aircraft (2021: 7), nil A320 (2021: 24), nil A321 (2021: 4) and nil engines (2021: 2). The income statement impact of the sale and leaseback of the 10 aircraft was a £21 million loss recognised in other costs (2021: £79 million gain recognised in other income offset by £14 million loss recognised in other costs.)
11. Property, plant and equipment
The net book value of aircraft includes £297 million (2021: £132 million) relating to advance payments for future deliveries. This amount is not depreciated.
The net book value of aircraft spares is £81 million (2021: £67 million).
As at 30 September 2022, easyJet was contractually committed to the acquisition of four LEAP engines (2021: 0) and 168 (2021: 101) Airbus 320 family aircraft, with a total estimated list price1 of US$ 21.9 billion (2021: US$ 12.3 billion) before escalations and discounts for delivery in financial years 2023 (7 aircraft), 2024 (21 aircraft), 2025 (23 aircraft) and 2026 to 2029 (117 aircraft).
* £33 million of cost and £33 million of accumulated depreciation from components disposed of in the year ended 30 September 2021 were identified which were previously included as disposals, which have now been presented in Aircraft sold and leased back, reflecting the aircraft with which they were associated.
The ‘Other’ categories are comprised of leasehold improvements, computer hardware, leasehold property, fixtures, fittings and equipment, and work in progress in respect of tangible projects. The work in progress as at 30 September 2022 was £20 million (2021: £10 million).
Assets of £908 million (2021: £934 million) are pledged as security for the drawn portion of the UKEF backed facility.
1. 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 2022 of 11.2% (or 2.7% CAGR).
2. Transfers are from work in progress on other owned assets to computer software intangible assets, which are reflected in the additions line in note 10.
easyJet holds aircraft under leasing arrangements that are recognised as right of use assets and lease liabilities, with remaining lease terms ranging up to 10 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, are 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.
The £14 million credit in the prior year recognised as expenses relating to short-term wet leases relates to the release of an accrual which was no longer required.