IFRS 16, policies, maintenance provisions for leased aircraft, certain disclosures, sale and leaseback

easyJet plc – Annual report – 30 September 2021

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. 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 reasonably certain to exercise, then the lease term will be considered to extend beyond that noncancellable 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 asset 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 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. For each transaction, where the sale proceeds and lease payments are judged to be at 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 and lease payments are not at 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. Gains on sale and leaseback transactions are recognised in other income, with losses on sale and leaseback transactions recognised in other costs. This has been retrospectively applied to the comparative financial year. See note 5 for further details.

Provisions (extract)

Maintenance

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 are provided over the term of the lease based on the estimated future costs, discounted to present value. These are capitalised to the right of use asset rather than recognised in maintenance in the income statement. These assets are depreciated immediately as the obligation has arisen as a result of flying hours already undertaken.

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 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).

1b.(ii) Critical accounting estimates (extract)

Aircraft maintenance provisions – £550 million (2020: £597 million) (note 18)

The most critical estimate required for the provision is considered to be the expected costs of the heavy maintenance checks at the time they are expected to occur. Other estimates also impacting the provision include the future utilisation of the aircraft, the condition of the aircraft, the lifespan of life-limited parts and the rate used to discount the provision.

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 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 aircraft 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 £24 million movement to the provision.

Aircraft carrying values — £3,559 million (2020: 4,333 million) — (note 11)

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 incorporate estimations of the future impact of climate change on easyJet, this includes the future financial impact within cash flow projections of the increased cost of carbon-offsetting, the future estimated price of ETS permits and the expected price and quantity required of Sustainable Aviation Fuel usage. The recoverable amounts exceed the carrying values as at 30 September 2021.

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 during the current financial year and the useful economic life and residual value amounts for aircraft and capitalised maintenance have been revised in line with the latest information available. This included the expected useful economic life estimate for CEO aircraft revised from 23 years to 18 years in line with expected usage and the residual value for aircraft revised based on reports obtained from independent aircraft valuation experts. The revised estimates led to a net accelerated depreciation of the fleet on a prospective basis from 1 July 2021. The changes increased the depreciation charge by c.£13 million in the financial year 2021. This increase is expected to annualise at £47 million in financial year 2022. The change in depreciation charge is non-cash.

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. See Note 25 for details of the split between headline and non-headline for hedge discontinuation.

2. Included within net exchange gains on monetary assets and liabilities is a £15 million loss (2020: £13 million loss) relating to the fair value loss on USD foreign exchange derivatives designated as fair value through profit and loss.

3 Loss before tax (extract)

The following have been included in arriving at loss before tax:

The sale of EU ETS assets in the prior year resulted in a remeasurement of the EU ETS liability which reduced 2020 fuel costs by £33 million.

5. Non-headline items (extract)

Sale and leaseback gain

During the year, easyJet completed the sale and leaseback of 7 A319 (2020: 17), 24 A320 (2020: 9) and 4 A321 (2020: 7) and 2 engines (2020: nil). The Income Statement impact of the 35 aircraft and 2 engine sale and leasebacks was a £79 million gain (2020: £45 million gain) recognised in Other income offset by a £14 million loss (2020: £7 million loss) recognised in Other costs.

The prior year net gain of £38 million has been reclassified on the face of the Income statement to present £45 million of gains within Other income and £7 million of losses within Other costs. There is no net impact on EBITDAR or the loss before tax.

11. Property, plant and equipment

The net book value of aircraft includes £132 million (2020: £281 million) relating to advance and option payments for future deliveries. This amount is not depreciated.

As at 30 September 2021, easyJet was contractually committed to the acquisition of 101 (2020: 101) Airbus 320 family aircraft, with a total estimated list price* of US$ 12.31 billion (2020: US$ 12.16 billion) before escalations and discounts for delivery in financial years 2022 (8 aircraft), 2023 (7 aircraft) and 2024 (18 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.

Assets of £934 million are pledged as security for the drawn portion of the UKEF backed facility (2020: £1,066 million pledged as security for the Revolving Credit Facility and term loans).

* 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 2021 of 7.3% (or 2.38% CAGR).

17. 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 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 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 below.

The £14 million credit recognised as Expenses relating to short term wet leases relates to the release of an accrual recognised in financial year 2020 which was no longer required.