2007/082006/072005/062004/052003/042002/03Key Documents

Dart Group PLC Company Reports

Business and Financial Review

The Group’s financial performance for the year to 31 March 2015 is reported in line with International Financial Reporting Standards (“IFRS”), as adopted by the EU, which were effective at 31 March 2015.

Group Financial Performance 2014/15

A slower than anticipated start to the financial year in our Leisure Travel business gave way to stronger consumer demand for both our package holidays and flight-only products in the late summer market, a momentum which continued through winter. As a result, the business achieved increased volumes of customers plus a small improvement in yields, which contributed to the Group’s 12% increase in turnover to £1,253.2m (2014: £1,120.2m). The Distribution & Logistics business experienced a reduction in turnover of 1%.

An integrated approach to Leisure Travel revenue management, a focus on operational efficiency and considered cost investment ensured the Group delivered an improved underlying operating profit, which grew by 3% to £50.6m (2014: £49.2m). Following a Supreme Court ruling delivered on 31 October 2014, which refused Jet2.com permission to appeal against the Court of Appeal’s earlier judgment in the case of Huzar v Jet2.com Limited relating to flight delay compensation under Regulation (EC) No 261/2004, the Group made an exceptional provision of £17.0m which led to operating profit falling by 32% to £33.6m.

Net financing income of £7.0m (2014: cost £7.1m) included £1.6m in relation to mark-to-market adjustments on certain ineffective derivative hedges and a positive £4.8m adjustment owing to the revaluation of foreign currency balances held at year end. These mark-to-market adjustments reflect the maturing of certain hedges which, at the previous year end date, were deemed to be surplus to requirements. This was due to a disparity between the monthly phasing of those transactions and the Group’s 2014/15 US dollar and euro requirement being hedged. The foreign currency revaluation principally relates to a US dollar surplus following a decision to deliver summer 2014 airline capacity growth by leasing aircraft, rather than the original intention of buying. This surplus is expected to be utilised during the year ending 31 March 2016.

As a result, the Group achieved a statutory profit before tax of £40.2m (2014: £42.1m). Underlying Group EBITDA increased by 11% to £121.9m (2014: £109.9m).

The Group’s effective tax rate of 18% (2014: 15%) was lower than the headline rate of corporation tax of 21% as a consequence of reductions made in relation to its decreasing deferred tax liability. Underlying basic earnings per share increased by 29% to 31.72p (2014: 24.68p). However, after accounting for the exceptional provision of £17.0m, overall basic earnings per share reduced by 9% to 22.42p.

In consideration of the Group’s improved underlying trading performance, the Board is recommending a final dividend of 2.25p per share (2014: 2.14p). On 20 November 2014, the Board declared an interim dividend of 0.75p per share (2014: 0.60p), which, coupled with the proposed final dividend, equates to a full year dividend of 3.00p per share (2014: 2.74p).

The Group generated net cash flow from operating activities of £116.1m (2014: £130.8m) out of which capital expenditure of £76.4m (2014: £83.5m) was incurred. Capital expenditure as a % of EBITDA fell to 73% (2014: 76%) as the Group invested in the long-term maintenance of its aircraft and engines and acquired two Boeing 737-800 aircraft for its summer 2015 flying programme.

The Group generated net cash inflows(a) of £39.1m in the year (2014: £42.8m), resulting in a year end cash position, including money market deposits, of £302.8m (2014: £263.7m). The Group continues to be funded, in part, by payments received in advance of travel from its Leisure Travel customers, which at the reporting date amounted to £318.7m (2014: £285.8m).

Of these customer advances, £97.5m (2014: £133.3m) was considered restricted by the Group’s merchant acquirers as collateral against a proportion of forward bookings paid for by credit or debit card. These balances become unrestricted once our customers have travelled. The business also had £51.7m (2014: £7.4m) of cash placed with various counterparties in the form of margin calls to cover out-of-the-money hedge instruments, primarily a result of the drop in the price of crude oil. The majority of these out-of-the-money positions are anticipated to run off through summer 2015 as the hedged instruments mature.

The Group is also required by the UK Civil Aviation Authority to maintain certain levels of “available liquidity”, which is defined as free cash plus available undrawn banking facilities.

Total shareholders’ equity reduced by £24.4m as profit after tax of £32.8m (2014: £35.9m) was exceeded by adverse movements in the cash flow hedging reserve, a result of the net mark-to-market movements on jet fuel and currency forward contracts.

Business & Financial Review: Leisure Airline

Leisure Travel – Leisure Airline

The Group’s Leisure Travel business which incorporates Jet2holidays, our ATOL licensed package holidays operator, and Jet2.com, the North's leading leisure airline, concentrates on high volume leisure destinations in the Mediterranean, the Canary Islands and European Leisure Cities.

The business increased its departing customer numbers by 8% to 3.02m (2014: 2.81m). Of those, 1.00m (2014: 0.83m) chose our great value package holiday product, a growth of 20%, with the remaining 2.02m (2014: 1.98m) choosing to enjoy a flight only. Our customers continue to demand value and consistent quality, together with excellent customer service and therefore, the growth in our package holiday customers, to 33% of the total (2014: 30%), is particularly pleasing.

An integrated approach to revenue and demand management between the two products, plus the growing proportion of flying to the Canary Islands and Eastern Mediterranean, contributed to an improved load factor of 91.2% (2014: 91.0%); a 2% increase in net ticket price per passenger to £79.87 (2014: £78.39); and a 3% increase in the average price of a package holiday to £591 (2014: £572). The continued development and refinement of the Jet2holidays hotel products, ranging from 2-star self-catering through to luxury 5-star all-inclusive accommodation, plus an increasing number of people choosing 4 and 5-star packages, resulted in improved gross margin per package holiday compared to the prior year.

Non-ticket revenue per passenger, which is primarily discretionary in nature, increased by 5% to £30.91 (2014: £29.49). This revenue stream continues to be optimised through our customer contact programme as we focus on predeparture (primarily hold bags and advanced seat assignment), in-flight (pre-ordered meals, drinks, snacks, cosmetics and perfumes) and ancillary products (car hire and travel insurance).

As a result, total Leisure Travel turnover grew by 14% to £1,101.5m (2014: £967.0m) whilst underlying operating profit grew 3% to £46.9m (2014: £45.6m).

Approximately 52% of our package holidays are sold online via Jet2holidays.com, 17% of holiday bookings are made through our call centre, based at our commercial centre in Leeds, and the balance via high street and online travel agents, whilst our flight-only seats are booked on the Jet2.com website. Technology and how the customer uses it, is perpetually evolving, and our websites and mobile applications are continuously developed and refined to ensure that the search and booking experience is as smooth as possible whether the customer uses a PC, tablet or mobile phone. Increasingly, customers are looking to engage with the overall brand and product experience rather than merely making a booking. Recognising this, the business has invested in content management systems which provide the customer with personalised content and imagery from the moment they land on the website home page, improving the overall customer experience, engagement and ultimately, conversion.

A smooth customer journey and experience are paramount whichever booking channel is chosen. Further investment has been made in our call centre to both handle the increasing volume of customer calls and to improve response times. Similarly, we are developing our post-booking information and assistance to customers, and have bolstered our pre-travel services teams.

Sales through travel agents remains an important distribution channel for the business, and our package holidays can be booked through all major travel agent chains, key multiples, homeworker companies and independent agents.

The delivery of great customer service is at the heart of our brand values. To ensure that every employee understands this ethos, the business has continued to invest in its allemployee engagement programme “Take Me There”, with each and every colleague receiving training on the importance of delivering customer service excellence at every point in our customers’ journey.

During the year, our leisure airline Jet2.com expanded its route network, operating a total of 217 routes (2014: 205). We also strengthened our cities product with the introduction of Jet2CityBreaks – offering a packaged flight and hotel product in leading European Leisure Cities. Being mindful of the weak demand environment experienced in early summer 2014, Jet2.com has tightened seat capacity on certain routes during early summer 2015. Peak summer seat capacity, however, remains unchanged, and the airline will fly 239 routes to 55 destinations.

Sustained levels of investment in product, brand and customer service excellence, plus the delivery of an attractive end-to-end product, engenders loyalty and repeat bookings and gives us the greatest opportunity to retain and attract customers, both existing and new. As a result, the business expects to see further growth in customer numbers and revenues.

Business & Financial Review: Distribution & Logistics

Distribution & Logistics

The Group’s distribution business, Fowler Welch, is one of the UK’s leading logistics providers to the food industry supply chain, serving retailers, processors, growers and importers across its network of eight sites, strategically located to meet demand. A full range of added value services is provided, including storage, case-level picking and packing and an award winning national distribution network.

Revenues decreased by 1% to £151.7m (2014: £153.2m) as the full year impact of closing its European operating base and a small regional support hub in 2014, plus the effect of lower fuel prices passed onto customers, were largely offset by new contract wins and organic growth. Operationally, the business performed well, handling seasonal volumes efficiently, though regulatory changes resulted in an industry-wide driver shortage which led to increased driver costs. These factors, in addition to considered cost investment, resulted in operating profit increasing by 3% to £3.7m (2014: £3.6m).

The Heywood Hub, Fowler Welch’s 500,000 square foot ambient (non-temperature-controlled) shared user storage and distribution site located near Bury, Greater Manchester, increased revenues by 6% year-on-year, as it gained a number of new customers.

Spalding, our key distribution centre in the major growing region of Lincolnshire, built revenues by 18% year-on-year despite the fall in fuel prices. This was primarily due to the first full year of a new contract with a Danish-owned pork product processor for whom Fowler Welch provides a specialist distribution service.

The regional distribution sites at Washington, Tyne and Wear and at Newton Abbot, Devon provide direct store delivery services on behalf of retailer distribution networks and, combined, make time-sensitive deliveries to over 100 stores every day.

The recently refurbished Hilsea depot, which is located near to Portsmouth International Port, had a mixed year. New contract wins and growth with existing customers underlined the strength of the range of warehousing, consolidation and distribution services offered, but these were negated by the loss and associated closure costs of its Canary Islands tomatoes distribution contract. Further consolidation and distribution opportunities have been secured for the year ahead and these, together with the new contracts already implemented, see the site well placed for 2015/16.

Fowler Welch’s Kent operations, at its Teynham and Paddock Wood distribution centres, sit in the heart of that county’s fruit growing areas and provide distribution services for this important local industry and for businesses importing fruit and produce from across the English Channel.

During the year, operations commenced at Integrated Service Solutions (“ISS”), Fowler Welch’s new joint venture, which stores, ripens and packs stone-fruit, and exotic and organic fruits at Teynham using the latest technology and marketleading grading, sorting and packing equipment. Fowler Welch’s share of post-tax start-up losses of £0.4m was anticipated. The operation continues to develop, with volumes and throughput increasing and margins encouraging as the mix of product and the productivity of the various packing lines improve. With volumes now committed for 2015/16, the operation is expected to generate a positive return in the coming 12 months. Since the reporting date, the business has been granted planning approval to extend the Teynham site in order to maximise ISS’s and other opportunities. We expect this project to be completed in the first half of 2016.

Continued focus on building a quality revenue pipeline and developing creative added value services for its customers remains fundamental to Fowler Welch’s growth strategy. In addition, further opportunities to increase the efficiency of the Fowler Welch distribution network are also being identified as it gains enhanced operational visibility through Enterprise, the new distribution, planning and transport operating system.

With its strong and committed team, a well positioned national network of sites and the expertise and flexibility to operate effectively in both the temperature-controlled (chill and produce) and ambient arenas, Fowler Welch has a strong operational foundation. The continued addition of better quality revenue streams, supplemented by added value, innovative supply services to key customers, such as those recently implemented by ISS, means the outlook for Fowler Welch is encouraging.

Principal Risks and Uncertainties

The Group’s strategy is to grow its business through a combination of organic expansion and, if appropriate, carefully planned acquisitions in areas related to its existing businesses and markets. This section describes the principal risks and uncertainties which may affect the Group’s business operations, its reputation, financial results and strategic objectives. This list is not intended to be exhaustive.

Safety and security

The safety and security of our customers and our colleagues is a key priority. Failure to prevent or deal effectively with a major safety incident, including a security related threat, could adversely affect the Group’s reputation, and operational and financial performance.

The assessment of health and safety risks in the hotels we feature, as well as the other holiday components we package, is part of our normal package holiday business routines; this is reflected in our package holiday Safety Management System. Supplier compliance is reviewed prior to any hotel being placed on sale or occupied by any Leisure Travel customer, and a compliance programme is in place for all featured hotels, including auditing and ongoing reviews of the safety of the programme. A Health and Safety Steering Committee reviews all activity undertaken, and recommends the health and safety strategy implemented by the Board.

Our airline business operates a robust Safety Management System based upon a ‘Just Culture’, which provides an environment where all colleagues are encouraged to report and submit safety related information in a timely manner. This enables proactive assessment and mitigation of risk associated with our operation, escalated via regular internal safety steering committees and action groups.

Compliant and effective Safety Management System oversight is provided by the appropriate use of occurrence report investigations, flight data management, risk management, health and safety and aviation security inspections, together with quality assurance audits across our operations.

All airline safety and security matters are managed by our Safety, Compliance and Assurance group which reports directly to the Accountable Manager and the Safety Management Board. This board, which meets quarterly, monitors trends and identifies any areas of risk that require closer attention.

Competition

The Group is impacted by competitor activity in each business area.

As a result, the Leisure Travel business will continue to focus on customer driven scheduling on popular routes to high volume leisure destinations in order to maximise Load Factor, Net Ticket Yield, Non-ticket Revenue and Average Package Holiday Price, whilst ensuring that our great value proposition remains attractive to our customers.

We continue to work alongside and invest in relationships with key hotel suppliers to ensure the availability of accommodation that meets our customers’ requirements. The operation will continue to benefit from a number of sales channels – the web, through travel agencies and via tour operators – and from nonscheduled aircraft utilisation through its passenger and freight charter activities.

In the Distribution & Logistics business, the loss of a substantial customer is the largest financial risk facing the company. This is mitigated by Fowler Welch’s focus on developing a pipeline of future business opportunities, together with the achievement of high service levels and careful cost control, in the chilled, produce and ambient market sectors.

IT system dependency and information security

The Group is reliant on a number of key IT systems, their scalability and ongoing development. The Leisure Travel business is dependent on the internet and receives the majority of its revenues through online debit and credit card transactions. Further revenues are received at departure airports and on our flights via Chip & PIN-secured devices. The primary IT risks to the Group are a loss of systems, unauthorised access to facilities, or a security breach, which could lead to disruption that has an operational, a reputational and/or a financial impact. To mitigate these risks and to ensure any potential loss of functionality is minimised, the Group regularly tests its disaster recovery plan in relation to its IT infrastructure, which would be activated should a loss of functionality occur. The Group also operates a formal IT Change Management process that directs and controls changes to its data processing environment. In addition, the Group is engaged in regular information security reviews and updates its policies and procedures in line with industry best practices and standards and business requirements. This ensures that the Group has in place systems, controls and processes to protect its network from external and internal security threats.

Exposure to fluctuations in fuel prices and exchange rates

The cost of fuel remains a material element of the cost base of the Leisure Travel business, and the effective management of fuel price variation will continue to be important.

The Group’s strategy is to manage fuel price risk, via forward contracts, with the aim of limiting exposure to sudden increases in oil prices, whilst ensuring the business remains competitive. The Distribution & Logistics business is not directly affected by such price rises, since contracts allow for increases to be passed on to its customers.

The Group, particularly the Leisure Travel business, incurs considerable operational costs which are euro and US dollar denominated and is therefore exposed to sudden movements in exchange rates. To protect against such fluctuations, the Group uses forward currency contracts with approved counterparties.

Further information on hedging, which is our key mitigation to these risks, is contained within the treasury management section on pages 17 and 18 and in note 22 to the Consolidated Financial Statements.

Economic conditions

Whilst we believe that UK consumers regard their summer holiday as a very important element of the annual household budget, ultimately, economic conditions are likely to have an impact on the level of demand for the Group’s Leisure Travel services. To mitigate this risk, the Group will continue to focus on serving its customers’ demand for great value package holidays in, and flights to, high volume leisure destinations in the Mediterranean, the Canary Islands and European Leisure Cities.

Environmental risks

As evidenced in recent years, the Leisure Travel business is at potential risk of disruption from the force of nature, such as extreme weather conditions and volcanic activity, and through other external factors, such as: acts of terrorism; epidemics; pandemics; and strike action.

The business mitigates this risk by regularly updating a carefully planned response to be implemented by a team of experts should there be significant disruption to our Leisure Travel activities. The Group also maintains prudent levels of liquid funds to enable the business to continue to operate through a period of sustained disruption.

In addition, the investment in our commercial centre in Leeds means that we have the ability to run our business from more than one site, which supports our established Business Continuity Plan.

Government policy and regulatory intervention

The airline industry is heavily regulated, with recent intervention including, most notably, passenger compensation in relation to flight delays and cancellations under Regulation (EC) No 261/2004.

There is a continuing risk that the imposition of taxes and charges, which are levied by regulatory decision rather than by commercial negotiation at levels in excess of economic cost, may result in reduced passenger demand or adversely impact our cost base. In this regard, the Group will maintain its focus on delivering a great value package holiday product, the careful management of its route network, on-time performance and will continue to engage with policy setters and regulators to encourage legislation that is fit for purpose.

Treasury management

Liquidity risk

Liquidity risk reflects the risk that the Group will have insufficient funds to meet its financial obligations as they fall due. As at the year end, the Group had significant cash balances, together with a range of unutilised banking facilities, in relation to which all covenants had been met. The Group’s strategy for managing liquidity risk is to maintain cash balances in an appropriately liquid form and in accordance with approved counterparty limits, whilst securing the continuity and flexibility of funding through the use of committed banking facilities. Additionally, short-term cash flow risk in relation to margin calls in respect of fuel and foreign exchange hedge positions is minimised through diversification of counterparties together with appropriate credit thresholds. The Group seeks to match long-term assets with long-term liabilities wherever possible. In addition, a regular assessment is made of future banking facility covenant compliance and headroom.

Fuel, currency and carbon hedging

The Group utilises foreign exchange forward contracts and monthly fuel swaps to hedge its exposure to movements in euro and US dollar exchange rates, and its exposure to jet fuel price movements that arise through its Leisure Travel activities. The Group’s Hedging Policy permits the use of such instruments to manage fuel price and currency risk only. The Board reviews and agrees this policy for managing each of these risks at least annually; these policies have been consistent during the year. It is the Group’s policy that no trading in financial instruments shall be undertaken for speculative purposes.

Details on derivative transactions outstanding at the year end relating to forward currency contracts and aviation fuel swaps are detailed in note 22 to the consolidated financial statements.

The policy in relation to fuel and foreign currency hedging is summarised below:

Aviation fuel price risk

The Group’s policy is to forward cover up to 90% of future fuel requirements, up to thirty months in advance. Further information in relation to aviation fuel swaps held is given in note 22 to the consolidated financial statements. As at 31 March 2015, the Group had hedged substantially all of its forecast fuel requirements for the 2015/16 year and a proportion of its requirements for the subsequent year, in line with the Board’s policy.

Foreign currency risk

The Group has significant transactional foreign currency exposure, primarily relating to the euro and the US dollar.

Transactional currency exposures primarily arise as a result of purchases denominated in foreign currency undertaken in the ordinary course of business, in particular related to expenditure on aviation fuel, aircraft maintenance, air traffic control, airport charges and hotel accommodation. The Group’s policy is to cover up to 90% of its expected requirements for a period of up to thirty months in advance, using forward foreign exchange contracts. As at 31 March 2015, the Group had hedged a significant proportion of its forecast foreign exchange requirements for the 2015/16 year. Further information in relation to foreign currency exchange risk is given in note 22 to the consolidated financial statements.

Carbon risk

The Group also hedges its carbon exposure in relation to its obligations under the EU Emissions Trading Scheme. As at 31 March 2015, the Group has acquired its entire requirement for the year ending 31 December 2015 and a substantial portion of the following year’s requirement.

Capital risk management

The Group’s objective when managing capital is to safeguard the Group’s ability to continue as a going concern whilst providing a return to shareholders. The Group’s multi-year planning process gives clear visibility of earnings and liquidity to ensure continued operation well within banking facility covenant levels.

Gary Brown
Group Chief Financial Officer

27 July 2015