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

Dart Group PLC Company Reports

Business & Financial Review

The Group is composed of two principal operating businesses, Aviation and Distribution, which trade in separate market segments.

2008/09 performance

The Group's financial performance for the year to 31 March 2009 is reported in line with International Financial Reporting Standards (IFRS), as adopted by the EU, that were effective at 31 March 2009. The unavailability of hedge accounting under IFRS for derivative contracts in the 2006/7 year results in a timing difference in the recognition of changes in the value of these contracts which reverses in subsequent accounting periods.

In order for readers of the accounts to establish the underlying performance of the Group, results are presented in these accounts showing not only the required accounting treatment under IFRS but also the Group's underlying performance should hedge accounting have been possible for the year ended 31 March 2007. It is envisaged that a similar presentation will be adopted in the accounts for the interim and final results for the year ended 31 March 2010.

Summary Income Statement
  2009
£m
2008
£m
Revenue 439.3 429.3
Net operating expenses (404.1) (423.7)
Operating Profit 35.2 5.6
Net financing costs (6.4) (3.0)
Profit on disposal of
fixed assets
- 1.3
Profit before taxation1 28.8 3.9
Financing costs 6.4 3.0
Depreciation 30.7 30.3
EBITDA1 65.9 37.2

1Stated excluding specific IAS 39 fair value movements.

Although Group turnover increased by 2.3%, EBITDA increased by 77.2% and underlying Group profit before tax increased from£3.9m to £28.8m, reflecting a focus on profitability rather than growth in Jet2.com, our leisure airline operation. The Group'seffective tax rate for the year of 19% was lower than last year (2008 - 26%), principally reflecting the recognition of deferred tax assets from tax losses arising in prior years.

Subject to shareholders' approval, the Directors recommended the payment of a final dividend of 0.71 pence for the year ended 31 March 2009, which would be paid on 21 September 2009.

As set out in the summary cash flow below, the Group generated positive cash flows of £29.0m in the year, with a positive net cash position as at 31 March 2009 of £11.8m (2008 - £17.2m net debt). The Group's improved cash generation was driven by a combination of improved EBITDA and lower capital expenditure, in part offset by an increase in working capital requirements.

Summary Cash Flow
  2009
£m
2008
£m
EBITDA 65.9 37.2
Other P&L adjustments 0.2 (1.1)
Movements in working capital (4.6) 6.3
Interest and taxes (4.7) (4.8)
Net cash generated from
operating activities
56.8 37.6
Investing activities (27.8) (37.0)
Other items - (3.7)
Increase in net cash 29.0 (3.1)

With improved profitability and considerable positive cash generation, the Group's balance sheet strengthened in the year. The resulting increase in shareholders' equity and the positive net cash position are the principal changes in the shape of the balance sheet from the previous year end.

Summary Balance Sheet
  2009
£m
2008
£m
Non-current assets 199.7 204.6
Net current liabilities (92.5) (89.0)
Other liabilities (25.6) (24.0)
Net cash/(debt) 11.8

(17.2)

Shareholders' equity 93.4 74.4
Net debt -

(17.2)

Gearing1 -

26%

1 Net debt/Equity excluding cash flow hedge reserve

back to top ^

Segmental performance - Aviation

The Aviation division comprises the Group's passenger and freight charter operations, scheduled leisure airline and associated tour operator activities, trading under the Jet2.com and Jet2holidays.com brands. It operates 21 Boeing 737-300 aircraft, including eight "Quick-Change" aircraft, and nine Boeing 757-200 aircraft from its home base of Leeds Bradford International Airport and five other northern bases.

During 2008/9, Jet2.com focused its scheduled airline activities on leisure routes, adding a number of additional routes particularly out of Leeds Bradford International Airport, with a number of city routes being discontinued out of Manchester. Overall scheduled airline seat capacity was reduced by 21% for Summer 2008 and by 49% for Winter 2008/9. The Winter reductions centred on lower frequency on Western Mediterranean routes.

This successful route and capacity management resulted in a significant increase in load factor to 78% (2007/8 - 72%), at improved yields. The Group added an additional, leased, Boeing 757 aircraft to the fleet in May 2008 to support its increased focus on longer haul leisure destinations.

Retail revenues are a very important source of income for the scheduled airline business, allowing low fares to be maintained. Retail revenue per passenger increased from £9.10 to £14.93 in 2008/9, generated from a number of sources including hold baggage charges and online seat assignment.

Jet2.com switched over to its own in-house developed reservation system in February 2008. The introduction of our own reservation system allows us to tailor our offering more quickly and effectively to meet customer needs, and improve the online shopping experience. Retail revenues, in particular online seat assignment and extra leg room, have increased significantly as a result of the introduction of this system. A trade portal into this system has been developed to improve access to Jet2.com for the travel trade. Jet2.com also introduced a loyalty scheme in November 2008 to reward regular fliers.

Jet2.com's charter activities were further expanded in the year. The Royal Mail contract, under which night mail flights are undertaken from six UK airports, continues to be serviced well, with industry leading punctuality, to enable Royal Mail to meet its service obligations. The passenger charter operation provides flights for tour operators, specialist holiday providers and in support of promotional and sporting events. Increasingly we are working with tour operators on a part aircraft basis, to supplement load factor on our scheduled services, as well as using charter activity to improve utilisation of aircraft outside peak periods. Passenger charter revenues grew significantly in 2008/9 as a result of greater aircraft availability and strong market demand, partly influenced by the market exit of some competitors.

In its second full year of operation, Jet2holidays.com sold over 36,000 holidays, all on Jet2.com flights. Holidays are packaged dynamically by linking flights with accommodation provided by our bed supplier and a range of airport transfer options. During the year, the holidays call centre was repatriated to the UK to ensure that direct customers calling us obtain the best possible advice. A trade portal was also developed during the year to improve travel agency access to Jet2holidays.com.

Having fully hedged its fuel costs in advance of the relevant season, the business was not subject to the very significant fuel price increases which impacted the industry during the financial year. The business has fully hedged its anticipated fuel requirement for the year ending March 2010.

We continue to benefit from the long-term agreement with Pratt & Whitney for the fixed price maintenance of the CFM56-3 series engines, which power our Boeing 737-300 aircraft. Pratt & Whitney have also started to manufacture and supply a range of parts for these engines at attractive pricing under their Global Material Solutions Programme. This agreement delivers increased engine efficiency, cost certainty and price reductions for the business.

Reducing fuel burn and consequent emissions is a high profile project within Jet2.com. The company has a significant checklist of actions which include efficient aircraft loading and lower aircraft flying speeds made possible by the introduction of a newly implemented flight planning system. Two Boeing 757s have had fuel efficient winglets fitted and a further two aircraft are to be fitted with winglets this Autumn. Overall year on year fuel savings and consequent emission reductions in excess of 3.5% were achieved.

Aviation
  2009
£m
2008
£m
Revenue 326.4 308.8
Operating expenses (295.3) (308.5)
Operating profit 31.1 0.3
Net financing income/(costs) (2.0) 1.3
Profit on disposal of property,
plant and equipment
- 1.3
Profit before interest and tax 29.1 2.9
Net financing income/(costs) 2.0 (1.3)
Depreciation 30.0 29.3
Aviation EBITDA 61.1 30.9
Profit Margin 8.9% 0.9%
EBITDA margin 18.7% 10.0%
KPIs
  2009 2008
Number of owned aircraft
at 31 March
29 29
Passenger numbers 3.2m 4.0m
Load factor 78% 72%
Retail revenue per passenger £14.93 £9.10
Percentage of estimated
annual fuel requirement
hedged for the next
financial year
100% 100%
Capital expenditure £26.1m £37.4m
Average monthly staff
turnover
2.5% 2.0%
Advance sales made at
year end date
£95.1m £96.9m

Jet2.com's financial performance was significantly improved by the focus on leisure routes and tailoring of seat capacity to demand, leading to increased load factors and yield. Total aviation revenues grew by 6% despite the overall 28% reduction in scheduled seat capacity. The company reduced its cost base in 2008/9. The reduction in seat capacity allowed the business to eliminate the need for short-term wet leased aircraft which had been required in Summer 2007 to supplement the owned fleet.

back to top ^

Segmental performance - Distribution

The Group's Distribution business, Fowler Welch-Coolchain, is one of the UK's leading logistics providers serving UK retailers, importers and manufacturers. Focusing on food and drink, the business operates from eight strategic locations and offers a range of logistics solutions including storage, case pick-to-order and national distribution of both temperature-controlled and ambient products.

The Group's Distribution business, Fowler Welch-Coolchain, is one of the UK's leading logistics providers serving UK retailers, importers and manufacturers. Focusing on food and drink, the business operates from eight strategic locations and offers a range of logistics solutions including storage, case pick-to-order and national distribution of both temperature-controlled and ambient products.

Revenues reduced by 6% in the year, principally as a result of two customer losses sustained in the early part of the year, following very aggressive competitor pricing. By the end of the year, this business volume had been replaced through a combination of new business wins, in particular a significant contract for a chilled meats supplier, and additional activity undertaken for existing customers.

Distribution
  2009
£m
2008
£m
Revenue 112.9 120.5
Operating expenses(1) (108.8) (115.2)
Operating profit 4.1 5.3
Profit on disposal of property,
plant and equipment
- -
Profit before interest and tax 4.1 5.3
Depreciation 0.7 1.0
EBITDA 4.8 6.3
Profit margin 3.6% 4.4%
EBITDA margin 4.3% 5.2%

KPIs
  2009 2008
Warehouse space - sq. ft. 480,000 480,000
Number of tractor units
in operation
304 351
Number of trailer units
in operation
697 769
Mileage per gallon 8.70 8.53
Fleet mileage per annum 33.0m 36.3m
Number of employees 1,100 1,132

Given the flexible nature of the operation, Fowler Welch-Coolchain was able to manage its costs down largely in line with reduced business volumes, to minimise the profit impact of reduced revenues. Action was also taken to improve efficiency by optimising the own driver to contractor mix, particularly in Spalding and Washington. This has put the business in a stronger position for the current financial year. The company has focused heavily on fleet utilisation, both at individual depot level and also through optimising national network synergies. Additional double deck trailers have also been added to the fleet. This has delivered both efficiencies and environmental benefits, through fleet reductions and fewer empty miles. We believe this trend will continue into the year ahead. Investment in driver training continues and will remain ongoing. Continuing fleet evaluation enables the company to make critical decisions with fleet replacement programmes, thus ensuring that the most fuel efficient vehicles are purchased.

During the year, the company successfully introduced a new warehouse management system for a number of customers, allowing real-time online visibility of stock levels as well as inbound and outbound movements. This will be fully rolled out during the current financial year.

Despite the economic slowdown, the company increased its portside activities by handling more imported containers. This activity complements fleet utilisation and extends the service offering to provide true end-to-end logistics capabilities.

In the current trading environment, the sector has seen both considerable consolidation and increased customer demand for a sustainable lean supply chain, both of which are leading to further opportunities for Fowler Welch-Coolchain. The company is well established with a hard won reputation for its ability to service variable volumes on short lead times, cost effectively through a national network of strategically situated distribution centres. The company's continuing strategy is both to grow organically and to take advantage of capability enhancing acquisition opportunities as they arise.

back to top ^

Principal risks and uncertainties

The Group's strategy is to grow its business through a combination of organic expansion and carefully planned acquisitions in areas related to its existing businesses and markets. The principal risks and uncertainties facing the business include the following:

Competition

The Group is impacted by competitor activity in both of its business areas. The loss of a substantial customer is the largest financial risk facing the company. This risk is mitigated by Fowler Welch-Coolchain's focus on service levels and cost control, both of which are critical to success in this sector.

The leisure airline sector is an increasingly competitive market, a position exacerbated by the current economic environment. Headline fare price competition remains very strong, and as a result the Group will continue to seek to maximise both its retail revenue income and the load factor on its aircraft.

Fuel prices

The price of fuel rose very significantly in Summer 2008, impacting on the price of both Jet Fuel and diesel. The cost of fuel will continue to be a very significant element of the Aviation cost base, and managing price variation effectively will continue to be important to the business.

The Group's fuel price risk management strategy aims to limit the exposure of the Aviation division to sudden and significant increases in oil prices, whilst ensuring the business remains competitive.

The Distribution division is not directly affected by such price rises, since contracts allow for increases to be passed on to its customers.

Economic conditions

Ultimately economic conditions will have an impact on the level of consumer demand for the Group's airline services. Whilst we believe that UK consumers regard their summer holiday as a very important element of the household budget, it is likely that there will be a reduction in discretionary travel. To mitigate this risk, the Group will continue to tailor its flying programme carefully to take account of trends in demand. Expanding the Jet2holidays. com offering also enables the Group to increase revenues from our Jet2.com customers.

Government policy

It is stated UK and EU policy to apply additional taxes to the aviation industry and it is foreseeable that the tax burden will continue on the road haulage sector. Load factor will become an increasing issue for the sector given the planned introduction of the EU Emissions Trading Scheme which will be charged on an aircraft basis. There is a risk that the imposition of these taxes, at levels in excess of the economic cost of emissions, may result in reduced passenger demand.

back to top ^

Treasury management

Bank Facilities

As at the year end, the Group's bank facilities comprised a revolving credit and an overdraft facility. The Group's objective is to manage liquidity risk by maintaining a balance between continuity and flexibility of funding through the use of revolving credit and overdraft facilities, whilst seeking to match long-term assets with long-term liabilities wherever possible. Since the year end, the Group has successfully completed a refinancing of its syndicated facilities. Together, these facilities meet the Group's foreseeable funding needs and put Dart in a strong position to take advantage of business opportunities as they arise in the future.

Fuel and currency hedging

The Group utilises foreign exchange and fuel forward contracts to hedge its exposure to movements in US Dollar and Euro exchange rates and to Jet Fuel prices arising as a result of its aviation activities. The Group's treasury 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.

Details on derivative transactions outstanding at the year end relating to forward currency contracts, cross currency swaps and aviation fuel swaps are detailed in note 21 to the Group accounts.

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 future fuel requirements up to 100% and up to three years in advance. The magnitude of the aviation fuel swaps held is given in note 21 to the Group accounts. For the year ending 31 March 2009 the Group has fully hedged its current forecasted fuel requirements. Further fuel swap hedges have been taken out for the years ending 31 March 2011 and 31 March 2012, hedging approximately 40% and 30% respectively of the expected requirements.

Foreign currency risk

The Group has significant transactional foreign currency exposure, the most significant being the US Dollar.

Transactional currency exposures primarily arise as a result of purchases in foreign currency undertaken in the ordinary course of business, in particular related to expenditure on aviation fuel, aircraft maintenance, air traffic control and airport charges. The Group's policy is to cover all material transactional risks for a minimum period of six months using forward foreign exchange contracts. For the year ending 31 March 2010, the Group has hedged 95% of its forecast foreign exchange requirements. The magnitude of the foreign currency exchange risk is given in note 21 to the Group accounts.

Structural currency exposures exist where the Group has a small Euro exposure in respect of net overseas investment. However, as these exposures are not material, no hedging has taken place.

Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern whilst providing returns for shareholders.

The Group maintains a conservative approach to dividend policy, ensuring funds are retained to support further business growth.

The gearing ratio at 31 March 2009 and 2008 was as follows:

  2009
£m
2008
£m
Net debt (a) - 17.2
Equity reserves 93.4 74.4
Cashflow hedge reserve (1.9) (10.0)
Net equity reserves (b) 91.5 64.4
Gearing (a)/(b) - 26.7%

A D Merrick
Group Finance Director
29 July 2009

back to top ^