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.

2009/10 performance

The Group's financial performance for the year to 31 March 2010 is reported in line with International Financial Reporting Standards (IFRS), as adopted by the EU, which were effective at 31 March 2010.

Summary Income Statement
  2010
£m
2009
£m
Revenue 434.5 439.3
Net operating expenses(1) (415.1) (404.1)
Operating Profit(1) 19.4 35.2
Net financing costs (0.5) (6.4)
Profit on disposal of
fixed assets
0.2 -
Profit before taxation(1) 19.1 28.8
Financing costs 0.5 6.4
Depreciation 33.0 30.7
EBITDA(1) 52.6 65.9

(1)Stated excluding specific IAS 39 fair value movements.

Underlying Group profit before tax decreased from £28.8m to £19.1m in the year to 31 March 2010, reflecting a more challenging trading environment, in particular for the Group's Aviation operations. Overall turnover fell by 1%, with growth in Distribution revenues offset by a reduction in Jet2.com, whose seat capacity was managed down in the light of reduced consumer demand in both Summer and Winter. Underlying EBITDA(1) of £52.6m (2009 - £65.9m) is down 20% on last year reflecting lower margins in the Aviation operations.

The Group's effective tax rate for the year of 30% (2009 - 19%) was substantially in line with the corporation tax rate, last year's lower rate being driven by the recognition of deferred tax assets from tax losses arising in prior years.

In recognition of a reasonably satisfactory year in challenging trading conditions and current trading performance, the Group recommends, subject to shareholder approval, a final dividend of 0.75p for the year ended 31 March 2010 (2009 - 0.71p).

The Group generated cash inflows of over £40m in the year, resulting in a positive net cash position as at 31 March 2010 of £52.2m (2009 - £11.8m). The Group's improved cash generation was principally driven by the Aviation division which saw an increase in forward bookings in the latter part of the year. Capital expenditure, which increased by approximately £4m in the year, included the acquisition of a further 757-200 aircraft in January 2010, to operate from Jet2.com's new base at East Midlands airport.

Summary Cash Flow
  2010
£m
2009
£m
EBITDA(1) 52.6 65.9
Other P&L adjustments 0.3 0.2
Movements in working capital 17.9 (4.6)
Financial derivative
close out costs
6.0 -
Interest and taxes (4.1) (4.7)
Net cash generated from
operating activities
72.7 56.8
Investing activities (32.3) (27.8)
Other items - -
Increase in net cash 40.4 29.0

(1)Stated excluding specific IAS 39 fair value movements.

The Group's balance sheet continued to strengthen, driven by both profit performance in the year and cash generation from advance bookings. The resultant increase in shareholders' equity and the improved cash position are the principal changes in the balance sheet from the previous year end. The business continues to be funded in part by customer payments received in advance of flights taken. The growth in trade payables is principally driven by deferred income growth, reflecting stronger forward booking performance for the forthcoming Summer relative to the previous year.

Summary Balance Sheet
  2010
£m
2009
£m
Non-current assets 201.3 199.7
Net current assets 15.7 2.6
Deferred revenue (121.4) (95.1)
Other liabilities (32.3) (25.6)
Cash 52.2 11.8
Shareholders' equity 115.5 93.4

(1)Stated excluding specific IAS 39 fair value movements.

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Segmental performance - Aviation

The Aviation division comprises the Group's scheduled leisure airline, tour operations and associated commercial activities, trading under the Jet2.com and Jet2holidays. com brands. The Company operates 24 Boeing 737-300 aircraft, including eight "Quick Change" aircraft, and ten Boeing 757-200 aircraft, from its home base of Leeds Bradford International Airport, and Belfast, Blackpool, East Midlands, Edinburgh, Manchester and Newcastle airports.

During 2009/10, Jet2.com continued its careful development of the scheduled airline network, increasing the number of routes to Eastern Mediterranean destinations, whilst managing down winter capacity and reducing some frequencies, tailoring capacity to market demand. Overall scheduled airline seat capacity was reduced for both Summer 2009 and for Winter 2009/10. This careful route and capacity management resulted in load factors being increased to 80% (2008/9: 78%), albeit partly at the expense of yields. Load factor performance was supported by the ongoing development of the airline's yield management system and by the sale of seat allocations to third party tour operators, particularly on newer routes.

Retail revenues continue to be a very important source of income for the scheduled airline business, allowing low fares to be maintained. Retail revenue per passenger increased from £14.93 to £21.12 in 2009/10, these being generated from a number of sources including hold baggage charges, online seat assignment, extra leg room seats, on board sales, and commissions on car hire. Customers are also able to pre-order hot food. The business is devoting considerable resource to developing its in-house reservation system to both improve the booking experience for customers and optimise retail revenues. During the year the Jet2.com reservation system has also been enhanced to offer our customers dynamic currency conversion, online redemption for "myJet2" loyalty scheme members as well as discounted pricing on bundles of optional purchases such as food and extra leg room. The trade portal continues to be enhanced to provide the travel trade with easy access to Jet2.com scheduled flights in recognition of the importance of the dynamic packaging segment of customer demand.

Jet2.com's passenger and freight activities continue to be an important element of the overall Aviation operation. The passenger charter activity provides flights for many different end users, including tour operators, specialist holiday providers and in support of promotional, sporting and other events, and enables the business to improve utilisation of aircraft outside peak periods. The Royal Mail contract, under which night mail flights are undertaken every weekday from six UK airports, continues to be serviced well, with industry leading punctuality, to enable the Royal Mail to meet its service obligations. Total charter revenues reduced by 27% in the year reflecting a weaker market for passenger charter business, after a very strong year in 2008/9, although the business continues to enjoy a strong reputation with its customers, exemplified by being voted Passenger Airline of the Year by the Baltic Air Charter Association.

In 2007, the business launched Jet2holidays.com as another route to market for the distribution of airline seats. This element of the Aviation division has grown significantly and delivered over 64,000 holidays, all on Jet2.com flights in the year. Holidays are packaged dynamically by linking flights with accommodation and a range of airport transfer options. In order to improve the product range, pricing and the quality of the offering to our customers, increasingly accommodation is being contracted directly rather than via bed bank operators. The Jet2holidays.com website is constantly being enhanced to improve the quality of both the customer and the trade booking experience. The call centre, direct web bookings and bookings through online and offline trade sites are all important elements of the distribution mix.

The Group added an additional, leased, Boeing 737 aircraft to the fleet in June 2009 to enable the expansion of Manchester based operations, and provide additional charter availability. In January 2010, the purchase of an additional 757 aircraft was completed. This aircraft will predominantly be used for scheduled flying on Eastern Mediterranean routes from the new East Midlands base. Two additional 737 aircraft have also been acquired on a lease basis to support the Summer 2010 flying programme from Manchester, with a number of new routes being added.

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. The agreement with Pratt & Whitney delivers increased engine efficiency, cost certainty and price reductions for the business.

Jet2.com continued to improve fuel efficiency during the year, with a multi-phase programme aimed at reducing both fuel burn and associated emissions. The Company has a significant checklist of actions, which include efficient aircraft loading, route optimisation, and lower aircraft flying speeds, made possible by the introduction of a newly implemented flight planning system, supplemented by ongoing engineering activity. Two further Boeing 757 aircraft were fitted with fuel efficient winglets this winter.

Aviation
  2010
£m
2009
£m
Revenue 312.0 326.4
Operating expenses(1) (300.0) (295.3)
Operating profit(1) 12.0 31.1
Net financing income/(costs) (0.5) (2.0)
Profit on disposal of property,
plant and equipment
0.2 -
Profit before interest and tax(1) 12.7 29.1
Net financing income/(costs) (0.5) 2.0
Depreciation 32.0 30.0
Aviation EBITDA(1) 44.2 61.1
Profit Margin 4.1% 8.9%
EBITDA margin 44.2 61.1

(1)Stated excluding specific IAS 39 fair value movements.

KPIs
  2010 2009
Number of owned aircraft
at 31 March
30 29
Passenger numbers 3.1m 3.2m
Load factor 80% 78%
Net ticket yield £48.69 £51.86
Retail revenue per passenger £21.12 £14.93
Average hedged price of fuel
US$ per tonne
$786 $907
Percentage of estimated
annual fuel requirement
hedged for the next
financial year
90% 100%
Capital expenditure £31.4m £27.9m
Average monthly staff
turnover
1.5% 2.5%
Advance sales made at
year end date
£121.4m £95.1m

Jet2.com's financial performance was impacted by weaker demand for both scheduled flying and passenger charter operations, coupled with further investment in Jet2holidays.com. Total Aviation revenues fell by 4.4%, despite the growth in holiday sales, without which year on year revenues would have been 7% down. Cost growth was contained to less than 2%, despite the impact of the weakness of sterling.

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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 12 strategically located distribution centres and offers a range of logistics solutions including storage, case pick-to-order and national distribution of both temperature-controlled and ambient products.

The entire share capital of Bawdsey Haulage Limited, a container logistics business based in Felixstowe, was acquired in September 2009 for a relatively small sum. This acquisition has enabled growth with existing customers and also new clients. We now offer port-based distribution services from Southampton, Tilbury, Thamesport, Sheerness, Teesport and Liverpool, in addition to our comprehensive services from Britain's premier port of Felixstowe. This acquisition positions the business as an end-to-end logistics service provider of temperature-controlled, ambient and break bulk/full load container services.

In May 2010, the business completed the purchase of a 500,000 sq. ft. freehold distribution centre on 22 acres of land in Heywood, Greater Manchester. The acquisition of these premises, which are know as "The Hub" (pictured on pages 8 and 12), increases our stockholding capacity within our ambient business from circa 17,000 to 50,000 pallets with further space available to be temperature-controlled, thus providing a chilled distribution facility in the North West for existing and new clients.

The Company has built its reputation around a flexible service offering that meets the strict time-sensitive and multi-temperature supply chain requirements of UK retailers. On a daily basis, the Company collects local suppliers' products, which are then consolidated with product picked from stock holding in the Company's strategically based warehouses before delivery. This activity has increased in the year to approximately 1.5 million cases of various fast moving consumer goods handled on a weekly basis.

Distribution revenue increased by 9% in the year, with growth experienced across the network as a whole, through a combination of continued organic growth, substantial new business wins and the Bawdsey Haulage acquisition.

The increase in volumes near Manchester required an investment in operational capacity, with the addition of a short term satellite site for the ambient business to cover seasonal volume peaks, and extra space being secured for our Portsmouth operations in May 2009 to facilitate a new business win. Fleet size also increased during the year following the Bawdsey Haulage acquisition and the start of distribution operations in the Midlands for Mars, in addition to an overall expansion of our own fleet as a result of increased business and service level requirements.

Distribution
  2010
£m
2009
£m
Revenue 122.5 112.9
Operating expenses(1) (115.1) (108.8)
Operating profit 7.4 4.1
Profit on disposal of property,
plant and equipment
- -
Profit before interest and tax 7.4 4.1
Depreciation 1.0 0.7
EBITDA 8.4 4.8

 

KPIs
  2010 2009
Warehouse space - sq. ft. 621,000 480,000
Number of tractor units
in operation
341 304
Number of trailer units
in operation
800 697
Mileage per gallon 8.3 8.7
Fleet mileage per annum 34.9m 33.0m
Number of employees 1,148 1,100

The actions taken in the previous financial year to improve operating efficiency, supplemented by further optimisation of the national network and continued focus on reduction in empty mileage, enabled Fowler Welch-Coolchain to improve its profit margin significantly. This improved performance was achieved despite the business driven capacity increases and the effects of the exceptionally severe winter on fuel efficiency.

Within the year, the Company completed the implementation of Manhattan, a globally recognised warehouse management system, into its chilled warehousing operations. This generated operational efficiencies through labour savings and allows realtime online visibility of stock levels and management information. The system will be implemented into the ambient operation at "The Hub" during the first half of the current financial year.

Over the last year, the Distribution business continued to make progress in reducing the environmental impact of its operations and thereby further reduced its carbon footprint. By maximising our network, further reduction in empty mileage and enhanced trailer fill, the net carbon impact per unit of product delivered reduced. A key driver in this improvement was the introduction of a further 15 double deck trailers during the year. Whilst this has a detrimental impact on fuel efficiency, the overall carbon impact is reduced by virtue of the 50% increase in trailer fill which this equipment delivers. An enhanced telematics system was deployed during the year and when fully operational will deliver enhanced vehicle operating visibility and will enable a further reduction in empty running to be achieved.

Ongoing driver training continues across all sites, encompassing regular defensive driver assessments that in turn deliver fuel efficiency improvements. Our fleet replacement programme for both tractor and trailer units continues to evaluate the marketplace to ensure the optimum fuel efficient equipment is procured, further improving the business's carbon footprint.

Given the global economic climate experienced over the last 12 months, and the ongoing challenges facing the distribution industry as a whole, the food and drink sector has again proved resilient in this downturn.

Fowler Welch-Coolchain remains well positioned in its marketplace to exploit further opportunities as a result of ongoing consolidation within its sector.

The additional warehousing capacity secured and the Company's growing reputation as a quality, low cost end-to-end service provider, offering national as well as regional solutions, will enable the business to continue to grow organically through existing and new customer relationships.

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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. In the Distribution business, the market continues to consolidate as smaller players either exit the market or are taken over. 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 continues to be an intensely competitive market, despite the high profile failures of both XL and Globespan in recent years. Headline fare pricecompetition remains very strong at every base from which the airline flies. The Group will continue to focus on customer driven scheduling on popular routes in order to maximise both its load factor and retail revenue income on its aircraft. The operation will continue to benefit from non-scheduled flight aircraft utilisation through its passenger and freight charter activities and fromabroad distribution base for its scheduled seats via the web, through the trade, via tour operator seat allocations and its in-house tour operation.

Fuel prices

The cost of fuel will continue to be a very significant element of the Aviation cost base, and the effective active management of fuel price variation will continue to be importan/t 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 clear that there was a reduction in discretionary travel in 2009/10. To mitigate this risk, the Group will continue to plan 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 also. Load factor will become an increasing issue for the sector given the planned introduction of a successor to Airline Passenger Duty and the EU Emissions Trading Scheme, both of 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.

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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 a range of banking facilities. The Group's objective is to manage liquidity risk by maintaining cash balances together with continuity and flexibility of funding through the use of banking facilities, whilst seeking to match long-term assets with long-term liabilities wherever possible. Since the year end, the Group has completed the acquisition of a major new Distribution site in the North West and is in the final stages of completing long term financing associated with this site.

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 givenin note 21 to the Group accounts. As at 31 March 2010 the Group had substantially hedged its forecasted fuel requirements for the 2010/11 year and a proportion of its requirements for the subsequent two years in line with the Board's policy

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. As at 31 March 2010, the Group had hedged substantially all of its forecast foreign exchange requirements for the current year. 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 asmall 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.

A D Merrick
Group Finance Director
23 July 2010

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