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

Dart Group PLC Company Reports

Business and Financial Review

The Group comprises three principal operating businesses; Leisure Airline, Package Holidays and Distribution & Logistics. The Package Holidays and Leisure Airline operations work closely together to provide a range of leisure travel services to our Northern customers.

2011/12 performance

The Group's financial performance for the year to 31 March 2012 is reported in line with International Financial Reporting Standards ("IFRS"), as adopted by the EU, which were effective at 31 March 2012.

Overall Group turnover increased by 26% to £683m (2011: £543m), with growth in all segments, including a 140% rise in Package Holiday revenues. However, despite improved trading in both Distribution & Logistics and Package Holidays, Group profit before tax grew by only 7% to £28.1m (2011: £26.2m). This decrease in the Group's profit margins was driven by reduced profitability in the Leisure Airline business, principally as a result of fuel cost rises. Group EBITDA was similarly impacted, falling by 2% to £62.9m (2011: £64.2m).

The Group's effective tax rate of 19% (2011: 34%) was lower than the headline figure, as the reduction in the corporation tax rate decreased the Group's deferred tax liability. The Group generated net cash inflows1 of over £45m in the year (2011: £54.6m), resulting in a positive net cash position, including money market deposits, of £152m (2011: £106.8m) as at 31 March 2012. Total cash received from Jet2holidays and Jet2.com customers in advance of their trips, amounted to £180m (2011: £135m) at year end. The Group's cash generation was principally driven by the Leisure Airline division, which continues to benefit from strong forward bookings, with Package Holidays also generating strong early season cash flows. The working capital related cash improvement reduced, year-on-year, in line with lower growth in the summer 2012 flying programme – a 10% increase in airline capacity relative to a 28% increase in summer 2011.

Capital expenditure reduced from £68m to £47.3m; the previous year's expenditure having included the acquisition of the Hub, Fowler Welch's North West distribution centre, and an above average number of Boeing 757 engine overhauls. This year's capital expenditure included the purchase of five Boeing 737-300s, enabling the fleet to be increased to 42 aircraft to meet the needs of the summer 2012 programme, and further investment in Fowler Welch infrastructure. Three leased aircraft were returned during the winter months.

The Group's balance sheet continues to strengthen, driven by both profit performance in the year and cash generation from advance bookings.

The resulting increase in shareholders' equity, the improved gross cash position and the increase in non-current assets are the principal changes in the balance sheet from the previous year end. The overall increase in shareholders' equity does not equate to the Group's post tax profit for the year, due to a reduction in the market value of outstanding fuel and currency hedges at the year-end relative to the previous year. The business continues to be funded in part by customer payments received in advance of travel from our leisure customers. Deferred revenue grew 45% yearon- year, as the Group's leisure travel businesses continue to enjoy strong forward bookings.

1 Cash inflows are reported including money market deposits (cash deposits with maturity of more than three months) to give readers an understanding of total cash generation. The Consolidated Group Cash Flow Statement reports the net cash flow excluding these deposits.

Segmental Performance

Leisure Airline

The Leisure Airline division trades under the Jet2.com brand and operates scheduled flights to a range of leisure destinations from its home base at Leeds Bradford International Airport, and Belfast, Blackpool, East Midlands, Edinburgh, Glasgow, Manchester and Newcastle airports.

Total Leisure Airline turnover, including sales of seats to Jet2holidays, increased by 25% to £461m (2011: £369m) as a result of a 27% growth in scheduled passengers to 4.3 million, with retail revenue growth (2012: £27.86 – 2011: £25.84) offsetting the per passenger decline in ticket revenue yield (2012: £51.47 – 2011: £52.42). Like-for-like Charter revenues increased year-on-year reflecting additional winter flying in part offset by the decision not to undertake passenger charter flights during the peak summer flying months.

Profitability declined by 10% to £21.7m (2010/11: £24.1m); this reduced margin was principally a result of cost increases which we were unable to pass on to our customers. Overall, costs grew by 21% as a result of a 24% per tonne increase in aviation fuel and volume driven increases.

During the year, Jet2.com continued its careful expansion of the scheduled airline network, adding Glasgow airport as a new base and extending its flying programme at East Midlands, Newcastle and Manchester airports, largely by adding flights to tried and trusted Jet2.com destinations. We operated a total of 145 routes in the year, adding the new destinations of Bodrum and Krakow.

Overall scheduled airline seat capacity was increased by 23% in the year. Despite this significant expansion, careful route scheduling and capacity management coupled with some improvement in customer demand, resulted in load factors increasing to 87% (2011: 85%). Load factor performance was underpinned by further development of the airline's yield management system and by the sale of seats both to Jet2holidays and third party tour operators. Seat sales to Jet2holidays represented 10% of total scheduled flying in the year. Net ticket revenue reduced slightly to £51.47 from £52.42.

Retail revenue per passenger increased to £27.86 from £25.84. This was generated from a number of sources including hold baggage charges for a sector leading 22kg weight allowance, online seat assignment, extra leg room seats, onboard sales and commissions on car hire and insurance. New developments in the year included a redeveloped travel insurance product – the best value in the market, and further development of dynamic pricing for retail revenues.

In order both to improve customer service and increase efficiency, we brought passenger handling in-house at Blackpool airport and Newcastle airport for summer 2011 with Faro airport following for summer 2012, the fifth overseas base at which we self handle.

Revenues in Jet2.com's passenger and Royal Mail charter operations were up on the previous year. The passenger charter activity provides flights for many different customers, including tour operators, specialist holiday providers, the UK Government, and in support of promotional, sporting and other events, enabling the business to improve utilisation of aircraft outside peak periods. We operated approximately 600 passenger charter flights during the year including a series of regular flights during the winter months for the Emirate of Ras al- Khaimah, flying German holiday makers into this relatively new resort. We continue to undertake significant flying for Royal Mail, for whom night mail flights are undertaken every weekday from six UK airports, performed with industry leading punctuality levels, enabling Royal Mail to meet its universal service obligation.

Jet2.com continues to improve its fuel efficiency by means of its wide-ranging "efficient flying" programme. This programme looks at all aspects of the airline's operation which can influence or directly impact upon the operational efficiency of its flying activities. The combined effects of all the elements of this scheme are estimated to have saved the airline over 34,000 tonnes of carbon emissions in the year.

Jet2.com now operates a fleet of 42 aircraft having acquired five Boeing 737-300 aircraft and leased two Boeing 737-800s towards the end of the financial year. Three leased 737-300 aircraft were returned at the end of their leases during the year. Jet2.com will continue to add to its owned and leased fleet in line with customer demand from our Northern based seat-only and package holiday customers. Seat capacity has been increased by 10% for summer 2012, with growth focused on tried and trusted, good value destinations.

Segmental Performance

Package Holidays

Jet2holidays is the Group's package holiday operator; it is an integral part of the Group's leisure travel activities, working closely with Jet2.com to provide ATOL protected holidays to a wide range of destinations from our eight Northern UK airports.

Jet2holidays revenue increased by 140% to £115m (2011: £48m). This has been largely driven by growth in customer numbers, with over 216,000 customers travelling in the year (2011: 98,000). Revenue growth has also been driven by a move to "all inclusive" and "half board" holidays, and increased retail revenues for products sold through the Jet2holidays booking process, including in-flight meals and extra leg-room seats.

The increasing scale of the business has enabled us to improve both operating margins and profitability. Despite the challenging economic environment and competitive pressures, gross margins per holiday have been maintained through careful management and further enhancement of the Package Holidays yield management system. Jet2holidays moved into profitability this financial year, with operating profit improving to £2.5m (2011: loss £0.5m).

This growth is substantially a reflection of the successful further development of the Jet2holidays hotel product range and a fully integrated approach with Jet2.com. During the year, the range of hotels on offer has increased to over 1,600 properties; 1,200 of which have been directly contracted by our in-house team. The product range is focused on "all inclusive" and "half board" holidays, meeting our customers' demand for great value. Our customers have also had the opportunity to select "5 star" accommodation under our "Indulgent Escapes" brand.

Jet2holidays are sold over the internet, through high street and online travel agents, and from our UK based call centre. The Jet2holidays website is being continuously developed to improve the quality of both the customer and the trade booking experience. Both visits and conversion levels are significantly higher than the previous year. Sales through travel agents remain an important element of the business and Jet2holidays can now be booked through most major travel agent consortia, multiples, homeworker companies and key independents in the UK. Further investment was made in our UK based call centre to enable it to handle call volume growth, which has continued into the summer 2012 booking season.

Looking forward to the year ending 31 March 2013, the business expects further substantial growth in customer numbers. The product offering, which now includes free child places at hundreds of hotels, is very attractive in the current environment. We continue to invest significant sums in marketing, focusing in particular on TV and online media, to increase brand and product awareness. This continued investment in the product, together with the opportunity to cross sell to Jet2.com scheduled service customers, means that we remain confident in delivering continued growth. Our direct relationships with our hotels and the focus on Jet2holidays as part of Jet2.com's overall capacity planning will ensure that we have the product and capability to meet our predicted increases in demand

Segmental Performance

Distribution & Logistics

The Group's distribution business, Fowler Welch, is one of the UK's leading logistics providers serving UK retailers, importers and manufacturers. The business operates from 13 regional distribution centres and offers a range of logistics solutions, including storage, case pick-to-order, and national distribution of both temperaturecontrolled and ambient products.

The business successfully completed a number of significant changes in the year, whilst maintaining growth in revenue of 6% to £152.4m. Operating profit increased by £1.5m to £4.3m. The business faced a number of cost challenges, in particular related to energy and insurance rates, as well as continued price pressure from customers.

Key network developments included the successful streamlining of operations at the Hub in Heywood (Greater Manchester) from a challenging implementation in the previous year; the successful start-up of the Newton Abbot (Devon) site; and the rationalisation of our Container operations as a result of choosing to cease trading at Felixstowe. These changes, together with continued, customer focused, quality service at our established sites, give Fowler Welch the platform for a period of continued organic growth.

Our key Spalding site achieved lower gross margins in the year due to lower revenues and reduced sub-contractor availability. However, the outlook for the site is very positive for the coming year. Investment in the site has increased our capacity by 250,000 cases per week, all of which has already been sold to existing and new customers.

The successful implementation in July 2011 of a new 15,000 sq ft cross-dock distribution site in Newton Abbot, to extend our TESCO express store distribution model, will act as a platform for growth in the South West region in the coming year.

Washington, Kent and the South Coast all enjoyed good gross margins, with operations experiencing high utilisation throughout the year, on the back of strong revenues.

The Ambient operation at the Hub in Heywood saw slower than planned revenue growth, but gross margin performance improved significantly year-on-year. Emphasis on service has been a high priority, following the site's challenging implementation in 2010; the growing reputation of Fowler Welch in the Ambient sector will enable continued growth in the coming years. This success was underlined by being awarded the ASDA "carrier of the year" award for 2012.

In June 2011, Fowler Welch reduced the scale of its container business, closing its Felixstowe operation. Key customers were, however, retained and these are now serviced from a new site, located at Alconbury on the A1 in Cambridgeshire.

The new business model for distributing containers contributed to the overall improvements in miles per truck and an overall reduction in tractor unit numbers. This has also been a tactical approach, to ensure that increased fleet flexibility is maintained in this difficult trading environment.

Investment in both IT and management infrastructure continues as a high priority. A new transport management system has been selected for implementation in the current financial year and the management team has been strengthened with a number of key appointments. These investments are focused on improving operational efficiency in order to improve gross margins.

Fowler Welch is looking forward to a successful year, with a number of new contracts with a variety of temperaturecontrolled and ambient customers already underway. This includes Winterbotham Darby in Teynham (Kent) and new volume awarded by an existing Blue Chip client at the Desborough (Northamptonshire) operation. Growth will be carefully managed to ensure all synergies with our existing customers and operations are fully exploited.

Principal risks and uncertainities

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. The principal risks and uncertainties facing the business include the following:

Competition

The Group is impacted by competitor activity in each of its business areas. In the Distribution business, the market has seen some consolidation 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's focus on service levels and cost control, both of which are critical to success in this sector.

The Leisure Airline and Package Holidays sectors continue to be intensely competitive market places. Headline fare price competition remains very strong at every base from which Jet2.com flies. The Group will continue to focus on customer driven scheduling on popular routes in order to maximise its load factor, yield, and retail revenue on its aircraft. The operation will continue to benefit from non-scheduled flight aircraft utilisation through its passenger and freight charter activities and from a broad distribution base for its scheduled seats via the web, through travel agencies, via tour operator seat allocations and to its in-house tour operator. Jet2holidays competes effectively through the provision of a broad range of great value package holidays accessible from all of our eight Northern bases

Fuel prices

The cost of fuel will continue to be a very significant element of the Leisure Airline and Package Holidays cost bases, and the effective management of fuel price variation will continue to be important to the businesses. The Group's fuel price risk management strategy aims to limit the exposure of both businesses to sudden and significant increases in oil prices, whilst ensuring the businesses remain 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.

Economic conditions

Ultimately, economic conditions will have an impact on the level of consumer demand for the Group's Leisure Airline and Package Holidays 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 has been a reduction in discretionary travel in recent years due to continuing economic uncertainty. To mitigate this risk, the Group will continue to plan its flying programme carefully to take account of trends in demand. Expanding the Jet2holidays offering also enables the Group to increase revenues from our Jet2.com customers.

Political risks

The Leisure Airline and Package Holidays businesses can be impacted by political uncertainty, both directly through reduced demand for travel to countries to which Jet2.com flies, and indirectly through the impact of such political uncertainty on fuel prices and exchange rates. This risk is mitigated through careful management of the route network and through the Group's approach to hedging fuel and foreign exchange risk.

Environmental risks

As evidenced in recent years, the Leisure Airline and Package Holidays businesses are at potential risk from the force of nature, such as extreme weather conditions and volcanic activity. The business mitigates against this risk by establishing and regularly updating a carefully planned response to be implemented by a team of experts, should there be significant disruption to our flying activity. The Group maintains prudent levels of liquid funds to enable the business to continue to operate through a period of sustained disruption to the flying programme.

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. It is clear that the increases in Airline Passenger Duty had an impact on flights to Egypt, prior to the subsequent political uncertainty which caused Jet2.com to suspend flying to Sharm el Sheikh and Hurghada in February 2011. The EU Emissions Trading Scheme commenced in 2012, as did further increases in Airline Passenger Duty. There is a continuing risk that the imposition of these taxes, at levels in excess of the economic cost of emissions, may result in reduced passenger demand.

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, and had met all banking covenants. The Group's strategy for managing liquidity risk is to maintain cash balances in appropriately liquid form and in accordance with approved counterparty limits, whilst securing the continuity and flexibility of funding through the use of committed bank facilities. Additionally, short term cash flow volatility risk in relation to margin calls in respect of fuel and foreign exchange hedge positions is minimised through diversification of counterparties and 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 covenant compliance and headroom.

Fuel, currency and carbon 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 Leisure Airline 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 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 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 22 to the Consolidated financial statements. As at 31 March 2012, the Group had hedged substantially all of its forecast fuel requirements for the 2012/13 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 and the euro.

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, airport charges and hotel accommodation. 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 2012, the Group had hedged a large proportion of its forecast foreign exchange requirements for the 2012/13 year. The magnitude of the foreign currency exchange risk is given in note 22 to the Consolidated financial statements.

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.

The Group also hedges its carbon exposure given the commencement in 2012 of the EU Emissions Trading Scheme. It has acquired all of its requirement for the year ending 31 December 2012 and approximately 60% 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 maintains a conservative approach to dividend policy, ensuring funds are retained to support further business growth. Our multi-year planning process ensures that we have clear visibility of earnings and liquidity to ensure we continue to operate well within bank covenant levels.

Andrew Merrick
Group Finance Director

23 July 2012