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easyJet ‘reported’ profit up 181% for 2010 fiscal year

easyJet has reported its full-year results to the end of September 2010 with reported profit before tax of £154.0 million based on revenues of £2,973.1 million.

The revenue figure 11.5% up on last year’s £2,666.8 million, while the reported profit before tax is a 181.5% increase on £54.7 for the previous fiscal year.

Underlying profit before tax (which excludes £27.3 million of cost relating to the volcanic ash cloud and £7.0 million loss on disposal of A321 aircraft in 2010 and £11.0 million profit on disposal of A321 aircraft in 2009) was up by 330.9% at £188.3 million from £43.7 million.

Profit after tax was £121.3 million, compared with the previous year’s figure of £71.2 million, resulting in a return on equity of 8.6%, up 3.1 percentage points on last year’s 5.5%.

The carrier reported continued growth in total revenue per seat, up 5.1% (3.3% at constant currency), following strong growth in the prior year (up 4.1% at constant currency) which the company said was driven by the strength of the network and good underlying consumer demand.

Disruption costs, easyJet noted, have had a significant impact on the financial results with a £97.9 million increase versus the prior year. This was split into £27.3 million being volcano related, £20.8 million snow related and £49.8 million of costs (wet leasing and other costs, mainly EU 2004/261 related), as a result of Air Traffic Control (ATC) strike action and easyJet’s operational difficulties over the summer

The return on equity increased to 8.6% from 5.5% as easyJet delivered both capacity growth and margin improvement.

easyJet announced that the guiding principle moving forward will be driving improvement in margins to achieve profit per seat of £5 and ROCE (return on capital employed) of 12% through the cycle. There will be increased focus on business customers.

Commenting on the results, the airline’s chief executive Carolyn McCall remarked, “easyJet’s solid financial performance in a tough trading environment demonstrates that the business model is strong. I’ve now been at easyJet for four months and completed my review of the business and capital structure. The strategy will build on the strength of easyJet’s network and target leisure and business customers with its best value fares to convenient airports. easyJet is strongly positioned to take advantage of the continuing profitable growth opportunities in European short-haul. This combined with margin improvement through a tight focus on costs and accessing new revenue opportunities, means that easyJet is poised to continue the strong operating cash generation of the past few years.”

Total fuel cost for 2010 was £733.4 million, a £73.8 million decrease on 2009. After taking into account a 6% increase in volume, fuel cost per seat was £13.09, down £2.19 from £15.28 per seat in 2009. The market cost of fuel, excluding fees and charges, increased in the year from $595 per metric tonne to $688. However, the effective price for fuel, after taking into account jet fuel hedging, decreased significantly from $951 per metric tonne to $732 as higher cost hedges matured.

The effective US dollar exchange rate reduced in the year from 1.78/£ to 1.64/£ resulting in a sterling cost of fuel (excluding fees and charges) of £445 per metric tonne compared to £536 in 2009.

easyJet founder and largest shareholder, Haji-Ioannou, who was against the strategy of the airline’s previous chief executive, commented, "The new management team has made some positive moves towards creating some real shareholder value. The decision to pay a dividend, in particular, represents a welcome change from the old regime which seemed to place the interests of suppliers above those of shareholders. This is a good first step, but I would like to see the dividend payout ratio increased over time to 50% of earnings per share.

"Given that this company now employs approximately £4 billion of capital in a fleet of 200 aircraft, I applaud the shift in focus on maximising the return on all capital employed (ROCE) rather than just on equity,” Sir Stelios added. "When one adjusts the balance sheet to take into account the ‘off balance sheet’ aircraft leases and noting the target set by the board of 12% ROCE, it implies a profit of £480m or about three times the current level. Let’s hope the improved execution of the business model will produce such profit levels in the next 2-3 years.

"The management of easyJet also needs to carefully assess the financial viability of any fleet expansion. If the profit target per aircraft is roughly £2m then the company should only buy more aircraft (over and above the 200) if it has identified specific new routes for these new aircraft that produce that amount of profit per aircraft. New route data should be shared with all shareholders for transparency.

"I remain very concerned with the strategy of the previous management which expanded the fleet to develop summer holiday routes leaving it with approximately 40 aircraft parked over the winter. Parked aircraft lose money,” Sir Stelios noted. "For this reason, I welcome the renewed focus on the business traveller which should generate more consistent revenues.

"Last but not least I continue to believe that it will be in the best interests of the company to re-engage with Boeing in order to market test the price before placing any more orders from Airbus. Only by negotiating with at least two suppliers do you ensure you receive the best possible price," concluded Sir Stelios.

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