3rd May 2006 07:01
easyJet PLC03 May 2006 easyJet PlcInterim results for the 6 months to 31 March 2006 3 May 2006 RESULTS AHEAD OF EXPECTATIONS; GUIDANCE UPGRADED • Pre-tax loss of £40m, better than expectations; good first half performance despite unit fuel costs up 49% (£55m) or £3.01 per seat. • Cost reduction momentum continues: costs per seat excluding fuel down 6.2% or £1.84 per seat from £29.59 to £27.75. • Total revenue per seat up 0.8% in the spite of the effect of Easter falling in the first half in 2005 and the second half in 2006. • Ancillary revenues significantly improved, up 31% or £0.76 per seat. • 14.9m passengers carried, up 10.1%. •Strong balance sheet with cash increasing by £59m to £726m. •Continued growth in network to 235 routes and 67 airports, utilising 110 aircraft. €28 new routes and 4 new destinations started operating in the period with 8 further new cities announced for summer 2006. •Continued strong operating performance with 80% of flights arriving within 15 minutes of scheduled arrival and 96% arriving within an hour. Commenting on the results, Andy Harrison, Chief Executive, said: "easyJet's growth continues unabated, based on our unique and outstandingcustomer proposition of the lowest fares, convenient airports and customer care.We grew our revenues by 14% in the first half, launching 28 new routes andinaugurating services to our newest base in Milan Malpensa. "We are encouraged by our first half performance, which is slightly ahead of ourexpectations at the time of our AGM in February. Successful cost reduction andrevenue improvements, especially in ancillaries have largely offset theconsiderable hike in fuel prices and the effect of Easter moving from the firsthalf in 2005 to the second half in 2006. "Our stronger than expected first half performance and a good Easter provide thebasis for an improved full year outlook. We are conscious that we have a bigsummer ahead, that the price of oil remains a risk, and we continue to operatein a highly competitive environment. Notwithstanding these uncertainties, we nowanticipate full year passenger revenue per seat to be broadly in line with 2005,and expect ancillary revenue to grow at around twenty per cent per seat for thefull year. Our continued cost management should result in a fall ofapproximately five per cent per seat excluding fuel. We assume the price of Jetfuel will stay around current levels and we maintain a neutral view on exchangerates. Overall, we now expect pre-tax profit to grow by ten to fifteen per centcompared with 2005." For further details please contact: easyJet plc Press:Toby Nicol Corporate Communications +44 (0) 1582 525 339 Analysts:Julia Collins Investor Relations +44 (0) 1582 525 258Andrew Barker Investor Relations +44 (0) 1582 525 274 There will be an analyst presentation at 9:00 am on 3 May 2006 at ABN AMRO, 3rdfloor, 250 Bishopsgate, EC2M 4AA. A live webcast of the presentation will beavailable at www.easyJet.com. There will be an analyst and investor conference call at 2:00 pm on 3 May 2006.For further details, contact Helen Lutman at Financial Dynamics on 020 72697153. Chairman's statement The twin virtues of optimising revenues and reducing costs have continued to bethe main objectives of easyJet's management team during the first half of thisfinancial year. The results demonstrate their success with ancillary revenuesincreasing by 31% per seat over the same period last year and although passengerrevenue per seat showed a decline of 1.5%, the lucrative Easter period felloutside the first half of this year but was within it in 2005. Performance oncost reduction, excluding fuel, was exemplary with the drive from the previousyear being sustained. The previous year saw a reduction of 4.4% but in the firsthalf of this year, a reduction of 6.2% was achieved. Our passenger numbers increased by 10% over the same period last year withcustomers attracted, as before, by easyJet's winning combination of routes,frequencies, convenient airports and a young and reliable fleet of aircraft.This combination gives us confidence to continue expanding the business acrossthe network and in the creation of new routes. All of these achievements have been made in the face of tough competition and ofhigh prices for oil. They reflect much credit on the leadership of easyJet bythe management team and on all of our people. In September 2005, shareholdersvoted for the Long Term Incentive Programme, which provides the management teamwith targets to double the Company's return on equity from a figure of 7.1% in2005 to 15% in 2008. These are challenging targets but I am encouraged by thestart that has been made. During this period, the Board of Directors was strengthened by the appointmentof two non-executive directors, Professor Rigas Doganis and David Michels. Rigasis something of a legend in aviation, having been visiting professor in AirTransport Management at Cranfield University with a particular focus on low costairlines. He is currently Chairman of the European Aviation Club in Brussels, anon-executive director of South African Airways and a director of HyderabadInternational Airport Ltd. David, who until recently was Group Chief Executiveat Hilton Group plc, is a non-executive director of The British Land Company plcand Marks and Spencer Group plc. As the Senior Independent Non-ExecutiveDirector, he brings to the Board unrivalled experience of the travel industryand considerable expertise in listed companies. This has been a good start to the year and backed by a strong Board and barringunforeseen circumstances, I remain confident in the ability of the easyJet teamto continue to enhance shareholder value, during the remainder of the year andbeyond. Sir Colin ChandlerChairman2 May 2006 Chief Executive's review At the heart of easyJet's success is our outstanding customer proposition,offering a unique combination of the lowest fares, convenient airports andcustomer care. This is augmented by our • Total commitment to safety • Simple low fare structure • Low unit costs • Strong branding. There are encouraging early signs in our Interim Results that we are movingforward more rapidly to deliver our full potential. We have a new leadershipteam in place with clear priorities; these are network development, revenueenhancement, cost reduction and improved efficiency, and continued developmentof our people. Our growth is continuing with customers attracted by our lowfares which represent a considerable discount to network carriers. Our strongcustomer proposition is highlighted by the near 50% increase in customer visitsto our website in the first half of the year. We recognise that our strong customer proposition needs to be backed by goodreturns to our shareholders. Achieving our goal of 15% Return on Equity meansalmost doubling our profit per seat by 2008. The improvement will come from acombination of factors. Network In the first half we continued to expand and improve our network. Our capacitygrowth, in available seats, was 13% for the half with our plan for the full yearmaintained at 15%. We continued to exploit opportunities to grow our networkthroughout Europe, and in March 2006 we opened our 16th base in Milan Malpensa.This is in addition to strengthening our existing network bases. We have alsoannounced new routes to non European Union destinations in Croatia (Split andRijeka), Morocco (Marrakech), and Turkey (Istanbul). Overall in the period weadded 28 new routes and discontinued 5. We have initiated a detailed route byroute review of the existing network, seeking to maximise our return on assetsand looking for new opportunities. Revenue Total revenues per seat improved in the first half when compared to last year by0.8%, despite the fact that Easter has moved to the second half falling in April2006 compared with March 2005. This performance was supported by an exceptionalimprovement in ancillary revenues which increased by 31% per seat, a year onyear increase in absolute terms of £19 million or 47%. Our insurance, car rentaland hotel partner revenues have performed particularly well, partially helped bythe dynamic packaging of some of these products. This makes it easier forcustomers to add these items when purchasing their flights and has helpedincrease conversion rates. The announcement in February 2006 of our roll out ofinternet check-in marks another advance in our customer friendly product and wewill continue to innovate with ideas such as "speedy boarding". This iscurrently in test and offers customers early boarding and the freedom to selecttheir seat of preference. We are adding resource to our yield managementprocesses to ensure we optimise contribution on a route by route basis. Costs Only through consistent cost reduction to drive a lower cost base can our lowfare commitment be delivered to our customers. In the first half we continued tomake good progress, with total costs per seat, excluding fuel, down 6.2%compared to last year. In the period, we saw the benefit of our long termmaintenance contract with SR Technics; a significant reduction in overheadcosts; and further improvement in our unit airport costs. The current high costof fuel means we must continue to look for ways to improve our efficiency andreduce costs while ensuring we never compromise on our commitment to safety. People We recognise our people as a key differentiator at easyJet and recognise theimportance of our crew and the value of their commitment, personality andprofessionalism in delivering the easyJet experience. We are proud of ourtraining standards and celebrated the opening of our easyJet Academy in November2005, a world class training facility for our crew. In terms of the easyJetmanagement team, we have made some changes over the past year and the new teamare settling in, working together, delivering innovations and new solutions,whilst continuing to drive and improve the business. Key business highlights • Pre-tax loss of £40 million was better than expectations; good first half performance despite unit fuel costs increasing by £55 million (49%) or £3.01 per seat. • Cost reduction continues: costs per seat excluding fuel fell by 6.2% or £1.84 per seat from £29.59 to £27.75. • Total revenue per seat was up 0.8% in spite of the effect of Easter falling in the first half in 2005 and the second half in 2006. • Ancillary revenues showed a significant improvement year on year rising 31% on a per seat basis equating to an extra £0.76 per seat. • 14.9 million passengers were carried, an increase of 10.1%. • 28 new routes have started operating, with a total of 235 routes at 31 March 2006. This includes the addition of four new destinations (Bournemouth , Bremen, Doncaster and Lisbon). Eight further new cities have been announced for the summer (Bordeaux, Istanbul, Marrakech, Palermo, Rijeka, Rimini, La Rochelle, Split), increasing the easyJet network to 75 airports in 21 European countries. • Our operating performance continues to be strong, with 80% of flights arriving within 15 minutes of scheduled arrival (2005: 80%) and 96% of flights arriving within an hour (2005: 95%). • The balance sheet was further strengthened in the period: at 31 March 2006, we held £726 million of cash on the balance sheet, £59 million more than at 30 September 2005. Outlook Our stronger than expected first half performance and a good Easter provide thebasis for an improved full year outlook. We are conscious that we have a bigsummer ahead, that the price of oil remains a risk, and we continue to operatein a highly competitive environment. Notwithstanding these uncertainties, we nowanticipate full year passenger revenue per seat to be broadly in line with 2005,and expect ancillary revenue to grow at around twenty percent per seat for thefull year. Our continued cost management should result in a fall ofapproximately five percent per seat excluding fuel. We assume that the price ofjet fuel will stay around current levels and we maintain a neutral view onexchange rates. Overall, we now expect pre-tax profit to grow by ten to fifteenpercent compared with 2005. Andy HarrisonChief Executive2 May 2006 Selected consolidated financial and operating Six months ended 31 Changedata March (unaudited) 2006 2005 % Financial performance measuresRevenues, £million 629.5 553.3 13.8Operating costs, £million (602.2) (519.6) (15.9)EBITDAR (1), £million 27.3 33.7 (18.9)Finance and ownership costs (2), £million (67.6) (55.3) (22.0)Loss before tax, £million (40.3) (21.6) 85.9Loss after tax, £million (28.9) (15.4) 87.3Net assets, £million 856.6 783.0 9.4Loss per share (basic), pence (7.17) (3.86) 85.8 Key performance indicatorsReturn on equity (3) (3.4%) (2.0%) (1.4)ppLoss before tax per seat, £ (4) 2.22 1.34 65.2Revenue per seat, £ (5) 34.67 34.38 0.8Cost per seat, £ (6) 36.89 35.72 3.3Cost per seat excluding fuel, £ (7) 27.75 29.59 (6.2)Seats flown (millions) (8) 18.2 16.1 12.8 Output measuresPassengers (millions)(9) 14.9 13.5 10.1Number of aircraft owned/leased at end ofperiod(10) 114 103 10.7Average number of aircraft owned/leasedduring period(11) 110.5 96.1 15.0Number of aircraft operated at end ofperiod(12) 107.0 92.0 16.3Average number of aircraft operatedduring period(13) 100.8 88.0 14.5Sectors(14) 118,782 106,705 11.3Block hours(15) 207,779 184,426 12.7Number of routes operated at end ofperiod 235 187 25.7Number of airports served at end ofperiod 67 57 17.5 Other performance measuresLoad factor(16) 81.8% 83.8% (2.0)ppOperated aircraft utilisation (hours perday)(17) 11.3 11.4 (0.8)Owned/leased aircraft utilisation (hoursper day)(18) 10.3 10.6 (2.9)Available seat kilometres ("ASK")(millions) (19) 16,672 14,526 14.8Revenue passenger kilometres("RPK")(millions)(20) 13,642 12,150 12.8Average sector length (kilometres) 918 903 1.7Average fare (£)(21) 38.45 38.08 1.0Revenue per ASK (pence)(22) 3.78 3.81 (0.9)Cost per ASK (pence)(23) 4.02 3.96 1.5 Footnote references are defined below Footnotes (1) EBITDAR is earnings before interest, taxes, depreciation, amortisation and lease payments (excluding the maintenance reserve component of operating lease payments). Maintenance reserve costs are charged to the cost heading, "Maintenance". (2) Finance and ownership represents depreciation, amortisation of intangibles, aircraft dry lease costs, share of profit after tax of associates and financing income. (3) Return on equity represents the loss after tax divided by the average shareholders' funds (4) Loss per seat represents loss before tax divided by the number of flown seats available for passengers (5) Revenue per seat represents total revenues divided by the number of seats flown available for passengers (6) Cost per seat represents total revenues plus loss before tax, divided by the number of seats flown available for passengers (7) Cost per seat excluding fuel represents total revenues less loss before tax plus fuel costs, divided by the number of seats flown available for passengers (8) Represents the number of seats flown available for passengers (9) Represents the number of earned seats flown by easyJet. Earned seats include seats that are flown whether or not the passenger turns up, because easyJet is generally a no-refund airline and once a flight has departed a no-show customer is generally not entitled to change flights or seek a refund. Earned seats also include seats provided for promotional purposes and to easyJet staff for business travel. (10) Represents the number of aircraft owned plus those held on lease arrangements of more than one month's duration at the end of the relevant period. (11) Represents the average number of aircraft owned plus those held on lease arrangements of more than one month's duration during the relevant period. (12) Represents the number of owned/leased aircraft in service at the end of the relevant period. Owned/leased aircraft in service exclude those in maintenance and those which have been delivered but have not yet entered service or those out of service prior to disposal or return. (13) Represents the average number of owned/leased aircraft in service during the relevant period. Owned/leased aircraft in service exclude those in maintenance and those, which have been delivered but have not yet entered service or those out of service prior to disposal or return. (14) Represents the number of one-way revenue flights. (15) Represents the number of hours that aircraft are in actual service, measured from the time that each aircraft leaves the terminal at the departure airport to the time that such aircraft arrives at the terminal at the arrival airport. (16) Represents the number of passengers as a proportion of the number of seats available for passengers. No weighting of the load factor is carried out to recognise the effect of varying flight (or "stage") lengths. (17) Represents the average number of block hours per day per aircraft operated during the relevant period. (18) Represents the average number of block hours per day per aircraft owned / leased during the relevant period. (19) Represents the sum by route of seats available for passengers multiplied by the number of kilometres those seats were flown. (20) Represents the sum by route of passengers multiplied by the number of kilometres those passengers were flown. (21) Represents the passenger revenue divided by the number of passengers carried. (22) Represents the total revenue divided by the total number of ASK's. (23) Represents the difference between total revenue and profit before tax, divided by the total number of ASK's. Consolidated income statement(unaudited) Notes Six months ended 31 March Year ended 30 September 2006 2005 2005 £million £million £million Passengerrevenue 571.0 513.6 1254.2Ancillaryrevenue 58.5 39.7 87.2---------------- ----- ---------- ---------- ----------Revenue 629.5 553.3 1341.4 Ground handlingcharges,includingsalaries (71.2) (62.8) (130.5)Airport charges (115.7) (105.3) (230.1)Fuel (165.9) (98.6) (260.2)Navigationcharges (54.6) (49.9) (108.6)Crew costs,includingtraining (75.2) (66.6) (136.2)Maintenance (51.4) (57.9) (119.2)Advertising (17.4) (18.7) (32.8)Merchant feesand incentivepay (8.6) (7.5) (15.6)Aircraft andpassengerinsurance (8.2) (9.6) (19.3)Other costs (34.0) (42.7) (82.4)---------------- ----- ---------- ---------- ----------EBITDAR* 27.3 33.7 206.5 Depreciation (10.4) (8.4) (15.8)Amortisation ofintangibleassets (0.4) (0.4) (0.8)Aircraft drylease costs (63.5) (58.5) (123.7)---------------- ----- ---------- ---------- ----------Group operating(loss) / profit(EBIT) (47.0) (33.6) 66.2 Share of profitafter tax ofassociate 0.1 0.1 0.1 Interest andother financeincome 15.6 12.0 27.2Interest andother financecharges (9.0) (0.1) (10.9)---------------- ----- ---------- ---------- ----------Net financingincome 6.6 11.9 16.3 ---------------- ----- ---------- ---------- ----------(Loss) / profitbefore tax (40.3) (21.6) 82.6 Tax 4 11.4 6.2 (23.6)---------------- ----- ---------- ---------- ----------(Loss) / profitafter tax (28.9) (15.4) 59.0================ ===== ========== ========== ========== (Loss) /earnings pershare (pence) 3Basic (7.17) (3.86) 14.78Diluted N/A N/A 14.43 * EBITDAR is defined as earnings before Net financing income, Tax, Depreciation,Amortisation and Lease payments (excluding the maintenance reserve component ofoperating lease payments). Consolidated balance sheet (unaudited) Notes 31 March 2006 31 March 2005 30 September 2005 £million £million £million Goodwill 309.6 309.6 309.6Intangible assets 1.1 1.2 1.4Property, plantand equipment 502.5 301.7 398.6Financial assets -cash on deposit 47.6 16.2 22.4Other long termassets 6.0 12.6 6.7Investmentsaccounted forusing the equitymethod 0.3 0.3 0.2---------------- ------ ---------- ---------- ----------Non-current assets 867.1 641.6 738.9 Trade and otherreceivables 244.8 212.7 210.7Asset held forsale - - 7.1Financial assets:Cash on deposit - 16.2 6.1Derivativefinancialinstruments 2 13.0 - - Cash and cashequivalents 726.1 604.5 667.0---------------- ------ ---------- ---------- ----------Current assets 983.9 833.4 890.9 Borrowings (16.5) (10.0) (16.3)Finance leaseborrowings (1.7) - -Trade and otherpayables (493.8) (403.1) (342.9)Current taxliabilities (39.3) (12.5) (38.9)Provisions (10.9) (8.5) (16.4)---------------- ------ ---------- ---------- ----------Currentliabilities (562.2) (434.1) (414.5)---------------- ------ ---------- ---------- ----------Net current assets 421.7 399.3 476.4 Borrowings >1 year (207.7) (118.8) (201.0)Finance leaseborrowings > 1year (72.8) - -Other non-currentliabilities (79.7) (63.5) (75.1)Provisions (59.3) (51.7) (53.6)Deferred taxliabilities (12.7) (23.9) (22.2)---------------- ------ ---------- ---------- ----------Non-currentliabilities (432.2) (257.9) (351.9)---------------- ------ ---------- ---------- ----------Net assets 856.6 783.0 863.4================ ====== ========== ========== ========== Ordinary shares 7 101.6 99.8 100.1Share premium 7 579.2 554.2 557.2Retained earnings 7 170.3 127.7 206.0Other reserves 7 5.5 1.3 0.1---------------- ------ ---------- ---------- ----------Shareholders'funds - equity 856.6 783.0 863.4================ ====== ========== ========== ========== Consolidated statement of cashflows (unaudited) Six months ended 31 March Year ended Notes 2006 2005 30 September 2005 £million £million £million Cashflows from operatingactivitiesCash generated from operations 6 90.6 155.0 221.0Interest received 13.7 12.0 28.8Interest paid (5.4) (1.5) (5.7)Tax paid (0.5) 3.4 2.9---------------------- ----- -------- -------- --------Net cash from operating activities 98.4 168.9 247.0 Cashflows from investingactivitiesProceeds from sale of property,plant and equipment 29.1 42.9 75.5Purchase of property, plant andequipment (143.3) (99.5) (237.0)Proceeds from sale of asset heldfor 7.1 - -resalePurchase of intangible fixed (0.1) (0.6) (1.4)assetsDividend received from joint - - 0.2venture---------------------- ----- -------- -------- --------Net cash used in investingactivities (107.2) (57.2) (162.7) Cashflows from financingactivitiesNet proceeds from issue ofordinary 10.8 - 2.0share capitalPurchase of shares held by (0.1) - -trusteesNet proceeds from drawdown of newbank loans 24.4 36.5 146.2Repayment of bank loans (21.3) (21.9) (46.9)Net proceeds from sale and financeleasebacks 74.5 - -Management of liquid resources (19.6) (18.1) (14.2)---------------------- ----- -------- -------- --------Net cash inflow / (used) infinancing activities 68.7 (3.5) 87.1 Effects of exchange rate changes (0.8) 0.3 (0.4)--------------------- ----- -------- -------- --------Net increase in cash and cashequivalents 59.1 108.5 171.0 Cash and cash equivalents atbeginning of period 667.0 496.0 496.0---------------------- ----- -------- -------- --------Cash and cash equivalents at endof 726.1 604.5 667.0period ===== ======== ======== ============================== Consolidated statement of recognised income and expense (unaudited) Notes Six months ended 31 March Year ended 2006 2005 30 September 2005 £million £million £million Cash flow hedgesFair value losses in period,net of tax (3.3) - -Transfers to net profit (2.0) - -Translation differences onforeign currency netinvestments (0.1) 1.3 0.1--------------- -------- ---------- ---------- ----------Income / (expense) recogniseddirectly in equity (5.4) 1.3 0.1 (Loss) / profit for theperiod (28.9) (15.4) 59.0--------------- -------- ---------- ---------- ----------Total recognised income /(expense) for the periodattributable to shareholdersof the Company (34.3) (14.1) 59.1 Adoption of IAS 32 and IAS 39 2 13.3 - ---------------- -------- ---------- ---------- ----------Total recognised income andexpense (21.0) (14.1) 59.1=============== ======== ========== ========== ========== Operational and Financial Review Half year 2006 compared with half year 2005 Revenue easyJet's revenue increased by 13.8% from £553.3 million to £629.5 million, fromhalf year 2005 to half year 2006. Total revenue per seat increased by 0.8% from£34.38 to £34.67. Passenger revenue, the largest component, comprises the price paid for the seatless government taxes such as Air Passenger Duty and VAT. It increased by 11.2%from £513.6 million to £571.0 million, driven by a 12.8% growth in seats flownfrom 16.1 million to 18.2 million, offset by a 1.5% reduction in passengerrevenue per seat from £31.91 to £31.44. Revenue from ancillary sources, within ongoing operations, includes in-flightsales of food and beverages, excess baggage and sporting good charges, changefees, credit card booking fees and commissions received from products andservices sold such as hotel and car hire bookings and travel insurance. In halfyear 2006, £58.5 million was earned from ancillary sources, up 47.2% from theprior half year. The ancillary revenue per seat increased by £0.76 per seat to£3.23, an increase of 31%. The average sector length increased by 2% to 918 kilometres. Ground handling charges, including salaries easyJet's ground handling charges increased by 13.4% from £62.8 million to £71.2million, from half year 2005 to half year 2006. The increase in third-partyground handling charges reflects the increase in the number of sectors flown.Additional costs of £2 million were also incurred in de-icing charges as aresult of an unusually cold winter across Europe. Despite this, the groundhandling cost per seat increased by only 1% to £3.92. Airport charges easyJet's external airport charges increased by 9.8% from £105.3 million to£115.7 million from half year 2005 to half year 2006. This increase wasattributable to the increase in the number of sectors flown. On a per seatbasis, costs fell by 3% from £6.55 to £6.37. Fuel easyJet's fuel costs increased by 68.2% from £98.6 million to £165.9 millionfrom half year 2005 to half year 2006. There has been a 41.2% increase ineasyJet's effective average unit US dollar fuel cost, compared with the previousyear, resulting in additional costs to easyJet of £45.1 million. The weakeningof the value of sterling against the US dollar, the currency in which fuelprices are denominated, over the course of half year 2006 provided an additionalcost of £11.1 million. Increased flying resulted in £12.5m additional fuelcosts. Set against this were the benefits of a more fuel efficient fleet ofaircraft, which provided a benefit of £1.4 million. On a per seat basis, costsincreased by 49% from £6.13 to £9.14. Navigation charges easyJet's navigation charges increased by 9.4% from £49.9 million to £54.6million from half year 2005 to half year 2006. This increase was principallyattributable to the increased number of ASKs flown. Cost savings were derivedfrom lower unit charges and a weaker Euro, but were partially offset by onaverage heavier aircraft. On a per seat basis, costs reduced by 3% from £3.10 to£3.01. Operational and financial review (continued) Crew costs, including training easyJet's crew costs increased by 12.9% from £66.6 million to £75.2 million fromhalf year 2005 to half year 2006. The increase in crew costs resulted from anincrease in headcount during the half year 2006 to service the additionalsectors and aircraft operated by easyJet during the period. Maintenance Maintenance expenses decreased by 11.3% from £57.9 million to £51.4 million fromhalf year 2005 to half year 2006. easyJet's maintenance expenses consistprimarily of the cost of routine maintenance and spare parts and provisions forthe estimated future cost of heavy maintenance and engine overhauls on aircraftoperated by easyJet pursuant to dry operating leases. The extent of the requiredannual maintenance reserve charges is determined by reference to the number offlight hours and cycles permitted between each engine shop visit and heavymaintenance overhaul on aircraft airframes. The decrease in maintenance costswas largely due to the benefits of new contractual arrangements being negotiatedwith lower prices, such as with SR Technics set off by the additional costs of a11.3% increase in the number of sectors flown. On a per seat basis, costsreduced by 21% from £3.60 to £2.83. Advertising Advertising costs decreased by 7.0% from £18.7 million to £17.4 million fromhalf year 2005 to half year 2006. In half year 2005, there were additional costsincurred redesigning the easyJet brand in 2005 with a new "Come on, let's fly"campaign, for which there was no comparable spend in 2006. As a result, theadvertising cost per seat fell by 18% from £1.16 to £0.96. Merchant fees and incentive pay Merchant fees and incentive pay increased by 14.0% from £7.5 million to £8.6million from half year 2005 to half year 2006. Merchant fees and incentive payincludes the costs of processing fees paid to credit card companies on all ofeasyJet's credit and debit card sales and the per-seat sold/transferredcommission paid as incentive pay to easyJet's telesales staff. The increase isreflective of a larger volume of transactions in line with the growth of thebusiness. Aircraft and passenger insurance Aircraft and passenger insurance costs decreased by 14.6% from £9.6 million to£8.2 million from half year 2005 to half year 2006. The decrease is dueprimarily to renegotiation of insurance contracts offset against an increase inboth aircraft and passenger numbers. Other costs Other costs decreased by 20.3% from £42.7 million to £34.0 million from halfyear 2005 to half year 2006. Items in this cost category include administrativeand operational costs (not included elsewhere) including some salary expenses.Also this cost category includes compensation paid to passengers, currencyexchange gains and losses and the profit or loss on the disposal of fixedassets. The principal reason for the decrease is management action to increasethe efficiency of the administration function. On a per seat basis, costs fellby 29% from £2.65 to £1.87. Operational and financial review (continued) Depreciation and amortisation of intangibles Depreciation charges increased by 23.9% from £8.4 million to £10.4 million fromhalf year 2005 to half year 2006. The depreciation charge reflects depreciationon owned or finance leased aircraft and capitalised aircraft maintenancecharges, and also includes depreciation on computer hardware and other assets.easyJet has owned or leased under a finance lease an average of 22.3 A319aircraft during the half year 2006 (half year 2005: 6.0 B737-300 aircraft and7.3 A319 aircraft). The increase in depreciation reflects the additional numberof owned aircraft, the strength of the US dollar which has increased the cost ofaircraft acquired, and the additional depreciation of other assets such asspares and leasehold improvements. Amortisation of intangibles remained unchanged at £0.4 million for both halfyear 2005 and half year 2006. The amortisation charge reflects amortisation onpurchased computer software. Aircraft dry lease costs easyJet's aircraft dry lease costs comprise the lease payments paid by easyJetin respect of those aircraft in its fleet operated pursuant to dry operatingleases and end of operating lease return costs. Aircraft dry lease costsincreased by 8.4% from £58.5 million to £63.5 million from half year 2005 tohalf year 2006. This increase was principally due to new aircraft beingintroduced to the fleet during the period under operating lease. During theperiod 5 new leased aircraft were added to the fleet and 8 were retired. Overthe period, easyJet has been impacted by the weakening of the value of sterlingagainst the US dollar, the currency in which lease costs are denominated, andrising dollar interest rates. Share of profit after tax of associate The Big Orange Handling Company Limited is a company owned by Menzies AviationLimited and easyJet. It was set up in January 2004 to provide ground handlingservices at London Luton Airport. The share of operating profit after tax inboth half year 2005 and half year 2006 is similar at £0.1 million. Interest and other finance income Interest and other finance income represents interest received or receivable byeasyJet, offset by the revaluation of financing assets and liabilities.easyJet's financing income increased from £12.0 million in half year 2005 to£15.6 million in half year 2006. This was primarily due to the increase in cashand cash on deposit held, from £636.9 million at 31 March 2005 to £773.7 millionat 31 March 2006. Interest and other finance charges Interest and other finance charges represents interest paid or payable byeasyJet, offset by the revaluation of financing assets and liabilities. Financecharges relate predominantly to easyJet's borrowings through either loans orfinance leases. The average number of aircraft held under these arrangementsincreased by 67.5% from 13.3 in half year 2005 to 22.3 in half year 2006.Interest and other finance charges increased from £0.1 million in half year 2005to £9.0 million in half year 2006. The increase is attributable to the increasein number of aircraft financed, the impact of rising US dollar interest rates,and the effect of foreign exchange revaluations which produced a credit of £2.0million during half year 2005. Taxation In half year 2006, easyJet recognised a tax credit of £11.4 million (half year2005 - tax credit of £6.2 million). The increase in the tax credit recognised isdue to the increase in pre-tax losses. Operational and financial review (continued) Retained profit for the year For the reasons described above, easyJet's retained loss after interest andtaxes increased by 87.3% from £15.4 million in half year 2005 to £28.9 millionin half year 2006. Loss per share The basic loss per share increased by 85.8% from 3.86 pence in the half year2005 to 7.17 pence in half year 2006. Notes to the financial statements For the six months ended 31 March 2006 (unaudited) 1. Basis of preparation easyJet plc ("easyJet" or the "Group" or the "Company") has historicallyprepared its audited annual financial statements and unaudited interim resultsunder UK Generally Accepted Accounting Practice ("GAAP"). In the current year,easyJet has adopted International Financial Reporting Standards ("IFRS") for thefirst time as the Group is required to present its annual consolidated financialstatements in accordance with accounting standards adopted for use in theEuropean Union (EU). The interim financial information has been prepared underthe Group's IFRS accounting policies, details of which were made available on 20January 2006 in the document entitled "Explanation of the financial impactfollowing adoption of International Financial Reporting Standards". Thisdocument contains reconciliations of easyJet's equity and results from UK GAAPto IFRS at the date of transition to IFRS, 1 October 2004, and for the yearended 30 September 2005. Reconciliations of easyJet's balance sheet and incomestatements for the six months ended 31 March 2005 are detailed below. As at the date of this Interim Report, not all International Financial ReportingStandards ("IFRSs"), including interpretations of both the StandingInterpretations Committee and the International Financial ReportingInterpretations Committee ("IFRIC"), issued by the International AccountingStandards Board have been endorsed by the European Commission. These standardsare subject to ongoing review and endorsement by the European Commission, whilstthe application of the standards continues to be subject to interpretation byIFRIC as well as emerging industry consensus. As a consequence, furtheradjustments to the accounting policies and treatments may need to be made to theinformation presented in this document before it is published as comparativeinformation for the Group's full year results for the year ending 30 September2006. easyJet has adopted IAS 32, Financial Instruments: Disclosure and Presentationand IAS 39 Financial Instruments: Recognition and Measurement from 1 October2005 and applied the exemption not to restate its comparative information forthe impact of these standards. The Group's accounting policies for thesestandards are included in the document "Explanation of the financial impactfollowing adoption of International Financial Reporting Standards", which can beviewed under the financial information section of our website, easyJet.com. TheGroup has chosen to recognise the fair value of all financial Instruments ascurrent assets and liabilities on the balance sheet. The Group's accountingpolicies for Financial Instruments in the periods to 30 September 2005 areincluded in the Group's annual report for the year ended 30 September 2005. Theimpact of adopting IAS 32 and IAS 39 is explained below. easyJet has chosen not to adopt IAS 34 "Interim Financial Statements" inpreparing its 2005 interim statement, and therefore this interim financialinformation is not in full compliance with the presentational and disclosurerequirements of IFRS. The financial information included in this statement does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.The financial information for the year ended 30 September 2005 included in thisInterim Report is based upon easyJet's consolidated financial statements forthat year, restated for the adoption of IFRS. Those financial statements werereported on by easyJet's auditors at that time and have been delivered to theRegistrar of Companies. The report of the auditors was unqualified and did notcontain a statement under section 237 (2) or (3) of the Companies Act 1985. 2. Adoption of IAS 32 and IAS 39 As permitted by IFRS 1, IAS 32 and IAS 39 have been adopted prospectively from 1October 2005 and as a consequence the fair value of certain financialinstruments have been measured and adjustments have been made to the BalanceSheet at that date. At 1 October 2005, easyJet has met the criteria to adopt hedge accounting forforeign exchange and fuel derivative instruments. These instruments compriseforwards and zero cost collars. As a result of applying hedge accounting, at 1October 2005 the fair value of the financial instruments has been recognised asa financial asset on the balance sheet, with the intrinsic value of theinstruments at that date being recognised in reserves, and the time valueportion being an adjustment to retained earnings. Effect of changes on consolidated balance sheet at 1 October 2005: At 30 September Impact of At 1 October 2005 adoption IAS 32 2005 and 39 £million £million £million Non-currentassets 738.9 - 738.9 Financialassets -derivativefinancialinstruments - 21.0 21.0Other currentassets 890.9 (1.4) 889.5------------------- --------- --------- ---------Current assets 890.9 19.6 910.5 Currentliabilities (414.5) - (414.5) Deferredtaxation (22.2) (6.3) (28.5)Othernon-currentliabilities (329.7) - (329.7)------------------- --------- --------- ---------Non-currentliabilities (351.9) (6.3) (358.2)------------------- --------- --------- ---------Net assets 863.4 13.3 876.7=================== ========= ========= ========= Share capitaland sharepremium 657.3 - 657.3Retainedearnings 206.0 2.5 208.5Other reserves 0.1 10.8 10.9------------------- --------- --------- ---------Shareholders'equity 863.4 13.3 876.7=================== ========= ========= ========= In the six months ended 31 March 2006, the movement in the intrinsic value offinancial instruments has been taken to reserves and the time value portion hasbeen taken to the income statement, causing an additional expense of £0.9million before taxes, or a net impact of £0.6 million after taxes. SinceeasyJet's hedging instruments predominantly comprise zero cost collars, theincome statement impact of the time value of instruments will be zero over thefull life of the instrument. 3. Earnings per share The earnings per share are based on the following: Six months Year ended 30 ended 31 March 2006 2005 September 2005 (Loss)/profit for the periodretained for equity shareholders(£million) (28.9) (15.4) 59.0 Number Number Number Weighted average number ofordinary shares in issue duringthe period used to calculatebasic earnings per share(millions) 403.4 399.1 399.3 Weighted average number ofdilutive share options used tocalculate dilutive earnings pershare (millions) N/A N/A 9.6 There is no diluted earnings per share for the six months ended 31 March 2005and 2006 as the impact of share options on the basic earnings per share isantidilutive. 4. Taxation The taxation charge is made up as follows: Six months ended 31 March Year ended 2006 2005 30 September 2005 £million £million £million Current taxation: 0.9 (8.9) 18.2 Deferred taxation (12.3) 2.7 5.4------------------- --------- --------- ---------Total taxation (credit)/charge (11.4) (6.2) 23.6=================== ========= ========= ========= Effective tax rate 28.2% 28.5% 28.6% Tax on items charged to equity comprises: Six months ended 31 March Year ended 2006 2005 30 September 2005 £million £million £million Deferred tax credit on stock options 1.3 3.3 8.0Deferred tax credit on fair valuemovements of cashflow hedges 1.4 - - The effective tax rate in the six months ended 31 March 2006 is different fromthe standard rate of tax principally due to overseas profits having been taxedat lower effective tax rates in those countries. Due to the loss making positionof the Group, a tax credit has been recognised, as these losses are expected tobe more than matched by profits in the second half of the year ending 30September 2006. 5. Dividends No dividends have been paid or proposed in the period ended 31 March 2006 orduring the comparative accounting periods. 6. Reconciliation of net (loss) / profit to net cash inflow from operatingactivities Six months ended 31 March Year ended 2006 2005 30 September 2005 £million £million £million Net (loss) / profit (28.9) (15.4) 59.0 Adjustments for:Tax (credit) / charge (11.4) (6.2) 23.6Depreciation charge 10.4 8.4 15.8(Profit) / loss on disposal ofproperty, plant and equipment (0.9) 0.3 2.4Amortisation of intangibles 0.4 0.4 0.8Share based payments charge 2.3 1.6 2.0Interest income (15.6) (12.0) (27.2)Interest expense 8.9 2.1 8.2Financial instruments - time value 0.9 - -Share of results of joint venturesafter taxation (0.1) (0.1) (0.1)Foreign exchange 1.1 (0.8) 5.3 Changes in working capital:(Increase)/decrease in trade andother receivables (33.0) 23.5 21.1Increase in payables 147.9 115.7 43.3Increase in provisions 0.2 17.5 27.2Decrease in other non-current assets 3.5 4.2 12.2Decrease in financial instruments 0.3 - -Increase in other non-currentliabilities 4.6 15.8 27.4------------------- --------- --------- ---------Cash generated from operations 90.6 155.0 221.0=================== ========= ========= ========= 7. Consolidated reconciliation of movements in shareholders' equity Share capital Share premium Other reserves Retained Total earnings £million £million £million £million £million At 30September 2005 100.1 557.2 0.1 206.0 863.4Adoption ofIAS 32 and IAS39 (note 2) - - 10.8 2.5 13.3 ----------------- ------- ------- ------- ------- -------At 1 October2005 100.1 557.2 10.9 208.5 876.7 Loss for theperiod - - - (28.9) (28.9)Cashflow hedgesFair valuegains inperiod, net ofdeferred tax - - (3.3) - (3.3)Transfers tonet profit,net of tax - - (2.0) - (2.0)Translationdifferences onforeigncurrency netinvestments - - (0.1) - (0.1)Share optionsProceeds fromshares issued 1.5 22.0 - - 23.5Value ofemployeeservices - - 3.5 3.5Movement inshares held bytrustees - - - (0.1) (0.1)Movement inreserves foroptionsexercised - - - (12.7) (12.7)---------------- ------- ------- ------- ------- -------At 31 March2006 101.6 579.2 5.5 170.3 856.6================ ======= ======= ======= ======= ======= 8. Contingent liabilities The Group is involved in a number of disputes or litigation in the normal courseof business. Whilst the results of such disputes cannot be predicted withcertainty, easyJet believes that the ultimate resolution of these disputes willnot have a material effect on the Group's financial position or results. 9. Effect of the change to IFRS (continued) a) Reconciliation of the income statement for the six months ended 31 March 2005 Adjustments - see note 10 (a)(ii) (b) (c) (d) (e) (f) (g) UK GAAP S'ware Forex Share options G'will Eee bens Tax Assoc IFRS £m Passengerrevenue 513.6 513.6Ancillaryrevenue 39.7 39.7-------------- ----- ----- ----- ----- ----- ----- ----- ----- -----Group revenue 553.3 553.3 Groundhandlingcharges (62.8) (62.8)Airport charges (105.3) (105.3)Fuel (98.6) (98.6)Navigationcharges (49.9) (49.9)Crew costs (66.6) (66.6)Maintenance (57.9) (57.9)Advertising (18.7) (18.7)Merchant fees& incentivepay (7.5) (7.5)Aircraft andpax insurance (9.6) (9.6)Other costs (39.1) (2.4) (1.6) 0.4 (42.7)-------------- ----- ----- ----- ----- ----- ----- ----- ----- -----EBITDAR 37.3 - (2.4) (1.6) - 0.4 - - 33.7 Depreciation (8.5) 0.4 (0.3) (8.4)Accelerateddepreciationof 737-300aircraft (2.7) 2.7 -Goodwillamortisation (8.8) 8.8 -Amortisationof intangibleassets - (0.4) (0.4)Aircraft drylease costs (58.5) (58.5)-------------- ----- ----- ----- ----- ----- ----- ----- ----- -----Groupoperating loss (41.2) - - (1.6) 8.8 0.4 - - (33.6) Share ofprofit aftertax ofassociate 0.1 0.1 Interestreceivable andother income 12.0 12.0Interestpayable andother charges (2.1) 2.0 (0.1)-------------- ----- ----- ----- ----- ----- ----- ----- ----- -----Net financingincome 9.9 - 2.0 - - - - - 11.9-------------- ----- ----- ----- ----- ----- ----- ----- ----- -----Loss before tax (31.2) - 2.0 (1.6) 8.8 0.4 - - (21.6) Tax 8.9 (2.7) 6.2-------------- ----- ----- ----- ----- ----- ----- ----- ----- -----Retained lossfor the year (22.3) - 2.0 (1.6) 8.8 0.4 (2.7) - (15.4)============== ===== ===== ===== ===== ===== ===== ===== ===== ===== 9. Effect of the change to IFRS (continued) b) Reconciliation of presentation of the Balance sheet as at 31 March 2005 UK GAAP Presentation adjustments - see note 10 UK GAAPUK GAAP £m (i) (ii) (iii) (iv) (v) (vi) £m IFRS presentation G'will S'ware LT Assets Cash Prov'ns Forex 300.8 300.8 GoodwillIntangibleassets 300.8 (300.8) 1.2 1.2 Intangible assetsTangible 335.1 (1.2) 333.9 Property,assets plant and equipment 16.2 16.2 Financial assets - deposits 7.6 7.6 Other long term assetsOtherinvestments 0.3 0.3 Investments accounted for using the equity method----------- ----- ----- ----- ----- ----- ----- ----- ----- -------------Fixed assets 636.2 - - 7.6 16.2 - 660.0 Non-current assets Debtors 174.1 (7.6) 166.5 Trade and other recievablesFinancialassets -deposits 16.2 16.2 Financial assets - depositsCash at bankand in hand 636.9 (32.4) 604.5 Cash and cash equivalents----------- ----- ----- ----- ----- ----- ----- ----- ----- -------------Current 811.0 - - (7.6) (16.2) - 787.2 Current assetsassets Bank loans 10.0 10.0 BorrowingsTrade andother 403.1 403.1 Trade andpayables other payablesCorporation 12.5 12.5 Current taxtax liabilities 8.5 8.5 Provisions----------- ----- ----- ----- ----- ----- ----- ----- ----- -------------Creditors:duewithin one 425.6 - - - - 8.5 434.1 Currentyear liabilities----------- ----- ----- ----- ----- ----- ----- ----- ----- -------------Net currentassets 385.4 - - (7.6) (16.2) (8.5) 353.1 Net current assets Bank loans 118.8 118.8 Borrowings >1 yearAccruals anddeferredincome 63.5 63.5 Other non-current liabilities 51.7 51.7 Provisions 20.2 20.2 Deferred tax liabilities----------- ----- ----- ----- ----- ----- ----- ----- ----- -------------Creditors:due 182.3 - - - - 71.9 254.2 Non-currentafter one liabilitiesyear Provisionsforliabilties 80.4 - - - - (80.4) -andcharges----------- ----- ----- ----- ----- ----- ----- ----- ----- -------------Net assets 758.9 - - - - - 758.9 Net assets=========== ===== ===== ===== ===== ===== ===== ===== ===== ============= Called upshare capital 99.8 99.8 Ordinary sharesShare premiumaccount 554.2 554.2 Share premiumProfit andloss account 104.9 (1.3) 103.6 Retained earnings 1.3 1.3 Other reserves----------- ----- ----- ----- ----- ----- ----- ----- ----- -------------Shareholders'funds - 758.9 - - - - - - 758.9 Shareholders'equity ===== ===== ===== ===== ===== ===== ===== ===== funds - equity=========== ============= 9. Effect of the change to IFRS (continued) c) Reconciliation of impact of adopting IFRS on the Balance sheet as at 31 March2005 UK GAAP IFRS adjustments - see note 10 IFRSUK GAAP £m (b) (c) (d) (e) (f) £m Forex Share options G'will Eee bens Tax Goodwill 300.8 8.8 309.6Intangible assets 1.2 1.2Property, plant andequipment 333.9 (32.2) 301.7Financial assets -deposits 16.2 16.2Other long term 7.6 5.0 12.6assetsInvestments accountedfor using the equitymethod 0.3 0.3-------------------- ----- ----- ----- ----- ----- ----- -----Non-current assets 660.0 (27.2) - 8.8 - - 641.6 46.2 212.7Trade and otherrecievables 166.5 16.2Financial assets -deposits 16.2 604.5Cash and cashequivalents 604.5-------------------- ----- ----- ----- ----- ----- ----- -----Current assets 787.2 46.2 - - - - 833.4 Borrowings 10.0 10.0Trade and otherpayables 403.1 - 403.1Current taxliabilities 12.5 12.5Provisions 8.5 8.5-------------------- ----- ----- ----- ----- ----- ----- -----Current liabilities 434.1 - - - - - 434.1-------------------- ----- ----- ----- ----- ----- ----- -----Net current assets 353.1 46.2 - - - - 399.3 Borrowings >1 year 118.8 118.8Other non-currentliabilities 63.5 63.5Provisions 51.7 51.7Deferred taxliabilities 20.2 3.7 23.9-------------------- ----- ----- ----- ----- ----- ----- -----Non-currentliabilities 254.2 - - - - 3.7 257.9 --------------------- ----- ----- ----- ----- ----- ----- -----Net assets 758.9 19.0 - 8.8 - (3.7) 783.0==================== ===== ===== ===== ===== ===== ===== ===== Ordinary shares 99.8 99.8Share premium 554.2 554.2Retained earnings 103.6 19.0 - 8.8 - (3.7) 127.7Other reserves 1.3 1.3-------------------- ----- ----- ----- ----- ----- ----- -----Shareholders' funds -equity 758.9 19.0 - 8.8 - (3.7) 783.0==================== ===== ===== ===== ===== ===== ===== ===== 10. Explanation of principal changes under IFRS a) Presentation adjustments Note 9 contains reconciliations to assist in understanding the nature and valueof the differences between UK GAAP and IFRS. The financial information is in IFRS format, and reflects a number ofdifferences in presentation between UK GAAP and IFRS as follows; i) The disclosure of goodwill as separate from intangible assets on the balance sheet; ii) The classification of software that is not an integral part of operating hardware as an intangible asset separate from property plant and equipment on the balance sheet, and the classification of the related depreciation as amortisation; iii) The classification of long term assets previously included in current assets; iv) The reclassification of cash on deposit with a maturity of greater than one year or between three months and one year, previously classified as liquid resources in the cashflow statement, as a long term or current financial asset; v) The reclassification of provisions as current or non-current liabilities; vi) The reclassification of foreign exchange reserves arising on the retranslation of subsidiaries with a functional currency other than Sterling from retained earnings to other reserves; and vii) The format of the income statement is substantially similar to that of the results of operations included in the Operating and Financial Review in the Group's previous UK GAAP financial statements. The Companies Act Schedule 4 format of the Profit and Loss account is no longer required to be used under IFRS and use of this alternative format is more relevant to how the business is managed; b) IAS 21 - The Effects of Changes in Foreign Exchange Rates, and IFRS 1 - First Time Adoption of IFRS Under UK GAAP, certain US Dollar denominated assets and liabilities are treatedas a foreign operation (branch) with the US Dollar as their functional currency.As a result, exchange movements on retranslation of assets and liabilities aretaken to reserves rather than through the income statement. IAS 21 providesadditional criteria to allow the functional currency of a foreign operation tobe determined. Certain aircraft owning companies within the Group have nowceased to be classified as US Dollar branches under IAS 21, and now have aSterling functional currency. On implementing IAS 21, non monetary assets havebeen restated at historic exchange rates, with no translation differencesarising subsequent to their purchase. Exchange differences on retranslation ofmonetary items are taken to the income statement. This has resulted in anadditional £0.5 million gain being recognised during the six months ended 31March 2005. The net book value of the Airbus fixed assets was restated to remove the impactof historic foreign exchange differences recognised on retranslation of the USDollar denominated assets into Sterling under UK GAAP. Depreciation has alsobeen restated to take into account the new cost base of the aircraft fixedassets. This resulted in an increase in the net book value of fixed assets of£18.8 million at 31 March 2005. As a result of these changes to the cost ofAirbus aircraft fixed assets, depreciation increased by £0.4 million in the sixmonths ended 31 March 2005. Under the exemptions allowed by IFRS 1, the fair value at 1 October 2004 of theBoeing 737-300 aircraft has been taken as their deemed cost. This has resultedin a one off valuation decrease in property, plant and equipment of £6.5 millionat 31 March 2005, a decrease in accelerated depreciation of £2.7 million and adecrease in depreciation of £0.2 million for the six months ended 31 March 2005,and an increase in the loss on disposal of fixed assets of £0.9 million for thesix months ended 31 March 2005. Certain payments on account made prior to delivery of aircraft are monetaryassets, as the aircraft that will be delivered as a result of these payments areexpected to be sold to lessors and leased back under operating leases on thebasis of commercial arrangements in place. These pre delivery deposits have beenclassified separately on the balance sheet, resulting in a decrease in the bookvalue of fixed assets of £44.3 million at 31 March 2005. Adoption of IAS 21 may cause additional volatility in the income statement dueto changes in foreign exchange rates. This risk will be managed through amixture of drawing down loans in Sterling, holding cash and cash equivalents inUS Dollars and entering into foreign exchange derivative instruments. c) IFRS 2 - Share-based Payment IFRS 2 requires a charge to be made to the income statement for the cost ofproviding share options to employees. The expense is calculated as the fairvalue of the award on the date of grant, and is recognised over the vestingperiod of the scheme. A binomial model has been used to calculate the fair valueof options on their grant date. easyJet has applied the provisions of IFRS 2only to awards made after 7 November 2002, an exemption allowed on transition byIFRS 1. There was no net impact on the balance sheet at 1 October 2004 as aresult of adopting IFRS 2. In the six months ended 31 March 2005, the application of IFRS 2 results in apre tax charge to the income statement of £0.4 million. d) IFRS 3 - Business Combinations Under UK GAAP, goodwill arising on business combinations is amortised over aperiod not exceeding 20 years. Under IFRS 3, regular amortisation of goodwill isprohibited. Instead, an annual impairment test is required to support thecarrying value of goodwill. Amortisation of goodwill arising on the purchase of TEA Basel AG (now easyJetSwitzerland) and Newgo 1 Limited, the parent company of Go Fly ceased on 1October 2004, resulting in an increase of pre tax profits of £8.8 million in thesix months ended 31 March 2005. e) IAS 19 - Employee Benefits Under UK GAAP, no provision is made for annual leave accrued. Under IAS 19, theexpected cost of compensated short term absences should be recognised at thetime the related service is provided. As a result, on transition, a provision of£0.4 million was recognised. A £nil provision is required at 31 March 2005,therefore there was a £0.4 million benefit in the six months ended 31 March2005. f) IAS 12 - Income taxes Under UK GAAP, deferred tax was provided on timing differences that hadoriginated, but had not reversed, before the balance sheet date. Under IAS 12,deferred tax is provided on temporary differences based upon the future recoveryor settlement of assets and liabilities recognised in the balance sheet. As a result of other accounting policy changes resulting from the implementationof IFRS, and the implementation of IAS 12, a total additional deferred taxliability of £3.7 million has been provided at 31 March 2005, and the tax creditunder IFRS has been reduced by £2.7 million in the six months ended 31 March2005 by comparison to UK GAAP. These changes are a result of the followingitems: • No deferred tax on share options was recognised on transition as themarket value of an easyJet share on 30 September 2004 was £1.27, less than theexercise price of all the options which were issued after 7 November 2002 andwhich are accounted for under IFRS 2. A deferred tax asset of £0.3 million hasbeen recognised on transition in respect of share options issued prior to 7November 2002. At 31 March 2005, a deferred tax asset of £3.3 million wasrecognised on all options. This caused a £3.3 million increase in equity. Theincrease in the deferred tax asset partly reflects the increase in the shareprice at 31 March 2005 to £2.16, above the exercise price for the majority ofthe options in issue on that date; and • Other adjustments as a result of changes in asset bases and changes inaccounting policies resulted in the recognition of an additional deferred taxliability at 31 March 2005 of £7.0 million and a reduction in the tax credit of£2.7 million. g) IAS 28 - Investments in Associates Associated undertakings are equity accounted for under both IAS 28 and UK GAAP.The only difference between the treatment of associates under IFRS compared toUK GAAP is the disclosures in the income statement. easyJet's share of the posttax profits of its associate are shown on a single line in the income statementunder IFRS, whereas under UK GAAP easyJet's share of the pre tax profits of itsassociate were separately disclosed, with associate's the tax charge included inthe Group's tax charge. This has no impact on the result for the six monthsended 31 March 2005. Independent review report to easyJet plc Introduction We have been instructed by the company to review the financial information forthe six months ended 31 March 2006 which comprises consolidated incomestatement, consolidated balance sheet, consolidated statement of cash flows,consolidated statement of recognised income and expense and related notes. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the Directors. The Directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of the Group willbe prepared in accordance with International Financial Reporting Standards asadopted by the European Union. This interim report has been prepared inaccordance with the basis set out in note 1. The accounting policies are consistent with those that the Directors intend touse in the next annual financial statements. As explained in note 1, there is,however, a possibility that the Directors may determine that some changes arenecessary when preparing the full annual financial statements for the first timein accordance with International Financial Reporting Standards as adopted by theEuropean Union. The IFRS standards and IFRIC interpretations that will beapplicable and adopted by the European Union at 30 September 2006 are not knownwith certainty at the time of preparing this interim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 March 2006. PricewaterhouseCoopers LLPSt Albans2 May 2006 Notes: (a) The maintenance and integrity of the easyJet web site is the responsibilityof the Directors; the work carried out by the auditors does not involveconsideration of these matters and, accordingly, the auditors accept noresponsibility for any changes that may have occurred to the interim reportsince it was initially presented on the web site. (b) Legislation in the United Kingdom governing the preparation anddissemination of financial information may differ from legislation in otherjurisdictions. 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