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Treasury profile: how Ryanair does it Back  
The underlying principles that determine how Ryanair’s treasury carries out its functions are the risk-averse nature of the Ryanair Group and the fact that the department is a cost centre and not a profit centre writes Neil Sorahan (pictured right). Treasury activities and risks are managed so that their potential impact does not adversely affect Ryanair’s financial objectives of increasing EBITDA, maintaining margins and reducing costs.
RRyanair adopted its current business strategy in the early 1990s when a new management team, including the current chief executive, commenced the restructuring of Ryanair’s operations to become a low-fares airline based on the low cost operating model pioneered by Southwest Airlines Co. in the United States. This was followed by an IPO in 1997, with the airline being floated on the Dublin and New York (NASDAQ) stock exchanges.

Today Ryanair, which has the lowest fares and lowest costs of any airline in Europe, has achieved 15 years of continuous growth at high margins, enjoys a market cap in excess of E5 billion, employs more than 2,200 people and anticipates carrying somewhere in excess of 23 million passengers during the year to 31 March 2004 on its 135 routes. Of these routes, 50 were launched in financial year ended March 2003. In 2003, Ryanair increased its order with Boeing to take delivery of 125 Boeing 737-800 aircraft over the next eight years with an option to buy a further 125 aircraft during that period . Ryanair also completed its first airline acquisition in April 2003 when it acquired Buzz, a subsidiary of KLM. Following a restructure, 12 Buzz routes were successfully re-launched in May 2003.

Ryanair group treasury
During this period of rapid growth, Ryanair Group Treasury (Treasury) has evolved with the business. Based in corporate head office at Dublin Airport this highly centralised department is responsible for the following key functions:
• Cash management & monitoring the investment of the Group’s major cash balances
• Financing the Group’s ongoing funding requirements
• Monitoring and managing the Group’s extensive foreign exchange, interest rate and commodity exposures

Ryanair Treasury is split into a front, middle and back office. The Audit Committee of the Board of Directors has overall responsibility to ensure that management has effectively fulfilled its responsibilities and is managing the treasury function in accordance with the Group’s treasury policies and procedures. All such policies and procedures are agreed with the Audit Committee on a regular basis.

Treasury’s mission and primary objective is to manage treasury activities and risks in a manner that is supportive of corporate business and financial objectives. In particular, treasury activities and risks are managed so that their potential impact does not adversely affect Ryanair’s financial objectives of increasing EBITDA, maintaining margins and reducing costs.

The underlying principles that determine how Treasury carries out its functions are the risk-averse nature of the Ryanair Group and the fact that the department is a cost centre and not a profit centre. The Group has a strict policy that no speculative trading in financial instruments shall take place.

Cash management
Due to increased profitability and strong cash flow generation over the past number of years, Ryanair has in excess of €1.1 billion cash on its balance sheet and a net cash position of €168 million at quarter ended 30th September, 2003.

The primary objectives of cash management in Ryanair are i) to ensure that strong cash controls are in place over all cash balances; ii) ensure that the Group has access to sufficient liquidity to enable it to meet its obligations as and when they fall due and to provide adequately for contingencies; and iii) achieve a strong return on liquid investments, subject to acceptable credit risk and liquidity constraints. Security of capital is achieved by only dealing with counterparties of an acceptable credit quality and in instruments where the risk to capital is minimised.

An overriding concern for the Ryanair Treasury team is that all cash management systems must have the highest level of internal controls to ensure the safety of all funds invested. Dividing the department into a front, middle and back-office with clear division of duties has helped achieve this goal.

Corporate and investment funding needs arise primarily from the purchase of new aircraft. The most recent transaction, announced in January of 2003, was an agreement by Ryanair with The Boeing Company to purchase 125 Boeing 737-800 aircraft with an option to buy up to a further 125 aircraft to be delivered over the next eight years. Treasury is responsible for ensuring that there are adequate facilities available to fund this capital expenditure programme.

The Group has financed the purchase of its last 41 aircraft with long-dated amortising bank debt, guaranteed by the Export Import Bank of the United States of America (EXIM). This source of financing has enabled the Group to finance its aircraft at very competitive low cost pricing. Treasury is continuously assessing alternative, low cost, sources of finance.

Foreign exchange, interest rate & fuel risk management

Managing exposures and minimising risk is a core function of Treasury. Foreign exchange, interest rate and fuel cost fluctuations are the primary risks arising from the Group’s financial operations. As such they are managed tightly and in accordance with the Group’s risk minimisation policy.
Ryanair has a euro denominated balance sheet and profit & loss account. However a large proportion of its costs are US dollar denominated - namely jet fuel, maintenance costs, insurance and aircraft. In addition a significant portion of the Group’s revenues is in sterling pounds. Where possible, foreign exchange risk is reduced by holding significant assets/liabilities in euro; matching foreign currency income and expenditures with each other; and using financial instruments to hedge a high percentage of the remaining exposures on a twelve-month rolling basis.

The key target for Treasury in relation to interest rate risks is to reduce risks as far as possible, to secure the interest cost on long-term residual interest rate exposures over time and to achieve an acceptable return on long term investment of surplus cash (subject to credit risk and liquidity constraints). In line with the Group’s risk-averse nature and preference for certainty, Ryanair has traditionally favoured a high level of fixed rate debt. More recently however, in recognition of the fact that the Group has in excess of €1.1 billion floating rate cash, it has taken on floating rate debt that can be matched with floating rate cash to provide a natural interest rate hedge.

Finally, jet fuel costs are Ryanair’s single largest operating expense. The Group’s fuel risk policy is to hedge between 70 per cent and 90 per cent of its forecast rolling annual volumes required to ensure that the future cost per gallon is locked in. This policy has been adopted to prevent exposures, in the short-term, to adverse movements in world jet fuel prices and has served the Group well over the past number of years.

There is an ancient Chinese curse which says, ‘May you live in interesting times’. Like it or not we do live in interesting and challenging times. As such it is important that an organisation such as Ryanair eliminate as much uncertainty and risk as possible from its decision making process so that it can manage the business that it knows best - namely a low cost/ no frills airline. Treasury endeavours to facilitate this through the implementation of its various treasury polices and the strict adherence to best practice and controls in its day-to-day activities.

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