A n n u a l r e p o r t a n d a c c o u n t s 2 0 1 6 INVESTING IN OUR STRENGTHS ANNUAL REPORT AND ACCOUNTS 2016 2016 has been a year of uncertainty. The aviation industry in particular has faced many challenges: low oil prices and interest rates; the continuing impact of terrorism; the decision for the UK to exit the European Union; and increased market capacity sustained by a low fuel price, have all contributed significantly to the position of our business today. However, in these unpredictable times easyJet has continued to pursue its strategy for disciplined growth and long-term shareholder value. This year we have made considerable investments in our business. We have further strengthened the network, continued to invest in projects to deliver customer benefits and cost savings and reinforced the balance sheet. This will enable us to target long-term earnings growth and drive long-term value to our shareholders. STRATEGIC REPORT easyJet at a glance Our business model Chairman’s letter Chief Executive’s review Overview Our market context Our strategy Outlook Key performance indicators Financial review Going concern Viability statement Key statistics Risk Corporate responsibility GOVERNANCE Chairman’s statement on corporate governance Board of Directors Executive Management Team Corporate governance report Directors’ remuneration report Directors’ report Statement of Directors’ responsibilities Independent auditors’ report to the members of easyJet plc ACCOUNTS Consolidated accounts Notes to the accounts Company accounts Notes to the Company accounts OTHER INFORMATION Five-year summary Glossary 2 4 6 7 7 8 9 15 16 18 22 22 23 24 32 43 44 46 48 60 76 79 80 86 91 114 117 119 120 VISIT OUR WEBSITE FOR OTHER INVESTOR INFORMATION http://corporate.easyJet.com/investors OUR STRENGTHS INVESTMENT CASE Unparalleled network We have an increasing presence in the right markets, and with frequencies and slots at slot- constrained primary airports that deliver choice and flexibility to our customers. 97.6% PERCENTAGE OF EASYJET CAPACITY THAT TOUCHES A NUMBER ONE OR NUMBER TWO AIRPORT(3) 803ROUTES OPERATED(1) 132AIRPORTS IN 31 COUNTRIES (1) As at 30 September 2016. Well-known brand We are respected for delivering a safe, reliable and great value service to top destinations across Europe and beyond. Low-cost model We are driven by our strong focus on cost savings, with a commitment to maintaining easyJet’s structural cost advantage against the legacy and charter operators who are its major competitors in its markets. BRAND IN THE UK, FRANCE AND SWITZERLAND(2) Number 1 or 2 74%OF OUR CUSTOMERS ARE 91.6% RETURNING CUSTOMERS(3) LOAD FACTOR(3) COST PER SEAT DECREASE 4.6% YEAR-ON-YEAR AT CONSTANT CURRENCY Flat TARGET FOR COST PER SEAT EXCLUDING FUEL(4) 167AVERAGE NUMBER OF SEATS PER PLANE(1) (2) Based on data received for brand awareness for the 2016 financial year from the Millward Brown Brand tracker. (3) In the year ending 30 September 2016. (4) At constant currency, performance from 2015 financial year compared to 2019 financial year at normal levels of disruption. Low-cost model We are driven by our strong focus on cost savings, with a commitment to maintaining easyJet’s structural cost advantage against the legacy and charter operators who are its major competitors in its markets. COST PER SEAT DECREASE 4.6% YEAR-ON-YEAR AT CONSTANT CURRENCY Flat TARGET FOR COST PER SEAT EXCLUDING FUEL(4) 167AVERAGE NUMBER OF SEATS PER PLANE(1) Strong balance sheet Driving revenue growth Disciplined use of capital We maintain a strong balance sheet to facilitate our low funding costs, operational flexibility and to provide insulation from external shocks. We have a clear focus on building strong relationships with customers to create more sustainable, long-term revenues leveraging quality, innovation and digital. We have a clear capital structure framework and a strategy intended to maximise shareholder returns. LIQUIDITY PER 100 SEATS OF(1) £3.2m 18.3M APP DOWNLOADS TO 30 SEPTEMBER 2016 NET CASH OF(1) £213m 73.1M 156UNENCUMBERED AIRCRAFT(1) INTRODUCTION OF PASSENGERS(3) 50%DIVIDEND PAYOUT RATIO 237% TOTAL SHAREHOLDER RETURN OVER FIVE YEARS TO 30 SEPTEMBER 2016 INVESTING IN OUR STRENGTHS UNPARALLELED NETWORK DISCIPLINED USE OF CAPITAL LOW‑COST MODEL WELL‑KNOWN BRAND DRIVING REVENUE GROWTH STRONG BALANCE SHEET UNDERPINNED BY OUR PEOPLE www.easyJet.com 1 Strengthening our network ICELAND SWEDEN ESTONIA UK M A R K D E N D S N E T H E R L A N BELGIUM GERMANY FRANCE SWITZERLAND AUSTRIA POLAND CZECH REPUBLIC HUNGARY SLOVENIA CROATIA SERBIA O R G E N T E N O M K O S O V O GREECE POR TUGAL SPAIN ITALY BULGARIA PONTA DELGADA MOROCCO www.easyJet.com/EN/routemap to see our entire network 803 routes AT 30 SEPTEMBER 2016 BASES NETWORK AIRPORTS COUNTRIES WITH BASES DESTINATION COUNTRIES 2 TURKEY I S R A E L EGYPT easyJet at a glanceWHAT WE DOLow-cost European point-to-point airline.We use our cost advantage and number one and number two network positions in strong markets to deliver low fares and operational efficiency on point-to-point routes, with our people making the difference by offering friendly service for our customers.WHERE WE DO ITIntra-European short-haul network.Our network is focused on primary airports serving high GDP catchment areas.easyJet plc Annual report and accounts 2016 ICELAND SWEDEN ESTONIA UK M A R K D E N OVER 30NEW ROUTES ON SALE FOR WINTER 2016 WITH MORE NEW ROUTES ANTICIPATED FOR SUMMER 2017 D S N E T H E R L A N BELGIUM GERMANY POLAND CZECH REPUBLIC FRANCE SWITZERLAND AUSTRIA HUNGARY SLOVENIA CROATIA POR TUGAL SPAIN ITALY BULGARIA SERBIA O R G E K O S O V O N T E N O M GREECE TURKEY PONTA DELGADA MOROCCO BASES NETWORK AIRPORTS COUNTRIES WITH BASES DESTINATION COUNTRIES 132AIRPORTS IN 31 DIFFERENT COUNTRIES I S R A E L EGYPT 3 www.easyJet.comStrategic reportGovernanceAccounts An efficient low‑cost model to drive above‑market returns KEY RESOURCES The success of our business depends on a number of key resources: Market cap of £4b 257 aircraft Over 10,000 people 18.3m app downloads over 73.1m passengers OUR VALUES SAFETY UNDERPINS EVERYTHING WE DO (1) Based on a share price of £10.07 at 30 September 2016. 4 Our business modelOur sustainable business model makes travel easy and affordable and drives growth and returns for shareholders.Capital easyJet has a strong capital base, with market capitalisation of £4 billion(1) and a net cash position of £213 million at 30 September 2016. easyJet’s credit ratings are amongst the strongest in the world for an airline.Aircraft easyJet operates a modern Airbus fleet, using the A320 family of aircraft, and is up-gauging its fleet to 186 seat cabins and the new fuel efficient A320neo aircraft. This provides customer, operating and maintenance benefits to the Group.SafetyWe never compromise on safetySimplicityWe cut out the things that don’t matter to keep us lean and make it easyOne teamTogether we’ll always find a wayPeople easyJet has a dedicated workforce of over 10,000 people, including 2,865 pilots and 6,516 cabin crew members as at 30 September 2016.Stakeholders easyJet interacts with a number of stakeholders in its operations, such as customers, suppliers, (including infrastructure owners and operators e.g. airports, air traffic control), regulators and national governments.Technology and insighteasyJet leverages its customer relationship management capabilities, driving revenue by increasing customer loyalty and implementing its wider digital strategy. Our increasingly sophisticated use of data will enable us to continue to make travel easy and affordable in the longer term.easyJet plc Annual report and accounts 2016 HOW WE DO IT We build on our business through our strategic pillars: OUTCOMES Turn to page: 9 for more details on Strategy http://corporate.easyJet.com to read more about our values Turn to page: 16 for more details on KPIs SAFETY UNDERPINS EVERYTHING WE DO 5 Build strong number one and two network positionsWe fly from the main airports in attractive catchment areas. We are increasing our presence in the right markets, with frequencies and slots at primary airports that deliver choice and flexibility.A lean cost advantageeasyJet is committed to maintaining its structural cost advantage against the legacy and charter operators. We have low overhead costs, use our aircraft efficiently and have a lean approach to all areas of the business. Customer and operational excellencePeople are attracted to the well-known easyJet brand and high-quality service offering. We make it easy to buy our low fares through our website and digital platforms, which have on average over one million visits every day. Grow revenue We have a clear focus on building strong relationships with customers to create more sustainable, long-term revenues leveraging quality, innovation and digital. easyJet is looking to develop new revenue streams, leveraging its network, cost focus and track record of innovation.Data and digitaleasyJet's award-winning digital platform continues to be a major enabler of revenue and customer satisfaction. easyJet’s app has been downloaded 18.3 million times at 30 September 2016 and as it becomes more established it is driving increasing contribution to revenue.The best peopleIt is our people who continue to deliver the strategy for the business and will drive future success. Internally, we continue to focus on recruiting the right people, helping them to understand our values and their role, and then giving them the tools to develop a high-performance culture. IntegrityWe stand by our word and do what we sayPassionWe have a passion for our customers, our people and the work we doPioneeringWe challenge to find new ways to make travel easy and affordableCustomer satisfaction 72%Operational excellence 77%On‑time performanceGenerating high returns for our shareholders50%dividend payout ratioEmployee engagement76%www.easyJet.comStrategic reportGovernanceAccounts Chairman’s letter Driving stakeholder returns now accepted an executive role in the business as our Chief Operating Officer, in which I believe she will make a major contribution in developing that part of the business. Shareholder returns In May, the Board increased the dividend payout ratio to 50%. This is a further demonstration of its confidence in the future of the business. Since starting to pay a dividend in 2011, easyJet has steadily increased the ratio. In total easyJet has returned more than £1 billion in dividends to shareholders since 2011 and the Board is pleased to recommend a dividend for the year of 53.8 pence per share. Looking ahead Looking ahead to 2017, easyJet expects the European short-haul aviation market to continue to grow. However, with continuing uncertainty in the economic and political outlook, we will remain vigilant with regards to changes in demand and market behaviour. In the meantime, easyJet is investing in initiatives that will drive efficiency and innovation to support long-term revenue growth and mitigate the effect of factors that are outside of the airline’s control, such as disruption and the impact of foreign exchange rate changes on demand and on the cost base. We firmly believe that our business model, cost position and strong balance sheet mean that our strategy is the right one to deliver sustainable long-term value for shareholders. JOHN BARTON Non‑Executive Chairman Financial performance easyJet has delivered a resilient financial performance this year, despite a number of events that have disproportionately affected easyJet when compared with other airlines. easyJet grew its passenger numbers to a new high of 73.1 million, showing continued strong demand for its services. This record level of flying generated slightly reduced revenues of £4,669 million in 2016, as passengers benefitted from low fares, with a reinforced programme of cost controls, that delivered savings ahead of target of £95 million. easyJet's profit before tax was £495 million. Strategy easyJet's strategy is founded on leadership positions at many of Europe's foremost airports, providing the frequency and wide range of convenient destinations demanded by customers combined with a relentless focus on cost control which allows us to offer excellent value fares, making travel easy and affordable. Despite challenging market conditions characterised by multiple terrorist actions, industrial strikes, geopolitical instability and currency movements as well as excess market capacity, easyJet’s lean business model and effective strategy continue to identify opportunities for highly targeted and profitable growth, which will deliver long-term value to shareholders. EU referendum easyJet remains committed to the UK and has taken steps to secure the future of the business following the outcome of the EU referendum. We are in the process of selecting a preferred country in which to obtain an EU-based Air Operator Certificate (AOC), securing flying rights in Europe. easyJet will continue to work closely with the UK Government and the EU to maintain a liberal aviation market in Europe. People easyJet’s focus on its culture and people, its "Orange spirit", is a key contributor to easyJet’s success. In a very difficult year it has been this spirit of commitment to passengers, particularly by front-line staff, that has ensured easyJet remains amongst the strongest airlines in Europe. During the year Chris Browne joined as a Non-Executive Director and, with a strong background in aviation, has made a significant contribution to board discussions. I am pleased that she has JOHN BARTON Chairman easyJet has delivered a resilient financial performance this year, with record passenger numbers showing continued strong demand for its services. We are investing for the future in order to deliver sustainable long-term value for shareholders. 50% DIVIDEND PAYOUT RATIO 73.1m RECORD PASSENGER NUMBERS IN THE YEAR ENDING 30 SEPTEMBER 2016 6 easyJet plc Annual report and accounts 2016 Chief Executive’s review Investing in our strengths CAROLYN MCCALL DBE Chief Executive We remain focused on our network advantage, digital leadership and offering our customers great low fares and high- quality service. £495m PROFIT BEFORE TAX (2015: £686M) 2.0% TOTAL COST PER SEAT IMPROVEMENT FROM THE 2015 FINANCIAL YEAR OVERVIEW easyJet has delivered a resilient performance in the 2016 financial year, in the midst of a challenging environment. Over four million more passengers flew with easyJet during the year reaching 73.1 million, and the Company achieved another year of record load factor at 91.6%. This reflects easyJet’s successful strategy of defending and maintaining market- leading positions in high-traffic, slot- constrained airports. Medium-term fundamentals across Europe remain robust with continued GDP growth supporting spending in all our major markets. Although low fuel prices continue to encourage increased capacity which impacts yields, easyJet has performed strongly in a highly competitive market by focusing on building number one positions in selected markets and strong cost control. The Company’s business model and strategy leave it well positioned to be a structural winner within its chosen markets in the overall European short-haul market. Strong passenger growth and resilient revenue performance: • Record number of passengers at 73.1 million, increasing by 4.5 million (6.6%) during the year. Load factor also increased to a record level of 91.6%, an increase of 0.1 ppts from last year, reflecting the attractiveness of easyJet’s network of destinations and frequencies at affordable prices. • Capacity increased by 6.5%, with growth focused on strengthening easyJet’s leading network of number one positions at Europe’s primary airports. • Total revenue declined by 0.4% to £4,669 million (2015: £4,686 million). Revenue per seat decreased by 6.4% to £58.46 due to: – increased market capacity and aggressive pricing stimulated by a sustained low fuel price; – cooling of demand and reduced consumer confidence following multiple terrorism-related incidents; – higher holiday costs for UK travellers following the EU referendum and subsequent weakening of sterling; and – severe disruption during the year (due to strikes, severe weather, airport issues) which resulted in 8,349 flights (2015: 6,789) being either cancelled, delayed over three hours or diverted. • Total impact of external events(1) during the year on profit before tax of an estimated £150 million. • Non-seat revenue growth of 17% due primarily to tailoring our on-board product range, reflecting increasing knowledge about our customers. Taking control on costs: • Total cost per seat improved by 2.0%, decreasing to £52.26. Total cost per seat at constant currency(2) improved by 4.6%, primarily driven by fuel price savings. Total cost per seat excluding fuel increased by 2.6% due to the impact of foreign exchange and at constant currency improved by 1.1%, slightly ahead of target. • Our reinvigorated lean cost programme delivered savings of £95 million, in airport, ground handling and maintenance costs, as well as supplier management improvements, overhead reductions and benefits realised from lean basing. • This partially offset increasing costs of disruption and underlying airport and ground handling cost inflation. • Foreign exchange cost headwinds of £112 million. • Pre-tax profit margin decreased by four percentage points to 10.6% (profit before tax of £495 million in the 2016 financial year versus £686 million in the 2015 financial year) mainly due to the decline in revenue and foreign exchange impact. • easyJet continues to target flat cost per seat excluding fuel at constant currency for the 2019 financial year versus the 2015 financial year at normal levels of disruption. (1) Includes terrorist related events (Paris, Egypt, Brussels, Nice and Turkey) and the immediate impact of the EU referendum outcome. (2) Constant currency is calculated by comparing the 2016 financial year performance translated at the 2015 financial year effective exchange rate to the 2015 financial year reported performance, excluding foreign exchange gains and losses on balance sheet revaluations. 7 www.easyJet.comStrategic reportGovernanceAccounts Chief Executive’s review continued Our market context easyJet operates in the European short-haul aviation market. The following trends are key drivers in that market TREND Macro Economic trends are currently favourable, with GDP growth in all our main markets. GDP growth is generally accepted as having a positive multiplier effect on air passenger traffic. +2.3% UK GDP growth year-on-year in the three months to September 2016 Capacity The total European short-haul market(4) grew by 6% year-on-year and by 8% on easyJet’s markets, driven primarily by a continued low fuel price. 6% market capacity growth in 2016 Fuel Continued low fuel prices are sustaining market capacity growth and weaker airlines. Average jet fuel price $ per MT $415 $606 2016 2015 2014 2013 $969 $996 Foreign exchange easyJet is exposed to foreign exchange rate movements, principally in the Euro and US dollar, which it hedges to mitigate volatility. GBP:EUR EXCHANGE RATE GBP:USD EXCHANGE RATE 1.28 FY2016 1.58 FY2016 Sector-leading balance sheet and dividend policy: • Raised €500 million bond in February and secured a sector-leading credit rating (Standard and Poor's: BBB+, Moody's: Baa1). In October 2016 a further €500 million bond has been issued on improved, industry-leading terms. • Cash and money market deposits at 30 September 2016 of £969 million (2015: £939 million). • Return on capital employed(3) at 14.6%, significantly above easyJet's cost of capital. • Dividend payout ratio increased to 50% of profit after tax delivering a proposed ordinary dividend per share of 53.8 pence (2015: 55.2 pence). MARKET ENVIRONMENT easyJet operates in the European short-haul aviation market, with a focused business model that has enabled it consistently to generate higher levels of profitability compared to legacy carriers, its main competitors. The overall short-haul market has grown by 25% over the last 10 years and its fundamentals remain strong. During this period, low-cost carriers have taken significant market share, with legacy carriers cutting mainline capacity and transferring capacity from flag airlines to lower cost subsidiaries in order to improve their competitiveness. In this environment, easyJet has grown to hold an estimated 8% of the European short-haul market. As competitors continue to struggle to restructure their high cost bases or operate with inadequate financial resources, easyJet is well positioned to continue selectively to strengthen its market positions. easyJet is focused primarily in Western and Northern Europe, where it flies to a network of primary airports and routes that tap into affluent markets with populations that have a high propensity to travel. Economic trends remain broadly favourable, with GDP growth expected in all our main markets. Developments this year The total European short-haul market(4) grew by 6% year-on-year in the year ending 30 September 2016 and by 8% in easyJet’s markets, driven primarily by a continued low fuel price. easyJet grew capacity by 7% during the period, with growth of 8% in the first half and of 6% in the second half. In the same period, easyJet’s competitors increased capacity by 8% in its markets, with particularly strong growth in Spain and Germany. (3) Return on capital employed shown adjusted for leases with leases capitalised at 7 times. (4) Capacity and market share figures from OAG. Size of European market based on internal easyJet definition. Historical data based on 12 month period from October 2015 to September 2016. 8 easyJet plc Annual report and accounts 2016 Our strategy easyJet is confident that through its strategy it will deliver sustainable growth and returns for shareholders 1 BUILD STRONG NUMBER ONE AND TWO NETWORK POSITIONS 2 A LEAN COST ADVANTAGE SAFETY 6 THE BEST PEOPLE SAFETY S A F E T Y S A F E T Y Driving growth and returns for our shareholders 3 CUSTOMER AND OPERATIONAL EXCELLENCE SAFETY 5 GROW REVENUE SAFETY 4 DATA AND DIGITAL OUR STRATEGY easyJet focuses on developing strong positions in Europe’s leading airports – flying between airports people want to travel to with optimised frequency. Its principal competitors at these leading airports are the legacy airlines and charter carriers. easyJet’s structural cost advantage relative to these airlines allows it to offer customers more affordable fares. This cost advantage is created through a combination of factors including: • aircraft configuration enabling a higher number of seats per aircraft; • higher load factor and aircraft utilisation driven by its 1. Build strong number one and two network positions easyJet’s strategy is focused on key airports, serving valuable catchment areas that represent Europe’s top markets by GDP, driving both leisure and business travel. easyJet has developed a more economically resilient network than its competitors, helping to support consumer demand throughout the cycle. These are strong, existing markets, built up over a period of time by legacy carriers. easyJet's portfolio of peak time slots at airports, where either total slot availability or availability at customer-friendly times is constrained, further reinforces its competitive advantage. easyJet currently holds 16 number one market positions and has identified a number of potential targets for the next five years where GDP is high, there are high passenger volumes and where there is no clear winner today. We have the opportunity to both capture further market share and to grow the overall market. Driven by strong underlying demand, an attractive customer proposition and a structural advantage, we will continue to invest up to 9% annual capacity increases in growing its network to drive the highest returns in the long-term. In 2016 we have refined our network strategy to ensure a greater focus on: • Achieving number one positions both at primary airports and on our routes: – On average, a number one airport and route position delivers over 50% greater contribution than a number two position on both. – 83% of easyJet's capacity touches an airport where it has the number one position by share. • Investing in scale: – Leading positions, route frequencies and multiple destinations create flexibility for customers, as well as reinforcing the easyJet brand to ensure that it is ‘top of mind’. • Investing with purpose: – easyJet has a track record of generating returns from purposeful investments. 54% of the top 25% of routes by contribution were not in the top 25% in 2012. point-to-point model; and To build on this, easyJet has a clear network strategy to: • younger fleet and advantaged fleet deal reducing ownership and maintenance costs. easyJet is confident that its strategy of building on its competitive advantages - an unparalleled network and market positions, efficient low-cost model, well-known brand and strong balance sheet - will position it to deliver sustainable and disciplined growth and returns for shareholders. easyJet is delivering its strategy through its six strategic pillars: 1. Build strong number one and two network positions 2. A lean cost advantage 3. Customer and operational excellence 4. Data and digital 5. Grow revenue 6. The best people • protect its number one positions in the UK and Switzerland; • • • secure a significantly stronger position in France; invest in lean bases to drive more efficient capacity growth across the network; and target specific market opportunities, such as city-based strategies in Germany, Italy and the Netherlands. easyJet regularly reviews its route network in order to maximise returns and exploit demand opportunities in the market. During the year easyJet added 106 routes to the network, slightly more than last year. These were focused on bases which supported the consolidation of its leading positions, including the UK, Switzerland and Italy; growing its share of the overall market in France (Paris Charles de Gaulle, Lyon, Toulouse); or allocated to new bases such as Amsterdam, Venice and Oporto. In February we opened a new base in Barcelona and in April announced a plan to open a seasonal base in Palma de Mallorca for summer 2017. Along with Oporto and Lisbon these latter two form a 9 www.easyJet.comStrategic reportGovernanceAccounts Chief Executive’s review continued core part of easyJet's lean basing strategy. Reflecting our discipline, it also discontinued 38 routes which either did not meet expected return criteria, or became secondary to a more attractive route elsewhere. Over time, increased route maturity and frequencies have contributed to increasing profitability and returns. easyJet has continued to establish stronger leadership positions in all of its main markets, to achieve the aim of holding the number one position in each market or a number two position to a weak flag carrier. Progress in easyJet's main markets is as follows: United Kingdom easyJet continues to reinforce its strong position in the UK market, both London-based and regional. We remain the number one carrier by market share at almost all of our UK bases, including its major bases of London Gatwick, London Luton, Bristol, Belfast and Edinburgh. Our positioning, market share and airport bases are driving both leisure and business passengers. easyJet increased capacity by 8% in the year ending 30 September 2016, maintaining market share on the key London to Scotland routes while investing in growth in Luton, Bristol and Manchester. easyJet's competitors increased their capacity on our markets by 9%. ICELAND Italy easyJet's main focus in Italy is on the higher-value catchment areas, reflecting our regional and city-based strategy. easyJet is the biggest operator at Milan Malpensa with 21 based aircraft, has recently opened a new base at Venice (with 4 based aircraft) and added a fourth aircraft to the base in Naples (and is the number one airline at both). During the year we successfully closed Rome Fiumicino, which still remains an important part of the network with an expected two million passengers a year. easyJet increased net capacity in Italy by 1%, after taking into account the closure of the Rome base, against competitor growth on its markets of 8%. France easyJet sees opportunities to grow its market share in France, leveraging its competitive market position against the flag carrier, adding capacity at Charles de Gaulle airport through up-gauging and strengthening its domestic network. easyJet is the number one carrier in Nice and number two after Air France in most of the remaining airports where it operates. We increased capacity in France by 8% in the year, against competitor growth on our markets of 5%. Switzerland easyJet is the number one operator at both Geneva and Basel airports, with the latter also part of the Zurich catchment area. We increased capacity by 7% in the year ending 30 September 2016, building and reinforcing our leading positions at both airports. As the leading airline brand in Geneva and Basel, easyJet’s strategy is to continue to build customer preference in the market. Competitor capacity declined by 1% in easyJet's markets, impacted by easyJet's strong action over the past two years. Germany Germany is a large and attractive market, although with a more regional, federal structure than other European countries. easyJet’s strategy is therefore city-based, not UK 14% 28 8% 20% 140 8% 10% 7 24% 4% 13 5% D S N E T H E R L A N GERMANY FRANCE SWITZERLAND 7% 3 6% 13% 7 17% L A G U T R O P SPAIN 24% 22 7% ITALY 12% 29 1%(5) Market share Based aircraft Capacity increase (5) Net capacity after taking into account the closure of the Rome base. 10 easyJet plc Annual report and accounts 2016 country-wide. easyJet is focused on its two bases at Berlin Schönefeld, where it is the number one airline, and Hamburg, which was opened in 2014. We are targeting continued growth in Germany, taking share from the incumbent operators. We have increased capacity by 5% during the year. Competitor growth on easyJet's markets was 11%, with high growth at Berlin Schönefeld in particular. Netherlands The Netherlands is a significant opportunity for easyJet, as Amsterdam is a major business and leisure market. Having opened a new base at Schiphol Airport, Amsterdam in March 2015 we are now the second-biggest operator and are continuing to invest in growth of our market share. easyJet increased capacity by 24% during the year against competitor growth on our markets of 8%. Portugal and Spain Portugal and Spain are easyJet's primary focus for lean basing, as well as inbound markets with strong demand on key flows to the region from the rest of Europe. We increased capacity by 17% and 6% in Portugal and Spain respectively. easyJet opened its new base at Barcelona in February 2016. Competitor market growth on easyJet's markets was 14% in Portugal and 16% in Spain. 2. A lean cost advantage easyJet has a strong cost-focused culture, with structural advantages in key areas that enable it to combine a leading airport network with affordable fares. easyJet’s lean culture consistently delivers substantial cost savings against underlying cost inflation and we are committed to delivering our target of flat cost per seat excluding fuel at constant currency in the 2019 financial year versus the 2015 financial year at normal levels of disruption. In 2016, cost per seat improved by 2.0% primarily reflecting benefits from fuel, partially offset by the £112 million impact of foreign exchange. At constant currency, cost per seat excluding fuel improved by 1.1%. Existing easyJet lean initiatives delivered savings of £95 million, an increase of 106% year-on-year. These savings were primarily the result of improvements in airports, maintenance and ground handling costs. easyJet has a number of initiatives in place that will help to deliver its future cost per seat target: • Leveraging increasingly large positions in our airports. Through our size, we are able to drive economies of scale from long-term deals with airport owners and operators, as well as with ground handling agents at those airports. We are now in our third year of a seven-year contract with Gatwick airport, as the largest operator at the airport, and will be consolidating our position into one terminal in 2017 to enhance our operational efficiency. Similarly, we are the largest airline at Luton airport, where we are in year three of a ten-year contract. As we grow our positions in new bases such as Amsterdam and Venice we will benefit from volume-related pricing agreements. In ground handling we annualised the benefit of our contract in Italy and saw savings from our growth in airports in the UK, Netherlands and Germany. We expect to agree a number of new airport and ground handling contracts in 2017 and 2018. (6) Based on fuel price quoted in original plan. • Continue to leverage our scale in maintenance. Our new component support arrangement, which started in October 2015, combined with other parts and heavy maintenance contracts, delivered savings of around £40 million during the year. This was supported by better distribution of parts across the network to enable faster repairs to aircraft. We have also begun using predictive analysis with the target to reduce parts failures and improve aircraft reliability and utilisation. • Tackling disruption. To control costs of strikes, airport congestion and aircraft unavailability to the business, we are investing some of our cost savings to increase resilience in our operations, including more flexibility in the network. We are also implementing improvements to rosters and scheduling to improve fatigue management, better lifestyles for crew as well as increase our ability to recruit and retain future talent. This will deliver passenger benefits and longer-term cost improvements. • Organisational review. Although easyJet is not encumbered with the significant historic costs of a legacy carrier (e.g. expensive pension arrangements) we are reviewing our structure and ways of working to enable easyJet to better deliver on our core strengths of our network, delivering for our customers, data and digital and maintaining our relative cost advantage. We expect this to result in a simpler, more efficient organisation and will deliver meaningful annualised savings once implemented. Further information on this will be provided throughout the 2017 financial year. • Efficient fleet management. We operate an exclusively Airbus A320 family fleet. This delivers operational flexibility as well as efficiencies in engineering and maintenance, crew, ownership and fuel. As the second largest operator of Airbus A320 family aircraft in the world we also benefit from significant economies of scale on acquisition. Between 2016 and 2021 we will derive a major benefit from up-gauging our fleet, from a majority 156-seat A319 composition to a fleet that is over 70% 186-seat A320s. The 186-seat A320neo aircraft are expected to have a 13% to 14% cost per seat benefit(6) compared to the 156-seat A319s. As indicated in the 6 October 2016 trading update, easyJet expects to incur a number of non-headline costs during the 2017 financial year. These costs will be separately disclosed as non-headline profit before tax items: • As a result of the UK’s referendum vote to leave the European Union, easyJet plans to establish an Air Operator Certificate (AOC) in another EU member state. This will secure the flying rights of the 30% of our network that remains wholly within and between EU states, excluding the UK. This one-off cost is expected to total around £10 million over two years with up to £5 million incurred in the 2017 financial year. The primary driver of the cost is the re-registering of aircraft in an EU AOC jurisdiction. • We are planning to enter into a sale and leaseback arrangement for 10 aircraft which is expected to take place in early December 2016. Due to the age of the selected aircraft at the time of this transaction and maintenance provision accounting, easyJet expects to incur a one-off, non-cash charge of approximately £20 million. 11 www.easyJet.comStrategic reportGovernanceAccounts Chief Executive’s review continued • The expense associated with implementing the Organisational Review in the 2017 financial year. Further details will be provided throughout 2017, however any costs associated with that will be targeting a six to nine month payback. easyJet will continue to relentlessly focus on lean cost control. Our cost saving programme will build on the strong momentum from 2016, leveraging our increasing scale and reviewing our cost management down to the most granular level. 4. Data and digital A core part of easyJet’s strategy is the implementation of its wider digital strategy. This includes leveraging data and easyJet’s digital platforms to support its network, customer focus and operational excellence by enhancing its customer relationship management capabilities. These tools help build customer loyalty and drive revenue growth. easyJet’s increasingly sophisticated use of data will enable it to make travel easy and affordable in the long-term. 3. Customer and operational excellence easyJet’s strong operational and cost performance is built around ensuring aircraft depart and arrive on time. This minimises disruption costs and improves customer satisfaction and repeat purchases, which in turn increases revenue. Disruption due to air traffic and other strikes in Europe, as well as severe weather and runway closures at Gatwick airport, has severely impacted easyJet’s performance during the year. During the year, easyJet cancelled 3,268 flights (2015: 2,637) and on-time performance was 77% across the network, a decrease of three percentage points from 2015. Given the level of disruption this is a resilient performance and excluding the UK, which was disproportionately affected, on-time performance was 80%. To secure better on-time performance easyJet has set up a taskforce to focus on the following main areas: • Reduce the number of events due to technical issues, using predictive maintenance and enhanced parts management and distribution. • • Improve disruption management through better processes and communication with our customers as well as using technology to reduce cost and improve effectiveness. Influence structural improvements through discussions with airports, national Governments and the EU. OTP % arrivals within 15 minutes(7) 2015 Network 2015 Network excluding UK 2016 Network 2016 Network excluding UK Q1 86% 86% 82% Q2 86% 87% 82% Q3 79% 81% 74% Q4 Full year 80% 74% 77% 71% 82% 77% 83% 84% 78% 76% 80% Our Gatwick North Terminal programme is already driving operational and customer benefits. The consolidation process will complete in January 2017 and total operational cost savings are anticipated of around £5 million. The auto-bag drop area, the biggest in the world, has now processed three million bags since it opened last October and we have added greater functionality to collect payment for additional or excess charges for luggage. 97% of our customers now wait less than five minutes to go through the bag drop experience which has improved customer satisfaction. We are now rolling out our “customer-host assist” that is expected to drive lower cost and greater customer satisfaction primarily through mobile-based functionality to self-serve. Loyalty and data In the last year 74% of our seats were booked by returning customers. We have seen a strong increase in customer loyalty in our core markets, with returning customers in the UK increasing by 9%, France by 11%, Switzerland by 11% and Amsterdam by 20%. easyJet’s marketable customers have now reached over 26 million, up 5%, providing further potential for growth. Following its launch earlier this year, Flight Club has now been successfully rolled out to our most valuable flyers, as identified through our customer database. We have seen a 14% uplift in retention and 32% uplift in CSAT amongst our Flight Club members. At the same time, easyJet Plus membership has grown by 40% following successful campaigns across our digital channels and Customer Relationship Management (CRM) programme. Flight Club aims to recognise and retain our high-value and loyal customers with a scheme that makes travel with easyJet even easier. Very different to legacy frequent flyer programs, which are highly expensive and complex, Flight Club makes the simple things even easier for our customers. The programme offers a range of benefits such as free name changes, free booking changes and a low price promise, all reinforced by a dedicated customer support team. Our CRM enables our customers to benefit from increasing levels of personalisation across multiple channels, with examples such as saved passport details, targeted marketing campaigns via email and text message, and bespoke offers from our affiliate partners. The user experience has been further developed over the year, with greater ease of interaction on the website and mobile and optimised layouts and design. Innovation and digital leadership Our digital platform is a key point of differentiation from our competitors. We believe that we have significant advantages in the capability of our web platform and our mobile offering. Our award winning App has now been downloaded 18.3 million times, an increase of 30% on last year. 20% of bookings are now on mobile, with ApplePay a significant step forward this year. Passengers are also increasingly using mobile boarding passes, which has increased 63% year-on-year. Enhancements like these add to the customer experience and drive customer loyalty, as well as driving our cost advantage. Since the year end easyJet has also signed a five-year contract with Founders Factory, the corporate backed accelerator and incubator. The partnership will create value for easyJet and our passengers by putting disruptive thinking at the centre of our digital strategy, helping us to explore opportunities for advanced TravelTech services that will help us to keep making travel easy and affordable. (7) On-time performance measured by internal easyJet system. 12 easyJet plc Annual report and accounts 2016 We will continue investing substantially in our digital capability, building on our success in enhancing the digital customer interface. The rollout of our new commercial platform is under way with live new homepages featuring an innovative flight search and low-fare finder tool. Full rollout is expected during Q2 2017. The primary objective is to give us significantly better flexibility and capability, specifically improving our ability to offer customers bespoke, attractive options. The combination of increasingly insightful customer knowledge and our digital programme offers increasing amounts of personalisation, tailoring booking journeys based on previous behaviour. This is expected to drive higher footfall and conversion rates, as well as higher attachment rates for a wider range of ancillary partners. It will also enable greater self-management capability through the entire journey chain, from booking to check-in, through the airport and in the event of disruption. 5. Grow revenue easyJet has driven its leading customer and digital proposition through constant innovation and by listening to its passengers, focusing on market demand and offering value. Business passengers Performance for the year has been encouraging with continued growth in business passenger numbers, and further investment in how we reach and interact with our corporate customers. We have continued to target business passengers, growing the number of passengers by 6% to 12.5 million, with September 2016 a record month for easyJet. We also signed 137 corporate agreements over the year, representing a 25% increase against last year, serving to demonstrate the significant growth potential for business passengers. There has also been a growth in business-specific fares throughout the year with a 14% increase in Flexi fares, which carry a greater yield premium. Our combination of using primary airports in large economic markets, alongside high frequencies and attractive flight timings, makes easyJet a logical choice for business passengers. We are focused on providing a bespoke business offering through distribution platforms, Travel Management Companies and direct to small and medium-sized enterprises. Growth in Global Distribution Systems (GDS) volume continued to drive revenue and channel movement from web bookings to GDS within the travel management company partners. The recent negotiations across our GDS partners extended our agreements with Amadeus, Sabre and Travelport for an additional term. Developments across our Self-Booking Tool partners have seen a 16% increase in bookings due to the lower fees applicable and customised set-up for our corporate accounts. easyJet has recently won Business Traveller Magazine's “Best Low-Cost Carrier” for the 14th successive year. easyJet continues to see opportunities to sell its business product across Europe and we continue to strengthen our corporate sales capability through a new market, customer and industry structure. New revenue streams Non-seat revenue has performed strongly, increasing by 17%, offsetting pressure on ticket yields from the external environment. easyJet has a programme to develop new revenue streams as well as enhancing existing revenue streams, leveraging its attributes of a primary airport-focused network, cost focus and track record of innovation. We are exploring new distribution channels, partner agreements and structures such as connectivity with other suitable airlines. Recent examples have been: • Earlier Flight – a mobile app-only proposition, targeting customers who may wish to switch flights at short notice on the day of travel. This flexibility is offered to customers for just £15 and capitalises on the scale of our mobile app use when customers are on the move. • In-flight – our investment continues to pay off with revenue growth of over 30% in the last 12 months. This year saw the introduction of pre-purchased in-flight vouchers, scaled through our targeted CRM programme. 6. The best people easyJet is passionate about its people and we believe they set us apart. We believe that our customer-facing employees are the very best in the industry and contribute significantly to the positive experience that our passengers enjoy, leading to increased loyalty and repeat business. It is our people who continue to deliver the business’ strategy and will drive our future success. We continue to focus on recruiting the right people, helping them to understand easyJet’s values and their role in the business and then giving them the tools to develop a high-performance culture. easyJet’s new Academy at Gatwick demonstrates our commitment to the development of our staff, providing a world-class training facility comprising of classrooms, cabin simulator, evacuation slide and fire training rig. The centre is an investment in our people, fulfilling easyJet's expected training needs to 2020. We recruited during the year to help support our growth, adding over 360 pilots and 1,400 cabin crew, as well as 280 people within the management, administration, engineering and maintenance departments. In line with our target, 35% of positions were filled by internal candidates. Retention rates remain good with employee turnover at 9.0%, while engagement scores remain high at 76%. Increasing diversity easyJet’s launch of the Amy Johnson Flying Initiative, in partnership with the British Women Pilots Association, is part of our long-term strategy to increase the number of our female pilots. easyJet set an initial target to double the proportion of its new entrant pilots who are female, from under 6% in 2015 to 12% over a two-year period. easyJet was able to meet its target within one year. Other activities to increase the number of female pilots include working with easyJet’s pilot training providers to attract more women to apply for its cadet programme and working in partnership with organisations which promote female take-up of STEM (Science, Technology, Engineering and Maths) subjects and women in business. 13 www.easyJet.comStrategic reportGovernanceAccounts Delivering shareholder return easyJet’s robust operational model and competitive position enable the Company to remain resilient in turbulent markets. With a strong balance sheet and cash flow generated from operations of over £700 million, easyJet comfortably has met its investment goals while maintaining its positive net cash position. easyJet ended the year with net cash of £213 million. Return on capital employed declined to 14.6% from 22.2% last year, as the combined impact of severe disruption, external events and increased capacity impacted yields. As we look forward, we expect that our ability to grow revenue and the renewed focus on cost will deliver strong earnings momentum and significant returns to shareholders. easyJet‘s proposed ordinary dividend per share of 53.8 pence is expected to be paid on 17 March 2017, with a record date of 24 February 2017, subject to shareholder approval at the Annual General Meeting. Hedging positions easyJet operates under a clear set of treasury policies agreed by the Board. The aim of easyJet’s hedging policy is to reduce short-term earnings volatility. Therefore, easyJet hedges forward, on a rolling basis, between 65% and 85% of the next 12 months' anticipated fuel and currency exposures and between 45% and 65% of the following 12 months' anticipated requirements. Specific decisions may require consideration of a longer-term approach. Treasury strategies and actions will be driven by the need to meet treasury, financial and corporate objectives. Chief Executive’s review continued Fleet easyJet has a young fleet of Airbus A320-family aircraft, secured on very competitive terms which were most recently updated in our framework agreement with Airbus in 2013. easyJet continues to maintain flexibility in its fleet planning arrangements to ensure that it can increase or decrease capacity deployed, subject to the opportunities available and prevailing economic conditions. easyJet uses the flexibility it has to move aircraft between routes and markets to improve returns. This flexibility is achieved through a number of ways that impact both the timing and scale of capacity deployment: new aircraft orders can be deferred, leases may be extended or not renewed, aircraft may be sold or utilisation can be reduced at times of low demand. easyJet continues to work with its suppliers to enhance its fleet flexibility. easyJet’s total fleet as at 30 September 2016 comprised 257 aircraft (2015: 241 aircraft), split between 156-seat Airbus A319s, 180-seat A320s and, since May 2016, 186-seat A320s. Over the next five years we will reduce cost by changing the fleet mix and ownership structure. We took delivery of 20 A320 aircraft in the year ending 30 September 2016, which provide a per seat cost saving of 7% to 8% compared to the A319 through economies of scale, efficiencies in crew, ownership, fuel and maintenance. Four A319 aircraft were returned to lessors and the average age of the fleet increased to 6.7 years (2015: 6.2 years). The larger A320 aircraft has been introduced over the last few years with increasing cost per seat benefits. The increase in the proportion of A320s and the increase in overall seat density delivered a 40 pence per seat cost saving in 2016. Based on our current plan, our capital expenditure for the next three years is as follows: Year Gross capital expenditure (£m) 2017 650 2018 2019 1,100 1,050 Our objective is always to optimise our return on capital employed through the allocation of aircraft and capacity across the network, regularly moving them to airports and routes with better opportunities. In February we closed our base at Rome Fiumicino and redistributed the eight base aircraft to other bases in Italy, including the opening of a new base in Venice. Every year we also churn routes that have not reached their targeted objectives. These actions reiterate our focus on returns and will increase the return on capital employed of the Company as a whole, as we have done regularly in the past and will do so in the future. We continue to add frequencies and commit to basing aircraft around the network in scale. In 2016 we broadly maintained our asset utilisation across the network, at an average of just under 11 block hours per day (2015: 11 hours). Fleet as at 30 September 2016: Owned Operating leases Finance leases 99 90 – 189 45 18 – 63 – 5 – 5 % of fleet 56% 44% Total 144 113 – 257 Changes in year Future committed deliveries Unexercised purchase rights (4) 20 – 16 – 36 130 166 – – 100 100 A319 A320 A320neo 14 easyJet plc Annual report and accounts 2016 Details of current hedging arrangements are set out below: Percentage of anticipated requirement hedged Six months to 31 March 2017 Average rate Full year ending 30 September 2017 Average rate Full year ending 30 September 2018 Average rate Fuel requirement 83% $664 / metric tonne 81% $617 / metric tonne 47% $510 / metric tonne US Dollar requirement 79% $1.53 74% $1.52 50% $1.43 Euro surplus 78% €1.36 82% €1.35 47% €1.27 CHF surplus 73% CHF 1.42 71% CHF 1.41 47% CHF1.35 Sensitivities • A $10 movement in fuel price per metric tonne impacts the 2017 financial year fuel bill by $2.8 million. • A one cent movement in £/$ impacts the 2017 financial year profit before tax by £2.0 million. • A one cent movement in £/€ impacts the 2017 financial year profit before tax by £0.4 million. • A one cent movement in £/CHF impacts the 2017 financial year profit before tax by £0.3 million. OUTLOOK We remain confident in our ability to deliver long-term growth and returns for shareholders as we continue to execute our strategy. For the six months to 31 March 2017 capacity is expected to increase by 9% as we invest in markets and routes that will build on our resilient network, enhance our customer proposition and underpin returns for the long-term. For the year to 30 September 2017 we currently plan to increase capacity by up to 9%. Based on current market fuel prices we expect the unit fuel(8) bill to decline by between £245 million and £275 million during the year to 30 September 2017. As you would expect, passengers will continue to benefit from the lower fuel cost and therefore we expect a mid to high single digit decline in revenue per seat at constant currency during the first half of the year. • The one-off cost associated with our organisational review, which we expect to result in a simpler, more efficient organisation and which will deliver meaningful annualised savings when implemented. We will provide further details in due course, however any costs associated with this programme will be targeting a circa six to nine month payback. While we remain committed to our target of flat cost per seat excluding fuel at constant currency in the 2019 financial year versus 2015 at normal levels of disruption, this year's expected increase reflects our investment in resilience, reducing disruption and improving customer experience, which will contribute to longer term cost efficiency. We may make further investments during the year if we believe the benefits of doing so are sure to deliver a stronger, more efficient operation. We are targeting a decline in total cost per seat at constant currency including fuel for the full year of approximately 3%, based on jet fuel prices within a range of $400 metric tonne to $520 metric tonne. Cost per seat excluding fuel and at constant currency is targeted to increase by approximately 1% for the full year, at normal levels of disruption, excluding non-headline items. These are as follows: • A non-cash, one-off £20 million charge as a result of the planned sale and leaseback of 10 A319 aircraft in December. This charge reflects a maintenance provision catch up and an accounting loss due to the construct of the transaction. We expect the transaction to result in a cash inflow of circa US$140 million. • One-off costs relating to the set-up of an EU AOC, which are expected to be up to £5 million in the 2017 financial year and around £10 million in total, mostly driven by the costs to re-register aircraft. Exchange rate movements(9) are likely to have an adverse impact of approximately £70 million in the first half year compared to the six months to 31 March 2016 and £90 million for the 12 months to 30 September 2017 compared to the 12 months to 30 September 2016. We continue to see significant longer term opportunities to grow revenue, profit and shareholder returns. We expect market demand to remain strong and easyJet’s unique model and strategy are well positioned to capture significant value from favourable trends in both leisure and business markets. CAROLYN MCCALL DBE Chief Executive (8) Unit fuel calculated as the difference between latest estimate of the 2017 financial year fuel costs less the 2016 financial year fuel cost per seat multiplied by the 2017 financial year seat capacity. (9) US $ to £ Sterling 1.2601, Euro to £ Sterling 1.1604. Currency and fuel increases are shown net of hedging impact. 15 www.easyJet.comStrategic reportGovernanceAccounts Key performance indicators Measuring our performance SAFETY FIRST FINAL EVENT RISK CLASSIFICATION (FERC) i k s R d e s i l a m r o N f o m u S 0.8 0.7 0.6 0.5 0.4 Sep 2013 Nov 2013 Jan 2014 Mar 2014 6 month rolling average FERC May 2014 Jul 2014 Sep 2014 Nov 2014 Jan 2015 Mar 2014 May 2015 Jul 2014 Sep 2015 Nov 2014 Jan 2016 Mar 2016 May 2016 Jul 2016 Aug 2016 Definition: All reported safety-related incidents are assessed and categorised with risk values assigned and aggregated to form a final event risk classification score. Performance: Safety remains our number one priority, supported by a strong safety reporting culture. Overall the final event risk classification score has decreased year-on-year. See Risk on pages 24-31 for more information MARKET SHARE AT AIRPORTS WHERE EASYJET IS NUMBER ONE OR TWO CARRIER (%) 22.8% 23.7% 23.4% 25.6% 26.5% 2012 2013 2014 2015 2016 Definition: Market share at airports where easyJet is the number one or number two carrier based on short-haul capacity. Performance: In line with our strategy we continued to increase our market share at airports where easyJet is the number one or number two carrier based on short-haul capacity, from 25.6% in 2015 to 26.5% in 2016. The improvement is reinforced by our continued growth in the percentage of easyJet capacity that touches a number one or two airport from 95.7% in 2015 to 97.6% in 2016. See Chief Executive's review on pages 7-15 for more information DATA AND DIGITAL GROW REVENUE BEST PEOPLE TOTAL NUMBER OF VISITS TO ALL DIGITAL PLATFORMS (m) REVENUE PER SEAT (£) EMPLOYEE ENGAGEMENT – uSAY (%)(1) 494 507 472 408 422 58.51 62.58 63.31 62.48 58.46 83% 83% 76% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2014 2015 2016 Performance: easyJet's award-winning digital platform has driven an increase in number of visits to all digital platforms from 494 million in the 2015 financial year to 507 million in the 2016 financial year. Definition: Revenue divided by seats flown. Performance: Revenue per seat decreased by 6.4% to £58.46 (2015: £62.48) with a decrease of 6.9% at constant currency due to the impact from terrorism-related events, the increasingly competitive capacity environment associated with low oil prices and a more expensive Euro for British travellers during the summer. Definition: Employee engagement index, based on results of an employee survey. Performance: The survey result saw a decrease compared to last year, reflecting the challenging year operationally and its effect on our people. However, the score continues to outperform the Ipsos Mori airline norm.(2) See Chief Executive's review on pages 7-15 for more information See Financial review on pages 18-22 for more information See Corporate responsibility on pages 32-42 for more information (1) Surveys carried out prior to 2014 were conducted using different methodology and the results are therefore not comparable. (2) IPSOS Mori is a market leading research company. 16 easyJet plc Annual report and accounts 2016 LEAN COST ADVANTAGE CUSTOMER AND OPERATIONAL EXCELLENCE COST PER SEAT EXCLUDING FUEL (£) OVERALL CUSTOMER SATISFACTION (%) ON-TIME PERFORMANCE (%) 36.25 38.17 37.70 37.35 38.31 80% 80% 78% 75% 72% 88% 87% 85% 80% 77% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Definition: Revenue less profit before tax, plus fuel costs, divided by seats flown. Performance: Cost per seat excluding fuel increased by 2.6% to £38.31, however decreased by 1.1% at constant currency due to savings from fleet up-gauging and easyJet lean initiatives which were partially offset by increases in charges at regulated airports and increased disruption costs. Definition: Customer satisfaction index, based on results of a customer satisfaction survey which measures how satisfied the customer was with their most recent flight. Performance: Overall customer satisfaction was lower than the prior year primarily due to increased disruption. Definition: Percentage of flights which arrive within 15 minutes of the scheduled arrival time. Performance: Increased disruption due to the continued air traffic control strikes and on-going congestion at London Gatwick contributed to the decrease in on-time performance to 77% (2015: 80%). See Financial review on pages 18-22 for more information See Chief Executive's review on pages 7-15 for more information See Chief Executive's review on pages 7-15 for more information DISCIPLINED USE OF CAPITAL ORDINARY DIVIDEND (pence per share) LIQUIDITY PER 100 SEATS (£m) ROCE (%) 55.2 53.8 45.4 3.5 3.2 3.2 2.5 2.7 33.5 21.5 22.2 20.5 14.6 17.4 11.3 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Performance: As a result of easyJet's strong balance sheet and the Board's confidence in the future success of the business, the Board increased the payout ratio of the ordinary dividend from 40% to 50% of profit after tax. The Board has recommended a final dividend of 53.8 pence per share (2015: 55.2 pence), which is in line with the revised dividend policy. Definition: Liquidity (cash plus revolving credit facility) per 100 aircraft seats. Performance: This remains significantly above the liquidity buffer to cover peak unearned revenue with a minimum position of £2.6 million per 100 seats. Definition: Normalised operating profit after tax divided by average adjusted capital employed. Performance: ROCE decreased to 14.6% (2015: 22.2%) driven by a fall in operating profit. See Financial review on pages 18-22 for more information See Financial review on pages 18-22 for more information See Financial review on pages 18-22 for more information 17 www.easyJet.comStrategic reportGovernanceAccounts Financial review Our financial results ANDREW FINDLAY Chief Financial Officer In the 2016 financial year, easyJet flew 73.1 million passengers (2015: 68.6 million) and delivered a profit before tax for the year of £495 million (profit of £6.20 per seat) a decrease of £191 million from a profit of £686 million (profit of £9.15 per seat) last year. The 2016 result includes an £88 million unfavourable movement from foreign exchange (which includes £7 million of foreign exchange losses on balance sheet revaluations). At constant currency, easyJet delivered a profit of £576 million during the year. £ million 4,669 (3,060) (1,114) 495 (68) 427 £ per seat 58.46 (38.31) (13.95) 6.20 (0.85) 5.35 2016 pence per ASK 5.32 (3.49) (1.27) 0.56 (0.07) 0.49 £ million 4,686 (2,801) (1,199) 686 (138) 548 £ per seat 62.48 (37.35) (15.98) 9.15 (1.84) 7.31 2015 pence per ASK 5.59 (3.34) (1.43) 0.82 (0.17) 0.65 498 6.23 0.57 688 9.18 0.81 FINANCIAL OVERVIEW Total revenue Costs excluding fuel Fuel Profit before tax Tax charge Profit after tax Operating profit* * Operating profit represents profit before interest and tax Seats flown grew by 6.5%. Total revenue per seat fell by 6.4% to £58.46. At constant currency, revenue per seat fell by 6.9% to £58.16. The decrease is attributable to the terrorist events in Egypt, Paris, Brussels, Turkey and Nice resulting in lower demand and yield, the increasingly competitive capacity environment associated with lower oil prices and the impact of the UK’s vote to leave the European Union leading to a more expensive Euro for British travellers during the summer. Excluding fuel, cost per seat increased by 2.6% to £38.31, but decreased by 1.1% at constant currency. This decrease is against a backdrop of continued inflationary pressure and significant disruption and was driven by volume deals on airport contracts, savings as a result of renegotiated airport and ground handling contracts and a new maintenance contract, together with unit cost savings arising from the up-gauging of the fleet. These were partially offset by higher airport costs at regulated airports and higher disruption costs following the terrorist events in Egypt, Paris, Brussels, Turkey and Nice, combined with industrial strike action and adverse weather conditions, resulting in an increase in EU261 associated costs. Disruption increased the cost per seat by £0.31 at constant currency. Fuel costs fell by £85 million, and from £15.98 to £13.95 per seat, primarily driven by the significant reduction in market price. Profit before tax per seat decreased by 32.3% to £6.20 per seat (2015: £9.15). The tax charge for the year was £68 million. The effective tax rate for the period was 13.7% (2015: 20.1%), lower than the standard UK rate of 20%, due to the impact of a change in future corporation tax rates on deferred tax. 18 easyJet plc Annual report and accounts 2016 Earnings per share and dividends per share Basic earnings per share Proposed ordinary dividend 2016 pence per share 108.4 53.8 2015 pence per share 139.1 55.2 Change (22.1%) (2.5%) Basic earnings per share decreased by 22.1% as a consequence of the £121 million decrease in the profit after tax. In line with the stated dividend policy of a payout ratio of 50% of profit after tax, the Board is recommending an ordinary dividend of £214 million or 53.8 pence per share which is subject to shareholder approval at the Company’s Annual General Meeting on 9 February 2017. This will be paid on 17 March 2017 to shareholders on the register at close of business on 24 February 2017. Return on capital employed (ROCE) ROCE 2016 14.6% 2015 22.2% Change (7.6ppt) ROCE for the year was 14.6%, a decline of 7.6 percentage points on the prior year. The decrease in ROCE was due to the decrease in profit for the year and a 11.5% increase in the average adjusted capital employed excluding lease adjustments, primarily due to the acquisition of twenty aircraft during the year and favourable mark-to-market movements in derivative contracts. The ROCE calculation excludes borrowings, cash and money market deposits and includes an adjustment for the capital implicit in aircraft operating lease arrangements. The adjustment is calculated by multiplying the annual charge for aircraft dry leasing by a factor of seven. EXCHANGE RATES The proportion of revenue and costs denominated in currencies other than sterling remained broadly consistent year-on-year: Sterling Euro US dollar Other (principally Swiss franc) Average exchange rates Euro - revenue Euro - costs US dollar Swiss franc 2016 50% 39% 1% 10% Revenue 2015 49% 40% 1% 10% 2016 27% 35% 32% 6% Costs 2015 27% 32% 35% 6% 2016 €1.28 €1.27 $1.58 CHF 1.51 2015 €1.29 €1.35 $1.58 CHF 1.48 The year-on-year variance in average Euro exchange rates for revenue and costs was principally due to the timing of revenue and cost cash flows. On average, revenue cash inflows occur several months before cost cash outflows, resulting in a change in Euro exchange rates impacting revenue later than costs. The net adverse impact on profit due to the year-on-year changes in exchange rates was mainly driven by the stronger average Euro rate: Favourable/(adverse) Revenue Fuel Prior year balance sheet revaluations Costs excluding fuel and prior year balance sheet revaluations Total FINANCIAL PERFORMANCE Revenue Euro £ million 8 – (3) (84) (79) Swiss franc £ million 10 – 1 (13) (2) US dollar £ million 4 (3) (5) (3) (7) Other £ million 2 – – (2) – Total £ million 24 (3) (7) (102) (88) Seat revenue Non-seat revenue Total revenue £ million 4,587 82 4,669 £ per seat 57.43 1.03 58.46 2016 pence per ASK 5.23 0.09 5.32 £ million 4,616 70 4,686 £ per seat 61.54 0.94 62.48 2015 pence per ASK 5.51 0.08 5.59 19 www.easyJet.comStrategic reportGovernanceAccounts Financial review continued Revenue per seat decreased by 6.4% to £58.46 (2015: £62.48). At constant currency, revenue per seat fell by 6.9% to £58.16. The decrease is attributable to the terrorist events in Egypt, Paris, Brussels, Turkey and Nice resulting in lower demand and yield, the increasingly competitive capacity environment associated with the lower oil prices and the impact of the UK’s vote to leave the European Union leading to a more expensive Euro for British travellers during the summer. Load factor increased by 0.1 percentage points to 91.6%. Revenue per ASK decreased by 4.8% (or by 5.3% at constant currency), impacted by a 6.4% decrease in revenue per seat, partially offset by a 1.7% decrease in the average sector length, mainly from reduced flying to Egypt. Costs excluding fuel Operating costs Airports and ground handling Crew Navigation Maintenance Selling and marketing Other costs Ownership costs Aircraft dry leasing Depreciation Amortisation Net interest payable Net exchange gains £ million £ per seat 2016 pence per ASK £ million £ per seat 2015 pence per ASK 1,267 542 336 237 107 296 2,785 103 157 12 6 (3) 275 15.86 6.78 4.21 2.97 1.33 3.71 34.86 1.30 1.97 0.15 0.08 (0.05) 3.45 1.44 0.62 0.38 0.27 0.13 0.33 3.17 0.12 0.18 0.01 0.01 – 0.32 3.49 1,122 505 313 229 102 276 2,547 114 125 13 8 (6) 254 14.96 6.73 4.17 3.06 1.36 3.70 33.98 1.51 1.66 0.17 0.12 (0.09) 3.37 1.34 0.60 0.38 0.27 0.12 0.33 3.04 0.14 0.15 0.02 – (0.01) 0.30 2,801 37.35 3.34 Total costs excluding fuel 3,060 38.31 Cost per seat excluding fuel increased by 2.6% to £38.31 but decreased by 1.1% per seat at constant currency. Airports and ground handling cost per seat increased by 6.1% and by 1.5% at constant currency. Charges at regulated airports increased as anticipated, primarily in Italy, combined with an increase in airport and ground handling costs at Gatwick. However, these were partially offset by volume deals, combined with savings from renegotiated airport and ground handling contracts. Crew cost per seat increased by 0.7% to £6.78 but decreased by 2.2% at constant currency. This was driven by efficiencies obtained from the up-gauging of our fleet, combined with a 1.7% decrease in average sector length and improved crew scheduling. This was partially offset by pay increases. Navigation costs increased by 0.8% per seat to £4.21 but decreased by 4.7% at constant currency driven by a 1.7% decrease in average sector length, annual price decreases primarily in France and Germany and a one-off £8 million settlement with Eurocontrol in the 2015 financial year. Maintenance costs per seat decreased by 3.0% to £2.97 and decreased by 5.3% at constant currency. A reduction in the number of leased aircraft resulted in reduced maintenance costs, combined with savings obtained from a new maintenance contract. Other costs per seat increased by 0.8% to £3.71 per seat, and decreased by 1.9% at constant currency. This was driven by a reduction in aircraft wet leasing and savings in employee costs, which was largely offset by an increase in disruption costs as a result of the terrorist events in Egypt, Paris, Brussels, Turkey and Nice, combined with Air Traffic Control industrial action and adverse weather conditions, resulting in an increase in EU261 associated costs. Aircraft dry leasing cost per seat decreased by 14.4% to £1.30 and by 14.3% at constant currency. Depreciation costs increased by 18.5% on a per seat basis. The movements are principally driven by the acquisition of 20 new aircraft last year and a decrease in the number of leased aircraft in the fleet. The average leased fleet decreased by 6.4% to 64 and the average owned and finance leased fleet increased by 12.6% to 185. Fuel Fuel £ million 1,114 £ per seat 13.95 2016 pence per ASK 1.27 £ million 1,199 £ per seat 15.98 2015 pence per ASK 1.43 Fuel cost per seat decreased by 12.7% and by 13.0% at constant currency. 20 easyJet plc Annual report and accounts 2016 During the period the average market jet fuel price fell by 32.9% to $415 per tonne from $619 per tonne in the previous year. The operation of easyJet’s fuel and US dollar hedging policy meant that the average effective fuel price movement only saw a decrease of 13.4% to £479 per tonne from £553 per tonne in the previous year. NET CASH AND FINANCIAL POSITION Summary net cash reconciliation Operating profit Depreciation and amortisation Net working capital movement Net tax paid Net capital expenditure Purchase of own shares for employee share schemes Net decrease in restricted cash Other (including the effect of exchange rates) Ordinary dividend paid Net (decrease)/increase in net cash Net cash at beginning of year Net cash at end of year 2016 £ million 498 169 35 (99) (586) (22) 6 (4) (219) (222) 435 213 2015 £ million 688 138 50 (98) (536) (92) 21 22 (180) 13 422 435 Change £ million (190) 31 (15) (1) (50) 70 (15) (26) (39) (235) 13 (222) Net cash at 30 September 2016 was £213 million (2015: £435 million) and comprised cash and money market deposits of £969 million (2015: £939 million) and borrowings of £756 million (2015: £504 million). After allowing for the impact of aircraft operating leases (seven times operating lease costs incurred in the year), adjusted net debt increased by £145 million to £508 million. Net capital expenditure includes the acquisition of 20 A320 aircraft (2015: 20 aircraft), the purchase of life-limited parts used in engine restoration and pre-delivery payments relating to aircraft purchases. The number of scheduled aircraft operating in the fleet increased from 233 at 30 September 2015 to 249 at 30 September 2016. easyJet made net corporation tax payments totalling £99 million during the 2016 financial year (2015: £98 million). Borrowings as at 30 September 2016 were £756 million, an increase of £252 million from 30 September 2015. During the period easyJet secured credit ratings from Moody's (Baa1 Stable) and Standard & Poor's (BBB+ Stable) and announced a £3,000 million Euro Medium Term Note Programme. Under this programme, on 9 February 2016 easyJet plc issued notes amounting to €500 million for a seven-year term with a fixed annual coupon rate of 1.750%. This increase in borrowings was offset by the repayment of four finance leases and early repayment of five loans. In the year ending 30 September 2015 easyJet signed a $500 million revolving credit facility with a minimum five-year term. The facility is due to mature in February 2021. Summary consolidated statement of financial position Goodwill Property, plant and equipment Derivative financial instruments Net working capital Restricted cash Net cash Current and deferred taxation Other non-current assets and liabilities Opening shareholders’ equity Profit for the year Ordinary dividend paid Change in hedging reserve Other movements 2016 £ million 365 3,252 98 (968) 7 213 (258) 3 2,712 2,249 427 (219) 263 (8) 2,712 2015 £ million 365 2,877 (297) (969) 12 435 (219) 45 2,249 2,172 548 (180) (222) (69) 2,249 Change £ million – 375 395 1 (5) (222) (39) (42) 463 21 www.easyJet.comStrategic reportGovernanceAccounts Financial review continued Net assets increased by £463 million, due to the profit generated in the period and favourable movements on the hedging reserve, which were only partially offset by the payment of the ordinary dividend. The movement on the hedging reserve was primarily due to the maturity of out of the money contracts. The net book value of property, plant and equipment increased by £375 million driven principally by the acquisition of 20 A320 family aircraft, and pre-delivery payments relating to aircraft purchases. ANDREW FINDLAY Chief Financial Officer GOING CONCERN easyJet’s business activities, together with factors likely to affect its future development and performance, are described in the strategic report on pages 1 to 42. Principal risks and uncertainties are described on pages 24 to 31. Note 22 to the accounts sets out the Group’s objectives, policies and procedures for managing its capital and gives details of the risks related to financial instruments held by the Group. At 30 September 2016, the Group held cash and cash equivalents of £714 million and money market deposits of £255 million. Total debt of £756 million is free from financial covenants, with £92 million due for repayment in the year to 30 September 2017. Net current liabilities at 30 September 2016 were £119 million and included unearned revenue (payments made by customers for flights scheduled post year end) of £568 million. The business is exposed to fluctuations in fuel prices and US dollar and Euro exchange rates. The Group’s policy is to hedge between 65% and 85% of estimated exposures 12 months in advance, and 45% and 65% of estimated exposures from 13 up to 24 months in advance. Specific decisions may require consideration of a longer-term approach. Treasury strategies and actions will be driven by the need to meet treasury, financial and corporate objectives. The Group was compliant with this policy at the date of this Annual report and accounts. After making enquiries, the Directors have a reasonable expectation that the Company and the Group will be able to operate within the level of available facilities and cash and deposits for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual report and accounts. VIABILITY STATEMENT The Directors have assessed easyJet’s viability over a three-year period to September 2019. This is based on three years of the strategic plan, which gives greater certainty over the forecasting assumptions used. In making their assessment, the Directors took account of easyJet’s current financial and operational positions and contracted capital expenditure. They also assessed the potential financial and operational impacts, in severe but plausible scenarios, of the principal risks and uncertainties set out on pages 24 to 31, which includes the impact of a sustained significant adverse movement in foreign currency exchange rates or jet fuel prices, and the likely degree of effectiveness of current and available mitigating actions. Based on this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet all their liabilities as they fall due up to September 2019. In making this statement, the Directors have also made the following key assumptions: • • • funding for capital expenditure in the form of capital markets debt, bank debt or aircraft leases will be available in all plausible market conditions; there will not be a prolonged grounding of a substantial portion of the fleet; and the terms of the United Kingdom leaving the European Union are such that easyJet will be able to continue to operate over broadly the same network as at present. 22 easyJet plc Annual report and accounts 2016 Key statistics Operating measures Seats flown (millions) Passengers (millions) Load factor Available seat kilometres (ASK) (millions) Revenue passenger kilometres (RPK) (millions) Average sector length (kilometres) Sectors Block hours Number of aircraft owned/leased at end of year Average number of aircraft owned/leased during year Number of aircraft operated at end of year Average number of aircraft operated during year Operated aircraft utilisation (hours per day) Owned aircraft utilisation (hours per day) Number of routes operated at end of year Number of airports served at end of year Financial measures Return on capital employed Liquidity per 100 seats (£m) Profit before tax per seat (£) Profit before tax per ASK (pence) Revenue Revenue per seat (£) Revenue per seat at constant currency (£) Revenue per passenger (£) Revenue per passenger at constant currency (£) Revenue per ASK (pence) Revenue per ASK at constant currency (pence) Costs Per seat measures Total cost per seat (£) Total cost per seat excluding fuel (£) Total cost per seat excluding fuel at constant currency (£) Operating cost per seat (£) Operating cost per seat excluding fuel (£) Operating cost per seat excluding fuel at constant currency (£) Ownership cost per seat (£) Per ASK measures Total cost per ASK (pence) Total cost per ASK excluding fuel (pence) Total cost per ASK excluding fuel at constant currency (pence) Operating cost per ASK (pence) Operating cost per ASK excluding fuel (pence) Operating cost per ASK excluding fuel at constant currency (pence) Ownership cost per ASK (pence) 2016 79.9 73.1 91.6% 87,724 81,496 1,098 482,110 934,223 257 248.7 249 234.6 10.9 10.3 803 132 14.6% 3.2 6.20 0.56 58.46 58.16 63.83 63.50 5.32 5.29 52.26 38.31 37.04 48.81 34.86 33.55 3.45 4.76 3.49 3.36 4.44 3.17 3.05 0.32 2015 75.0 68.6 91.5% 83,846 77,619 1,118 457,479 892,052 241 232.6 233 221.1 11.1 10.5 735 136 22.2% 3.2 9.15 0.82 62.48 62.48 68.28 68.28 5.59 5.59 53.33 37.35 37.44 49.96 33.98 33.98 3.37 4.77 3.34 3.35 4.47 3.04 3.04 0.30 Increase/ (decrease) 6.5% 6.6% 0.1ppt 4.6% 5.0% (1.7%) 5.4% 4.7% 6.6% 6.9% 6.9% 6.1% (1.8%) (2.3%) 9.3% (2.9%) (7.6ppt) 0.0% (32.3%) (31.1%) (6.4%) (6.9%) (6.5%) (7.0%) (4.8%) (5.3%) 2.0% (2.6%) 1.1% 2.3% (2.6%) 1.2% (2.3%) 0.3% (4.4%) (0.7%) 0.6% (4.4%) (0.5%) (4.1%) 23 www.easyJet.comStrategic reportGovernanceAccounts Risk Risk management framework The Group faces a number of risks which, if they arise, could affect its ability to achieve its strategic objectives. The Board is responsible for determining the nature of these risks and ensuring appropriate mitigating actions are in place to manage them effectively. Risk appetite The level of risk it is considered appropriate to accept in achieving easyJet’s strategic objectives is reviewed and validated by the Board on an annual basis. The appropriateness of the mitigating actions is determined in accordance with the Board's approved risk appetite for the relevant area. Risk management process The diagram below sets out easyJet’s risk management process. This is co-ordinated by the risk team, which reports to the Chief Financial Officer. The key elements of the process are: • The risk management process begins with the identification of significant risks by function. Risk identification workshops are run to identify matters which could materially impact on the functions or the wider business. These are attended by Executive Management Team members and senior managers. • Risks are assessed taking into account the potential impact and likelihood of the risks occurring and the key mitigation Turn to page 53 for further details on Risk Management and Internal Control RISK MANAGEMENT PROCESS measures identified. The current level of risk is compared to the Board’s risk appetite to determine whether further mitigation measures are required. Risks specific to the function’s activities are managed within the function on an on-going basis with regular follow-up by the risk team. • The most significant risks from each function (based on materiality, cross functional impact and/or those which have common themes across the business) are reviewed by the Risk Evaluation Group, which consists of members of senior management from each function. This Group’s role is to debate, agree and prioritise the principal risks. • These risks, which form the basis of the principal risks and uncertainties detailed in this section, are challenged and validated by the Executive Management Team and the Board. • The principal risks are monitored and managed throughout the year by the Executive Management Team and the Board in conjunction with the risk team. Risk reports are provided to the Board on a quarterly basis as a minimum. • In addition to supporting the Board, the risk team supports the business in its management of risks relating to key projects, third parties, countries and bases. Risk identification & assessment OPERATIONAL RISKS FINANCIAL RISKS REPUTATIONAL RISKS FEEDBACK FROM THE BOARD Challenge & ownership SPONSORSHIP AND RISK APPETITE ASSESSMENT SAFETY RISKS* RISK EVALUATION GROUP AGREES AND PRIORITISES PRINCIPAL RISKS EXECUTIVE MANAGEMENT TEAM PLC BOARD PROJECT/ PROGRAMME RISKS FEEDBACK FROM THE BOARD Challenge & ownership COUNTRY/ BASE RISKS THIRD PARTY RISKS * A separate management system monitors flight safety risks (easyJet's safety process is described in more detail on page 34). Risk identification & assessment 24 easyJet plc Annual report and accounts 2016 Principal risks and uncertainties The risks and uncertainties described below are considered, at this point in time, to have the greatest effect on easyJet’s strategic objectives. This list is not intended to be exhaustive. Whilst easyJet can monitor risks and prepare for adverse scenarios, the ability to affect the core drivers of many risks is not within the Group’s control, for example adverse weather, pandemics, acts of terrorism, changes in government regulation and macroeconomic issues. Link to strategy: Build number 1 and 2 network positions 1 2 A lean cost advantage The best people 6 3 Customer and operational excellence Grow revenue 5 4 Data and digital V Risks impacting the viability assessment (turn to page 22 for further details) SAFETY FIRST Risk description Major safety incident A major safety incident (such as a hull loss) could adversely affect easyJet’s reputation and its operational and financial performance. The impact of such an incident would be heightened if easyJet failed to react promptly and deal with it effectively. Link to strategy: V 6 1 5 2 4 3 Security threat or attack Failure to identify or prevent a major security-related threat or attack, or react immediately and effectively, could adversely affect easyJet’s reputation and its operational and financial performance. Such an incident has the potential to impact upon easyJet’s business, regardless of the location or target. The threat of further security-related attacks (regardless of where they may occur) may impact the future demand for air travel. Link to strategy: 6 1 5 2 4 3 Mitigation easyJet’s number one priority is the safety and security of its customers and people. A Safety Committee (a committee of the Board) oversees the management of easyJet’s safety processes and systems. Turn to pages: 48-49 for further details A Safety Review Board (at Executive Management Team level) is responsible for directing overall safety policy and governance. This is chaired by the Chief Executive. Safety Action Groups from across the airline are responsible for the identification, evaluation and control of safety-related risks. easyJet operates a Safety Management System using a leading software system (SafetyNet). This is used to: • collect and analyse safety data (enabling potential areas of risk to be projected); and • enable learning from easyJet and industry events/incidents to be captured and embedded into future risk mitigations. A robust incident reporting process and "Just Culture" are in place. Turn to page: 34 for further details easyJet has an emergency response process and performs regular crisis management exercises. Hull (all risks) and liabilities insurance (including spares) is held. easyJet has an industry-leading fatigue risk management system and has implemented the EASA Flight Time Limitations regulations. A Security Decision Group, comprising the Chairman, Chief Executive, appropriate members of the Executive Management Team and other senior management, determines whether easyJet should continue to operate in countries or areas affected by security-related incidents or conflict. As part of that process the easyJet security team work to provide the Security Decision Group with timely, credible and reliable information upon which to base operational decisions. easyJet adheres to all recommendations and guidelines provided by the authorities. The Director of Safety and Security and the Head of Security work with authorities and governments around easyJet’s network to assess whether security measures are effective and in compliance with regulatory requirements. A significant amount of work is carried out with the aim of enhancing: • early identification of developing and emerging security risks; • • • the active management of security risks; the methods for reducing the impact of any security-related incident; and the Group’s security culture and awareness. 25 www.easyJet.comStrategic reportGovernanceAccounts Risk continued COMMERCIAL AND OPERATIONAL Risk description Mitigation easyJet seeks to rapidly respond to any such activity that may impact its ability to grow the business. Competitor and consolidation activity is monitored, enabling strategic decision making on key routes and positions. The Network Development Forum, a cross-functional panel of senior executives, approves new bases and the allocation of assets around the network. Fleet framework arrangements, together with the Group’s leasing policy, provide easyJet with significant flexibility in respect of scaling the fleet according to business requirements. Strong cost control is a key behaviour across the Group, with initiatives to drive cost reduction and improve efficiency in targeted areas. There are processes in place, and clear roles and responsibilities within teams across the business, to plan for and manage significant disruption. A business disruption team, which includes senior management from relevant business areas, determines and initiates required action. Board policy is to maintain a liquidity buffer which allows the Group to better manage the impact of downturns in business or temporary curtailment of activities. In addition, easyJet holds business disruption insurance. Competition, capacity and industry consolidation The aviation market is highly competitive and easyJet operates in competition with both flag carriers and other low-cost airlines. Excess capacity in the market may arise due to a decrease in demand for air travel and/or additional capacity as a result of low fuel prices. This could have an adverse financial impact on easyJet. easyJet’s key competitive advantages include its network, cost base, brand, digital innovation and efficient and robust capital structure. Failure to retain these advantages or react quickly to competitor changes could have an adverse financial impact on easyJet. Industry consolidation could also affect the competitive environment in a number of markets. This could cause a loss of market position and erosion of revenue. Link to strategy: 66 11 55 22 44 33 Significant network disruption Widespread disruption to easyJet’s network may be caused by a single event or factors that occur for a sustained period. Examples include forces of nature (extreme weather, volcanic ash, etc.), terrorism, air traffic management issues, epidemics/ pandemics or the closure of a key airport. Significant disruption to the network could adversely affect easyJet’s reputation and its operational and financial performance. Link to strategy: 6 1 5 2 4 3 26 easyJet plc Annual report and accounts 2016 Link to strategy: Build number 1 and 2 network positions 1 2 A lean cost advantage The best people 6 3 Customer and operational excellence Grow revenue 5 4 Data and digital V Risks impacting the viability assessment (turn to page 22 for further details) COMMERCIAL AND OPERATIONAL CONTINUED Risk description Mitigation Continuity of services easyJet is dependent on a number of key IT systems and processes. Critical systems are hosted either across two data centres or within third party provider locations. Recovery arrangements, including failover between the two data centres, are in place for all locations holding critical systems. An IT incident management team is in place to respond rapidly to any unforeseen incidents that may arise. IT disaster recovery plans are tested regularly to identify areas for improvement in resilience. Business continuity plans ensure easyJet is prepared in the event of loss of facilities, including alternative sites for the relocation of critical staff. There is a defined procurement process, led by a centralised procurement team, which ensures a competitive and robust selection of suppliers. As part of the process, alternative service providers are identified and assessed against balanced evaluation criteria within the major markets in which easyJet operates. Any specific supplier risks are identified and assessed during the procurement process and controls and risk mitigation measures are included in the contracts entered into with the supplier. Contracts are managed according to easyJet’s supplier relationship management framework, with key principles covering defined ownership and accountability, a governance framework and effective communication. Supplier performance is monitored through regular business reviews, including achievement of service level agreements and key performance indicators. Robust transition plans are agreed in the event of switching suppliers to enable an acceptable level of service to be maintained. As easyJet operates across Europe there are 19 unions and nine representative bodies across eight countries which its crew are members of. easyJet seeks to maintain positive working relationships with all trade unions and other representative bodies. Each of the countries in which easyJet operates has localised employment terms and conditions. This mitigates the risk of large scale internal industrial action occurring at the same time. Processes are in place to adapt to disruptions as a result of industrial action. A loss of critical systems or access to facilities, including the website, may lead to significant disruption and could have an adverse operational, reputational and financial impact. Link to strategy: 6 1 5 2 4 3 Third party service providers easyJet has entered into agreements with third party service providers for services covering a significant proportion of its operational and cost base. Failure to manage third party performance adequately may adversely affect easyJet’s reputation and its operational and financial performance. Link to strategy: 6 1 5 2 4 3 Industrial action easyJet, and the aviation industry in general, has a significant number of employees who are members of trade unions. Industrial action taken by easyJet employees, or by the employees of key third-party service providers, could impact on easyJet’s ability to maintain its flight schedules. This could adversely affect easyJet’s reputation and its operational and financial performance. Link to strategy: 6 1 5 2 4 3 27 www.easyJet.comStrategic reportGovernanceAccounts Risk continued COMMERCIAL AND OPERATIONAL CONTINUED Risk description Mitigation The Board considers that the efficiencies achieved by operating a single fleet type outweigh the risks associated with easyJet’s single fleet strategy. The Airbus A320 family (which includes the A319) is one of the two primary fleets used for short-haul travel, the other being the Boeing B737 family. There are approximately 6,800 A320 family aircraft operating with a proven track record for safety and reliability. easyJet operates a rigorous established aircraft maintenance programme. To mitigate the potential valuation risks, easyJet regularly reviews the second-hand market and has a number of different options when looking at fleet exit strategies. Sale and leaseback facilitates the exit of A319 aircraft from the fleet by transferring residual value risk, and also provides flexibility in managing the fleet size. Mitigation The Finance Committee (a committee of the Board) oversees the Group’s treasury and funding policies and activities. Turn to page: 55 for further details The role of the Committee includes: • maintaining and implementing a treasury policy setting out Board-approved strategies for foreign exchange and fuel hedging, along with liquidity, interest rate management, counterparties' limits; and • reviewing and reporting on compliance with Board treasury policies. The policy is to hedge revenue and costs within a percentage band for a rolling 24-month period. Board policy is to maintain a liquidity buffer including cash and a $500 million five year revolving credit facility provided by a group of 12 relationship banks. This allows the Group to better manage the impact of downturns in business or temporary curtailment of activities. The basis for the liquidity policy was revised in 2016 to cover peak unearned revenue, with a minimum position of £2.6 million per 100 aircraft seats. A strong balance sheet supports the business through fluctuations in the economic conditions and the Group has access to diverse sources of funding to support liquidity requirements. Single fleet risk easyJet is dependent on Airbus as its sole supplier for aircraft. There are significant cost and efficiency advantages of a single fleet, however there are two main associated risks: • technical or mechanical issues that could ground the full fleet, or part of the fleet, which could cause negative perception; and • valuation risks which crystallise when aircraft exit the fleet. The main exposure at this time is with the ageing A319 fleet, where easyJet is reliant on the future demand for second-hand aircraft. V Link to strategy: 6 1 5 2 4 3 FINANCIAL Risk description Financial risk easyJet is exposed to various financial risks which could give rise to adverse pressure on the financial performance of the Group, e.g. costs, revenue and cash flow. • Market risks – easyJet's business model is sensitive to a sustained significant adverse movement in foreign currency exchange rates, jet fuel prices or interest rates, which can't be mitigated. • Counterparty risk – non- performance of counterparties used for depositing surplus funds (e.g. money market funds, bank deposits) and hedging. • Liquidity risk – misjudgement of the level of liquidity resulting in the inability to meet contractual/ contingent financial obligations or the inability to fund the business when needed. Link to strategy: 6 1 5 2 4 3 28 easyJet plc Annual report and accounts 2016 Link to strategy: Build number 1 and 2 network positions 1 2 A lean cost advantage The best people 6 3 Customer and operational excellence Grow revenue 5 4 Data and digital V Risks impacting the viability assessment (turn to page 22 for further details) FINANCIAL CONTINUED Risk description Mitigation Delivery of projects supporting the business strategy The business is undertaking a number of key projects and programmes to deliver key elements of the strategy. Failure to deliver the planned business benefits and cost savings from these projects may result in under achievement of easyJet’s planned financial results. Link to strategy: 6 1 5 2 4 3 PEOPLE Risk description The Executive Management Team meets monthly to review progress made on the portfolio of programmes and solve issues that require escalation. Key IT projects or programmes have additional oversight through the IT Governance and Oversight Committee (a committee of the Board). Turn to page: 55 for further details Each project or programme has its own steering group which provides challenge to the project, monitors progress and ensures that decisions are made at the appropriate level. A portfolio management office is in place to oversee delivery of projects and programmes, and track budgets and realisation of benefits. A project management framework, which sets out governance requirements, key processes and controls, is followed by all projects and programmes. "Lessons learnt" reviews are undertaken to ensure continuous improvement to this approach. Mitigation Attraction and retention of talent easyJet’s current and future success is reliant on having the right people with the right capabilities. There is a recruitment strategy for pilots and cabin crew. This includes pilot sponsorship and the Amy Johnson Flying Initiative to attract more female pilots. In addition, easyJet has developed a coherent employment brand to attract and retain top talent. Increased competition in the recruitment market may impact easyJet’s ability to attract and retain key talent. This could adversely affect the delivery of strategic objectives. Link to strategy: 6 1 5 2 4 3 An annual survey is undertaken to measure staff engagement and identify any areas for further management attention. easyJet’s aim is to develop talent from within. There are several talent development programmes in place for individuals who have been identified for fast-tracking into more senior roles as vacancies arise. Alongside this there is an annual succession planning process to ensure there are clear successors for all key business roles. 29 www.easyJet.comStrategic reportGovernanceAccounts Risk continued COMPLIANCE AND REGULATORY Risk description Mitigation Impact of EU exit Following the outcome of the UK referendum to leave the EU, there remains uncertainty as to how this will affect easyJet’s current market access rights. If easyJet is unable to continue to fly its intra-EU network this would have a significant operational and financial impact. An internal working group has been established to review all aspects of easyJet’s operations. easyJet is actively engaging with regulators, the UK Government and the EU to secure European flying rights through the continuation of a liberalised and deregulated aviation market across Europe. As a mitigant, easyJet is in the process of registering an Air Operator Certificate in an EU territory to enable access to the European aviation market in as similar a way as today in a post-Brexit landscape. easyJet has an in-house legal team to advise on legal issues and developments, and to monitor compliance with formal regulatory requirements. It also has a panel of external legal advisers both in the UK and in key easyJet markets, who are briefed to keep easyJet informed of any changes or new legislation and to assist easyJet in developing appropriate responses to such legislation. In addition, a Head of Compliance has recently been appointed to develop and lead internal compliance programmes. The Regulatory Affairs Group co-ordinates easyJet’s role in influencing future and existing policy and regulations that affect the airline industry and will work with industry bodies to assist in this, as appropriate. Country Review Boards are established for easyJet’s main markets, raising awareness of in-country issues, and providing a forum in which to highlight any potential legislative changes and impacts in the different countries. Link to strategy: V 6 1 5 2 4 3 Legislative and regulatory risks The airline industry is heavily regulated and there is a continual need to keep well informed and adapt to (as required) any legislative or regulatory changes across the jurisdictions in which easyJet operates. Failure to comply with legislative and regulatory requirements (or interpretations thereof), such as local consumer laws, legal decisions or policy changes in relation to passenger compensation, environmental and airport regulation, in the jurisdictions in which easyJet operates, could have an adverse reputational and financial impact. Link to strategy: 6 1 5 2 4 3 30 easyJet plc Annual report and accounts 2016 V Risks impacting the viability assessment (turn to page 22 for further details) Mitigation easyJet has an active shareholder engagement programme led by its investor relations team. As part of that programme easyJet engages with easyGroup Holdings Limited on a regular basis alongside its other major shareholders. In addition, the Company has a relationship agreement with easyGroup and Polys Holdings in line with the controlling shareholder regime as set out in the Financial Conduct Authority’s Listing Rules. Representatives from the Board and senior management take collective responsibility for addressing issues arising from any activist approach adopted by the major shareholders. The objective is to address issues when they arise and anticipate and plan for potential future activism. The brand licence agreement with easyGroup Ltd provides for the regular meeting of senior representatives from both sides to actively manage brand-related issues as they arise. Such meetings occur on a quarterly basis and have proven effective. easyJet also monitors compliance with brand licence service levels and has a right to take steps to remedy any instance of non-compliance. Link to strategy: Build number 1 and 2 network positions 1 2 A lean cost advantage The best people 6 3 Customer and operational excellence Grow revenue 5 4 Data and digital REPUTATIONAL Risk description Major shareholder and brand owner relationship easyJet has two major shareholders (easyGroup Holdings Limited and Polys Holdings Limited) which, as a concert party, control 33.73% of its ordinary shares. Shareholder activism on their part could adversely impact the reputation of easyJet and cause a distraction to management. easyJet does not own its company name or branding which is licensed from easyGroup Ltd. The licence includes certain minimum service levels that easyJet must meet in order to retain the right to use the name and brand. The easyJet brand could also be impacted through the actions of easyGroup or other easyGroup licensees. Link to strategy: 6 1 5 2 4 3 Cyber threat and information security easyJet receives most of its revenue through credit card transactions and operates as an e-commerce business. It faces both external cyber threats and internal risks to its data and systems. A security breach could negatively impact easyJet’s reputation and have an adverse operational and financial impact. Link to strategy: 6 1 5 2 4 3 An Information Security Steering Group, chaired by the General Counsel, oversees any developments in data threats and controls and determines whether appropriate responses are being taken to them. There are dedicated information security teams that monitor threats and ensure that the design, implementation and operation of easyJet systems are secure. This is through the following: • achieving "secure by design" through a dedicated security architecture capability; • monitoring of secure systems against unauthorised access; • reviewing the security of external and internal systems and easyJet.com through periodic vulnerability scanning; • considering information security risks within procurement processes and the introduction of new systems and IT services; • reviewing and refreshing information acceptable use policies; and • maintaining staff security awareness and education through a Security Champions network, online training materials and periodic awareness campaigns. Given the nature of this risk the appropriateness of the controls is under continuous review. 31 www.easyJet.comStrategic reportGovernanceAccounts Corporate responsibility How we run our business responsibly 20% 84% NEW TARGET TO INCREASE THE PROPORTION OF FEMALE PILOT CADETS TO, BY 2020 CUSTOMER SATISFACTION AMONGST PASSENGERS WITH REDUCED MOBILITY(1) <80g £8m CARBON EMISSIONS PER PASSENGER KILOMETRE(1) RAISED FOR UNICEF SINCE 2012 Achievements this year I want to highlight some particular achievements this year: • Female pilots – In the first year of our new Amy Johnson Flying Initiative we have met our target of doubling the proportion of our new entrant female pilots from under 6% last year to 12% selected this year, a year ahead of schedule. We have now set a new target to increase the proportion of our easyJet female pilot cadets to 20% by 2020. • Carbon reduction – Last year we increased our carbon emissions reduction targets, first set in 2013. This year our carbon emissions per passenger kilometre dropped below 80 grams. • Compensating passengers when their travel is disrupted – This year a series of mainly external events have affected some passengers’ travel. We want to provide good support at the time, such as giving useful updates or overnight accommodation when it’s needed. We also provide the appropriate compensation to passengers when it is due. In the year ending 30 September 2016 we processed over 521,000 out-of-pocket expenses and compensation claims for passengers. • Passengers who need special assistance – We want to offer a good experience for all of our passengers, including those who need some extra assistance. The easyJet Special Assistance Advisory Group (ESAAG), chaired by Lord David Blunkett, continues to provide valuable advice. Customer satisfaction amongst these passengers was 84% for the year ending 30 September 2016, which remains higher than for all passengers. • UNICEF – Our pan-European charity partnership continues and we have now raised more than £8 million in just over four years, thanks to the efforts of our crew and the generosity of our passengers. We are currently on course to meet our target of raising £10 million by 2018. CAROLYN MCCALL DBE Chief Executive easyJet’s purpose At easyJet we want to run our business with a true sense of purpose that both serves society and is based on a set of principles which helps us achieve sustainable profitability. Over the last year we have been working with Blueprint for Business, an organisation which helps businesses develop their purpose and role in society. We’ve always felt that people at easyJet know what the "right thing" to do is and they are passionate about making travel easy and affordable for our customers. Now we are developing easyJet’s role and impact in society and its purpose. We are building our purpose around our cause of making travel easy and affordable, our pride in helping to connect people across Europe, and the recognition that businesses face many choices and that easyJet wants to do things in the right way. This means being open, upfront and fair with our customers and suppliers, to build lasting relationships with both. It means being a good employer so that easyJet is somewhere people want to work, where the "Orange Spirit" of our people can thrive. It means being a good citizen and having a positive impact in the communities which we serve, and aiming to mitigate our impact on the environment. In this report we set out how easyJet is striving to live up to these principles. We see this as a challenge to ourselves which will help us to grow sustainably and continue to be a business that people want to work for, fly with and invest in. (1) In the year ending 30 September 2016. 32 easyJet plc Annual report and accounts 2016 easyJet’s role and impact in society – using the Blueprint principles 1 HONEST AND FAIR WITH CUSTOMERS AND SUPPLIERS S A FE T Y S A F E T Y 4 A GUARDIAN FOR FUTURE GENERATIONS 2 A RESPONSIBLE AND RESPONSIVE EMPLOYER S A F E T Y S A FE T Y 3 GOOD CITIZEN 1. Honest and fair with customers and suppliers • An open and honest relationship with all customers • Supporting customers during travel disruption • Working in partnership with suppliers • Committed to human rights 2. A responsible and responsive employer • A good employer across Europe • Fair reward and a stake in the Company for employees • Learning and development opportunities • A diverse workforce who are supported 3. Good citizen • Contributing to local communities • Reducing the impact of noise and emissions from aircraft on local communities • Helping local charities that are important to employees 4. A guardian for future generations • Efficient use of aircraft to reduce carbon emissions • Waste reduction Read our full corporate responsibility report on our website at corporate.easyjet.com 33 www.easyJet.comStrategic reportGovernanceAccounts Corporate responsibility continued SAFETY Safety is easyJet’s number one priority. easyJet is committed to providing a safe journey for its passengers and a safe working environment for all of its people and suppliers. easyJet's safety is managed and maintained through business processes and structures. Safety The Chief Executive of easyJet Airline Company Limited (EACL) and the Accountable Manager of easyJet Switzerland S.A. (EZS) are responsible for all aspects of safety delivery. The Director of Safety and Security reports directly to the Chief Executive and the Chairman and has a remit to act independently outside of other operational or commercial considerations. The Safety Committee, made up of independent Non-Executive Directors, also reviews safety matters. More information on the Safety Committee is provided on pages 48 and 49. Security The easyJet security team works closely with government and regulatory agencies throughout easyJet's network in order to minimise the vulnerability of easyJet's customers and people to security risks. Security risk assessments, informed by the current geopolitical situation, are made for each country and airport to which easyJet flies. The business also employs measures to protect business and personal data. All easyJet aircraft have on-board defibrillators, for use by the crew or medical professionals travelling as passengers if someone on board is having severe heart problems. 34 Fatigue risk management easyJet manages the risk of fatigue to make sure that its crew can operate flights safely. The airline uses a Fatigue Risk Management system which provides data to help predict the risk of fatigue in pilots. The system was established over ten years ago and is one of only two such systems approved for use by the UK Civil Aviation Authority (CAA). easyJet has also collaborated with the US National Aeronautics and Space Administration (NASA) on fatigue research and analysis. Fatigue Review In 2015 the Board asked the Director of Safety and Security to undertake a review of fatigue within crew. This review was undertaken independently of all the operational departments. The findings of the review were presented to the Board in March 2016 and included eight primary and 28 secondary recommendations. The business is currently considering its response to these recommendations and some actions are already being undertaken. Disruptive behaviour easyJet does not tolerate disruptive behaviour on its flights. Its crew are trained to assess all situations to make sure that the safety of the flight and other passengers is not compromised at any time. This year easyJet signed the British Air Transport Association (BATA)’s Code of Conduct on this issue which seeks to minimise instances of disruptive behaviour and ensure a safe and enjoyable environment for passengers and employees. The airline has introduced measures to discourage and try to prevent disruptive behaviour, as well as further increasing the support for its crew to respond when it does occur. This work is being targeted at particular flights which are known to be at higher risk of disruptive behaviour. This has included: • communicating with customers in advance and at the gate that easyJet does not tolerate disruptive behaviour and that they cannot drink alcohol purchased in the airport on board; • placing security guards at departure gates for • specific flights; scheduling more experienced crew members to work on flights identified as higher risk; • encouraging captains to reiterate the airline’s messages through their announcements to passengers; • a robust scheme to support crew from a welfare • perspective when they have experienced an incident on board; and the easyJet security team taking action against disruptive passengers and working closely with the police to seek prosecutions. Disruptive behaviour on board is often caused by passengers who have consumed too much alcohol whilst in the airport before their flight or who consume alcohol on board that has been purchased at the airport. easyJet is determined to tackle this issue and is working with industry partners to find a voluntary solution. However, if this is not sufficient then easyJet will also press for necessary regulatory changes. easyJet plc Annual report and accounts 2016 Safety in the supply chain easyJet carries out oversight of safety in its supply chain through its Standards Assurance and Compliance Monitoring processes. Standards Assurance enables managers to undertake performance reviews through sample checks to monitor service level agreements, key performance indicators and supplier engagement activities. Compliance Monitoring is undertaken by easyJet’s independent operations risk compliance monitoring team. The audit schedule is established on a risk-based programme focused on applicable standards throughout the supply chain. RIDDOR For the UK operation easyJet captures Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (RIDDOR) reports in its safety reporting system, SafetyNet. HONEST AND FAIR WITH CUSTOMERS AND SUPPLIERS Customers easyJet’s cause is to make travel easy and affordable. easyJet wants to provide its customers with a good, safe service and a friendly experience. easyJet wants to be open and honest with its customers to build lasting relationships with them. In 2013 easyJet introduced a Customer Charter which sets out what customers can expect from easyJet. The Charter is available at: www.easyJet.com/customer-charter. Please refer to the Chief Executive's review on pages 7 to 15 for more information on our customer and operational excellence. Supporting passengers during disruption easyJet seeks to support passengers during disruption and this has become particularly important this year due to a range of factors which have led to increased disruption. easyJet has continued to increase the support options available for passengers. Passengers are already given timely updates about their flight through text messages, emails and live updates on easyJet’s Flight Tracker tool. This year easyJet has introduced self-service management tools for passengers to use during times of disruption. This allows passengers whose flights are cancelled to directly transfer to other flights, request a refund and arrange for overnight accommodation. easyJet covers all reasonable out-of-pocket expenses for extended delay situations and adheres to EU261 compensation requirements. In the year ending 30 September 2016 easyJet processed over 521,000 out-of-pocket expenses and compensation claims for passengers. easyJet has also introduced a disrupted passenger survey to better understand the experience of these passengers. An apology email and the survey are sent to every passenger who has been affected by a delay of over three hours or a cancellation. Customers who need special assistance easyJet wants to make travel easy and affordable for all of its passengers, irrespective of any disability or other constraint they may have. In 2012 easyJet established the easyJet Special Assistance Advisory Group (ESAAG) to provide feedback and guidance on the services it provides to passengers who require special assistance. The group is Chaired by Lord David Blunkett, a former UK cabinet minister who is himself blind. The group includes members from key easyJet markets (the UK, France, Switzerland and Italy) and all have personal or professional experience of special assistance issues. easyJet carried 456,821 passengers who needed special assistance in the year ending 30 September 2016. This increased by 9% from the year ending 30 September 2015. Customer satisfaction amongst these passengers was 84%. This was down by 3% year-on-year, however it was 12 percentage points higher than customer satisfaction amongst all passengers. easyJet has a range of measures for passengers who require special assistance: • A trained special assistance customer contact centre team. • On-board wheelchairs on all aircraft. • easyJet crew are trained in special assistance and understand the needs of passengers with disabilities, including how to identify and support those with hidden disabilities. 35 www.easyJet.comStrategic reportGovernanceAccounts Corporate responsibility continued ESAAG has taken very seriously the importance of training at all levels of staffing and best practice elsewhere. In particular, work is being undertaken to improve the interface between the airline (which under regulation carries responsibility) and airports and their service providers, who are often the immediate source of either support or concern. There is much still to be done. Airports and their special assistance providers remain a very important part of the overall journey experience for passengers. This is why ESAAG has continued to work with European aviation regulators, airports and special assistance providers on its pan-European Charter on meeting the needs of air travellers with disabilities. I would like to thank the members of ESAAG for their work and easyJet for continuing to take on our advice to improve the service for all passengers. RT HON THE LORD BLUNKETT, of Brightside and Hillsborough Chair of easyJet Special Assistance Advisory Group ESAAG members Rt Hon The Lord Blunkett, of Brightside and Hillsborough – Chair Ann Bates OBE – Transport Access Advisor - Aviation and Rail Roberto Castiglioni – Access to Air Travel Expert, Member of UK CAA Disability Advisory Group Ann Frye – Member of CAA Consumer Panel, Director, PassePartout Training Ltd, Visiting Professor, University College London Mervyn Kholer – Age UK Stefano Medaglia – Accessible transport adviser and architect based in Milan Jean-Marie Munier – Former adviser at Association pour Adultes et Jeunes Handicap Marcus Rocca – Mobility International Schweiz Report from the Chair of the easyJet Special Advisory Group - Rt Hon The Lord Blunkett, of Brightside and Hillsborough The easyJet Special Assistance Advisory Group was established in 2012 and has continued to work with easyJet, as well as regulators and the wider aviation sector, to improve the experience for passengers who need special assistance and contribute to a better experience for all passengers. This year easyJet’s new 186-seat A320 aircraft with a re-designed cabin have started to come in to service, including an improved ‘Space Flex’ accessible toilet which was introduced based on the advice of ESAAG. This complements the on-board wheelchairs which are already standard across all easyJet aircraft. Customers booking special assistance are now served by a new specialist team of customer contact centre agents, who are fully trained in special assistance issues. This is an important point of contact with special assistance customers and ESAAG is pleased to see the improvement in the service. ESAAG has continued to work with easyJet on key projects for the airline, including the consolidation of easyJet’s operations at London Gatwick in the North Terminal and the on-going development of its website and mobile apps. This has ensured that the needs of people with special assistance are considered throughout easyJet. Further progress is reflected by the customer satisfaction score amongst passengers who use special assistance, which remains high and above that of the whole passenger population. 36 easyJet plc Annual report and accounts 2016 Suppliers easyJet’s suppliers have an important role in making travel easy and affordable for the airline’s customers. The business seeks to have an open, constructive and effective relationship with all suppliers, to contribute to its success. easyJet has an established supplier relationship management framework, which provides a toolkit and guidance for easyJet managers who lead relationships with easyJet’s key partners. The framework is developed around easyJet’s core values and the objective is to build strong lasting relationships with partners and drive value from the partnership. The principles are based on managing suppliers in the same way that easyJet manages its people, and ensuring that suppliers’ rights and responsibilities are clearly set out. When tendering for new suppliers easyJet seeks information from suppliers on factors including quality assurance, health and safety, environmental practices, sub-contracting arrangements and legal, regulatory and tax compliance. Human Rights and the Modern Slavery Act 2015 easyJet seeks to comply with all relevant laws in the countries in which it operates, and co-operates with the efforts of national law enforcement agencies and border agencies to combat human rights abuses and crimes such as human trafficking. easyJet’s security team work closely with the UK Government’s Anti-Slavery Commission to try to identify human traffickers and fully cooperate and support police and other agencies with human trafficking investigations relating to its passengers. easyJet’s policies seek to respect human rights standards defined by internationally agreed principles: the International Bill of Human Rights; the International Labour Organisation Declaration on Fundamental Principles and Rights at Work; and the United Nations Guiding Principles on Business and Human Rights. It also expects third parties who deal on its behalf to observe these principles and includes specific obligations relating to human rights compliance in key new and renewed supplier agreements. easyJet does not tolerate the use of any forced, compulsory or child labour or exploitation. easyJet welcomes the introduction of the UK Modern Slavery Act 2015 (MSA) and embraces the transparency objectives and principles of the MSA. easyJet is committed to enhancing its existing supply chain management policies and procedures and staff training to ensure improved transparency around working conditions of individuals working in its supply chain and greater staff awareness of the typical behaviours and actions of human traffickers. easyJet welcomes the closer focus the UK Government has brought to the important issue of modern slavery and will seek to be a contributor to the development of best practice in this area. Prior to the end of March 2017, easyJet will publish its formal slavery and human trafficking statement and report in more detail on the MSA compliance programme work underway. Bribery and corruption easyJet has a company-wide anti-bribery and corruption policy. There is also a gifts and hospitality policy and an online Register to record all gifts and hospitality that are accepted by employees. When tendering key new supplier contracts easyJet informs suppliers of its anti-bribery and corruption and gifts and hospitality policies and requires compliance as a condition of doing business with easyJet. Subsequently, in key contracts an appointed supplier is expected to reaffirm its commitment by signing up to specific contractual obligations on anti-bribery and corruption in its contract with easyJet. A RESPONSIBLE AND RESPONSIVE EMPLOYER Employment easyJet wants to be a responsive and responsible employer, creating an environment where people want to work and they can thrive. During the year ending 30 September 2016 easyJet has recruited: • 368 pilots; • • 279 employees to its management and administration team 1,496 cabin crew; and and engineering and maintenance teams. During the year ending 30 September 2016, 35% of management and administration vacancies were filled through internal recruitment (2015: 35%). As at 30 September 2016 easyJet employed 10,774 people across its network (2015: 10,104). Employee turnover 9.0% 7.5% 6.5% 6.7% 6.6% 2012 2013 2014 2015 2016 Overall employee turnover (based on voluntary departures) for the year ending 30 September 2016 was 9.0%, compared to 6.6% in the year ending 30 September 2015. Within the different easyJet communities the turnover this year was: • Pilots – 5.7% • Cabin crew – 10.1% • Management and administration; and engineering and maintenance – 10.3% Local employment easyJet employs people on local contracts in eight countries across Europe, complying with national laws. This has a higher cost than the approach taken by some other airlines that employ all of their people on one contract, irrespective of where they may work. easyJet does this so that its roles are attractive locally and to reflect each country’s employment practices. Trade unions and employee representation easyJet works with 19 unions and nine representative bodies across eight countries. In the year ending 30 September 2016 easyJet released employee representatives for a total of 4,920 days. 37 www.easyJet.comStrategic reportGovernanceAccounts Corporate responsibility continued easyJet also consults its employees across Europe on business issues through its European Works Council. Engagement easyJet’s 2016 employee survey had a fall in engagement of seven percentage points to 76%. The results by community were: • Pilots – 66% • Cabin crew – 76% • Engineering and maintenance – 85% • Management and administration – 86% easyJet believes these results reflected the more challenging operational environment and the effect of this on flight crew. easyJet is working to better protect crew from these operational challenges in the future, such as by seeking to make crew rosters more stable. While the overall engagement figure was lower, easyJet believes the survey also shows there is still a strong belief in easyJet as a good place to work and a commitment to looking after customers, the business strategy and its future success. 94% of respondents agreed that they understood 'how important it is to make sure our customers have a great experience with easyJet' and 83% agreed that they understood 'how my role contributes to easyJet’s commercial and financial success'. Employee attendance in the year ending 30 September 2016 was 95.8% (2015: 96.2%). Reward easyJet offers a competitive reward package, focused on cash and variable pay rather than fixed benefits. The reward package includes an annual performance-driven bonus (based on personal and Group performance) and share awards (based on the financial performance of the Group). All easyJet employees, with a minimum amount of service, have the opportunity to become shareholders in the business. All employees can join easyJet’s Save As You Earn scheme, which allows employees to save money from their salary with the option to purchase shares. All UK employees can take part in the Buy As You Earn scheme, in which employees can buy shares from their salary each month and easyJet buys matching shares. The UK schemes are approved by Her Majesty’s Revenue & Customs. easyJet also awards Performance (free) Shares to employees. 38 easyJet also offers a small number of associated airline benefits in line with the business’ cost-focused approach. These include insurances and access to reduced cost travel on easyJet services. easyJet contributes towards a group personal pension plan in the UK and, where negotiated, to pension arrangements for its employees in Germany and Portugal. Part time and flexible working easyJet aims to provide flexible working arrangements, part time working and job sharing that fit its business model and the personal circumstances of its people. As at 30 September 2016 there were 1,454 easyJet employees who worked part time (working less than 35 hours per week), making up 13.5% of the employee population. Learning and development easyJet provides significant new entrant and on-going training for its pilots and cabin crew. It has two training centres at London Gatwick and London Luton airports which are used by crew from across the easyJet network. easyJet has an established pilot cadet programme, in partnership with CTC Aviation, CAE Oxford Aviation Academy and FTEJerez, to train people for their first full-time flying role. In addition to role-specific training, easyJet also offers learning and development opportunities. In the year ending 30 September 2016 it offered 158 face-to-face training workshops for management and administration employees, which had over 781 participants, as well as 70 e-learning courses for all employees. easyJet’s graduate programme currently has 42 participants from across Europe, working in different parts of the airline to develop their skills and knowledge. easyJet is part of an industry working group which is considering the use of apprenticeships and the new apprenticeship system being introduced by the UK Government. Diversity Gender easyJet is an equal opportunities employer and works hard to create an environment where women have the opportunity to build careers in all communities and at all management levels of the organisation. As at 14 November 2016 easyJet has two female Directors on its Board, the Chief Executive and the Chair of the Audit Committee. The Board’s female make-up is 22.2%. The Group had three female Directors between 1 January 2016 and 30 September 2016, until Chris Browne stepped down from the Board. As at 14 November 2016 55.6% (five out of nine) of easyJet’s Executive Management Team were women. easyJet is committed to ensuring there is a pipeline of women coming up through the organisation. Middle managers will provide the pipeline for future senior managers and easyJet wants to grow the number of women in its senior management team. easyJet plc Annual report and accounts 2016 • Senior management team (including the Executive Management Team) as at 30 September 2016 – 17 people out of 62 in total were female (27.4%). • Middle management as at 30 September 2016 – 89 people out of 252 in total were female (35.3%). As at 30 September 2016 the overall easyJet workforce was 46.1% female. At 30 September 2015 this was 45.4%. Gender pay easyJet continues to support the UK government’s commitment to address the gender pay gap. Last year, for the first time, easyJet provided information on its gender pay gap. To be meaningful, pay gap comparisons need to be made by type of role. Otherwise the statistics, which should be a useful guide for companies and employees, risk becoming distorted and losing their value. As an illustration, female pay as a percentage of male pay at easyJet, irrespective of the type of role or any other consideration, was 35% for the year ending 30 September 2016, an improvement of three percentage points compared to the year ending 30 September 2015. This is based on full-time equivalent basic salary of active UK employees. This is influenced by the salaries and gender make-up of easyJet’s two largest communities, its pilots and cabin crew. Pilots are predominantly male and their salaries are higher than for cabin crew, the majority of whom are female. However, easyJet salaries for equivalent roles are broadly equal across the genders, reflecting the business’ commitment to gender equality. Salaries for pilots and cabin crew are collectively agreed, meaning for example that a female captain’s basic salary will be 100% that of a male captain and a female cabin crew member’s salary will be 100% that of a male cabin crew member. Female pilots easyJet has recognised that in the whole airline industry the proportion of female pilots is too low. The International Society of Women Airline Pilots estimates that there are around 130,000 airline pilots worldwide, of which 4,000 or just over 3% are female. In 2015 easyJet introduced a new strategy to encourage more women to become pilots and to develop women already in pilot roles. This became the Amy Johnson Flying Initiative, in partnership with the British Women Pilots Association and named after the female aviation pioneer. easyJet set an initial target to double the proportion of its new entrant pilots who are female, from under 6% in 2015 to 12% over a two-year period. Over the first year the activities by easyJet included: • working with the UK government and organisations which promote female take-up of STEM (science, technology, engineering and maths) subjects; • offering loan underwriting of around £100,000 for six female new entrant pilots; • offering up to 10 training loan underwritings for A320 type ratings for female pilots entering from other airlines; • current pilots at easyJet have visited schools and youth organisations to talk about aviation careers; and • easyJet female pilots have been highlighted in the media and through easyJet’s own communication channels. “On behalf of the family, this is a wonderful opportunity being offered to today’s women and we know Amy would have been delighted.” JUDY CHILVERS AND SUSAN CROOK nieces of Amy Johnson easyJet was able to meet its target within one year, as just over 12% of new entrant pilots selected in the year ending 30 September 2016 were female. Some of the selected new entrants are already flying with easyJet or have started their training, while others will begin in the year ending 30 September 2017. As a result, easyJet has set a new target to increase the proportion of easyJet female pilot cadets to 20% by 2020. Disability easyJet treats applicants with disabilities equally and supports current employees who become disabled. This includes offering flexibility and making reasonable adjustments to the workplace to ensure they can achieve their full potential. However for easyJet’s two largest communities, pilots and cabin crew, there are a range of regulatory requirements on health and physical ability that all applicants and current employees must comply with. Diversity survey This year easyJet carried out a voluntary and anonymous survey of its UK employees, to better understand the make-up of its workforce and how it can further support its people. The results of this survey are now being considered by the business. easyJet will also discuss carrying out similar surveys with its employees' representative groups and relevant national authorities in other European countries. This would take account of local legal and cultural considerations. easyJet is also a member of OUTStanding, an organisation which promotes equality and inclusion for people of all sexualities in the workplace. 39 www.easyJet.comStrategic reportGovernanceAccounts “We remain hugely grateful to easyJet’s customers and staff for their incredible support for UNICEF’s global polio eradication work. Thanks to easyJet, UNICEF was able to quickly support the response to a sudden outbreak of polio in Myanmar. We have also been able to help protect millions of children against polio in Afghanistan, one of the last countries where polio is still endemic. A historic opportunity exists to end polio forever but while the disease continues to survive anywhere, children everywhere remain at risk as the recent polio outbreak in Nigeria shows. We would like to thank easyJet for their valued support at this pivotal time.” REZA HOSSAINI UNICEF Polio Director Corporate responsibility continued GOOD CITIZEN UNICEF easyJet has a pan-European charity partnership with UNICEF, the world’s leading children’s organisation. Since the partnership began it has raised over £8 million, helping UNICEF to protect millions of children around the world from disease and keep them safe during emergencies. During the spring, summer and winter collection periods easyJet cabin crew carry out on-board appeals for customers to donate their spare change and leftover foreign currency. The funds primarily support UNICEF’s vaccination work to keep children safe from polio, as part of the global efforts to eradicate this deadly disease. Over the past year the funds raised through the partnership have helped UNICEF vaccinate more than seven million children against polio in Myanmar and purchase more than four million polio vaccines which have been used to protect children in Afghanistan. In the year ending 30 September 2016 the partnership raised over £1.4 million, which included the on-board collections and other fundraising activity by easyJet employees. This year easyJet collected on-board to support UNICEF’s Soccer Aid 2016 appeal, which was focussed around a celebrity football match. The collection on UK-based aircraft raised over £50,000 and donations were doubled by the UK government bringing the total to over £100,000. In addition to fundraising, easyJet also helps to raise awareness of UNICEF’s work for children. This includes an easyJet aircraft with a special ‘Change for Good’ UNICEF livery, featuring the UNICEF partnership in the inflight magazine ‘Traveller’, and making announcements about UNICEF’s work on-board flights during collection periods. easyJet and UNICEF’s target is to raise £10 million through the partnership by 2018. Field trip In April 2016 four easyJet employees visited Cameroon to witness first-hand how on-board donations are helping protect children from polio. They were selected through an application process that considered their support for UNICEF and ability to become an internal ambassador for the partnership. Polio is no longer endemic in Cameroon, but in 2014 there was an outbreak in the eastern region. The group learnt about the complexities involved in ensuring every child is vaccinated in order to prevent future outbreaks. They joined a group of trained community volunteers as they went from house to house encouraging mothers to vaccinate their children, and they saw babies being vaccinated against polio in remote health clinics. Employee fundraising for UNICEF In November 2015, to mark easyJet’s 20th birthday, 17 easyJet employees cycled from Glasgow to London, to reflect easyJet’s first route. The group, which included pilots, cabin crew and engineers, covered over 400 miles and raised money for UNICEF. 40 easyJet plc Annual report and accounts 2016 Aircraft noise easyJet seeks to reduce the impact of aircraft noise on residents who live near airports or under flights paths. This includes: • working locally with airports and ATC to put in place noise • mitigation activities that best fit each airport; that easyJet aircraft meet the tightest international noise standards (ICAO Chapter 4); and • easyJet pilots using flying techniques to reduce noise impact, such as continuous descent approaches. From 2017 easyJet will start to receive the next generation A320neo aircraft. These aircraft were already expected to be quieter and more fuel efficient, but recent flight tests have shown that the A320neo aircraft are over 50% quieter than current generation aircraft during the take-off and landing phase. Vortex generators In recent years there has been some concern about a particular sound associated with A320 family aircraft of all airlines due to the airflow under the wing. A ‘vortex generator’ fitting has been introduced to address this. All new aircraft delivered to easyJet since September 2014 are fitted with vortex generators. In November 2015 easyJet began an engineering programme to modify 197 existing aircraft with vortex generators. It expects to complete the programme by March 2018. As at 30 September 2016 more than half of easyJet’s fleet were fitted with vortex generators. A GUARDIAN FOR FUTURE GENERATIONS easyJet’s biggest impact on the environment is its fuel consumption and the associated carbon emissions. easyJet is continuing to make more efficient use of fuel and to further reduce emissions per passenger kilometre on its flights. The whole airline industry will continue to rely on the use of fossil fuels in the medium term. easyJet believes the industry must make continual improvements in the efficient use of these fossil fuels, whilst also supporting the longer-term technological change necessary to deliver flights with significantly lower carbon emissions. 41 “I had the chance of a lifetime to see first-hand the work that UNICEF does and how the money we raise really makes a difference and changes people’s lives. It was a humbling experience, but at the same time really positive. The people we met were amazing and really wanted to make a difference and were so keen to answer questions. They made us feel so welcome. Overall this was an experience I will never forget.” MARK WILKINSON easyJet Corporate Sales for Northern Europe Italian earthquake appeal Following the earthquake in Italy in August 2016 easyJet carried out on-board collections on its Italian based aircraft for just over three weeks, raising over £149,000 to support the Italian Red Cross’ efforts. Charity Committee easyJet has a Charity Committee made up of airline employees which provides support to charities which are important to employees. These tend to be smaller charities in the areas where easyJet’s employees live. This year the Committee has made more than 140 awards of flight vouchers or financial donations, each to the value of £250 or €300. Community work in Luton easyJet has continued to make a significant contribution to the community in Luton and Bedfordshire, in the area near its head office and where the largest group of employees are based. • easyJet funds a scheme with Luton Town Football Club to offer every primary school in Luton and Bedfordshire a free physical education session with the club. • easyJet also continued to be a patron of Love Luton, an organisation which seeks to promote and improve the town. • easyJet carried out a trial mentoring programme between easyJet female managers and young women in education in Luton and Bedfordshire. www.easyJet.comStrategic reportGovernanceAccounts Corporate responsibility continued Carbon emissions easyJet’s CO2 emissions in the year ending 30 September 2016 were 6.5 million tonnes, compared to 6.1 million tonnes in the year ending 30 September 2015. This is calculated based on easyJet's fuel uplift. The increase in overall emissions has been due to the continued expansion of easyJet’s operations. In the year ending 30 September 2016 easyJet’s passenger numbers increased by 6.6% compared to the year ending 30 September 2015. easyJet’s calculation of emissions is based on fuel burn measurement, which is verified to comply with the European Union’s Emission Trading System requirements. CO2 equivalents from emissions of other greenhouse gases are not included as there are no conversion factors available for these emissions from aircraft fuel burn. easyJet’s carbon reduction target is based on carbon emissions per passenger kilometre. In 2015 easyJet strengthened this target, as it had already exceeded the target originally set in 2013. easyJet’s current target, set in 2015, is to reduce its carbon emissions per passenger kilometre by 8% by 2020 compared to 2013. In the year ending 30 September 2016 easyJet’s carbon emissions per passenger kilometre were 79.98 grams (g), down from 81.05g per passenger kilometre in the year ending 30 September 2015. Carbon emissions per passenger kilometre (g) 84.40 84.60 85.48 83.76 82.03 81.05 79.98 2010 2011 2012 2013 2014 2015 2016 Efficient aircraft easyJet operates an efficient fleet of A320 family aircraft equipped with CFM56 engines. In 2015 easyJet increased its order to 130 for the new generation Airbus A320neo aircraft, for delivery from 2017 to 2022 and has purchase rights on a further 100 aircraft. These aircraft, equipped with CFM LEAP-1A engines and wingtip "Sharklets", will be 13% to 15% more fuel efficient than existing aircraft types. Operating efficiently easyJet continues to focus on reducing emissions and fuel burn for each aircraft. • easyJet worked with Airbus to develop a new cabin design for A320 family aircraft which adds a further six seats, whilst maintaining the level of passenger comfort. The first aircraft was delivered by Airbus in May 2016 and the cabin layout is planned to be retrofitted to existing A320 aircraft between autumn 2016 and spring 2018. This is contributing to the overall reduction in easyJet’s carbon emissions per passenger kilometre. 42 • easyJet has started to introduce lightweight Recaro seats that make each aircraft over 580kg lighter, a 26% seat weight reduction. These seats have been a standard feature of aircraft delivered to easyJet since April 2013 and are now fitted in 57 aircraft. • Sharklet wing tips make the aircraft more fuel efficient. This technology delivers up to 4% savings in fuel consumption and consequent reductions in CO2 emissions. These have been standard on aircraft delivered to easyJet since August 2013 and have also been retrofitted to 6 existing aircraft, so are now a feature on 58 easyJet aircraft. • easyJet's pilots have implemented measures to save fuel whilst still operating the aircraft safely and effectively, such as one engine taxiing, continuous descent approaches and minimum use of the auxiliary power unit when on the ground. • easyJet’s flight decks became paperless in 2014 and its entire fleet is now fitted with Panasonic Toughpads which replaced laptops and printed navigational charts. This has removed 27kg of paper per aircraft per flight, equating to a reduction of over 2,000 tonnes of CO2 emissions for easyJet as a whole per year. • easyJet’s enhanced maintenance programme includes the washing of the engine's compressors routinely to ensure they operate as efficiently as possible. Although some of these measures reduce CO2 emissions per flight by relatively small amounts, easyJet‘s large number of flights per day means the total savings are significant. Industry efforts and future technology easyJet is an active participant in Sustainable Aviation, a UK body made up of airlines, aviation manufacturers, air traffic control providers and other organisations in the sector. It supports efforts to reduce carbon emissions and has produced a carbon emissions roadmap. This shows that UK aviation is able to accommodate significant growth to 2050, without a substantial increase in absolute carbon emissions, through a number of measures to improve aircraft fuel efficiency and international carbon trading. Local air quality Local air quality impact arises from nitrogen oxides (NOx) emissions during aircraft take-offs and landings. easyJet’s new engines feature a tech insertion which reduces NOx emissions by around 25%. These are in use in 71% of easyJet’s aircraft. De-icing fluid Aircraft de-icing fluid contains Glycol which can affect the water environment if not collected after use. easyJet chairs the UK Glycol recovery group, of 31 member companies who are working to introduce airport recycling systems and developing technologies to reduce the amount of fluid used, such as varying the spray blend based on air temperature. Waste management easyJet seeks to recycle as much waste as possible. On board the crew seek to separate recycled cans from general waste. The airline does not have control of the final management of on-board waste which is dependent on the facilities at each airport where waste is collected by local cleaning and ground handling contractors. easyJet also has recycling in place in its offices and hangars around its network. easyJet plc Annual report and accounts 2016 Chairman's statement on corporate governance Committed to corporate governance Dear Shareholder At easyJet, we are committed to maintaining high standards of corporate governance to enhance performance and for the protection of our shareholders. I would like to highlight, in particular, the following key areas of governance during 2016: STRATEGY Defining the long-term strategic objectives for the Group, continuing to assess their appropriateness, and evaluating progress against these objectives has continued to be a key focus for the Board, in particular in light of the challenging economic and operating environment. This year the Board held strategy sessions in March and September at which we challenged and shaped the strategic priorities brought by management. BOARD AND COMMITTEE COMPOSITION As reported in last year’s Annual Report, there were a number of changes to the Board during the year. After almost nine years of service, John Browett stepped down from the Board on 31 December 2015. I would like to thank John on behalf of the Board for his dedicated service and commitment. We welcomed Chris Browne to the Board as Non- Executive Director in January 2016. On 30 September 2016 she stepped down from the Board to join the easyJet Executive Management Team as Chief Operating Officer from 1 October 2016. Andrew Findlay joined the Company and the Board as Chief Financial Officer at the start of the 2016 financial year. Both individuals have brought valuable experience to our business and further strengthened our composition in respect of experience, skills and personal attributes. There have been several changes in the make-up of our Committees, with a change in the chairmanship of three Board Committees, with Andy Martin succeeding Adèle Anderson and John Browett as Chair of the Finance Committee (in December 2015) and the IT Oversight and Governance Committee (in January 2016) respectively. On the Safety Committee, Chris Browne succeeded Professor Rigas Doganis as Chair of the Safety Committee on 1 March 2016 and Dr. Andreas Bierwirth has subsequently become Chair following Chris Browne stepping down from the Board on 30 September 2016. The membership of the Board’s Committees as at 14 November 2016, and the changes made during the 2016 financial year and up to this date, can be found on pages 44 to 45. OUTCOME OF THE EU REFERENDUM The Board has reviewed management’s plans to ensure the airline will fully maintain its existing network and operations at every scheduled Board meeting following the outcome of the EU referendum. A Brexit sub-committee of the Board has been set up to review planning in more detail, which includes undertaking the formal process to acquire an Air Operator Certificate (AOC) in an EU jurisdiction. The sub-committee has received updates from the Company’s working group relating to project progress and met in November for a deep dive into the project detail. The Board remains confident that the UK leaving the EU will not have a material impact on the Group’s strategy or its ability to deliver long-term sustainable earnings growth and returns to shareholders. BOARD EFFECTIVENESS Each year, the Board undertakes a formal evaluation of its effectiveness. Following the externally facilitated review by Independent Audit Limited last year, this year the 2016 Board and Committees effectiveness review was facilitated by the Company Secretary and Group General Counsel, Kyla Mullins. In addition, Charles Gurassa, the Senior Independent Director, also led a review of my performance with input from the other Non-Executive Directors. Further details of the evaluation process are provided on page 57. Following this review, I am satisfied that the Board and its Committees are performing effectively and that there is the appropriate balance of skills, experience, independence and knowledge of the Group to enable the Directors to discharge their respective duties and responsibilities effectively. I am also satisfied that the members of the Board, in particular the Non-Executive Directors, have sufficient time to undertake their roles at Board and Committee level with the Company, so as to be able to discharge their responsibilities effectively. BOARD COMMITTEES The Board delegates certain of its responsibilities to the Board Committees to enable it to carry out its functions effectively. A diagram of the Board governance structure is set out on page 48. STRUCTURE OF THE CORPORATE GOVERNANCE REPORT The corporate governance report which follows is intended to give shareholders an understanding of the Company’s corporate governance arrangements and how they operated during the year. The corporate governance report includes reports from each of the Committee Chairs to provide details on key matters addressed by the Committees during the year. We have also set out a separate section (on pages 56 to 58) to provide a detailed description of how the Company has complied with the principles of the UK Corporate Governance Code. COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE The Board considers that it and the Company have, throughout the year, complied without exception with the provisions of the UK Corporate Governance Code (September 2014), which is the version of the Code which applies to the Company for its 2016 financial year. The Code is issued by the Financial Reporting Council and is available for review on the Financial Reporting Council’s (FRC’s) website: https://www.frc.org.uk JOHN BARTON Non‑Executive Chairman 43 www.easyJet.comStrategic reportGovernanceAccounts Board of Directors An experienced and balanced board JOHN BARTON CHARLES GURASSA N RNF CAROLYN MCCALL DBE ANDREW FINDLAY Chief Executive Chief Financial Officer First appointed October 2015 Key areas of prior experience Finance Previous relevant experience Andrew was previously Chief Financial Officer at Halfords plc (2011-2015). Prior to this, Andrew was Director of Finance, Tax and Treasury at Marks and Spencer Group plc (2009-2011). He has also held senior finance roles at the London Stock Exchange and at Cable and Wireless both in the UK and US. First appointed July 2010 Key areas of prior experience Media Current external appointments Non-Executive Director, Burberry Group plc and member of the Audit and Nominations Committees. Director of French Chamber of Commerce. Previous relevant experience Prior to joining easyJet, Carolyn was Chief Executive of Guardian Media Group plc (2000-2010). She was also Non-Executive Director of Lloyds TSB Limited (2008-2009), Tesco plc (2005-2008) and New Look plc (1999-2005). Carolyn was Chair of Opportunity Now (2005-2009) and former President of Women in Advertising and Communications London (WACL) (2002-2003). Non‑Executive Chairman First appointed May 2013 Key areas of prior experience Finance, Governance Current external appointments Non-Executive Chairman, Next plc. Senior Independent Director of SSP Group plc and Luceco plc. Non-Executive Director of Matheson & Co Ltd. Previous relevant experience John has also served as Chairman of Catlin Group Limited (2012-2015), Cable and Wireless Worldwide plc (2010-2012), Brit Holdings plc (2007-2009) and Wellington Underwriting plc (2003-2006). John was previously Senior Independent Director of WH Smith plc (2006-2011) and Hammerson plc (1998-2007). He was also the Chief Executive of insurance broker JIB Group plc (1984-1997). After JIB’s merger with Lloyd Thomson he became Chairman of the combined group, Jardine Lloyd Thompson Group plc (1997-2001). Non‑Executive Deputy Chairman and Senior Independent Director First appointed June 2011 Key areas of prior experience Airline industry Current external appointments Non-Executive Chairman, Channel 4. Non-Executive Chairman, Genesis Housing Association. Senior Independent Director, Merlin Entertainments plc. Trustee, English Heritage. Trustee, Migration Museum. Previous relevant experience Charles’ career has been primarily in the travel, tourism and leisure industries in a number of senior positions including Chief Executive of Thomson Travel Group plc (1999-2003), Executive Chairman of TUI Northern Europe Limited (1999-2003) and Director of Passenger and Cargo at British Airways plc (1995-1999). Charles retired from full time work in June 2003 to pursue a portfolio career. He was previously Non-Executive Chairman of LOVEFiLM International Limited (2006-2011), Phones4U Limited (2007-2011), Virgin Mobile plc (2004-2006), Alamo/ National Rent a Car (2004-2006), 7Days Ltd (2003-2010) and Non-Executive Director at Whitbread plc (2000-2009) and MACH (2007-2013). BOARD COMMITTEE MEMBERSHIP AS AT 14 NOVEMBER 2016 S R A N F I Safety Committee Remuneration Committee Audit Committee Nominations Committee Finance Committee IT Governance and Oversight Committee CHANGES DURING THE 2016 YEAR AND UP TO 14 NOVEMBER 2016 • Andrew Findlay was appointed on 2 October 2015. • John Browett stepped down from the Board on 31 December 2015. • Chris Browne was a member of the Board between 1 January 2016 and 30 September 2016. She stepped down from the Board to join the Executive Management Team as Chief Operating Officer. 44 easyJet plc Annual report and accounts 2016 ADÈLE ANDERSON S R A I Independent Non‑Executive Director First appointed September 2011 Key areas of prior experience Finance Current external appointments Non-Executive Director, Intu Properties plc and Chair of Audit Committee and member of Remuneration Committee. Non- Executive Director, Spire Healthcare Group plc and Chair of Audit and Risk Committee and member of Remuneration Committee. Member of Board of Trustees, Save the Children UK, and member of Audit Committee. Member of Audit Committee, Wellcome Trust. Previous relevant experience Until July 2011, Adèle was a Partner in KPMG and held roles including Chief Financial Officer of KPMG UK, Chief Executive Officer of KPMG’s captive insurer and Chief Financial Officer of KPMG Europe. DR. ANDREAS BIERWIRTH S F Independent Non‑Executive Director First appointed July 2014 Key areas of prior experience Airline industry Current external appointments Chief Executive Officer, T-Mobile Austria GmbH. Member of the Supervisory Board of Lindner Hotels AG, Casinos Austria AG (on behalf of the Austrian Government) and the German-Austrian Chamber of Commerce, Austria's Association of Industry. Previous relevant experience Andreas previously served as a Member of the Board at Austrian Airlines AG (2008-2012), including as Chief Commercial Officer for the whole period. He also served as Vice President Marketing of Deutsche Lufthansa AG in Frankfurt (2006-2008). Prior to this, Andreas was first Deputy Managing Director and later Managing Director at Germanwings (2002-2006). KEITH HAMILL OBE ANDY MARTIN FRANÇOIS RUBICHON S A N I R A N F I NR Independent Non‑Executive Director Independent Non‑Executive Director Independent Non‑Executive Director First appointed July 2014 Key areas of prior experience Airline industry Current external appointments Project Manager, Le Groupe La Poste. Previous relevant experience François was most recently Executive Vice President of Human Resources, General Affairs & Organisation at Societe Francaise du Radiotelephones (SFR). Prior to this François was Deputy Chief Executive Officer and Chief Operating Officer of Aéroports de Paris for seven years. François has worked in a number of advisory positions within government for the Minister of Transport, Infrastructure, Housing, Tourism and Maritime Affairs (2002-2005) and as a social adviser to the then French Prime Minister. First appointed September 2011 Key areas of prior experience Finance, Airline industry Current external appointments Non-Executive Director of Intertek Group plc and member of the Audit Committee. Previous relevant experience From 2012 to 2015, Andy was the Group Chief Operating Officer for Europe and Japan for Compass Group plc and prior to that served as their Group Finance Director from 2004 to 2012. Before he joined the Compass Group, he was Group Finance Director at First Choice Holidays plc (now TUI Group) which had an airline as part of a wider tour operator business. Andy has also held senior financial positions with Granada Group plc (1996-2001), Forte plc (1994-1996) and Arthur Andersen (now part of Deloitte) (1985-1994) including Partner (1992-1994). First appointed March 2009 Key areas of prior experience Finance, Strategy Current external appointments Chairman, Horsforth Holdings Limited. Non-Executive Director, Samsonite International SA. Previous relevant experience Keith was Chairman of Travelodge (2003-2012) and Go, prior to its acquisition by easyJet in 2002, (2001-2002). His other previous Chairman roles include Tullett Prebon plc (2006-2013), Collins Stewart plc (2000-2006), Avant Homes Limited (2013 -2014), Heath Lambert Limited (2005-2011) and Moss Bros Group plc (2001-2008). His Non-Executive Director roles include Max Property Group plc (2010-2014), Electrocomponents plc (1999-2008) and Cadmus Communications Corporation (2002-2007). Keith was Finance Director of WH Smith (1996-2000), of Forte plc (1993-1996) and of United Distillers (1991-1993), Director of Financial Control at Guinness plc (1988-1991) and a Partner in Price Waterhouse (1986-1988). 45 www.easyJet.comStrategic reportGovernanceAccounts Executive Management Team An experienced team to deliver CHRIS BROCKLESBY Chief Information Officer CHRIS BROWNE OBE Chief Operating Officer PETER DUFFY Chief Commercial Officer ANDREW FINDLAY Chief Financial Officer First appointed February 2011 See Board of Directors’ profiles. Key areas of prior experience Marketing, Digital and Commercial Previous relevant experience Before joining easyJet, he was Marketing Director for Audi in the UK (2007-2011). Prior to that, Peter was Marketing Services Director at Barclays (2005-2007). First appointed March 2015 Key areas of prior experience IT Previous relevant experience Before joining easyJet, Chris was CIO at Tesco Bank and was a member of the Executive Committee with responsibility for IT, Change Management, Supplier Management and Procurement (2007-2015). Chris also spent 18 years at Accenture in their Financial Services and Technology practices. He became a Partner in 2000 and led the UK Financial Services Systems Integration practice as well as leading work at clients such as AXA Life, Zurich Financial Services, Standard Life and Prudential. First appointed October 2016 Key areas of prior experience Airline industry Current external appointments Non-Executive Director of Bovis Homes plc and member of the Nominations, Remuneration and Audit Committees. Previous relevant experience Chris was appointed to the Board of easyJet on 1 January 2016 as a Non-Executive Director, before stepping down on 30 September 2016 to join the Executive Management Team as Chief Operating Officer. Chris has previously held several senior leadership positions within aviation including Chief Operating Officer, Aviation, of TUI Travel plc (2014-2015), Managing Director, Thomson Airways (2007- 2014) and Managing Director, First Choice Airways (2002-2007). She also has commercial and general management experience in a consumer facing industry with previous roles at Carlson Worldwide and Iberia Airways. CHANGES DURING THE 2016 YEAR AND UP TO 14 NOVEMBER 2016 • Mike Campbell stepped down from the Executive Management Team in December 2015, and is retiring at the end of 2016. • Alita Benson, the former Group People Director, stepped down from the Executive Management Team in December 2015. • Warwick Brady, the former Chief Operating Officer, stepped down from the Executive Management Team on 30 September 2016. • Rachel Kentleton, the former Group Director: Strategy and Implementation, stepped down from the Executive Management Team in October 2016. • Andrew Findlay, Jacky Simmonds and Chris Browne were appointed during the period. See individual profiles for details. 46 easyJet plc Annual report and accounts 2016 CAROLYN MCCALL DBE Chief Executive See Board of Directors’ profiles. PAUL MOORE Communications Director First appointed November 2010 Key areas of prior experience Communications Previous relevant experience Before joining easyJet, Paul was Group Public Affairs and Communications Director for FirstGroup (2006-2010). Prior to that Paul worked for Virgin Atlantic Airways for 10 years as its Director of Corporate Affairs (1997-2006). KYLA MULLINS Company Secretary and Group General Counsel First appointed February 2015 Key areas of prior experience Legal, Company Secretarial, Regulation Previous relevant experience Kyla is a qualified solicitor, having spent four years with Clifford Chance (1989-1993) before moving in-house. Over the past 20 years she has held senior legal positions in the media, entertainment and strategic outsourcing sectors. Before joining easyJet Kyla was General Counsel and Company Secretary at Mitie Group plc (2014-2015), Global General Counsel of EMI Music (2009-2012), and Group Legal Director at ITV plc and Granada Media (2000-2007). JACKY SIMMONDS Group People Director First appointed January 2016 Key areas of prior experience Airline industry, travel and tourism, Human Resources Current external appointments Non-Executive Director, Wolseley plc, and Chair of the Remuneration Committee and member of the Audit and Nominations Committee. Previous relevant experience Before joining easyJet, Jacky was Group Human Resources Director at TUI (2010-2015) and previously held a number of senior positions within the Group, including Human Resources Director for TUI UK & Ireland and First Choice plc before the merger with TUI (2007-2010). CATH LYNN Group Director of Strategy and Network First appointed September 2009 Key areas of prior experience Commercial, Operations, Procurement Previous relevant experience Cath joined easyJet in 2002 following the merger with Go and has carried out a number of senior roles at easyJet including Head of Ground Operations, Head of Airport Development and Procurement, Head of Network Development, Network and Planning Director, Customer and Revenue Director and Group Commercial Director. Prior to easyJet Cath spent 12 years in retail for J Sainsbury before joining Go (1998-2002) where she was part of the management buy-out team and headed up cabin services, ground operations and customer service. 47 www.easyJet.comStrategic reportGovernanceAccounts Corporate governance report Board Committees The Committee reports that follow set out, amongst other things, the responsibilities and activities of the Committees in the past financial year. The terms of reference of each Committee are documented and agreed by the Board. The Committees’ terms of reference are available in the governance section of easyJet’s corporate website: http://corporate.easyJet.com The Chair of each Board Committee formally reports back to the Board. Details of Directors’ attendance at Board and Board Committee meetings are set out on page 56. SAFETY COMMITTEE Safety Committee Chair: Dr. Andreas Bierwirth (from 1 October 2016) See pages 48 to 49 Remuneration Committee Chair: Charles Gurassa See pages 49 to 50 DR. ANDREAS BIERWIRTH Chair of the Safety Committee I took over from Chris Browne as Chair of the Safety Committee on 1 October 2016. In line with easyJet’s position that safety is our number one priority, the Safety Committee will continue to ensure that safety receives the highest level of Board attention. Membership as at 14 November 2016 (all current members are independent Non-Executive Directors) Audit Committee Chair: Adèle Anderson Nominations Committee Chair: John Barton Finance Committee Chair: Andy Martin IT Governance and Oversight Committee Chair: Andy Martin See pages 50 to 53 • Dr. Andreas Bierwirth (appointed as Chair effective from 1 October 2016) • Adèle Anderson (appointed to the Committee effective See page 54 See page 55 See page 55 from 1 October 2016) • Keith Hamill Committee changes Although Professor Rigas Doganis stepped down from the Board of easyJet as a Non-Executive Director on 1 December 2014, he remained as Chairman of the Safety Committee until 29 February 2016. Chris Browne became a member of the Committee on her appointment to the Board on 1 January 2016 and was appointed as Chair from 1 March 2016. She stepped down from the Committee on 30 September 2016 at the same time she stepped down from the Board to join the easyJet Executive Management Team. She was considered an independent Non-Executive Director at the Safety Committee meetings she attended during the 2016 financial year. Adèle Anderson joined the Committee effective from 1 October 2016. Turn to page 56 for meeting attendance table 48 easyJet plc Annual report and accounts 2016 Key responsibilities • To monitor and follow up on safety incidents reported to the Board to ensure that they have been satisfactorily closed either by easyJet and/or the relevant external parties. • To receive, examine and monitor reports on actions taken by departments. • To review and monitor the implementation of easyJet’s annual safety plan. The Committee also examines specific safety issues as requested by the Board or any member of the Committee. Where appropriate, the Committee reviews relevant reports published by the UK Air Accident Investigation Branch, major incidents that have affected other operators, as well as other external reports on matters relevant to safety and security. Independent safety reports from the Director of Safety and Security are presented at every Board meeting. The Committee ensures that both internal and relevant external events are fully investigated and that appropriate actions have been taken where necessary. The Director of Safety and Security has a direct reporting line to the Chairman which reinforces the independence of safety oversight. In addition, the Chairman of the Committee has reported to the Board with their own assessment of safety management within the airline throughout the year. Highlights of the 2016 financial year A range of safety-related matters have been reviewed by the Committee during the 2016 financial year involving all areas – flight operations, cabin crew, ground services and engineering. Some of these reviews followed requests from the Board to carry out detailed assessments of specific operational incidents; others were reports of safety actions taken by easyJet operational departments, and investigations by national investigation authorities. These included a review of the implementation of recommended measures following the Germanwings incident, security reports on Brussels, France and other relevant regions affected during the year by acts of terrorism, and reports on the actions of easyJet’s Disruptive Passenger Action Group. In 2015 the Director of Safety and Security was tasked by the Board to undertake a review of fatigue within crew, independent of all the operational departments. The Safety Committee monitored the progress of the fatigue review and reviewed its findings. The Committee will continue to oversee the implementation of the recommendations. REMUNERATION COMMITTEE CHARLES GURASSA Chair of the Remuneration Committee The remuneration policy has been designed to be straightforward and transparent, in alignment with the Company’s principle of having a simple and cost- effective approach. Membership as at 14 November 2016 (all current members are independent Non-Executive Directors) • Charles Gurassa (Chair) • Adèle Anderson (appointed to the Committee effective from 1 January 2016) • Andy Martin (appointed to the Committee effective from 1 October 2016) • François Rubichon Committee changes John Browett stepped down from the Board and the Remuneration Committee on 31 December 2015. Adèle Anderson was appointed to the Remuneration Committee in his place. Chris Browne was also a member of the Committee on her appointment to the Board on 1 January 2016. Once it became apparent that Chris would be joining the Executive Management Team, the Board determined that she was no longer independent as required as a Committee member under the Remuneration Committee terms of reference. She therefore stepped down from the Remuneration Committee in September ahead of the Remuneration Committee’s last meeting of the 2016 financial year. Andy Martin joined the Committee effective from 1 October 2016. Turn to page 56 for meeting attendance table 49 www.easyJet.comStrategic reportGovernanceAccounts Corporate governance report continued Key responsibilities To assess and make recommendations to the Board on the policies for remuneration for each of the Executive Directors and the Chairman, as well as the level and structure of remuneration for senior management. Highlights of the 2016 financial year The Committee: • reviewed the salaries of the Executive Directors and senior management; • assessed the level of performance against the 2015 financial year bonus measures and determined the level of award for the Executive Directors and senior management; • determined the bonus targets for the 2016 financial year; • measured achievement against the LTIP performance measures that were set in December 2012 and agreed the vesting percentage in December 2015; • considered external reward market, corporate governance activity and shareholder feedback and assessed the implications for easyJet executives; • agreed the performance targets for the Long Term Incentive Plan for the 2016 financial year; reviewed and approved the PLC Board Expenses Policy; and • • considered and debated gender pay and future reporting requirements. The full Directors’ remuneration report is on pages 60 to 75. Additional disclosures under the UK Corporate Governance Code For additional disclosures under the UK Corporate Governance Code in relation to the Remuneration Committee’s work and remuneration consultants, please refer to the Directors’ Remuneration Report on pages 60 to 75. 50 AUDIT COMMITTEE ADÈLE ANDERSON Chair of the Audit Committee During the year, the Audit Committee’s focus has, as in previous years, centred on the integrity of the Group’s financial reporting, system of risk management, internal controls, and the effectiveness of both internal and external audit. The Committee has continued to follow a detailed programme of work and to respond to the increasing depth of review and reporting that is now required of Audit Committees. Membership as at 14 November 2016 (all current members are independent Non-Executive Directors) • Adèle Anderson (Chair) • Keith Hamill • Andy Martin The Committee members have been selected to provide the wide range of financial and commercial expertise necessary to fulfil the Committee’s duties and responsibilities. Adèle Anderson was a partner in KPMG until July 2011 and held roles including Chief Financial Officer of KPMG UK, Chief Executive Officer of KPMG’s captive insurer and Chief Financial Officer of KPMG Europe. She currently chairs the audit committees of Intu Properties plc and Spire Healthcare plc. Keith Hamill has had considerable experience as a Director of listed companies and was Finance Director of WH Smith, Forte plc and United Distillers. Andy Martin was Group Finance Director of Compass Group plc between 2004 and 2012, and prior to this held other senior financial positions with First Choice Holidays plc (now TUI Group), Forte plc and Granada Group plc. He is also a Non-Executive Director and Audit Committee member of Intertek Group plc. The Board considers the Committee members’ financial experience to be recent and relevant for the purposes of the Code. Further, in accordance with the 2016 Corporate Governance Code (applying to the Company from its 2017 financial year) the Board has determined that the current composition of the Audit Committee as a whole has competence relevant to the sector in which the Company operates. All the Committee members have had a significant amount of sector experience as Non-Executive Directors of easyJet for a number of years, and in addition Andy Martin has had executive sector experience in his previous role at First Choice Holidays plc. All three committee members are qualified accountants. easyJet plc Annual report and accounts 2016 Committee changes Chris Browne was also a member of the Committee on her appointment to the Board on 1 January 2016. She stepped down from the Committee on 30 September 2016 at the same time she stepped down from the Board to join the easyJet Executive Management Team. She was considered an independent Non-Executive Director at the Audit Committee meetings she attended during the 2016 financial year. Turn to page 56 for meeting attendance table Main activities and responsibilities of the Committee Please refer to the Audit Committee terms of reference for further details on the Committee’s duties and responsibilities, available in the governance section of easyJet’s corporate website, http://corporate.easyJet.com. Responsibilities How the Committee discharged its responsibilities To monitor and review: the integrity of the financial statements and related formal announcements, and the significant financial reporting issues and judgements which they contain the Company’s risk management systems and internal control Review of the financial statements and announcements relating to the financial performance and governance of the Group at year end and half year. The Committee also considered the material areas in which significant judgements were applied based on reports from both the Group’s management and the external auditors. Further information is provided in the Financial reporting and significant financial issues section. Review of the adequacy and effectiveness of the Group’s ongoing risk management systems and control processes, through an evaluation of: the risk and assurance plans; Internal Audit reports; risk assessments; information security and business continuity; • • • • • control themes; and • internal financial control assessments. the effectiveness of the Company’s Internal Audit function and its activities The Committee undertook an assessment of the effectiveness and independence of the Internal Audit function, which included consideration of: • key Internal Audit reports; • stakeholder feedback on the quality of Internal Audit activity; Internal Audit’s compliance with prevailing professional standards; and the implementation of Internal Audit recommendations. • • the Company’s relationship with the external auditors, including: • • • their independence and objectivity; the effectiveness of the external audit process; recommending the appointment, reappointment or removal of the external auditors; The Committee will also be reviewing the external quality assessment of the Internal Audit function to be undertaken later this year for reporting to the Audit Committee in February next year. Further information is provided in the Internal Audit section. The Committee considered the appointment of the external auditors, confirming and assessing their independence, objectivity and effectiveness. The Committee welcomed a new senior statutory auditor for the 2016 financial year, and the Committee Chair was involved in selecting and interviewing the new partner. • approving their remuneration and terms of engagement; Further information on: and the policy on the supply of non-audit services. • • how the effectiveness, independence and objectivity of the external audit process were assessed, is provided in the External auditors and effectiveness of external audit process section; and the external auditors’ non-audit services, and audit tendering, is provided in the Non‑audit services and the Audit tendering sections respectively. • 51 www.easyJet.comStrategic reportGovernanceAccounts Corporate governance report continued Responsibilities the adequacy and security of the Group’s arrangements for its employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters the Group’s systems and controls for the prevention of bribery and detection of fraud, including receiving reports on non-compliance Other duties of the Audit Committee include: • annually reviewing its terms of reference; • assessing potential conflicts of interest of Directors on behalf of the Board; and • as requested by the Board, providing advice on whether the Annual report and accounts are fair, balanced and understandable. How the Committee discharged its responsibilities During the year, the Committee reviewed: • whistleblower reports and the refresh and re-launch of the whistleblowing processes; reports on anti-bribery and corruption procedures; reports on procedures on fraud and loss prevention; and reports on credit card fraud monitoring and investigations. • • • The Committee reviewed its terms of reference and made some changes in line with best practice. A couple of potential conflicts were considered and assessed during the year. The Committee determined that these were potential transactional conflicts of interest which were yet to arise. Further information on the Committee’s role on providing advice on whether the annual report and accounts is fair, balanced and understandable is provided in the Financial reporting and significant financial issues section. Specific items which the Committee looked at during the financial year as part of and in addition to its main activities include the review of: • • • • • • • • the treasury function and accounting treatment of hedging transactions; the accounting treatment for property, plant and equipment and intangible assets; the accounting treatment of the maintenance provision; the process for cash flow forecasting; the Group’s business continuity planning; the Group's depreciation policy and aircraft residual values; the Group’s information security programme, including capabilities, policies and procedures, and the PCI programme dealing with payment card data; and the support for making a viability statement. Financial reporting and significant financial judgements The Committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements. For example, during the financial year, the Committee reviewed the level of provisions and accruals recorded which are judgemental in nature. The Committee reviewed accounting papers prepared by management which provide details on significant financial reporting judgements. The Committee also reviewed reports by the external auditors on the full year and half year results which highlight any issues with respect to the work undertaken on the audit. The Committee reviewed financial issues through discussion with management and the external auditors and comparison to other organisations. The number of such issues currently considered as significant are, however, limited given easyJet’s relatively simple business model and group structure which are unencumbered with legacy issues. The significant issues considered in relation to the accounts are detailed below: • The Committee reviewed the maintenance provision at the year end. A number of judgements are used in the calculation of the provision, primarily pricing, utilisation of aircraft and timing of maintenance checks. The Committee addressed these matters using reports received from management which underpin the basis of assumptions used. The Committee also discussed with the external auditors their review of the assumptions underlying the estimates used. • The Committee considered whether the carrying value of goodwill and landing rights held by easyJet should be impaired. The judgement in relation to impairment largely relates to the assumptions underlying the calculation of the value in use of the business being tested for impairment; primarily whether the forecasted cashflows are achievable and the overall macroeconomic assumptions which underlie the valuation process. The Committee addressed these matters using reports received from management outlining the basis for assumptions used. The forecasted cashflows used in the calculation were presented to the Board. • The Committee considered the key treasury transactions, and the application of hedge accounting. easyJet hedges forward, on a rolling basis, between 65% and 85% of the next 12 months anticipated fuel and currency requirements and between 45% and 65% of the next 12 months anticipated requirements. Significant exposure relating to the acquisition cost of aircraft is also managed through the use of foreign currency forward exchange contracts where 90% of the next two years forecast requirement is hedged. easyJet does not operate any other significant derivative financial instruments. However, this area remains significant due to the quantity of fuel and exchange rate hedges. • The Committee reviewed the level and calculations of key accruals and provisions which are judgemental in nature. Specifically the area of customer claims in respect of flight delays, cancellations and Air Passenger Duty. The Committee is satisfied that the judgements made by management are reasonable, and that appropriate disclosures have been included in the accounts. At the request of the Board, the Committee also considered whether the Annual report and accounts are fair, balanced and understandable and whether they provided the necessary information for shareholders to assess the Group’s position and performance, business model and strategy. The Committee is satisfied that, taken as a whole, the Annual report and accounts are fair, balanced and understandable. In reaching this 52 easyJet plc Annual report and accounts 2016 conclusion, the Committee considered the overall review and confirmation process around the Annual report and accounts, including: • • • the input of subject matter experts, the Executive Management Team and other senior management and, where applicable, the Board and its Committees; the processes and controls which underpin the overall review and confirmation process, including the verification process being carried out by an internal financial controls specialist (independent of the Finance function); and Internal Audit providing assurance over the audit trail for material data points relating to the non-financial statement aspects of the Annual report and accounts, and external audit providing assurance over the accounts. The Committee was provided with, and commented on, a draft copy of the Annual report and accounts. In carrying out the above processes, key considerations included ensuring that there was consistency between the accounts and the narrative provided in the front half of the annual report, and that there was an appropriate balance between the reporting of weaknesses, difficulties and challenges, as well as successes, in an open and honest manner. Risk management and internal control The Board, as a whole, including the Audit Committee members, consider the nature and extent of easyJet’s risk management framework and the risk profile that is acceptable in order to achieve the Company’s strategic objectives. The Audit Committee has reviewed the work done by management, the Committee itself and the Board on the assessment of the Company’s principal risks, including their impact on the prospects of the Company. As a result, it is considered that the Board has fulfilled its obligations under the Code in relation to risk management and internal controls. Further details on the Company’s principal risks and uncertainties and their impact on the prospects of the Company are set out on pages 24 to 31. easyJet’s system of internal controls, along with its design and operating effectiveness, is subject to review by the Audit Committee, through reports received from management, along with those from both internal and external auditors. Any control deficiencies identified are followed up with action plans tracked by the Committee. Further details of risk management and internal control are set out on page 59. Internal Audit The Audit Committee is responsible for overseeing the work of the Internal Audit function. It reviews and approves the scope of the Internal Audit annual plan and assesses the quality of Internal Audit reports, along with management’s actions relating to findings and the closure of recommended actions. The Audit Committee also considers stakeholder feedback on the quality of Internal Audit’s work. Further information on the Internal Audit function is provided on page 59. In order to safeguard the independence of the Internal Audit functions, the Head of Internal Audit is given the opportunity to meet privately with the Audit Committee without any other members of management present. External auditors and effectiveness of external audit process PricewaterhouseCoopers LLP were reappointed auditors of the Company at the 2016 Annual General Meeting following a tender process undertaken in 2015. Senior management monitors the auditors’ performance, behaviour and effectiveness during the exercise of their duties, which informs the Audit Committee’s decision to recommend reappointment on an annual basis. The Audit Committee also assesses the effectiveness, independence and objectivity of the external auditors by, amongst other things: • considering all key external auditor plans and reports; • having regular engagement with the external auditor during Committee meetings and ad hoc meetings (when required), including meetings without any member of management being present; the Committee Chair having discussions with the Senior Statutory Auditor ahead of each Committee meeting; and following the end of the financial year, each Committee member completing an auditor effectiveness review questionnaire. • • Non‑audit services In order to preserve objectivity and independence, the external auditors are not asked to provide consulting services unless this is in the best interests of the Company, in accordance with easyJet’s non-audit services policy which is available in the governance section of easyJet’s corporate website, http:// corporate.easyJet.com. In the 2016 financial year, PriceWaterhouseCoopers LLP did provide services in addition to its usual audit work by providing a comfort letter in relation to the Company’s setting up of a Euro Medium Term Note (EMTN) Programme. It was determined that the nature of the work would not undermine auditor objectivity and independence. This additional scope of work was in line with the Company’s non-audit service policy, which allows an external auditor to undertake as an auditor, work in connection with debt capital raising. The fees relating to this additional work were £38,000 but were not considered to be non-audit services. Therefore, in the 2016 financial year the Company incurred no non-statutory audit fees (2015: nil). Audit tendering PricewaterhouseCoopers LLP were first appointed to audit the Annual report and accounts for the year ended 30 September 2006, and have therefore served a 10 year term. Under EU audit reform legislation, companies are required to have a mandatory rotation of auditors after 10 years, or 20 years if there is a compulsory retender at 10 years. During the 2015 financial year, the Committee led a tender process for external audit services, following which the Audit Committee agreed to recommend that the Board reappoint PricewaterhouseCoopers LLP as, on balance, they performed better than the Committee's pre-agreed selection and assessment criteria. 53 www.easyJet.comStrategic reportGovernanceAccounts Corporate governance report continued NOMINATIONS COMMITTEE JOHN BARTON Chair of the Nominations Committee This year the Committee focused on leading a review of the composition of the Board and succession planning both at Board and Executive Management Team level, and reviewing the make-up of the Board Committees given the changes to the Board during the year. Membership as at 14 November 2016 (members are independent Non-Executive Directors and the Non-Executive Chairman of the Board) • John Barton (Chair) • Charles Gurassa • Keith Hamill (appointed from 1 October 2016) • Andy Martin (appointed from 1 October 2016) • François Rubichon Committee changes To ensure that the important subject matter of the Committee's remit is discussed with a wide number of Non-Executive Directors, Andy Martin and Keith Hamill joined the Committee effective from 1 October 2016. Turn to page 56 for meeting attendance table Key responsibilities • Keeping under review the composition, structure and size of, and succession to, the Board and its Committees; • Succession planning for senior executives and the Board; • Leading the process for Board appointments by identifying and nominating, for the approval of the Board, candidates to fill Board vacancies as and when they arise; and • Evaluation of the balance of skills, knowledge, experience and diversity on the Board. Highlights of the 2016 financial year • Together with an external consultant, leading the calibration of the capability and skills of the current Board against the future requirements in terms of size, structure, composition and behaviours; • Consideration of the appointments to the Board Committees following the change in Board composition; and • Reviewing management’s succession plans for senior executive positions. Board appointments process The Committee adopts a formal and transparent procedure for the appointment of new Directors to the Board. With the exception of Chris Browne’s recruitment as disclosed in last year’s Annual report, there were no searches for Board Directors during the 2016 financial year. Following the Committee’s review of the skills, knowledge, experience and diversity on the Board, the Committee is recommending to the Board the recruitment of at least one additional Non-Executive Director during the 2017 financial year. Should the Board seek to recruit any additional Directors during the course of next year, its practice is to use external search consultants. Diversity The Board recognises the benefits of having diversity across all areas of the Group and believes that this supports easyJet’s continued success and advantage. When considering the optimum make-up of the Board, the benefits of diversity of the Board are appropriately reviewed and balanced where possible, including in terms of differences in skills, industry experience, business model experiences, gender, race, disability, age, nationality, background and other contributions that individuals may make. The Committee continues to encourage diversity of business skills and experience, recognising that Directors with varying skill sets, capabilities and experience gained from different geographic and cultural backgrounds enhance the Board. In identifying suitable candidates the Committee will seek candidates from a range of backgrounds, with the final decision being based on merit against objective criteria. As at 14 November 2016, the Company has two female Directors, one being the Chief Executive. The Board has a 22% female representation. The Company had three female Directors between 1 January 2016 and 30 September 2016, until Chris Browne stepped down from the Board. easyJet’s policy on diversity applies across all levels of the organisation, and further details can be found in the Corporate responsibility section on pages 38 to 39, including further details of the Executive Management Team. As at 14 November 2016, the number of women on the Executive Management Team had increased from last year to five (out of nine positions) such that women now make up the majority of that team. 54 easyJet plc Annual report and accounts 2016 FINANCE COMMITTEE IT GOVERNANCE AND OVERSIGHT COMMITTEE ANDY MARTIN Chair of the Finance Committee ANDY MARTIN Chair of the IT Governance and Oversight Committee The Finance Committee continues to provide effective oversight of the Group’s treasury and funding policies and activities, ensuring that activities undertaken will not subject the Group to undesired levels of risk, and that treasury activities are appropriately aligned with Group strategy and support the Group financial performance. Membership as at 14 November 2016 (all members are independent Non-Executive Directors) • Andy Martin (Chair effective from 1 December 2015) • Dr. Andreas Bierwirth (appointed to the Committee effective from 1 December 2015) • Charles Gurassa Committee changes Adèle Anderson stepped down from the Committee as Chair and Committee member effective from 30 November 2015. Andy Martin took over as Chair from 1 December 2015 and Dr. Andreas Bierwirth was appointed to the Committee on 1 December 2015. Turn to page 56 for meeting attendance table Key responsibilities To review and monitor the Group’s treasury policies, treasury operations and funding activities, along with associated risks. Highlights of the 2016 financial year The Committee: • • • • supported the Board in publishing credit ratings from Moody's and Standard & Poor's and oversaw the setting up of a Euro Medium Term Note Programme under which Eurobonds were issued; reviewed the capital structure of the business, specifically in relation to the liquidity buffer maintained by the airline and the management of the aircraft residual values; reviewed hedge accounting on cross-currency interest rate swaps; and reviewed the Company’s treasury policy. The IT Governance and Oversight Committee provides governance oversight, and gives independent validation and challenge, to one of the Company’s key business areas. Membership as at 14 November 2016 (all members are independent Non-Executive Directors) • Andy Martin (Chair, appointed to the Committee effective from 1 January 2016) • Adèle Anderson • Keith Hamill Committee changes John Browett stepped down from the Board and the IT Governance and Oversight Committee (as Chair and member) on 31 December 2015. Andy Martin was appointed to the Committee and became Chair on 1 January 2016. Turn to page 56 for meeting attendance table Key responsibilities To provide independent oversight over the governance and controls relating to the IT business area, in particular covering the required resilience and change. Specifically the Committee: • monitors the strategic direction of the IT programme to • ensure it supports easyJet’s long-term goals within the ambit of its strategic framework; reviews the risks and controls associated with IT strategy to ensure appropriate mitigation is built into the implementation process; • monitors implementation of the IT strategy and ensures that changing business needs are being met in the context of the Company’s strategic goals and competitive position; and • provides financial oversight over the IT programmes as the Committee considers necessary, including ensuring an appropriate framework within which budgetary decisions are made. Highlights of the 2016 financial year The Committee has: • approved the business case for a new e-commerce platform and overseen the programme during its design phase; reviewed and commissioned independent assurance reports from consultants relating to certain IT programmes; and reviewed the capabilities and resourcing required to deliver the IT programmes. • • 55 www.easyJet.comStrategic reportGovernanceAccounts Corporate governance report continued COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE The Company has, throughout the 2016 financial year, complied without exception with the provisions of the UK Corporate Governance Code issued in September 2014 (the Code), which is the version of the Code which applies to its 2016 financial year. The section below details how the Company has complied with the Code, available at www.frc.org.uk. The following disclosures are ordered into the sections as they appear in the Code. encouraged to communicate directly with senior management between Board meetings. A.2 Division of responsibilities The roles of Chairman and Chief Executive are separate, set out in writing, clearly defined, and approved by the Board. They are available on easyJet’s corporate website: http://corporate. easyJet.com. The Chairman’s role is to lead the Board and ensure that it operates effectively. The Chief Executive’s role is the day-to-day running of the Group’s businesses and the development and implementation of strategy. A. Leadership A.1 Role of the Board The Board is responsible for providing effective leadership to the airline. It does this by setting strategic priorities and overseeing their delivery in a way that enables sustainable long-term growth, while maintaining a balanced approach to risk within a framework of effective controls. The Board has a formal schedule of matters reserved for its decision which is available in the governance section of easyJet’s corporate website: http://corporate.easyJet.com. Day-to-day management responsibility rests with the Executive Management Team, listed on pages 46 to 47. These individuals are also the Directors and Company Secretary of the principal operating company, easyJet Airline Company Limited. The Board meets regularly, with nine scheduled meetings having been held during the year. The Directors’ attendance records at those meetings and Board Committee meetings held during the year are shown in the table below. In addition to those scheduled meetings, two ad hoc Board meetings were also arranged to deal with matters arising between scheduled meetings as appropriate. Non-Executive Directors are also A.3 The Chairman The Chairman, John Barton, sets the Board’s agenda and ensures that adequate time is available for discussion of all agenda items, in particular strategic issues. On his appointment in May 2013, the Board considered John Barton to be independent in character and judgement in accordance with the Code. A.4 Non‑Executive Directors Charles Gurassa is Senior Independent Director and Deputy Chairman. In this role, Charles provides advice and additional support and experience to the Chairman as required, and is available to act as an intermediary for the other Directors if necessary. Charles is also available to address shareholders’ concerns that have not been resolved through the normal channels of communication with the Chairman, Chief Executive or other Executive Director, and leads the appraisal of the Chairman’s performance annually in consultation with the other Non-Executive Directors in a meeting without the Chairman being present. The Non-Executive Directors, together with the Chairman, have also met without any Executive Directors present during the year. During the year, there were no unresolved concerns regarding the running of the Company. Attendance at scheduled meetings during 2016 financial year For further information regarding when Board members joined or stepped down from Committees during and after the 2016 financial year, please refer to the “Committee changes” sections in the relevant Committee reports (pages 48 to 55). Number of scheduled meetings Executive Directors Carolyn McCall DBE Andrew Findlay Non‑Executive Directors John Barton Charles Gurassa Adèle Anderson(2) Dr. Andreas Bierwirth John Browett(3) Chris Browne(4) Keith Hamill OBE Andy Martin François Rubichon Board 9 Audit Committee 4 Remuneration Committee 3 Finance Committee 4 Safety Committee 4(1) Nominations Committee 3 IT Governance and Oversight Committee 2 9/9 9/9 9/9 9/9 8/9 9/9 1/2 7/7 9/9 9/9 9/9 4* 3* 4/4 3/3 4/4 4/4 2* 2* 3* 3/3 2/2 1/1 1/1 1* 3/3 2* 4* 4/4 3/3 4/4 4* 1* 4/4 1/1 3/3 4 /4 2* 3/3 3/3 3/3 2* 1* 1* 2/2 1/1 2/2 1/1 * Not a member of the relevant Committee – attendance at meeting by invitation. (1) Professor Rigas Doganis, who was not a member of the Board however was independent Chair of the Safety Committee, attended two meetings at which he was Chair until he was succeeded by Chris Browne as Chair on 1 March 2016. (2) Adèle Anderson missed a brief Board meeting held by conference call due to having problems dialling in on the day from overseas. (3) John Browett stepped down as Director on 31 December 2015. (4) Chris Browne joined the Board on 1 January 2016 and stepped down as Director on 30 September 2016. 56 easyJet plc Annual report and accounts 2016 B. Effectiveness B.1 Composition of the Board As at 30 September 2016, the Board comprised eight Non- Executive Directors (including the Chairman) and two Executive Directors. Following the stepping down of Chris Browne on 30 September 2016, as at 14 November 2016, the Board comprises seven Non-Executive Directors (including the Chairman) and two Executive Directors. After giving thorough consideration to the matter, the Board considers Adèle Anderson, Dr. Andreas Bierwirth, Charles Gurassa, Keith Hamill, Andy Martin and François Rubichon to be Non-Executive Directors who are independent in character and judgement. Chris Browne was considered independent on her appointment to the Board up until the Board’s September meeting when it was noted that as she was close to concluding an agreement for the Chief Operating Officer role on the easyJet Executive Management Team, she should no longer be viewed as independent. B.2 Appointments to the Board The Nominations Committee leads the process for Board appointments and makes recommendations to the Board. For information on the work of the Nominations Committee and a description of the Board’s policy on diversity, please refer to the Nominations Committee report on page 54. B.3 Commitment Following the Board evaluation process, detailed further below, the Board is satisfied that each of the Directors is able to allocate sufficient time to the Company to discharge their responsibilities effectively. Contracts and letters of appointment with Directors are made available at the Annual General Meeting or on request. The standard terms and conditions of the appointment of Non- Executive Directors are also available in the governance section of easyJet’s corporate website: http://corporate.easyJet.com. Executive Directors are encouraged to take up non-executive positions in other companies or organisations. Carolyn McCall DBE, the Chief Executive, has acted as Non-Executive Director at Burberry Group plc since September 2014. Appointment to such positions is subject to the approval of the Board which considers, amongst other things, the time commitment required. The Executive Management Team are permitted to hold one appointment on a Board or Committee of a listed company so long as this is not thought to interfere with the business of the Group. Pursuant to B3.1 of the Corporate Governance Code, John Barton was appointed as director of Luceco plc on 27 September 2016, which subsequently became a publicly quoted company on 17 October 2016. Despite this change to the Chairman’s commitments outside of easyJet, the Board is satisfied that there has been no impact to the Chairman’s commitment to the Company and he still continues to devote more than sufficient time to his duties as Chairman, as evidenced by his high attendance at committees at which he is not a committee member (on page 56). The Executive Directors and Non-Executive Directors reviewed, and were satisfied with, the Chairman’s time commitment to the Board as set out under “B.6 Evaluation” on this page. B.4 Development On joining the Board, new members receive a tailored induction, organised by the Company Secretary, which covers amongst other things: the business of the Group; • their legal and regulatory responsibilities as Directors; • • briefings and presentations from relevant executives; and • opportunities to visit and experience easyJet’s business operations. To update the Directors’ skills, knowledge and familiarity with the Group, visits to bases are organised for the Board periodically, to assist its understanding of the operational issues that the business faces. The Board was invited to visit the base in Geneva in June 2016 and to attend a Country Review Board there, as well as an airside tour of airport operations and the crew room, and meetings with Swiss management and the CEO of Geneva Airport. A briefing paper is provided to Board members to update them on relevant developments in law, regulation and best practice, usually two to four times per year. Directors are encouraged to highlight specific areas where they feel their skills or knowledge would benefit from development as part of the annual Board evaluation process. An example of training undertaken this year was the session held for all the Directors by the Company's corporate lawyers on the new EU Market Abuse Regulation which came into force in July 2016. B.5 Information and support All members of the Board are supplied with appropriate, clear and accurate information in a timely manner covering matters which are to be considered at forthcoming Board or Committee meetings. Should Directors judge it necessary to seek independent legal advice about the performance of their duties with the Company, they are entitled to do so at the Company’s expense. Directors also have access to the advice and services of the Company Secretary who is responsible for advising the Board on all governance matters and ensuring that Board procedures are complied with. The appointment and removal of the Company Secretary is a matter requiring Board approval. B.6 Evaluation A performance review of the Board, its Committees and Directors is carried out every year and is externally facilitated at least every third year. Following the evaluation being externally facilitated last year by Independent Audit Limited, the 2016 Board and Committee evaluation was conducted internally by the Company Secretary and Group General Counsel, Kyla Mullins, at the request of the Chairman. Kyla prepared surveys that were completed by Board members. In addition, Calibroconsult Limited, an external consultant engaged by the Nominations Committee to advise on Board succession planning and composition, undertook a series of in-depth, confidential working sessions with each member of the Board individually to understand, amongst other things, current key challenges for the Board and Executive Management Team. This was considered as part of the 2016 Board and Committee evaluation and fed back to the Chairman and the Company Secretary and Group General Counsel who discussed the outcomes and recommendations. Following discussion with the Board as a whole, areas identified for improvement were agreed by the Board. Calibroconsult Limited has no connection with the Company beyond evaluating the Board. The review extended to all aspects of Board and Committee performance including composition and dynamics (which complement the work undertaken by Calibroconsult Limited), the Chairman’s leadership, agenda and focus, time 57 www.easyJet.comStrategic reportGovernanceAccounts D. Remuneration For further information on the Company’s compliance with the Code provisions relating to remuneration, please refer to: • the Directors’ remuneration report on pages 60 to 75 for the level and components of remuneration (D.1); and • pages 49 to 50 (the Remuneration Committee Report) for the procedure relating to remuneration (D.2). E. Relations with shareholders E.1 Dialogue with shareholders The Company actively engages with investors and solicits their feedback. The Chairman and Deputy Chairman met with shareholders during the course of the year to help maintain a balanced understanding of their issues and concerns. They also attended a senior investor dinner in January and met with the Company's top 10 institutional investors. The Chairman has updated the Board on the opinions of investors. The views of shareholders and market perceptions are also regularly communicated to the Board via verbal briefings. easyJet has an investor relations department which runs an active programme to facilitate engagement with investors based around the financial reporting calendar. This year the programme has included one-to-one meetings with institutional investors, road shows and conferences. There is also regular communication with institutional investors on key business issues. During the course of the year the Chairman, Deputy Chairman and Chief Executive met with representatives of easyGroup Holdings Limited, the Company’s largest shareholder, to discuss relevant matters. The Chief Financial Officer has also met separately with representatives of easyGroup Ltd (an affiliate of easyGroup Holdings Limited) to discuss matters relating to the management and protection of the “easyJet” and “easy” brands. E.2 Constructive use of the Annual General Meeting The Annual General Meeting gives all shareholders the opportunity to communicate directly with the Board and encourages their participation. Shareholders are given the opportunity to raise issues formally at the Annual General Meeting or informally with Directors after the meeting. All Directors normally attend the Annual General Meeting and the Chairs of the Committees are available to answer questions at the Annual General Meeting. Corporate governance report continued management, strategic oversight, oversight of risk and succession planning, and priorities for change. Charles Gurassa, as Senior Independent Director, led a review of the Chairman’s performance and held a private meeting of the Non-Executive Directors without the Chairman present to discuss the Chairman’s performance it was concluded that John Barton's performance and contribution are strong and that he demonstrates effective leadership. The Executive Directors and the Non-Executive Directors also reviewed and were satisfied with the Chairman’s time commitment to the Board and the business. The Chairman conducted a process of evaluating the performance and contribution of each Director which included a one-to-one performance evaluation and feedback discussion with each of them. B.7 Re‑election The Company’s Articles of Association require the Directors to submit themselves for re-election by shareholders at least once every three years. However, the Board has decided that all Directors will stand for re-election or election at each Annual General Meeting in accordance with the Code. C. Accountability C.1 Financial and Business Reporting Please refer to: • page 79 for the Board’s statement on the Annual report and accounts being fair, balanced and understandable; • page 22 for the statement on the status of the Company • and the Group as a going concern; and the Strategic report on pages 4 to 15 for an explanation of the Company’s business model and the strategy for delivering the objectives of the Company. C.2 Risk Management and Internal Control The Board has carried out a robust assessment of the principal risks facing the Company and how those risks affect the prospects of the Company. Please refer to pages 24 to 31 for further information on the Company’s principal risks and uncertainties and page 22 for their impact on the prospects of the Company. The overall responsibility for easyJet’s systems of internal control and for reviewing their effectiveness rests with the Board. The Board has conducted an annual review of the effectiveness of the systems of internal control during the year, under the auspices of the Audit Committee. Further information on the Company’s risk management and internal control systems is given on page 59. C.3 Audit Committee and Auditors For further information on the Company’s compliance with the Code provisions relating to the Audit Committee and auditors, please refer to the Audit Committee report on pages 50 to 53. 58 easyJet plc Annual report and accounts 2016 RISK MANAGEMENT AND INTERNAL CONTROL The Board has overall responsibility for easyJet’s risk management and systems of internal control. Risk management easyJet has an established risk management process to ensure that significant risks are identified and mitigated where possible. For further details of the risk management process, the principal risks and uncertainties faced by the Group and the associated mitigating actions, please refer to pages 24 to 31. To ensure that risks are managed effectively, a number of activities are undertaken: • an Executive Management Team member is allocated as the risk owner for each principal risk, with responsibility for the day-to-day management of those risks; The internal control regime is supported by the operation of a whistleblower reporting function. The system is operated by a specialist external third-party service provider and allows employees to report concerns anonymously and in confidence. The Audit Committee has approved the processes and reporting structure for the function, and receives regular reports on its operation. Internal Audit The Internal Audit function’s key objectives are to provide independent and objective assurance on risks and controls to the Board, Audit Committee and senior management, and to assist the Board in meeting its corporate governance and regulatory responsibilities. Its work is based on a risk-based audit plan, which is approved by the Audit Committee on behalf of the Board, and updated on a rolling basis. • • ongoing risk management and assurance is provided through the various monitoring reviews and reporting mechanisms that are embedded into the business operations. The results of these reviews are reported to the Audit Committee and the Board, which considers whether these high level risks are being effectively controlled; regular operational (including safety), commercial, financial and IT functional meetings are held to review performance and to consider key risks and issues (please refer to pages 48 to 49 for details of the Safety Committee); the Executive Management Team meets regularly to consider significant risks, status of risk mitigations and overall business performance; this ensures key issues are escalated through the management team, and, as appropriate, ultimately to the Board; and the Directors review the effectiveness of internal controls, including operating, financial and compliance controls. • • The Audit Committee undertakes an annual review of the appropriateness of the risk management processes to ensure that they are sufficiently robust to meet the needs of the Group (please refer to pages 50 to 53 for details of the Audit Committee’s responsibilities). Internal control The responsibility for establishing and operating detailed control procedures lies with the Chief Executive. The internal control systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives. By their nature, they can only provide reasonable, but not absolute, assurance against material misstatement or loss. The Board has conducted an annual review of the effectiveness of the systems of internal control during the year, under the auspices of the Audit Committee. This included reviews of systems and controls relating to financial reporting processes and the preparation of the accounts. The internal financial control monitoring programme, administered by Internal Audit, has continued to enhance the review process. Internal Audit reviews the extent to which systems of internal control: • are designed and operating effectively; • are adequate to manage easyJet’s key risks; and • safeguard the Group’s assets. The Head of Internal Audit reports to the Head of Risk and Tax and has direct access to the Chief Executive and the Chairman of the Audit Committee. The Head of Internal Audit is invited to, and attends, Audit Committee meetings throughout the year and reports regularly on Internal Audit reviews to the Executive Management Team. During the year, the effectiveness of the Internal Audit function was assessed by the Audit Committee. The role of the Internal Audit function and the scope of its work both continue to evolve to take account of changes within the business and emerging best practice. A formal audit charter is in place. 59 www.easyJet.comStrategic reportGovernanceAccounts Directors’ remuneration report Annual statement by the Chair of the Remuneration Committee within our policy to ensure that our structures remain effective, competitive and aligned with the Company's objectives. Performance and reward outcomes in the 2016 financial year Challenging business conditions during the 2016 financial year meant that performance in the year declined from the strong position in 2015. Profit before tax was £495 million (2015: £686 million) and ROCE (including lease adjustments) was 14.6% (2015: 22.2%). There was an improvement in total cost per seat but on-time performance and customer satisfaction saw declines. In determining the Executive Directors’ remuneration this year the Committee has balanced the principle of paying for performance with the need to motivate and retain our key leaders. Despite the challenging market conditions, the executive team has been able to deliver solid operational and financial performance and the Company is now in a strong position to capitalise on the opportunities provided by the current market conditions and to build and strengthen its strategic position for the long-term. Bonus Annual bonuses are based on profit before tax and key operational and financial targets. A bonus of 13% of the maximum was awarded to the Chief Executive and a bonus of 21% of the maximum was awarded to the Chief Financial Officer in respect of the 2016 financial year which have included a number of extraordinary external events such as prolonged strike action, terrorism and severe air traffic congestion. This reflects the challenging business and operating environment during the 2016 financial year. One-third of the bonus earned is subject to compulsory deferral into shares for three years. LTIP The awards made in December 2013 are due to vest in December 2016. These awards are based on a combination of average ROCE performance (including lease adjustments) and relative total shareholder return (TSR) compared to FTSE 51-150 companies for the three financial years ended 30 September 2016. The Group achieved average ROCE performance (including lease adjustments) of 19.1% and the Company did not meet the threshold TSR performance target. This resulted in 32% of the awards vesting successfully, subject to continued employment to the vesting date. Remuneration for the year ending 30 September 2017 The Company’s remuneration policy was approved by shareholders at the Annual General Meeting (AGM) in February 2015 and we will not be asking shareholders to vote on a new policy at the 2017 AGM. We will be taking the following approach to implementation of the remuneration policy for the year ending 30 September 2017: Bonus The Committee has set appropriate and stretching annual bonus targets for the year ended 30 September 2017 based on profit before tax and key operational and financial targets. One-third of any bonus earned will be subject to compulsory deferral into shares for three years. LTIP Our LTIP for 2017 continues to be based on two measures: ROCE and TSR. ROCE encourages a disciplined use of capital and TSR creates alignment with the fortunes of our investors. CHARLES GURASSA Chair of the Remuneration Committee On behalf of the Board, I am pleased to present the Directors’ remuneration report (the "Report") for the year ended 30 September 2016. The 2016 Report sets out details of the remuneration policy for Executive and Non-Executive Directors, describes how the remuneration policy is implemented and discloses the amounts paid relating to the year ended 30 September 2016. Objectives of the Committee The Committee’s primary objective is to design a remuneration framework which promotes the long-term success of the Company. To this end we are guided by the following reward principles, which remain unchanged: • To establish a simple and cost-effective reward package in line with our low-cost and efficient business model. For example, our Executive Directors do not receive the level of executive benefits that can be found in most organisations (see page 62). • To support the achievement of our stated business strategy of growth and returns. Performance is assessed against a range of financial, operational and longer-term targets ensuring value is delivered to shareholders, and Directors are rewarded for the successful delivery of the key strategic objectives of the Company. • To pay for performance. Remuneration is heavily weighted towards variable pay, dependent on performance. This ensures that there is a clear link between the value created for shareholders and the amount paid to our Executive Directors. Remuneration framework Our remuneration structure is designed to be simple, transparent and to contribute to the building of a sustainable performance culture. It consists of a base salary, modest benefit and pension provision and, subject to stretching performance conditions, an annual bonus plan (part paid in cash and part deferred into shares) and shares awarded under a Long Term Incentive Plan (LTIP). Incentive pay is subject to recovery and withholding provisions. A post-vesting holding period operates for LTIP awards and significant share ownership guidelines apply. The Committee believes that the overall remuneration structure continues to be appropriate. It ensures there is significant alignment between the interests of Executive Directors and shareholders, focuses Executives on safely delivering easyJet's key strategic objectives and incorporates features which contribute to an appropriate level of risk mitigation. That said, we keep the policy under review and make periodic changes 60 easyJet plc Annual report and accounts 2016 The Committee believes the bonus and LTIP measures in combination will continue to focus the executive team on building the long-term and sustainable success of the business. The trading environment remains tough and the targets that have been set are felt to be appropriate and demanding in that context. Salary The Chief Executive’s salary will not be increased in 2017 and will remain at £705,600. This compares with the typical rate of increase to be awarded to sales, marketing and administrative employees across the Group of 1%. As reported last year, Andrew Findlay’s base salary was set at £425,000 when he joined the Board in October 2015. His salary was set at a significant discount to the market level with the intention that it would be brought up to the mid-market level over time to reflect progression in the role. The Committee reported in 2015 that it intended to increase his salary to £500,000 in equal increments over the next two to three years subject to individual and Company performance. In line with this commitment, the first step in this process will be to increase Andrew's salary, with effect from 1 January 2017, to £462,500. Andrew has indicated to the Committee that he would like his cash salary to remain static and that he would receive the amount of this increase in shares, which he would retain in order to build his shareholding in the Company; the Committee is supportive of his decision. Looking forward It is two years since shareholders approved our Remuneration Policy at the 2015 AGM and we will therefore be required to seek approval for a policy at the 2018 AGM for a further three years. In advance of that, the Committee intends to conduct a detailed review of our policy and practice to ensure it remains fit for purpose and we plan to consult shareholders during the course of this review. On behalf of the Committee thank you for your continued support. We trust that you find the Report informative and, as always, I welcome any comments you may have. 14 November 2016 OUR REMUNERATION POLICY What is the role of our Remuneration Committee? The Remuneration Committee has responsibility for determining remuneration for the Executive Directors and the Chairman of the Board. The Committee also reviews the remuneration of the Group’s most senior executives in consultation with the Chief Executive. The Committee takes into account the need to recruit and retain executives and ensure that they are properly motivated to perform in the interests of the Company and its shareholders, while paying no more than is necessary. What does the Committee consider when setting remuneration? When setting the policy for Executive Directors’ remuneration, the Committee takes into account total remuneration levels operating in companies of a similar size and complexity, the responsibilities of each individual role, individual performance and an individual’s experience. Our overall policy, having had due regard to the factors noted, is to weight remuneration towards variable pay. This is typically achieved through setting base pay at up to market median levels, offering very modest pension and benefits, and above-market variable pay opportunities linked to the achievement of demanding performance targets. In setting remuneration for the Executive Directors, the Committee takes note of the overall approach to reward for employees in the Group. Salary increases will ordinarily be (in percentage of salary terms) in line with those of the wider workforce. The Committee does not formally consult directly with employees on executive pay but does receive periodic updates from the Group People Director. The Committee also considers developments in institutional investors’ best practice expectations and the views expressed by shareholders during any dialogue. How do we take into account the views of shareholders when we determine the remuneration policy? easyJet remains committed to shareholder dialogue and takes an active interest in voting outcomes. We consult extensively with our major shareholders when setting our remuneration policy. If any of these shareholders were to be opposed to our policy, we would endeavour to meet with them, as appropriate, to understand and respond to any issues they may have. CHARLES GURASSA Chair of the Remuneration Committee WHAT IS IN THIS REPORT? This report sets out easyJet’s remuneration policy for Executive and Non-Executive Directors, describes the implementation of that policy and discloses the amounts earned relating to the year ended 30 September 2016. The report complies with the provisions of the Companies Act 2006 and supporting regulations. The report has been prepared in line with the recommendations of the UK Corporate Governance Code and the requirements of the UKLA Listing Rules. The Directors’ remuneration policy was approved by shareholders in a binding vote at the 2015 AGM on 12 February 2015. The policy took formal effect from the date of approval and the intention is that it will apply until the 2018 AGM. A summary of the policy has again been included in this report (set out on pages 61 to 67) for the purposes of clarity and transparency. The Annual Statement by the Chairman of the Remuneration Committee (set out on pages 60 to 61) and the Annual Report on Remuneration (set out on pages 67 to 75) will be subject to an advisory vote at the 2017 AGM. 61 www.easyJet.comStrategic reportGovernanceAccounts Directors’ remuneration report continued Operation (including maximum levels where applicable) Base salaries are normally reviewed annually, with changes effective from 1 January. Salaries are typically set after considering salary levels in companies of a similar size and complexity, the responsibilities of each individual role, progression within the role, individual performance and an individual’s experience. Our overall policy, having had due regard to the factors noted, is normally to target salaries at the market median level. Salaries may be adjusted and any increase will ordinarily be (in percentage of salary terms) in line with those of the wider workforce. Increases beyond those granted to the wider workforce (in percentage of salary terms) may be awarded in certain circumstances such as where there is a change in responsibility, progression in the role, experience or a significant increase in the scale of the role and/or size, value and/or complexity of the Group. Framework used to assess performance and provisions for the recovery of sums paid The Committee considers individual salaries at the appropriate Committee meeting each year after having due regard to the factors noted in operating the salary policy. No recovery provisions apply to salary. Executive Directors receive modest personal accident and life assurance cover (0.5 x salary), at similar levels as the wider UK workforce. The cost to the Company of providing these benefits may vary from year-to-year depending on the level of the associated premium. Not applicable. No recovery provisions apply to benefits. Executive Directors receive no other conventional executive company benefits. Executive Directors can pay for voluntary benefits, where Company purchasing power may provide an advantage to employees. Executive Directors are also eligible to participate in any all-employee share plans operated by the Company, in line with HMRC guidelines currently prevailing (where relevant), on the same basis as for other eligible employees. Should it be appropriate to recruit a Director from overseas, flexibility is retained to provide benefits that take account of those typically provided in their country of residence (e.g. it may be appropriate to provide benefits that are tailored to the unique circumstances of such an appointment as opposed to providing the benefits detailed above). Necessary expenses incurred undertaking Company business are reimbursed so that Executive Directors are not worse off on a net of tax basis for fulfilling Company duties. Defined contribution plan with the same monthly employer contributions as those offered to eligible employees in the wider UK workforce, of 7% of base salary. A cash alternative may be considered. While individuals are not obliged to make contributions, easyJet operates a pension salary sacrifice arrangement whereby individuals can exchange part of their salary for Company paid pension contributions. Where individuals exchange salary this reduces employer National Insurance contributions. easyJet credits half of this reduction (currently 6.9% of the salary exchanged) to the individual’s pension plan. Not applicable. No recovery provisions apply to employer pension contributions. 200% of salary holding required for the Chief Executive and 175% of salary for the Chief Financial Officer which is expected to be reached within five years of appointment. Executive Directors are required to retain half of the post-tax shares vesting under the LTIP until the guideline is met. Not applicable. Element, purpose and link to strategy Salary To provide the core reward for the role. Sufficient level to recruit and retain individuals of the necessary calibre to execute the Company’s business strategy. Benefits In line with the Company’s policy to keep remuneration simple and consistent. Pension To provide employees with long-term savings via pension provisions in line with the Company’s strategy to keep remuneration simple and consistent. Share ownership To ensure alignment between the interests of Executive Directors and shareholders. 62 easyJet plc Annual report and accounts 2016 Element, purpose and link to strategy Annual bonus To incentivise and recognise execution of the business strategy on an annual basis. Rewards the achievement of annual financial and operational goals. Compulsory deferral provides alignment with shareholders. Operation (including maximum levels where applicable) Maximum opportunity of 200% of salary for Chief Executive and 175% of salary for other Executive Directors. One-third of the bonus earned is subject to compulsory deferral into shares (or equivalent) in a Deferred Annual Bonus Plan (DABP), typically for a period of three years, and is normally subject to continued employment. The remainder of the bonus is paid in cash. Dividend equivalent payments may be made (in cash or shares) under the DABP, at the time of vesting and may assume the reinvestment of dividends. All bonus payments are at the discretion of the Committee, as shown following this table. LTIP Performance Share Award To incentivise and recognise execution of the business strategy over the longer term. Rewards strong financial performance and sustained increase in shareholder value. Each year LTIP awards may be granted subject to the achievement of performance targets. Awards normally vest over a three-year period. The maximum opportunity contained within the plan rules for Performance Share Awards is 250% of salary (with awards up to 300% of salary eligible to be made in exceptional circumstances, such as recruitment). The normal maximum face value of annual awards will be 250% of salary for the Chief Executive and 200% of salary for other Executive Directors. A dividend equivalent provision exists which allows the Committee to pay dividends on vested shares (in cash or shares) at the time of vesting and may assume the reinvestment of dividends. A holding period applies to share awards granted in the financial year ended 30 September 2015 and beyond. The holding period will require the Executive Directors to retain the after-tax value of shares for 24 months from the vesting date. Framework used to assess performance and provisions for the recovery of sums paid Bonuses are based on stretching financial, operational and, in some cases, personal/ departmental performance measures, as set and assessed by the Committee in its discretion. Financial measures (e.g. profit before tax) will represent the majority of bonus, with other measures representing the balance. A graduated scale of targets is set for each measure, with 10% of each element being payable for achieving the relevant threshold hurdle. Safety underpins all of the operational activities of the Group and the bonus plan includes provision that enables the Remuneration Committee to scale back the bonus earned in the event that there is a safety event which it considers warrants the use of such discretion. The cash and deferred elements of bonuses are subject to provisions which enable the Committee to recover the cash paid (clawback) or to lapse the associated deferred shares (malus) in the event of a misstatement of results for the financial year to which the bonus relates, or an error in determining the cash bonus or the number of shares comprising a deferred share award, within three years of the payment of the cash bonus. LTIP awards vest based on three-year performance against a challenging range of financial targets and relative TSR performance set and assessed by the Committee in its discretion. Financial targets will determine vesting in relation to at least 50% of awards. In order for the TSR portion of the award to be earned, the Company’s absolute TSR performance must also be positive over the performance period. 25% of each element vests for achieving the threshold performance target with 100% of the awards being earned for maximum performance (there is straight-line vesting between these points). The LTIP includes provisions which enable the Committee to recover value in the event of a misstatement of results for the financial year to which the vesting of awards related, or an error in calculation when determining the vesting result within three years of the vesting (i.e. clawback provisions apply). The mechanism through which the clawback can be implemented enables the Committee to: (i) reduce the outstanding LTIP share awards (i.e. malus provisions may be used to effect a clawback), or (ii) for the Committee to require that a net of tax balancing cash payment be made. 63 www.easyJet.comStrategic reportGovernanceAccounts Directors’ remuneration report continued What discretion is retained by the Committee in operating its incentive plans? The Committee will operate the annual bonus plan, LTIP and DABP according to their respective rules (or relevant documents) and in accordance with the Listing Rules where relevant. The Committee retains discretion, consistent with market practice, in a number of regards to the operation and administration of these plans. These include, but are not limited to, the following in relation to the LTIP and DABP: • • • • the participants; the timing of grant of an award; the size of an award; the determination of vesting; • discretion required when dealing with a change of control or restructuring of the Group; • determination of the treatment of leavers based on the rules of the plan and the appropriate treatment chosen; • adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends); and • the annual review of performance measures and weighting, and targets for the LTIP from year-to-year. In relation to the annual bonus plan, the Committee retains discretion over: • • • the participants; the timing of grant of a payment; the determination of the bonus payment; • dealing with a change of control; • determination of the treatment of leavers based on the rules of the plan and the appropriate treatment chosen; and • the annual review of performance measures and weighting, and targets for the annual bonus plan from year-to-year. In relation to both the Company’s LTIP and annual bonus plan, the Committee retains the ability to adjust the targets and/or set different measures if events occur which cause it to determine that the conditions are no longer appropriate (e.g. material acquisition and/or divestment of a Group business), and the amendment is required so that the conditions achieve their original purpose and are not materially less difficult to satisfy. Any use of the above discretions would be explained in the Annual Report on Remuneration and may be the subject of consultation with the Company’s major shareholders. The use of discretion in relation to the Company’s Save As You Earn and Share Incentive Plans will be as permitted under HMRC rules and the Listing Rules. Details of share awards granted to existing Executive Directors are set out on page 71 of the Annual Report on Remuneration. These remain eligible to vest based on their original award terms. How were the performance metrics chosen and how were the performance targets set? The performance metrics used for the annual bonus plan and LTIP have been selected to reflect the Group’s key performance indicators. Profit before tax is used to assess annual performance as this reflects how successful the Company has been in managing operations effectively (e.g. in maximising profit per seat whilst maintaining a high load factor). The balance is determined based on how well the Company performs against other specific key performance indicators set annually (e.g. on-time performance and customer satisfaction) to ensure that Executive Directors are motivated to deliver across a scorecard of objectives. Since safety is of central importance to the business, the award of any bonus is subject to an underpin that enables the Remuneration Committee to reduce the bonus earned in the event that there is a safety event that it considers warrants the use of such discretion. LTIP awards are earned for delivering performance against ROCE and relative TSR targets. These seek to assess the underlying financial performance of the business while maintaining clear alignment between shareholders and Executive Directors. Targets are set based on a sliding scale that takes account of relevant commercial factors. Only modest awards are available for delivering threshold performance levels with maximum awards requiring substantial outperformance of challenging plans. No performance targets are set for Save As You Earn and Share Incentive Plan awards since these form part of all-employee arrangements that are purposefully designed to encourage employees across the Group to purchase shares in the Company. Have LTIP Awards always been granted subject to the same performance targets? The LTIP, under which the Performance Awards are granted, was approved by shareholders in 2015. The measures used last year are the same as those intended to be used in the coming year. Further details on how the awards are structured and operated are set out in the plan rules which are available, on request, from the Company. How does the Executive Directors pay policy differ from that for other easyJet employees? The remuneration policy for the Executive Directors is more heavily weighted towards variable pay than for other employees, to make a greater part of their pay conditional on the successful delivery of business strategy. This aims to create a clear link between the value created for shareholders and the remuneration received by the Executive Directors. However, in line with the Company’s policy to keep remuneration simple and consistent, the benefit and pension arrangements for the current Executive Directors are on the same terms as those offered to eligible employees in the wider workforce. 64 easyJet plc Annual report and accounts 2016 How much could the Executive Directors earn under the remuneration policy? A significant proportion of remuneration is linked to performance, particularly at maximum performance levels. The charts below show how much the Chief Executive and Chief Financial Officer could earn under easyJet’s remuneration policy (as detailed above) under different performance scenarios (based on their salaries as at 1 October 2016). The following assumptions have been made: Minimum (performance below threshold) – Fixed pay only with no vesting under any of easyJet’s incentive plans. In line with expectations – Fixed pay plus a bonus at the mid-point of the range (giving 50% of the maximum opportunity) and vesting of 43% of the maximum under the LTIP. Maximum (performance meets or exceeds maximum) – Fixed pay plus maximum bonus and maximum vesting under the LTIP. Fixed pay comprises: • salaries – salary effective as at 1 October 2016; • benefits – amount received by each Executive Director in the 2016 financial year; • pension – employer contributions or cash-equivalent payments received by each Executive Director in the 2016 financial year; and • Free and matching shares under the all-employee share incentive plan. The scenarios do not include any share price growth or dividend assumptions. CHIEF EXECUTIVE Below threshold 100% £757,000 In line with expectations 34% 32% 34% £2,212,000 Exceeds target 19% 36% 45% £3,932,000 Fixed pay Annual Bonus LTIP (Performance) CHIEF FINANCIAL OFFICER Below threshold 100% £457,000 In line with expectations 38% 31% 30% £1,190,000 Exceeds target 22% 36% 41% £2,050,000 Fixed pay Annual Bonus LTIP (Performance) It should be noted that since the analysis above shows what could be earned by the Executive Directors based on the remuneration policy described above (ignoring the potential impact of share price growth), the numbers will be different to the values included in the table on page 69 detailing what was actually earned by the Executive Directors in relation to the financial year ended 30 September 2016, since these values are based on the actual levels of performance achieved to 30 September 2016 and include the impact of share price growth in relation to share awards. What are the Executive Directors’ terms of employment? Under the Executive Directors’ service contracts both parties are required to give 12 months’ notice of termination of employment. For Executive Directors, if notice is served by either party, the Executive Director can continue to receive basic salary, benefits and pension for the duration of their notice period during which time the Company may require the individual to continue to fulfil their current duties or may assign a period of garden leave. The policy for a new hire would be based on similar terms and will also include the ability for easyJet to make a payment in lieu of notice of up to 12 monthly instalments which would be reduced if alternative employment was taken up. Under the current Chief Executive’s contract, the Company, by mutual consent, may elect to make a payment in lieu of notice equivalent in value to 12 months’ basic salary, payable in monthly instalments which would be subject to mitigation if alternative employment is taken up during this time. Alternatively, this payment may be paid as a lump sum. Bonus payments may be made, payable in cash, on a pro-rata basis, but only for the period of time served from the start of the financial year to the date of termination and not for any period in lieu of notice. Any bonus paid would be subject to the normal bonus targets, tested at the end of the financial year. The current Chief Executive has a contractual entitlement to such a pro-rated payment under her service contract, other than in the cases of resignation or termination resulting from gross misconduct. These provisions do not apply to the Chief Financial Officer. In relation to a termination of employment, the Committee may make any statutory entitlements or payments to settle or compromise claims in connection with a termination of any existing or future Executive Director as necessary. The Committee also retains the discretion to reimburse reasonable legal expenses incurred in relation to a termination of employment and to meet any outplacement costs if deemed necessary. The Executive Directors’ service contracts and the Non- Executive Directors’ letters of appointment are available for inspection by shareholders at the Company’s registered office. What is the policy when an Executive Director leaves or there is a takeover? The rules of both schemes (LTIP and DABP) set out what happens to awards if a participant ceases to be an employee or Director of easyJet before the end of the vesting period. Generally, any outstanding share awards will lapse on such cessation, except in certain circumstances. 65 www.easyJet.comStrategic reportGovernanceAccounts Directors’ remuneration report continued If an Executive Director ceases to be an employee or Director of easyJet as a result of death, injury, retirement, the sale of the business or company that employs the individual, or any other reason at the discretion of the Committee, then they will be treated as a ‘good leaver’ under the relevant plan’s rules. Under the DABP, the shares for a good leaver will normally vest in full on the normal vesting date (or on cessation of employment in the case of death) and if the award is in the form of an option, there is a 12-month window in which the award can be exercised. Awards structured as options which have vested prior to cessation can be exercised within 12 months of cessation of office or employment. Under the LTIP, a good leaver’s unvested awards will vest (either on the normal vesting date or the relevant date of cessation, as determined by the Committee) subject to achievement of any relevant performance conditions, with a pro-rata reduction to reflect the proportion of the vesting period served. The Committee has the discretion to disapply time pro-rating if it considers it appropriate to do so. A good leaver may exercise their vested awards structured as options for a period of 12 months following the individual’s cessation of office or employment, whereas unvested awards may be exercised within 12 months of vesting. In determining whether an Executive Director should be treated as a good leaver, and the extent to which their award may vest, the Committee will take into account the circumstances of an individual’s departure. In the event of a takeover or winding-up of easyJet plc (which is not part of an internal reorganisation of the easyJet Group, in circumstances where equivalent replacement awards are not granted) all awards will vest subject to, in the case of LTIP awards, the achievement of any relevant performance conditions with a pro-rata reduction to reflect the proportion of the vesting period served. The Committee has discretion to disapply time pro-rating if it considers it appropriate to do so. In the event of a takeover, the Committee may determine, with the agreement of the acquiring company, that awards will be exchanged for equivalent awards in another company. What is the policy on Executive Directors holding external appointments? Executive Directors are permitted to accept one appointment on a board of a listed company so long as this is not thought to interfere with the business of the Group. Any fees received in respect of these appointments are retained directly by the relevant Executive Director. What would the remuneration policy be if a new Director was appointed? Base salary levels will be set in accordance with easyJet’s remuneration policy, taking into account the experience and calibre of the individual (e.g. typically up to market median levels but salaries above or below this level may be set dependent upon the level of the individual). Where it is appropriate to offer a lower salary initially, a series of increases to achieve the desired salary positioning may be given over the following few years subject to individual performance. Benefits will be provided in line with those offered to other employees, with relocation expenses/arrangements provided if necessary. easyJet may offer a cash amount on recruitment, payment of which may be staggered, to reflect the value of benefits a new recruit may have received from a former employer. 66 Should it be appropriate to recruit a Director from overseas, flexibility is retained to provide benefits that take account of those typically provided in their country of residence (e.g. it may be appropriate to provide benefits that are tailored to the unique circumstances of such an appointment). The maximum level of variable pay that may be offered on an ongoing basis and the structure of remuneration will be in accordance with the approved policy detailed above, i.e. at an aggregate maximum of up to 450% of salary (200% annual bonus and 250% Performance Shares under the LTIP), taking into account annual and long-term variable pay. This limit does not include the value of any buy-out arrangements. Different performance measures may be set initially for the annual bonus, taking into account the responsibilities of the individual, and the point in the financial year that they joined. Any incentive offered above this limit would be contingent on the Company receiving shareholder approval for an amendment to its approved policy at its next AGM. The above policy applies to both an internal promotion to the Board or an external hire. In the case of an external hire, if it is necessary to buy out incentive pay or benefit arrangements (which would be forfeited on leaving the previous employer), this would be provided for taking into account the form (cash or shares), timing and expected value (i.e. likelihood of meeting any existing performance criteria) of the remuneration being forfeited. Replacement share awards, if used, will be granted using easyJet’s share plans to the extent possible, although awards may also be granted outside these schemes if necessary and as permitted under the Listing Rules. In the case of an internal promotion, any outstanding variable pay awarded in relation to the previous role will be paid according to its terms of grant (adjusted as relevant to take into account the Board appointment). On the appointment of a new Chairman or Non-Executive Director, fees will be set taking into account the experience and calibre of the individual. Where specific cash or share arrangements are delivered to Non-Executive Directors, these will not include share options or other performance- related elements. How are the Non-Executive Directors paid? The Chairman, Deputy Chairman and Non-Executive Directors receive an annual fee (paid in monthly instalments). The fee for the Chairman is set by the Remuneration Committee and the fees for the Deputy Chairman and Non-Executive Directors are approved by the Board, on the recommendation of the Chairman and Chief Executive. What are the terms of appointment of the Non-Executive Directors? The Chairman, Deputy Chairman and Non-Executive Directors’ terms of appointment are recorded in letters of appointment, which are usually renewed every three years. The required notice from the Company is three months in all cases. The Non-Executive Directors are not entitled to any compensation on loss of office. easyJet plc Annual report and accounts 2016 Element Purpose and link to strategy Operation (including maximum levels where applicable) Fees To attract and retain a high-calibre Chairman, Deputy Chairman and Non-Executive Directors by offering market-competitive fee levels. The Chairman is paid an all-inclusive fee for all Board responsibilities. The other Non-Executive Directors receive a basic Board fee, with supplementary fees payable for additional Board Committee responsibilities. The Chairman and Non-Executive Directors do not participate in any of the Company’s incentive arrangements. Fee levels are reviewed on a periodic basis, and may be increased, taking into account factors such as the time commitment of the role and market levels in companies of comparable size and complexity. Flexibility is retained to exceed current fee levels if it is necessary to do so in order to appoint a new Chairman or Non-Executive Director of an appropriate calibre. Necessary expenses incurred undertaking Company business will be reimbursed so that the Chairman and Non-Executive Directors are not worse off, on a net of tax basis, for fulfilling Company duties. No other benefits or remuneration are provided to the Chairman or Non-Executive Directors. ANNUAL REPORT ON REMUNERATION Who is on the Company’s Remuneration Committee? As at 30 September 2016, the members of the Committee were: • Charles Gurassa (Chair) • Adèle Anderson (appointed to the Committee effective from 1 January 2016) • François Rubichon John Browett stepped down from the Board and the Committee on 31 December 2015. Adèle Anderson was appointed to the Committee in his place. Chris Browne was also a member of the Committee on her appointment to the Board on 1 January 2016. However, once it became apparent that Chris would be joining the Executive Management Team, the Board determined that she was no longer independent and she therefore stepped down from the Committee in September 2016, ahead of the Committee’s last meeting of the financial year. Andy Martin joined the Committee on 1 October 2016. The responsibilities of the Committee are set out in the Corporate governance section of the Annual Report on pages 49 to 50. The Chief Executive attends meetings by invitation and assists the Committee in its deliberations as appropriate. The Committee also receives assistance from the Group People Director and the Group Head of Reward. The Company Secretary and Group General Counsel acts as secretary to the Committee. No Directors are involved in deciding their own remuneration. The Remuneration Committee is advised by New Bridge Street (NBS), (a trading name of Aon plc). NBS has no other connection with the Company. However, a sister company in the Aon group also provides pension and flexible benefits administration services to the Company. NBS was appointed by the Committee in 2004. NBS advises the Committee on developments in executive pay and on the operation of easyJet’s incentive plans. Total fees (excluding VAT) paid to NBS in respect of services to the Committee during the 2016 financial year were £59,700. NBS is a signatory to the Remuneration Consultants Group Code of Conduct. The Committee has reviewed the operating processes in place at NBS and is satisfied that the advice it receives is independent and objective. How will the remuneration policy be applied for the 2017 financial year? What are the Executive Directors’ current salaries? The current and proposed salaries of the Executive Directors are: CEO CFO 1 January 2017 salary £705,600 1 January 2016 salary £705,600 £462,500 £425,000 Change 0% 9% Andrew Findlay’s base salary was set at £425,000 when he joined the Board in October 2015. The salary was set at a significant discount to the market level with the intention that it would be brought up to the mid-market level (£500,000) over time to reflect progression in the role. The increase is effective 1 January 2017, to £462,500 which was subject to an assessment of individual and Company performance, is the first stage in this process. Any future salary increase will remain subject to satisfactory individual and Company performance. Andrew Findlay has indicated to the Committee that he would like his cash salary to remain static and that he would receive the amount of this increase in shares, which he would retain in order to build his shareholding in the Company. 67 www.easyJet.comStrategic reportGovernanceAccounts Awards vest on a straight-line basis from threshold to on-target and from on-target to maximum. As with the awards granted in the 2016 financial year, ROCE targets are based on average ROCE over a three-year performance period, commencing on 1 October 2016. TSR targets are based on relative TSR compared to companies ranked FTSE 51-150 at the start of the performance period, where the average share price is calculated over three months at the start and end of the period. In addition, in order for the TSR-based awards to vest, easyJet must have achieved positive absolute TSR over the performance period. Targets are set taking account of management’s strategic plan, market consensus and the Board’s strong focus on driving value from its increasing capital base. The Committee considers the range of ROCE targets set to be at least as demanding as those set in prior years. A post-vesting holding period requiring the Executive Directors to retain the after tax value of any shares for two years from the vesting date will apply to awards made in 2017. The ability to apply clawback has also been extended from 2016 to cover situations where the individual is considered to have contributed to any safety failure which could result in reputational damage for the Company. How will the Non-Executive Directors be paid in the 2017 financial year? The fees for the Chairman and Non-Executive Directors will be as follows: Chairman Basic fee for other Non-Executive Directors Fees for Deputy Chairman and SID role(1) Chair of the Audit, Safety and Remuneration Committees(1) Chair of the Finance Committee(1) (1) Supplementary fees. £300,000 £60,000 £25,000 £15,000 £10,000 The Board has agreed that there will be no increase to the basic fees for the 2017 financial year; these were last reviewed and increased on 1 October 2013. Directors’ remuneration report continued For comparison, the typical rate of salary increase to be awarded to employees in sales, marketing and Group functions is 1%. What bonus will be awarded in respect of performance in the 2017 financial year? The maximum bonus opportunity remains at 200% of salary for the Chief Executive and at 175% for the Chief Financial Officer. The measures have been selected to reflect a range of financial and operational goals that support the key strategic objectives of the Company. The performance measures and weightings will be as follows: Measure Profit before tax (at constant currency) On-time performance Customer satisfaction Operating costs (excluding fuel) per seat at constant currency Departmental objectives As a percentage of maximum bonus opportunity CEO 70% 10% 10% 10% – CFO 60% 10% 10% 10% 10% The proposed target levels for the 2017 financial year have been set to be challenging relative to the business plan. The Committee is comfortable that the bonus targets for both Executive Directors are appropriately demanding in light of their respective bonus opportunities. The targets themselves, as they relate to the 2017 financial year, are commercially sensitive. However, retrospective disclosure of the targets and performance against them will be provided in next year’s remuneration report unless they remain commercially sensitive. The safety of our customers and people underpins all of the operational activities of the Group and the bonus plan includes a provision that enables the Remuneration Committee to scale back the bonus earned in the event that there is a safety event that occurs, which it considers warrants the use of such discretion. One-third of the bonus earned will be deferred into shares for a period of three years and subject to continued employment. How will the LTIP be operated in relation to the 2017 financial year awards? The award levels for the Executive Directors in the 2017 financial year will be 250% of salary for the Chief Executive and 200% of salary for the Chief Financial Officer. The 2017 financial year LTIP awards will be subject to the following performance conditions: Below threshold (0% vesting) Threshold (25% vesting) On-target (50% vesting) Maximum (100% vesting) ROCE (70% of total award) <9.0% 9.0% 11.2% 13.0% TSR (30% of total award) Below threshold (0% vesting) Threshold (25% vesting)