Treasury policies
Thomas Cook Group is subject to risks related to changes in interest rates, exchange rates, fuel prices and liquidity within the framework of its business operations.
To cover these risks, the Board of Directors has established treasury policies which are reviewed regularly to ensure they remain relevant to the business.
The Board approves all the financial instruments used by the Group to limit its risks. Internal guidelines provide the framework governing actions taken, responsibilities and controls. The use of derivative financial instruments is not permitted for speculative purposes, but instead serves exclusively to hedge existing underlying or planned transactions by the business units.
Treasury activities are managed by Group Treasury. Group Treasury reports regularly to the Board and is subject to periodic independent reviews and audits, which are presented to the Audit & Risk Management Committee.
In accordance with the provisions set out in IAS 39, all derivative financial instruments must be measured at their fair values. The market valuation of the derivative financial instruments used is based on market information and appropriate valuation methods. The fair value of options is determined by recognised option price models and that of interest rates derivatives takes account of terms to maturity based on current market interest rates and the interest rate yield curve. Positive market values of derivative financial instruments are recognised as an asset while negative market values are recognised as a liability.
The Group is financed by a balanced mix of equity and access to bank facilities.
The liquidity position of the Group is significantly influenced by the booking and payment pattern of customers. As a result, liquidity is at its lowest in the winter months and at its highest in the summer months. The Group manages the cyclical nature of its liquidity by making use of its revolving credit facility.
For its longer-term liquidity requirements, for example for acquisitions, the Group makes use of its term loan facility.
Foreign currency risks
The Group is active in many destinations and sales regions and, as such, is subject to the risk of exchange rate fluctuations in its operating activities. Exchange rate risks arise in connection with the sourcing of services from destinations outside the source market. Additionally, US dollar payments are made for the procurement of fuel and operating supplies for aircraft, as well as for investments in aircraft.
The Group’s policy requires all subsidiaries to hedge all trade-generated exposures with Group Treasury either as part of the budget process or at the time of brochure launch.
Use is made, in particular, of currency forwards, currency swaps and plain vanilla currency options in order to limit exchange rate risks and these are usually designed as cash flow hedges of forecast future transactions.
Interest rate risks
The Group is also subject to risks arising from interest rate movements in connection with its financing of aircraft and acquisition of investments. Floating rate medium- to long-term items are exposed to interest rate change risks. Interest rate swaps and interest rate collars are designated as cash flow hedges of the interest rate.
Cash from operations is invested in short-term bank deposits and money market funds.
Fuel price risk
Fuel exposures relate to flying costs for the seasons on sale. Price hedging transactions are undertaken for the purpose of limiting the risk of unfavourable changes in the price of fuel. The aim of the hedging policy is to hedge up to 95 per cent of the fuel requirement for the flight schedule concerned.
Group policy requires the Group airlines to hedge all fuel exposures with Group Treasury 12 to 18 months prior to consumption. Hedging is implemented primarily with a combination of fixed price contracts (swaps) and net purchased options and is either in crude oil, gas oil or kerosene.
Liquidity risk
The Group’s overall objective is to ensure that it is at all times able to meet its financial commitments as and when they fall due. Surplus funds are collected and invested with approved counterparties within authorised limits and with the aim of maintaining short-term liquidity while maximising yield.
In May 2008, the Group replaced the existing debt facility with a new credit facility amounting to €1.8bn (£1.4bn at the financial period end), of which €1.28bn (£1.0bn at the financial period end) is available for immediate use for the Group’s general corporate purposes, including acquisitions and the recently completed share buyback programme, as well as to manage the cyclical nature of the Group’s liquidity.
The Group uses its annual budget and three-year planning process to predict expected future liquidity of the Group. The liquidity forecast is reviewed and updated on a regular basis.
Short-term liquidity
Short-term liquidity is invested in a combination of deposits and, to a lesser extent, in securities having at least an investment grade rating. All securities are denominated in euro and largely represent corporate bonds, government bonds and asset backed securities with an average rating of A for the portfolio.
Counterparty exposure
The Group assesses its counterparty exposure in relation to the investment of surplus liquidity; fuel, foreign exchange and interest rate hedging available; undrawn credit facilities; drawn revolving credit facilities; and other facilities where repayment is due within one year.
Credit Default Swap (CDS) pricing and share price performance in the previous 30 day period are the criteria used to classify counterparties into strong, satisfactory and weak categories. The counterparty’s strength defines the aggregate limit of the Group’s exposure towards the relevant party.