Icelandair Group Annual Report 2007

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30 Risk Management Risk Management Various sources of financial risk inevitably play some part on the Group’s operations by nature. The Board of Directors is responsible for defining treasury policy measures to reduce the exposure of risk. The approved treasury policy, outlines the parameters and framework to which the Group is subject to, when dealing with financial risk arising from price volatility, liquidity fluctuations, asset management and corporate financing. An internal Risk Management Team, chaired by the CEO, actively controls the risk exposure within the Board’s policy limits. The main policy objectives outline the methods to be used to reduce costs and inconvenience arising from price volatility and uncertainty. To that end, the financial budget is used as a benchmark when evaluating market conditions and hedging strategies. Foreign currency risk The Group seeks to reduce its foreign exchange exposure arising from transactions in various currencies through a policy of matching, as far as possible, i.e. receipts and payments in each individual currency. Any mismatch is dealt with by currency trades within the Group before turning to outside parties. The biggest currency mismatch is found in Icelandair where US dollar cash inflow falls short of dollar outflow by roughly USD 100 millions due to fuel costs and capital related payments that are to a large extent denominated in US dollars. This shortage is financed by a surplus of European currencies, most importantly the Euro and Scandinavian currencies. The Group follows a hedging policy of 40-80% hedging ratio, 12 months in advance, and uses a portfolio of instruments, mainly collar options and forwards. Due to two years of continous weakening of the US dollar against the Euro the hedge ratio of EUR/USD has been kept at modest levels, thus allowing for enhanced participation of the beneficial upward trend. Fuel price risk The jet fuel price has proved to be increasingly volatile in recent years. Not only has the price development been characterised by a steep upward trend, generated by excessive world demand, but also surprises and unanticipated sharp movements due to volatile sentiment and speculative forces. Moreover, swap prices had for two years followed a positive curvature until returning to the more familiar “backwardation” during 2007. In 2007, the monthly average of jet fuel prices reached a record level of USD 920 pr tonne in November after starting off in January with the settlement price of USD550. The Group follows a policy of 40-80% hedging ratio, 12 months in advance and has recently maintained its ratio between 40 and 50% i.e. close to the lower policy boundaries due to the historically high prices. Hedge instruments used in 2007 weere to a big extent swaps and 3 way collars. Despite the unfavourable price developments, Icelandair and Air Iceland managed to keep fuel costs within budget limits. Price of EUR in terms of USD EUR in terms of USD Price of Jet fuel Price in USD pr. Tonne 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 2002 2003 2004 2005 2006 2007 1,000 900 800 700 600 500 400 300 200 100 1.5 1.3 1.1 0.9 0.7 0.5 2002 2003 2004 2005 2006 2007
Risk Management 31 Interest rate risk The largest share of outstanding loans are directly related to aircraft financing and denominated in US dollars. This is a consequence of the fact that the most liquid market for commercial aircraft denominates prices in US dollars. The Group follows a policy of hedging 40-80% of interest rate exposure of long term financing, 2-5 years in advance. Currently, only the aircraft loans are hedged against interest rate fluctuations with swap contracts, where the 6 month floating rate is exchanged for fixed interest rates. Forward rate agreements and options have occasionally also been used to that end. The contracts amount to USD 100 million and have been considerably favourable in recent years, as the floating rate has been increasing for some time. The average fixed interest rate is 4% compared to the 6 month floating rate, mid year 2007 of 5.5%. Most of the swap contracts expire in 2009 and 2010 so the recent US interest rate reductions will bring opportunities for improved hedge positions beyond 2009. Liquidity risk The Group’s policy extends to two tiers of liquidity preferences. Tier one relates to the necessary minimum benchmark to maintain adequate operational liquidity and tier two relates to a preferred minima for strategic liquidity. In both cases, certain asset classes are identified to qualify for each tier based on duration and value sensitivity. The amounts are re-valued annually with regards to the estimated turnover, annual fixed costs, cost of capital and uncertainty. Balance sheet risk Some part of the Group´s loan portfolio is composed of rather unfavourable ISK short term loans. To reduce the effects of those loans on total financial costs, currency and interest rate swaps were used to exchange ISK rates for lower EUR and USD rates. To the extent that such contracts cause imbalance between currency composition of assets and liabilities, exchange rate exposure will result and the net effects feed into the financial items of the income statement. The relatively strong ISK in 2007 supported such actions and thus donated some improvements to the financial items in the income statement. 6 month USD Libor 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 2002 2003 2004 2005 2006 2007
Page 1: Icelandair Group Annual Report 2007
Page 6 and 7: 4 2007 Calendar January February Ma
Page 8 and 9: 2007 Calendar 6 July August Septemb
Page 10 and 11: 8 Dear Shareholder The principal ai
Page 12 and 13: 10 CEO’s Comment It is both a gre
Page 15 and 16: Another charter for today. TF-FIT d
Page 17 and 18: 15 An Extraordinary Shareholders Me
Page 20 and 21: 18 Board of Directors Gunnlaugur M.
Page 23 and 24: Market Overview 21 The Aircraft Mar
Page 25 and 26: Icelandair Group Fleet 23 2 Boeing
Page 27 and 28: Financials 25 FINANCIAL INCOME AND
Page 29 and 30: Shareholder Information 27 the tota
Page 34 and 35: 32 Senior Management of Icelandair
Page 36 and 37: 34 Senior Management Hjörtur Þorg
Page 38 and 39: 36 Senior Management Árni Gunnarss
Page 40 and 41: 38 Our Roots in the Community Icela
Page 42 and 43: 40 Scheduled Airline Operations Sch
Page 44 and 45: 42 Icelandair Icelandair is the lar
Page 46 and 47: 44 and New York to Keflavik and nig
Page 48 and 49: 46 Icelandair Ground Services Inter
Page 50 and 51: 48 Global Capacity Solutions Icelan
Page 52 and 53: 50 Loftleiðir Icelandic Global Cap
Page 54 and 55: 52 Bluebird Cargo Global Capacity S
Page 56 and 57: 54 Chefs at the Hilton Reykjavik No
Page 58 and 59: 56 Air Iceland Travel & Tourism Ope
Page 60 and 61: 58 Icelandair Hotels Outlook Icelan
Page 62 and 63: 60 Iceland Travel At Iceland Travel
Page 64 and 65: 62 Endorsement & Statement by the B
Page 66 and 67: 64 Independent Auditors’ Report T
Page 68 and 69: 66 Consolidated Balance Sheet as at
Page 70 and 71: 68 Consolidated Statement of Cash F
Page 72 and 73: 70 Notes, contd.: 2e. contd.: begin
Page 74 and 75: 72 Notes, contd.: 3c. contd.: (iii)
Page 76 and 77: 74 Notes, contd.: 3. contd.: i. Imp
Page 78 and 79: 76 Notes, contd.: 3. contd.: p. Inc
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80 Notes, contd.: 5. contd.: Busine
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82 Notes, contd.: Operating expense
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84 Notes, contd.: 14. contd.: Aircr
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86 Notes, contd.: 18. contd.: Trade
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88 Notes, contd.: Long-term receiva
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90 Notes, contd.: 28. contd.: Hedgi
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92 Notes, contd.: 32. Contractual r
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96 Notes, contd.: 38. contd.: Expos
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100 Notes, contd.: 38. contd.: Equi
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102 Notes, contd.: 43. contd.: Sala
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104 Notes, contd.: Pro forma 2007 2
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Icelandair Group Annual Report 2007

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