FINANCIAL HIGHLIGHTS OF THE GROUP
In thousands of EUR (12 months ended 30 September) 2007 2006 Change
Financial ratios Operating revenue 236,177 185,358 27.4% EBITDAR 9,604 (32,143) n.m. EBITDAR margin 4.1% (17.3%) 21.4 pp EBIT (20,913) (55,477) n.m. EBIT margin (8.9%) (29.9%) 21.4 pp Loss before income taxes (20,203) (58,080) (65.2%) Net loss for the period (24,070) (57,292) (58.0%)
Equity (2,738) 16,369 (116.7%) Cash and cash equivalents 11,579 41,789 (72.3%)
Operating data Average no. of aircraft 12.9 14.0 (7.7%) No. aircraft at period end 14.0 14.0 0.0% Passengers 3,312,443 2,560,597 29.4% Aircraft utilisation (BH per day) 10:45 9:29 13.2% ASK (million km) 4,230 3,703 14.2% RPK (million km) 3,503 2,801 25.1% Load factor (RPK/ASK) 82.8% 75.6% 7.2 pp Revenue per ASK (EURc) 5.58 5.01 11.5% Revenue per seat (EUR) 58.2 52.8 10.2% Yield in EURc (Rev./RPK) 6.74 6.62 1.9% Average revenue per PAX (EUR) 71.3 72.4 (1.5%) Cost per ASK (EURc) 6.08 6.50 (6.6%) Cost per ASK ex fuel (EURc) 4.71 4.85 (3.0%) Cost per seat (EUR) 63.4 68.7 (7.7%) Sectors 27,796 25,542 8.8% Average stage length 1,041 1,055 (1.4%) Total staff at period end 927 860 7.7% Staff per aircraft 66 61 7.7%
2007 2006
Share capital (EUR) 42,796,000 38,990,000 Number of shares 42,796,000 38,990,000 Share price at year-end (EUR) 2.40 2.10 Market capitalisation at year-end (EUR) 102,710,400 81,879,000
ISIN AT0000497003 Listed on the stock exchanges of Vienna (prime market) and Warsaw Ticker symbol SKY SkyEurope l Annual Report 2007 3
TABLE OF CONTENTS
Highlights 2007 financial year 05
Foreword of the Management Board 10
Introduction of Executive team 12
Corporate governance (Management Board, Supervisory Board) 16
Bodies (Management Board, Supervisory Board) 17
Consolidated management report for 2007 18
Corporate and social responsibility 34
Group structure and shareholders structure 36
Consolidated financial statements 38
Unqualified auditor’s report with explanatory paragraph 70
Report of the supervisory board 72
Glossary 73
Imprint 74
Financial calendar 75 Dublin Copenhagen Manchester Cork Birmingham Amsterdam London Warsaw
Brussels Prague Krakow
Poprad/Tatry Paris Košice Bratislava Innsbruck Vienna
Milan/Bergamo Bucharest Treviso/Venice Nice Zadar Varna Sofia Split Barcelona Rimini Burgas Lisbon Dubrovnik Olbia Rome Thessaloniki Naples Malaga
Palermo Athens Catania Larnaca SkyEurope l Annual Report 2007 5
HIGHLIGHTS 2007 FINANCIAL YEAR
New experienced aviation management team appointed including CEO, CFO, and CCO
First profitable quarter ever with Q4 EBIT of EUR 14.3 million
Best financial year ever, with an EBIT margin of - 8.9%
New base in Vienna opened on 25 March 2007
Record number of carried passengers per year, over 3.3 million and 8.2 million during SkyEurope’s history
Highest load factor in the history of SkyEurope Airlines of 90.8% in August 2007 and 82.8% for the year
Year on year revenue growth of 41%
Unit costs reduced by 6.6%
Reallocation of capacity from Krakow and Budapest to Vienna and Prague in order to simplify operations
SkyEurope Airlines completes fleet renewal process and now has the youngest commercial fleet in Europe with 14 brand new Boeings 737- 700NG
The first directly purchased Boeing 737-700NG is delivered in July 2007
SkyEurope introduces an improved product focusing on less destinations and higher frequencies REVENUE (tEUR)
250,000
200,000
150,000
100,000
50,000 2005 2006 2007 0
EBIT (tEUR)
0 2005 2006 2007 (10,000)
(20,000)
(30,000)
(40,000)
(50,000)
(60,000) SkyEurope l Annual Report 2007 7
AVERAGE AGE OF FLEET (YEARS) 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2005 2006 2007
CASK (EURc)
6.60 6.50 6.40 6.30 6.20 6.10 6.00 5.90 5.80 2005 2006 2007
PASSANGERS & SEAT LOAD FACTOR
3,500,000 84.0% 3,000,000 82.0% 2,500,000 80.0% 2,000,000 78.0% 1,500,000 76.0% 1,000,000 74.0% 500,000 72.0% 2005 2006 2007 0 70.0%
Passengers SLF
MANAGEMENT BOARD 1 FOREWORD OF THE MANAGEMENT BOARD
This past year has been a significant one maintain them less and can utilise them for SkyEurope as we accomplished a more. Fiscal year 2008 will be our first number of major milestones over the full year where we will benefit from a past 12 months. completely new standardised fleet.
First, we were able to cut our operating Throughout fiscal year 2007, we loss significantly by more than half from successfully reduced our cost of the previous year and recorded the first operations on an ASK and per seat basis ever profitable quarter. We did this by by 6.6% and 7.7% respectively year- increasing aircraft utilisation and over-year by continuing our focus on improving both unit revenues and costs. reducing all controllable costs and Not only did we grow our airline by some significantly increasing the utilisation of 14% on a capacity basis, but were also our aircraft and crews. We are able to increase our yields and load particularly pleased with this factors at the same time with yields improvement of our unit costs, which growing by 1.9% and load factors by was accomplished despite increases in 9.5%. This was accomplished despite the cost of fuel, upward adjustments to operating less aircraft (in average 12.9 pilot and mechanic salaries and benefits, versus 14). and more expensive airports with the introduction of our Vienna operations. In March 2007, we commenced flights Further cost reductions will also results out of Vienna, taking advantage of the from our simplified network, even higher high disposable income of the Austrian aircraft utilisation and flying with a brand market and the under-presence of low- new fleet of standardised aircraft. cost carriers in Vienna. We initially positioned 2 aircraft in Vienna in late During this last year, we also made a March flying to 16 destinations and since number of changes to our executive we have allocated an additional 4 aircraft management team in order to help our in Vienna for the winter 2008 schedule. company evolve and grow. In May 2007, Nick Manoudakis, one of the founding Another major accomplishment has been members of easyJet, joined us as Chief the complete renewal of our fleet into Financial Officer. Shortly after in June what is now the youngest fleet in Europe. 2007, Jason Bitter who led the turn- During the year, we accelerated the around in the Company’s operations and retirement of our older 737 Classics, on-time performance since 2005 was replacing them with our new deliveries of appointed Chief Executive Officer of the Boeing Next-Generation 737s. These Airline. Steven Greenway also joined aircraft are equipped with fuel saving SkyEurope from Virgin Blue in December winglets making them far more fuel 2007 as our Chief Commercial Officer efficient and environmentally friendly and we now have a management team in than the Boeing Classics. These aircraft place with extensive airline experience are also more reliable than the previous and a track record of success. We are aircraft meaning that we have to already seeing the positive results from SkyEurope l Annual Report 2007 11
the depth of management experience frequencies per week have increased being brought to our team. from 6 frequencies to 15 with most destinations offering both a morning and With the new operational management evening departure as a minimum. team in place, SkyEurope’s founder Christian Mandl successfully completed We are now the largest low-cost carrier the management transition and operating from each of our bases. In subsequently announced that he would Bratislava, we are the single largest step down from the Management Board airline and we carry 52.3% of all of the Company and seek election to the scheduled traffic. In Prague, we also hold Company’s Supervisory Board at the next a dominant position and are the largest opportunity. home-based LCC carrying 15% of the total LCC traffic. In Vienna, we expect In September 2007, we announced the that with the allocation of additional reallocation of capacity from Krakow and capacity in the Winter 2008 season, we Budapest to Vienna and Prague. This are the largest LCC operating out of strategic move was designed with an aim Vienna airport. primarily to simplify our operations, improve utilisation of our aircraft and With the simplification of our operations, cabin crew, and reduce overheads. In our lower cost base, and our new fleet, addition, the markets we have chosen combined with our improved product, we have limited competition from low-cost are confident that we will achieve airlines, meaning that we compete profitability. We feel that SkyEurope’s primarily with higher-cost legacy carriers future will be challenging but prosperous. in those markets. We would like to thank all of our people The introduction of the winter schedule who have worked very diligently through highlights a major change in the yet another demanding year to help us scheduling philosophy of the airline as we achieve our goals, and our shareholders significantly reduced the number of for their continuing support of destinations and increased frequencies SkyEurope. on key markets in order to improve the product appeal by offering a consistent and convenient schedule. Our average On behalf of the Management Board,
Christian Mandl Jason Bitter Nick Manoudakis INTRODUCTION OF THE EXECUTIVE BOARD
Jason Bitter, Irish/Canadian, Chief ”Our goal is to offer the best Executive Officer (CEO since June 2007); value proposition in the former Chief Operating Officer of SkyEurope Airlines, a.s. from 2005. Mr. markets we serve. We expect Bitter gained experience with a number to achieve this by being the of airline companies, including SpiceJet Limited (Chief Operating Officer) and V lowest-cost producer of seats Bird Airlines Netherlands (Chief Commercial Officer), Finnair (Sales & in the markets we fly and to Marketing Executive), and has also been offer a convenient and reliable a consultant for several aviation clients. Mr. Bitter has a BA (Hons) degree and product with outstanding Masters degree from York University, customer service. following which he continued his studies at the University of Toronto where he By achieving this, we have achieved a Ph.D. (ABD). Mr. Bitter has also had experience as an associate a sustainable profitable professor of Political Science at York business for many years.” University.
Jason Bitter Chief Executive Officer SkyEurope l Annual Report 2007 13
Nick Manoudakis, Greek, Chief ”SkyEurope is now a very good Financial Officer from 1 May 2007 brand in the CEE. All the graduated from the University of California at Berkeley with a degree in fundamentals are in place Accounting, Finance, and Computer to lead the company to Science. Mr. Manoudakis practiced as a CPA in the U.S. before joining a small profitability. We are confident team to help devise the overall business plan for what in 1995 became easyJet. that we will achieve this As a founding member of easyJet, Mr. objective relatively soon not Manoudakis was the airline’s Finance Director between 1995 and the end of only by achieving better yields 1999. He then became the Finance but also by focusing on Director of easyGroup, acting as a CFO for several of their ventures. Mr. constantly improving our cost Manoudakis joined SkyEurope in May 2007 as CFO, bringing substantial low base. We aim to be the lowest cost airline experience to the group. cost airline in the region by a good margin.”
Nick Manoudakis Chief Financial Officer INTRODUCTION OF THE EXECUTIVE BOARD
Klaus Niedl, Austrian, Chief People ”For me there are two Officer (“CPO”) of SkyEurope Airlines, important assets in an airline: a.s. since November 2005. Mr. Niedl has more than 17 years experience in People People and aircraft. By taking Management and Organisational care of our culture I am development in leading management functions. His industrial background convinced that we can create is mainly in financial services (bank, business information) in Austria and with our outstanding people Central and Eastern Europe. He started a unique competitive his career as an assistant professor at the Vienna University of Economics, advantage." where he earned a Ph.D. in Business Administration. In addition, Mr. Niedl is a certified executive coach with extensive consulting experience.
Klaus Niedl Chief People Officer SkyEurope l Annual Report 2007 15
Steven Greenway, Australian, Chief ”SkyEurope is a fantastic brand Commercial Officer, joined SkyEurope and has increasing strength on 1 December 2007 from Virgin Blue (Australia) where he was Head of in all of its key markets. E-Commerce with responsibility for all This coming year will see us of Virgin Blue’s commercial E-Commerce activities including online sales, ancillary continue developing into revenue, online marketing and Virgin Blue’s wholesale programme, Blue a leading online retailer Holidays. Mr. Greenway initially started to reduce cost of sale, his career in the air transport industry as a graduate with Qantas before moving to enhancing our ancillary the UK to become an aviation consultant revenue contribution and for PwC and then as Head of Sales and Distribution Strategy for Virgin Atlantic refining our revenue prior to joining Virgin Blue in 2005. management techniques to optimize contribution from our flying programme. None of this would be possible without the fantastic contribution and dedication of our people, and the constant Steven Greenway Chief Commercial Officer support from our guests and communities we serve.” CORPORATE GOVERNANCE
Commitment to Corporate whereby any failure to observe these Governance standards (“C rules”) must be disclosed The Management Board of SkyEurope is and explained. In addition, the code committed to compliance with the includes a number of recommendations Austrian Corporate Governance Code and (“R rules”) that exceed mandatory the Polish Best Practices in Public requirements and call for voluntary Companies (together “Corporate compliance. Governance Codes”). SkyEurope substantially complied with the Corporate Governance Codes during These Corporate Governance Codes are the 2007 financial year. The deviations sets of voluntary, self-regulating rules from rules which requires explanation are that comprise elements of Austrian and disclosed on company website as follows: Polish stock corporation law and www.skyeurope.com/Investor recognised international standards of relations/Corporate Governance. corporate management. The scope of the code includes the creation of a more Audit Committee and activities transparent corporate structure and of the Supervisory Board effective control as well as the provision of information on the financial position The Supervisory Board created an Audit and development of the company to all Committee to deal with issues concerning stakeholder groups. the accounting and audit of the Company and the Group. The members of this SkyEurope is committed to compliance committee are Jeremy Blank and Jordan with the rules of the applicable versions Karatzas. Jeremy Blank has been of the Corporate Governance Codes, and designated as the financial expert in is dedicated to the principles of accordance with the provisions of the responsible management in order to Austrian Corporate Governance Code. realise sustainable and long-term increase in the value of the company. The Supervisory Board held four The version of Austrian Code of meetings during the 2007 financial year Corporate Governance, issued in June where the financial position and 2006, has been selected as the corporate strategy as well as important overriding framework for SkyEurope‘s events and investments were discussed. corporate governance as it tends to be In addition, the Chairman of the more strict than the applicable Polish Executive Board and Supervisory Board Corporate Governance Code. Special conferred regularly on major events and emphasis is placed on the development decisions between the meetings. The and continuous improvement of an approval of the Supervisory Board was efficient system of corporate controls and requested for all investment and sale risk management. decisions. The members of the Supervisory Board have defined criteria The code comprises important legal for independence in accordance with the requirements (“L rules”) as well as guidelines established by the Austrian recognised international standards, Corporate Governance Code. SkyEurope l Annual Report 2007 17
BODIES
MANAGEMENT BOARD Hans Källenius Jason Bitter Member of the Supervisory Board Member of the Management Board since re-elected 30 March 2007, term the 1 July 2007, term expires in June 2012. expires in 2012. Represents the minority shareholders. Nick Manoudakis Member of the Management Board since Josef In-Albon the 1 May 2007, term expires in April 2012. Member of the Supervisory Board since 30 March 2007, term expires in 2012. Christian Mandl Chairman of the Management Board since Gottfried Springer 27 July 2005, resigned on 30 November Member of the Supervisory Board since 2007. 1 February 2006, Deputy chairman since 1 October 2006, term expired Alain Skowronek 31 March 2007. Member of the Management Board since 27 July 2005, resigned on 31 May 2007. AUDIT Erhard Schmidt COMMITTEE Member of the Management Board since Jeremy Blank 8 August 2005, resigned on 31 December Chairman of the Audit Committee. 2006. Iordanis Karatzas Member of the Audit Committee. SUPERVISORY BOARD Iordanis Karatzas Chairman of the Supervisory Board since 1 October 2006, term expires in 2011.
Christophe Aurand Member of the Supervisory Board since 1 October 2006, term expires in 2011. Represents the shareholder York Global Finance II.
Jeremy Blank Member of the Supervisory Board since 1 October 2006, term expires in 2011. Represents the shareholder York Global Finance II. CONSOLIDATED MANAGEMENT REPORT FOR 2007
CRUDE OIL This Consolidated Management Report was prepared in accordance with sec. 100 Cushing, OK WTI Spot Price FOB (Dollar per Barrel) 95 267 in conjunction with sec. 251 of the Europe Brent Spot Price FOB (Dollar per Barrel) 90 Austrian Commercial Code (”HGB”) and 85 thus also constitutes the Management 80 75
Report on the individual financial USD/bbl 70 65 statements of SkyEurope Holding AG, 60 Vienna. 55 50 1/8/07 2/5/07 3/5/07 4/2/07 7/9/07 8/6/07 9/3/07 10/2/06 Economic environment 1/22/07 2/19/07 3/19/07 4/16/07 4/30/07 5/14/07 5/28/07 6/11/07 6/25/07 7/23/07 8/20/07 9/17/07 10/16/06 10/30/06 11/13/06 11/27/06 12/11/06 12/25/06
Economic growth in Europe continued Month during the past year. Within the EU, the average GDP is expected to increase by 2.7% in 2007 and growth of EU countries designed to provide us visibility over our of Eastern Europe are forecasted to fuel costs into the future. We were remain higher. GDP growth in Slovakia is hedged for 10 months in FY 2007 locking expected to increase by 8.8% in 2007 in in an average jet fuel price equivalent to the Czech Republic by 6.1% and in USD 61.7 per barrel Brent crude Austria 3.2%. compared to an average jet fuel price based on market rates of USD 62.9 per The total number of passengers barrel Brent equivalent. transported by air in the EU27 rose by 4.7% in 2006 compared with 2005, to The increase in fuel prices were partially almost 740 million. The growth rates of offset by the weakening USD versus the Slovakia, Czech Republic and Austria rose EUR and other European currencies. The by 34.2%, 8% and 5.8% respectively, all US dollar continued its slide, benefiting above the EU average of 4.7% the aircraft industry in Europe generally as a significant portion of airline According to IATA, the volume of air expenses are denominated in US dollars. passengers increased globally by 7.3% in The US dollar started the year at a rate the months from January to October of EUR/USD 1.26 and has steady 2007 in comparison to the same period declined to EUR/USD 1.43, a drop of of the previous year. Positive growth in approximately 13%. It is expected that all regions suggests that the underlying the USD will weaken further against the factors boosting demand remain EUR before it stabilizes later in FY 2008. relatively strong and that any significant slowdown in growth is unlikely. Similar to fuel risk, in FY 2007 we continued with our currency hedging to World oil prices continued to be high and improve the visibility over our costs. volatile throughout FY 2007 ranging between USD 51.75 and USD 80.03 per barrel Brent and an average price for the year of USD 65.66 per barrel Brent. We continued with our fuel hedging strategy SkyEurope l Annual Report 2007 19
EUR/USD FY 2007 distinct cost advantage and to a lesser
1.45 degree against other LCCs on the routes that we fly. 1.4 Bratislava was the first base of 1.35 SkyEuropeand is the home of our 1.3 Company headquarters. Today four Rate 1.25 aircraft are based in Bratislava and we fly 1.2 to nine destinations. Routes are carefully 1.15 selected so that there are no significant overlaps with flights out of Vienna. 1/8/07 2/5/07 3/5/07 4/2/07 7/9/07 8/6/07 9/3/07 10/2/06 1/22/07 2/19/07 3/19/07 4/16/07 4/30/07 5/14/07 5/28/07 6/11/07 6/25/07 7/23/07 8/20/07 9/17/07 10/16/06 10/30/06 11/13/06 11/27/06 12/11/06 12/25/06 Bratislava has no home based legacy Month carrier and therefore our primary competition out of Bratislava is Ryanair which flies selected routes out of Growth Bratislava. We currently fly 52.3% of all FY 2007 was another successful year for scheduled traffic out of Bratislava. SkyEurope in terms of growth. We carried over 3.3 million passengers, Our Prague base was opened in April representing growth of 29.4%, and an 2006 and has shown strong growth increase of over 750,000 passengers trends. Today we have 4 aircraft based in versus the previous year. Since inception, Prague and we fly to 13 destinations. In SkyEurope has now carried more than Prague, we hold the leading LCC position 8.2 million passengers. flying approximately 15% of all LCC We also increased our capacity by traffic. We compete mainly with Czech increasing the numbers of seats offered Airlines and to a lesser degree other by 15.7% despite having fewer average LCCs flying into Prague. aircraft in the fleet by utilising our aircraft more. Our ASKs increased by On 25 March 2007, we established a new 14.2% versus 2006. base in Vienna. This step strengthened the position of SkyEurope as the leading Despite the significant increase in low cost carrier in the region serving now passengers flown and load factors, we two main airports in a catchment area of were also able to grow our yield by 1.9% 6 million people. This move allows us to for the year reflecting a maturity of our combine the lower costs of Bratislava routes and improved marketing with higher disposable income in Vienna efficiency. and enables us to enhance aircraft utilisation to reduce unit operating costs. Bases and network With the allocation of an additional 4 We fly a total of 38 destinations in 18 aircraft to Vienna (for a total of 6 countries from our bases in Bratislava, aircraft) in the Winter 2008, we have Vienna, and Prague. The Winter 2008 now become the second largest airline at schedule, now in operation, reflects a Vienna airport and we fly to 18 reallocation of capacity from Budapest destinations. and Krakow, to Vienna and Prague in a move designed to reduce complexity and Of 93 routes that we flew in summer costs. We continue to compete primarily 2007, 23 were in direct competition with against legacy carriers where we have a other LCCs. Product People
Modern fleet Culture Our network is serviced by fourteen We consider people at all levels to be one brand new 737-700 aircraft with an of the key factors in the success of average age of 8 months, making SkyEurope. Teamwork together with SkyEurope’s fleet the youngest in Europe performance related incentives are the and one of the newest commercial fleets preconditions of successful and motivated in the World. These modern aircraft are staff, a key component of our equipped with 149 comfortable leather relationship with our customers. We seats, are about 12% more fuel efficient strive to create an open culture aligned and require approximately 15% less with a lean management approach. maintenance expenditures. In order to align these corporate core SkyEurope currently has ten additional values with the individual performance, aircraft on firm order to be delivered in we have introduced a company wide 2008 through 2010 and additional six bonus system to give employees and Boeing purchase rights that SkyEurope managers the chance to share in the plans to exercise in FY 2008 for delivery success of SkyEurope. in 2010 and 2011. In total, we expect to have 30 aircraft in our fleet by 2011. Training and development is regarded as an investment in our employees and in Product the future of SkyEurope. Therefore we SkyEurope aims at providing its have implemented the SkyAcademy customers a safe, quality product at low focusing on providing structured trainings prices. We offer: to develop our management (introduction • A convenient timetable with a high of Management by Objectives, number of daily frequencies; leadership, finance) and employees • Access to primary airports and most (e.g. customer orientation, European capital cities in Europe; Computer Driving Licence ECDL). These • Modern new aircraft with comfortable initiatives are voluntary investments and leather seats; are in addition to the mandatory • Assigned seating on board; trainings required for our operations, • High on-time performance; mainly for crews and technicians. • Web check-in; • Access to airport lounges. The development of an open culture is supported by different means both The 2008 Winter schedule was through formal and informal platforms. announced focusing on increased We reinforce open feedback through frequencies to less European destinations a regular electronic feedback system, with more convenient departure times for SkyCockpit, where employees are able to an overall improved product. provide feedback to their managers. Informal feedback comes from discussions facilitated through monthly SkyEurope l Annual Report 2007 21
staff events and team building events government, authorities, is of crucial such as SkyPub. importance. Therefore we prepared in FY 2007 a Code of Ethics and Business To support this approach of open Conduct that will be properly communication, we signed a lease implemented beginning of FY 2008. agreement in July 2007 for an office building in Bratislava close to the airport. The Code of Ethics and Business Conduct This new and modern working covers a wide range of business practices environment is not only less expensive and procedures. While it is not possible than our current office facilities but it to develop a detailed set of rules which allows us to implement an open space cover all circumstances, or which serve philospophy and to house all employees as a substitute for good judgment and under one roof. We expect this to ethical conduct, the purpose of this Code significantly improve our is to set forth the business ethics of communications, productivity and open SkyEurope in a written format which culture. provides clear guidance to all
Preparation of Code of Ethics SkyEurope’s employees. and Business Conduct By following the policies embodied in this We are convinced that the reputation of Code, we will support the achievement of SkyEurope as a fair, reputable and our objectives, provide attractive and honest organization can only be secure opportunities for all employees. It maintained if all of its staff, officers and is the policy of the Company that each of managers adhere to high moral and its employees comply with both the letter ethical standards in conducting the and spirit of this Code. Company’s business. Establishing and maintaining the trust and confidence of all stakeholders, including employees, the Management Board, existing or potential shareholders, creditors, customers, suppliers, lenders, Risk report 26,710 thousand at an average exchange SkyEurope has implemented appropriate rate of 1.4531 (EUR/USD) for the risk-management structures in its payment period from 13 November 2007 organisation. The relevant risks are to 29 September 2008 to hedge the regularly assessed and reported to the Group’s committed US Dollar payments Management Board with the aim of during the same period. ensuring that suitable measures can be taken at an early stage to counter these Fuel risk risks. Oil prices averaged at USD 65.66 per barrel Brent during the FY 2007, almost Financial instruments unchanged from the FY 2006 average of Derivative financial instruments were USD 65.37 per barrel Brent. Jet fuel utilised by SkyEurope during the period costs accounted for approximately 23% in the management of its foreign of total operating expenses. To be currency (US Dollar) and fuel price protected against sudden and exposures. SkyEurope’s policy is not to unpredictable upturn in oil prices having utilise derivative financial instruments for a strong impact on the business results, speculative purposes. the Company continued with its jet fuel risk management policy. In the FY 2007, Foreign currency risk approximately 89% of planned fuel Approximately half of SkyEurope’s consumption for the period from expenses, in particular fuel and certain November 2006 through August 2007 aircraft costs, are denominated in US was hedged at an average of USD 62.3 Dollars. The Group entered into forward per barrel equivalent of Brent crude oil. contracts during the period to purchase Hedges produced net positive gains for USD 122,275 thousand at an average the Company. exchange rate of 1.3052 (EUR/USD) to hedge the Group’s committed US Dollar SkyEurope now operates a modern fleet payments. of fuel efficient Next Generation Boeing aircraft, and in addition to the fuel Additionally, the Group has entered into hedges, a flight fuel conservation and contracts to purchase USD 89,013 tankering programme have been thousand at an average exchange rate of implemented. Together these 1.3768 (EUR/USD) for the payment programmes will continue to be the period from 1 October 2007 to 29 integral components of our fuel cost September 2008 to hedge the Group’s management priorities for FY 2008. committed US Dollar payments during the same period. The estimated fair Market risk market value of the contract as at 30 The business model adopted by September 2007 is negative EUR 2,159 SkyEurope is based on a balanced thousand. market risk. The Company’s multi-base network and its approach toward After 30 September 2007, the Group has targeting passengers both in domestic entered into contracts to purchase USD markets and in Western Europe serve to SkyEurope l Annual Report 2007 23
diversify risks similar to its broad Firstly as part of our new strategy, passenger profile. Flight schedules are we announced plans to reallocate aircraft prepared to appeal to leisure travellers capacity from Budapest and Krakow to and business travellers alike. our other 3 existing bases to take advantage of further economies of scale. Outlook As a result of this, we entered into a conditional sales agreement to dispose With our new network and base structure of our Ground Handling Company, in place, we have made significant GroundEurope, in October 2007 progress toward improving our fixed cost recording a net gain on sale of EUR utilisation (aircraft and crew) and we 1.8 million. expect our unit costs to decrease significantly. This will be enhanced by our In addition, we disposed of two aircraft modern and fuel efficient fleet where we in October and November 2007 as the should benefit from lower maintenance delivery times were sub-optimal and did costs and higher reliability. We continue not form a part of our business plan. to attack our cost base by further These subsequent events are detailed simplifying our business and removing in the notes to the consolidated financial complexities and are redesigning our statements. processes to reduce our overall headcount and improve efficiency. On 27 December 2007, we announced the completion of a EUR 15 million We have also improved our product financing facility from our largest significantly by reducing our destinations, shareholder, York Global Finance II while increasing our frequencies making S.a.r.l. This loan provides SkyEurope with our product more convenient for adequate working capital to continue passengers and therefore attracting with the execution of its turn-around plan passengers willing to pay more for our without diluting shareholders’ interests flights. We have a well known brand and through the issuance of new capital. an attractive, competitive product and we Refer to note 23(e) of the footnotes to expect unit revenues to increase as our the Consolidated Financial Statements. routes begin to mature, especially in Vienna, our youngest base.
With an improved product attracting higher fares combined with a lower cost structure, we expect to continue the operational improvements as we did in FY 2007.
Post Balance Sheet Events
Subsequent to 30 September 2007, a number of subsequent events occurred. OPERATIONAL AND FINANCIAL REVIEW
KEY OPERATING DATA
(12 months ended 30 September) 2007 2006 Change Operating data Average no. of aircraft 12.9 14.0 (7.7%) No. aircraft at period end 14.0 14.0 0.0% Passengers 3,312,443 2,560,597 29.4% Aircraft utilisation (BH per day) 10:45 9:29 13.2% ASK (million km) 4,230 3,703 14.2% RPK (million km) 3,503 2,801 25.1% Load factor (RPK/ASK) 82.8% 75.6% 7.2 pp Revenue per ASK (EURc ) 5.58 5.01 11.5% Revenue per seat (EUR) 58.2 52.8 10.2% Yield in EURc (Rev./RPK) 6.74 6.62 1.9% Average revenue per PAX (EUR) 71.3 72.4 (1.5%) Cost per ASK (EURc ) 6.08 6.50 (6.6%) Cost per ASK ex fuel (EURc ) 4.71 4.85 (3.0%) Cost per seat (EUR) 63.4 68.7 (7.7%) Sec tors 27,796 25,542 8.8% Average stage length 1,041 1,055 (1.4%) Total staff at period end 927 860 7.7% Staff per aircraft 66 61 7.7% SkyEurope l Annual Report 2007 25
KEY PERFORMANCE INDICATORS
Available seat kilometre (“ASK”) Load factor Despite a reduction in the average The Company implemented a “load factor number of aircraft operated during the active” policy at the beginning of the year (12.9 in 2007 vs. 14 in 2006), the financial year resulting in an increase in introduction of larger Boeing 737 NG the passenger numbers and overall aircraft and an increase in average daily revenue per available seat kilometre. utilisation by 13.2% to 10:45 hours per As a result of this, load factors increased day (9:29 hours in 2006), resulted in from 75.6% in 2006 to 82.2% in 2007. a 14.2% increase in capacity in 2007 The improvement in load factors also period to 4.2 million ASKs (3.7 million in reflects the maturity of some of our 2006). routes flown during the year.
Revenue per available seat kilometre (“RASK”) Revenue per available seat kilometre increased by 11.5% from an average of EURc 5.01 in 2006 to EURc 5.58 in 2007. This was mainly due to a 9.5% increase in load factor achieved during the quarter and a 1.9% increase in the average yield per passenger.
Cost per available seat kilometre (“CASK”) Cost per available seat kilometre decreased by 6.6% from EURc 6.50 in 2006 to EURc 6.08 in 2007. Unit cost reductions were driven primarily by increased aircraft utilisation of 13.2% versus 2006; a decrease in aircraft fuel prices due to fuel hedging; lower maintenance costs from newer aircraft and the release of aircraft redelivery provisions; a decrease in insurance premiums paid and a reduction in administration expenses due to efforts made to control overhead expenses. These decreases were offset by targeted increases in sales and marketing, increases in ground handling, airport charges, navigation charges etc, arising from the move to Vienna, a more expensive airport, and higher rental expenses associated with newer aircraft. INCOME STATEMENT
Expressed in thousands of EUR except basic and diluted loss per share.
30 September 2007 30 September 2006 Operating revenue Scheduled revenue 208,204 157,164 Ancillary revenue 11,589 4,254 Charter revenue 16,384 23,939 236,177 185,357
Operating expenses Aircraft fuel (57,892) (61,043) Sales and marketing (13,231) (10,487) Ground handling charges (19,216) (16,158) Maintenance, material and repairs (19,405) (27,708) Salaries, wages and benefits (25,832) (22,412) Navigation charges (23,522) (20,256) Aircraft and passenger insurance (1,980) (2,132) Administrative expenses (13,324) (17,818) Airport charges (51,261) (39,486) Base closure expense (910) - (226,573) (217,500)
Operating income (loss) before interest, tax, depreciation, amortisation and rental (EBITDAR) 9,604 (32,143) Depreciation and amortization (1,488) (1,547) Aircraft rental (29,029) (21,788) Operating loss (EBIT) (20,913) (55,478)
Other expenses Financial income (expense), net 710 (2,603)
Loss before income taxes (20,203) (58,081) Income tax (expense)/credit (3,867) 788 Net loss for the period after tax (24,070) (57,293) Weighted average number of ordinary shares at end of year 39,156,838 20,208,110 Basic and diluted loss per share (EUR) (0.61) (2.84) SkyEurope l Annual Report 2007 27
Revenue 2007 to bring the compensation to SkyEurope’s total revenue increased competitive levels, however on a cost per during the year by 27.4% in 2007 vs ASK basis have remained stable at EURc 2006 up from EUR 185.4 million in 2006 0.61 which is a result of better staff to EUR 236.2 million in 2007. The utilisation. The increased number of increase was primarily driven by higher staff at year end represents Krakow and scheduled revenue during 2007 reflecting Budapest based staff, which was a 29.4% increase in passengers from subsequently reduced after the closure 2.6 million to 3.3 million. The increase of those bases in October 2007. in passengers was accomplished by improving aircraft utilisation from an We expect that with the consolidation of average of 9:29 hours per day in 2006 our base network to 3 bases from 5 and to 10:25 hours in 2007 as well as higher a simplification of our operations, we will load factors, up from 75.6% to 82.8%. significantly improve our staff In addition, our yields improved 1.9% productivity and expect therefore to during 2007 despite an increase in load reduce our staff numbers accordingly. factors due primarily to improved revenue management and higher Aircraft fuel summer demand in Q4 2007 vs Q4 2006. SkyEurope’s fuel costs decreased by 5.2% from EUR 61 million to EUR 57.9 Total ancillary revenues per passenger million in 2007 vs 2006 primarily due to grew very significantly by 172.4% in the benefit of more modern and fuel 2007 vs 2006 (up 110.6% on a per efficient aircraft, and a weakening passenger basis) attributable primarily to USD/EUR exchange rate. On a per ASK increased passengers and web traffic and level, fuel price per ASK decreased 17% to an enhanced portfolio of products from EURc 1.65 to EURc 1.37. SkyEurope introduced and offered to customers, had a fuel hedge in place for most of FY including seat assignment, car rental 2007, the last of which expired in August and hotel bookings, options which are 2007. Since then the fuel is un-hedged available through SkyEurope’s website. but the cost is partially offset by a weakening US Dollar. The overall decrease in charter revenue of 31.6% in 2007 vs 2006 is due to Aircraft rental continued focus being put on SkyEurope’s There was an increase in aircraft rental scheduled operations and less on charter expense by 33.2% from EUR 21.8 million activities. in 2006 to EUR 29 million in 2007 which despite a decrease in the average Salaries, wages and benefits number of aircraft in the fleet is due to Salaries, wages and benefits have a higher proportion of more expensive increased by 15.3% in 2007 vs 2006 due aircraft being used (Boeing 737-700 NG to a larger number of crew staff from aircraft vs Boeing Classics). On a cost increased flying activities in the summer per ASK basis, aircraft rental expenses period and upward salary adjustments have increased during the year by 16.6% made to pilots and mechanics during from EURc 0.59 to EURc 0.69 due to the reasons described above, however during the year by 18.9% from EUR 16.2 partially offset by the 13.2% increase in million to EUR 19.2 million and on an aircraft utilisation during the year. This ASK basis have increased by 4.1% from increase is offset by fuel efficiencies and EURc 0.44 to EURc 0.45 due to an lower maintenance costs of the newer increase in sectors flown and a higher aircraft. average load factor. We also commenced operations in Vienna where the ground SkyEurope is targeting to further handling charges are more expensive. increase its aircraft utilisation in order to substantially reduce unit rental costs. We expect unit ground handling charges to increase as more capacity is allocated Sales and marketing to Vienna where costs are higher, These costs have increased as expected however this should be offset by better due to higher booking related costs deals reached with ground handling (credit card commissions and call centre suppliers who will benefit from an fees) attributable to higher passenger increase in the volume of passengers numbers and load factors combined with travelling our consolidated base network. targeted efforts made to further promote SkyEurope’s brand in key markets and to Airport charges establish the Vienna base. Sales and Airport charges, which represent landing marketing costs increased on a YTD basis fees (fixed turnaround charges) and per by 26.2% from EUR 10.5 million in 2006 passenger fees charged by airports, have to EUR 13.2 million in 2007. Sales and increased by 29.8% from EUR 39.5 marketing expenses per ASK increased million in 2006 to EUR 51.3 million in 10.4% from EURc 0.28 to EURc 0.31. 2007. This increase has been driven driven primarily by a 29.4% increase in Sales and marketing activities took place passengers carried and an 8.8% increase earlier during the year resulting in high in sectors flown resulting in higher total expenditures in Q2 and Q3 2007 during per passenger charges, in addition to the launch of the Vienna base and higher airport fees charged by the Vienna therefore less expenditure was required airport. during the last quarter of 2007. On a per ASK basis, there has been With the maturity of our product, a 13.6% increase in airport charges from a consolidation of our bases (advertising EURc 1.07 to EURc 1.21. focused on less markets) and an increased focus put on on-line marketing As with ground handling charges, in activities, we expect to significantly future periods we expect to benefit from improve our marketing efficiency in better airport agreements, as we will be future periods and reduce overall unit increasing the volume of passengers marketing costs. carried to fewer airports in our network.
Ground handling charges Navigation charges Ground handling charges have increased SkyEurope’s navigation charges, which SkyEurope l Annual Report 2007 29
include over-flight fees, air traffic control against the US dollar. and approach fees have increased 16.1% from EUR 20.3 million in 2006 to EUR Administrative expenses 23.5 million in 2007. The increase was Administration expenses have decreased primarily due to an increase in ASKs by 25.2% on a YTD basis from EUR 17.8 flown and a higher average maximum million to EUR 13.3 million due to efforts take off weight of Boeing 737-700s vs taken to control overheads. In addition, Boeing Classics. public offering related costs expensed in 2006 were not incurred in 2007. Items On a cost per ASK basis, navigation included in this category are charges increased 1.7% from EURc 0.55 administrative costs, professional fees to EURc 0.56 during the year. and operational costs not included elsewhere. On a per ASK basis, Maintenance, materials and administrative expenses have decreased repairs by 34.5% from EURc 0.48 to EURc 0.31. Significant maintenance expenses were incurred during the year due to the Administration expenses are largely redelivery of our remaining Boeing controllable and are subject to extensive Classic aircraft, however this has been management scrutiny with an aim of offset by the effect of lower maintenance reducing these costs in future periods costs on newer and more reliable aircraft significantly. This is accomplished and improved maintenance contracts through the implementation of strict cost with suppliers which lower our variable controls including a tight budgetary maintenance costs. Due to these factors, process and purchasing procedures and maintenance expenses have decreased in policies. 2007 vs 2006 falling from EUR 27.7 million to EUR 19.4 million and 38.7%. Depreciation and amortization On a per ASK basis from EURc 0.75 in Depreciation relates to charges taken on 2006 to EURc 0.46 in 2007. depreciable fixed assets consisting of aircraft, software, office equipment, and We have now fully renewed our fleet and leasehold improvements. There was no expect to benefit further from the lower significant absolute change to maintenance expenses of a brand new depreciation and amortization expense fleet. during the period.
Aircraft and passenger insurance As we received our first two on-balance Aircraft and passenger insurance costs sheet aircraft assets during Q4 2007, reduced by 7.1% from EUR 2.1 million in depreciation expense will increase 2006 to EUR 2.0 million in 2007 and significantly in future periods. 18.7% on a cost per ASK basis from EURc 0.06 in 2006 to EURc 0.05 in 2007. Base closure costs This was a result of lower rates being Base closure costs represent severance negotiated with insurance suppliers and payments made to employees impacted the effect of the strengthening Euro by the Budapest and Krakow base closures. Certain other expenses were which are not expected to be financed also incurred in relation to the base through sale and leaseback transactions closure such as early contract and other depreciable assets including termination penalties etc. software, office equipment and leasehold improvements. Base closure expenses will be offset in future periods by the benefits we receive The net book value of property, plant and of our network with less bases, better equipment increased from EUR 17.7 staff efficiency, and simplified operations. million at 30 September 2006 to EUR 70.1 million at 30 September 2007 due Interest and other finance to the addition of the two aircraft as charges mentioned above and additional pre- Interest and other finance charges delivery payments made to Boeing during represents interest paid or payable by the period. SkyEurope offset by the revaluation of financial assets and liabilities. Finance Deposits and other long-term charges relate predominantly to receivables accumulated interest expense on Long-term receivables and other assets convertible bonds issued in connection consist principally of deposits paid to with the Company’s secondary public lessors for aircraft under operating lease offering. The gain realised during the and other long-term deposits paid to quarter relates to foreign exchange gains suppliers. The deposits increased from on pre-delivery payment loans which EUR 8.3 million at 30 September 2006 to have more than offset the interest EUR 10 million at 30 September 2007 expense paid on convertible debt. due to the delivery of new aircraft financed on operating lease. Income tax expense Income tax expense represents the Deferred tax assets partial write down of the tax losses Deferred tax assets result primarily from incurred in the Hungarian entity as the value of tax losses incurred in operations in the Hungarian branch previous years available for carry ceased in October 2007 and hence it is forward. The Company expects to unlikely that the full amount of the tax generate sufficient taxable income in the losses will be recovered. future in order to utilise the deferred tax assets recorded. The decrease in the deferred tax asset from 30 September BALANCE SHEET 2006 is due to the EUR 3.9 million write down of the tax losses incurred in the Property, plant and equipment Hungarian entity as operations in the Property, plant and equipment includes Hungarian branch ceased in October principally two Boeing 737-700 aircraft 2007 and hence it is unlikely that the full delivered in July and August 2007, pre- amount of the Hungarian tax losses will delivery payments made to Boeing for be recovered. aircraft to be delivered in future periods SkyEurope l Annual Report 2007 31
Trade and other receivables Cash and cash equivalents Trade receivables represent receivables Cash and cash equivalents has decreased from credit card payments, tour from EUR 41.8 million at 30 September operators, outsourced sales desks at 2006 to EUR 11.6 million at 30 airports, lessors, and other miscellaneous September 2007 due to net operating receivables arising in the normal course cash outflow during the year; additional of operations. The increase in trade cash retentions held by our credit card receivables from EUR 13.6 million at 30 provider; and a reduction in advance fare September 2006 to EUR 21 million at 30 bookings as we introduced a product September 2007 is due to the increase in more attractive to business passengers our business activities and hence our who book closer to the date of the trade receivables and an increase in departure. The cash balance at 30 credit card retentions from our credit September 2006 included proceeds from card acquirer. a secondary public offering.
Prepayments for aircraft for sale Cash flows from operating activities has Subsequent to year end, the Group improved significantly in comparison to entered into an agreement with a third the prior year due primarily to party to sell two aircraft scheduled to be improvements in net cash operating delivered in October and November 2007 cash-ins driven by better year to date and therefore have been recorded as performance. short-term assets. Proceeds from the sale of the aircraft will be used to pay Interest-bearing loans and down the drawn portion of the pre- borrowings delivery payment loan classified as the Interest bearing loans and borrowings current portion of Interest-bearing loans represent term loan financing of two and borrowings. The aircraft sold were Aircraft and pre-delivery payment never incorporated into the winter financing obtained from Bank of Scotland schedule as the timing of the deliveries Corporate for nine aircraft to be delivered were considered suboptimal. in 2007 through 2009. The increase is due to the term loans drawn upon the Prepaid expenses delivery of the two Boeing 737-700 In accordance with industry practices, we aircraft in July and August 2007. pay many suppliers such as fuel suppliers and airports in advance and therefore we Of a total of ten aircraft on firm order, have a significant amount of prepaid pre-delivery payment financing has expenses. The prepaid expenses already been committed by Bank of decreased from EUR 25.5 million at 30 Scotland Corporate for five aircraft. September 2006 to 8.4 million at 30 Financing commitments are sought for September 2007 due to an overall the remaining orders. improvement in the administrative processing of prepayments and related The portion of interest-bearing loans and supplier invoices. borrowings due within the next twelve months has been classified as short- term. This includes the pre-delivery period for advance ticket sales resulting payment financing of the two aircraft from our enhanced, convenient schedule sold subsequent to year end and pre- aimed toward business passengers who delivery payments for aircraft to be book closer to the date of departure. delivered in the next 12 months where term loan financing has not yet been Trade and other payables secured. Trade and other payables represent trade debt owed to our suppliers that arise in Convertible bonds the normal course of business. The The amount recorded as convertible decrease from EUR 53.2 million at 30 bonds at 30 September 2007 represents September 2006 to EUR 42.9 million at the carrying value of the Tranche A 30 September 2007 is related to the convertible bond, net of the portion of decrease in prepaid expenses as the convertible bond recognized directly explained above. in equity. The decrease from 30 September 2006 resulted from the conversion of the Tranche B convertible CASH FLOW bond which has been partially offset by interest accrued on the Tranche A Cash flow from operating convertible bond. activities As a result of the reduced operating loss Maintenance provisions for the period and a higher number of Maintenance provisions represent advance bookings, net cash outflow from liabilities recorded for future maintenance operating activities improved and was expenses. Amounts are classified as EUR 27.3 million lower during the year current if it is expected the future ended 30 September 2007 versus 2006. maintenance event will occur within 12 This improvement was achieved despite a months of the balance sheet date and significant increase in operating activities non-current if longer than 12 months. and additional retentions held by our The significant decrease from 30 credit card acquirer. September 2007 is due to the redelivery of the Boeing Classic fleet and the Cash flows from investing and related release of provisions against financing activities expenses recorded during the period. Cash outflows from investing activities represent the purchase of two new Unearned revenue aircraft in July and August 2007, and Unearned revenue represents advance pre-delivery payments made to Boeing ticket sales made and has increased from for future aircraft deliveries. Financing EUR 22.7 million at 30 September 2006 has been secured for these purchases to EUR 25.7 million at 30 September and most pre-delivery payments and 2007. The marginal increase in unearned therefore cash-in from financing activities revenue versus the increase in seat is approximately equivalent to the cash capacity on sale for the coming seasons out from investing activities. is due to the expected shorter time SkyEurope l Annual Report 2007 33
Notes in accordance with §243a SkyEurope Airlines, a.s subsequent to of the Austrian Commercial Code year end on 21 December 2007. 1. The share capital comprises 9. The Company has not entered into any 42,796,000 ordinary shares. The share obligating agreements with its Board capital is paid in full. of Directors and/or Members of the 2. All shares have the same rights and Supervisory Board in the event of a obligations. change of control (takeover) according 3. The majority of the share capital is to the stipulations under §243 no. 9. free float. The only shareholder above the 10% threshold is York Global Finance II S.a r.l.. Vienna, 21 December 2007 4. There are no shares with special control rights. 5. All employees who are also Jason Bitter shareholders of the Company Nick Manoudakis personally exercise their voting right. 6. According to the Corporate Governance Code and the Company’s Articles of Association, members of the Management Board shall be only appointed if their Executive Board position ends at the latest with that year in which they reach 65th years of age. There are no applicable requirements resulting directly from the law regarding the appointment and recalling of members of the Management Board and the Supervisory Board and concerning the amendment of the Company’s Articles of Association. 7. The Company is not involved in any agreements that contain regulations that refer to the stipulations under §243 no. 8 of the Austrian Commercial Code. 8. In accordance with the stipulations under §243 no. 8 of the Austrian Commercial Code, certain change of control provisions exist in the terms and conditions of the Tranche A Convertible Bonds issued in September 2006 and in the EUR 15 million financing facility secured by CORPORATE AND SOCIAL RESPONSIBILITY
We are convinced that by Environmental protection In December 2006, the European balancing all stakeholder Commission drafted an amendment to directive 2003/87/EC in which the interests we are creating aviation industry will now participate into shareholder value. Therefore the emission trading scheme (ETS). Each Member State has involved stakeholders corporate social responsibility (airlines, airports, aviation authorities, etc.) into the discussion and completion means for us the responsible of this proposal. A small committee management of our business, (environmental and legal experts) has been appointed to represent SkyEurope environmental protection in these meetings. activities and positive SkyEurope highly supports this relationship management with regulation. Being a member of the European Low Fares Airline Association our employees and other (ELFAA), SkyEurope is intensively stakeholders. SkyEurope is involved in ELFAA’s activities which are focusing on modelling and implementing actively committed to the the new regulation in an equal manner. social and natural Youngest fleet in Europe environment. SkyEurope completed its aircraft renewal programme in FY 2007 where the older Boeing 737-300 and 737-500 were replaced by brand new Boeing 737-700 NG aircraft. These new aircraft reduce fuel consumption by up to 12% and produces less CO2 emissions. By actively investing in modern technology, SkyEurope reduces the need for non- renewable resources and significantly reduces noise emissions thereby contributing a better quality of life for airport neighbours.
Paperless Office SkyEurope’s concept of implementing a Shared Service Centre in its headquarters contributes to of the elimination of paper waste. Included within the Shared Service Centre are a Document Management System SkyEurope l Annual Report 2007 35
allowing for the electronic circulation of Sponsorship invoices and other corporate documents; SkyEurope cooperates with public schools an e-procurement system for electronic to provide students with industrial order management; and e-payroll related information. The cooperation whereby employees are provided access with Trencín High School in Slovakia to electronic archives for payslips. These allows students who specialize in aircraft systems all support our initiatives toward engineering, to complete their a paperless office environment. apprenticeship and become employable. Students can see first hand what is involved in performing maintenance activities on the Boeing 737-700 NG fleet. We also cooperate with a Bratislava based school in the fields of telecommunication (IT technicians) and commerce.
SkyEurope gives different institutions such as orphanages and playschools the chance to get in touch with the “mysterious” airline industry and to provide disabled children with unforgettable moments. This is done via excursions or free transport. GROUP STRUCTURE AND SHAREHOLDERS STRUCTURE
GROUP STRUCTURE
SkyEurope Holding AG (Vienna – Austria)
100%
SkyEurope Airlines, a.s. (Bratislava – Slovakia)
10% 97% 100%
SkyEurope Asset 3% Management Hungary Kft.
SkyEurope SkyEurope Airlines 90% Asset Hungary Kft. Management (Budapest - Hungary) (Ireland)
As of December 2007 SkyEurope l Annual Report 2007 37
SHAREHOLDER’S STRUCTURE AT 30 SEPT 2007
29.90% York Global Finance II S.a.r.l.
29.90% 9.32% Citigroup Global Markets Limited
4.51% 4.51% BLACKROCK Investment Management (UK) Limited
4.15% 52.12% 4.15% Deutche Bank AG
52.12% Other free float 9.32%
CONSOLIDATED FINANCIAL STATEMENTS
40 CONSOLIDATED INCOME STATEMENT
41 CONSOLIDATED BALANCE SHEET
42 CONSOLIDATED CASH FLOW STATEMENT
43 CONSOLIDATED STATEMENT OF CHANGES IN
43 SHAREHOLDERS’ EQUITY
44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER
(Expressed in thousands of EUR Note 30 September 30 September except basic and diluted los s per share) 2007 2006
Operating revenue Scheduled revenue 208,204 157,164 Ancillary revenue 11,589 4,254 Charter revenue 16,384 23,939 236,177 185,357 Operating expenses Aircraft fuel (57,892) (61,043) Sales and marketing (13,231) (10,487) Ground handling charges (19,216) (16,158) Maintenance, material and repairs (19,405) (27,708) Salaries, wages and benefits 16 (25,832) (22,412) Navigation charges (23,522) (20,256) Aircraft and passenger insurance (1,980) (2,132) Administrative expenses 14 (13,324) (17,818) Airport charges (51,261) (39,486) Base closure expense (910) - (226,573) (217,500) Operating income (loss) before interest, tax, depreciation, amortisation and rental (EBITDAR) 9,604 (32,143) Depreciation and amortization (1,488) (1,547) Aircraft rental (29,029) (21,788) Operating loss (EBIT) (20,913) (55,478) Other income (expenses) Financial income (expense), net 15 710 (2,603) Loss before income taxes (20,203) (58,081) Income tax (expense)/credit 18 (3,867) 788 Net loss for the period after tax (24,070) (57,293) Weighted average number of ordinary shares at end of year 39,156,838 20,208,110 Basic and diluted loss per share (EUR) 19 (0.61) (2.84)
See accompanying notes to the consolidated financial statements SkyEurope l Annual Report 2007 41
CONSOLIDATED BALANCE SHEET
(Expressed in thousands of EUR) Note 30 September 30 September 2007 2006
Assets Property, plant, equipment and intangible assets 5 70,053 1 7,710 Deposits and other long-term assets 6 9,990 8 ,336 Deferred tax assets 18 6,238 9 ,251 Total non-current assets 86,281 35,297
Expendable spare parts and inventories 1,158 1 ,119 Trade and other receivables 7 20,991 13,555 Advance payments for aircraft for sale 5 21,310 - Prepaid expenses 8 8,429 25,472 Cash and cash equivalents 9 11,579 41,789 Total current assets 63,467 81,935 Total assets 149,748 117,232 Equity Issued capital 10 42,796 38,990 Share premium 84,148 81,293 Reserves - cash flow hedges (2,159) (467) Accumulated losses (127,407) (103,337) Currency translation adjustment (116) (110) Total equity (2,738) 16,369 Liabilities Provisions 11 215 126 Other non-current liabilities 58 69 Interest - bearing loans and borrowings 13 45,599 10,876 Convertible bonds 13 5,314 10,245 Total non-current liabilities 51,186 21,316 Interest - bearing loans and borrowings 13 31,051 - Provisions - current 11 1,709 3,644 Unearned revenue 25,646 22,673 Trade and other payables 12 42,894 53,230 Total current liabilities 101,300 79,547 Total equity and liabilities 149,748 117,232
See accompanying notes to the consolidated financial statements CONSOLIDATED CASH FLOW STATEMENT
(Expressed in thousands of EUR) Note 30 September 30 September 2007 2006
Operating activities: Operating loss (20,913) (55,478) Unrealized foreign exchange (gains)/losses (78) (3,277) Depreciation of property, plant and equipment 5 1,488 1,547 Increase in inventories (39) (523) Increase in trade and other receivables (9,089) (5,311) Decrease (Increase) in other assets 17,043 (15,156) (Decrease) Increase in trade and other payables (7,363) 27,958 Decrease in other non-current liabilities (11) (146) (Decrease) Increase in provisions (1,846) 2 ,286 Cash used in operating activities (20,808) (48,100)
Investing activities Purchase of property, plant, equipment and intangible assets 5 (75,142) (17,460)
Net cash flows from investing activities (75,142) (17,460)
Financing activities Loans raised 14 65,774 10,876 Loans repaid - (249) Interest received 523 569 Interest paid (557) (72) Issue of share capital - 40,266 Issuance of Convertible bonds - 10,245 Cash flow provided from financing activities 65,740 61,635 Net decrease in cash and cash equivalents during the year (30,210) (3,925) Cash and cash equivalents at beginning of year 41,789 45,714 Cash and cash equivalents at end of year 11,579 41,789
See accompanying notes to the consolidated financial statements SkyEurope l Annual Report 2007 43
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Expressed in thousands of EUR) Issued Share Cash flow Accumulated Translation TotalPr capital premium hedge reserve losses reserve
At 1 October 2006 38,990 81,293 (467) (103,337) (110) 16,369 Conversion of Tranche B convertible bond 3,806 2,855 - - - 6,661 Results from cash flow hedges taken to equity - - (1,692) - - (1,692) Translation reserve - - - - (6) (6) Loss for the year - - - (24,070) - ( 24,070) At 30 September 2007 42,796 84,148 (2,159) (127,407) (116) (2,738)
At 1 October 2005 20,000 59,819 - (46,045) 24 33,798 Issue of capital and share premium from secondary public offering 18,990 12,717 - - - 31,707 Issue of convertible bonds - 8,757 - - - 8,757 Results from cash flow hedges taken to equity - - (467) - - (467) Translation reserve - - - - (134) (134) Loss for the year - - - (57,292) - ( 57,292) At 30 September 2006 38,990 81,293 (467) (103,337) (110) 16,369
See accompanying notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in thousands of EUR)
1 REPORTING ENTITY
SkyEurope Holding AG (the “Company”) is a publicly owned company domiciled in Austria. Its subsidiaries and branch offices, SkyEurope Airlines, a.s., SkyEurope Airlines Hungary Kft., SkyEurope Asset Management Hungary Kft., SkyEurope Airlines A.S., Spolka Akcyjna, Oddzial w Polsce, SkyEurope Airlines, a.s. - organizacní slozka and GroundEurope Kft., SkyEurope Asset Management (Ireland), (collectively referred to as the “Group”) provide short-haul, low-cost airline and related services from operational bases located at Bratislava, Budapest, Krakow, Prague and Vienna.
2 BASIS OF PREPARATION
• Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as pronounced by the International Accounting Standards Board (IASB) and as adopted by the European Union.
The financial statements were approved by the Board of Directors on 21 December 2007.
• Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: • derivative financial instruments are measured at fair value • financial instruments at fair value through profit or loss are measured at fair value
The methods used to measure fair values are discussed further in note 4.
• Functional and preparation currency These consolidated financial statements are presented in Euro, which is the Company’s functional currency. All financial information presented in Euro has been rounded to the nearest thousand.
• Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Judgements made by management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 24. SkyEurope l Annual Report 2007 45
3 GOING CONCERN
These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a “going concern” which assumes that the Group will continue its operations in the foreseeable future and will be able to realise its assets and discharge its liabilities in the normal course of operations. At the date of these financial statements, material uncertainties exist regarding the Group’s ability to continue as a going concern. These material uncertainties relate to the impact of historical operating losses as indicated in the consolidated income statements for the current year and for the prior period, negative cash flows from operations as indicated in the consolidated cash flow statements and the ability to generate positive cash flows and obtain further financing to fulfil its working capital commitments if cash on hand at 30 September 2007 together with cash generated from the sale of assets subsequent to year end (note 23), will not be sufficient to meet working capital requirements and to comply with covenants of GECAS operating leases (note 22).
Should the going concern assumption not be applicable, then adjustments would be necessary to the carrying value of assets, in particular the deferred tax asset, liabilities and the reported expenses. There can be no assurance that these adjustments will not be material. Furthermore, the effect of any change in this assumption could be so pervasive that a fundamental change in the basis of accounting would be required, rather than only an adjustment to the amounts recognised within the original basis of accounting. Were this to be the case, this would have a significant effect on the Group’s financial condition, and would be likely to lead to a further deterioration in respect of the Group’s equity position and impact on working capital commitments.
4 SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation The accounting policies set out below have been applied consistently except as described in point 4(a)(iii) and 4(a)(iv) to all periods presented in these consolidated financial statements, and have been applied consistently by all Group entities.
(i) Subsidiaries Subsidiaries are those enterprises controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
(ii) Transactions eliminated on consolidation All significant intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated upon consolidation.
(iii) Reclassification of income statement and balance sheet items Certain reclassifications have been made to comply with industry best practices and to allow more meaningful benchmarking of revenues and costs vs competition airlines. These changes represent only a change in performance measures and do not have an impact on net income. Comparative periods have also been reclassified. Reclassifications to income statement captions • Surcharges and booking fees have been reclassified from ancillary revenues to scheduled revenue; • Charter revenue previously classified as passenger revenue has now been disclosed separately on the face of the income statement; • Certain airport charges were netted against scheduled revenue in previous periods (against airport fee revenue classified within scheduled revenue) and have been reclassified to a new expense caption called “Airport Charges”; • “Aircraft and traffic servicing” has been separated into additional income statement captions, “Ground handling charges, Aircraft insurance, and Navigation charges”; • Payments made to lessors based on aircraft utilisation for future aircraft maintenance have been reclassified from “Aircraft rental” to “Maintenance, materials and repairs”.
Reclassification of balance sheet captions • The Group has chosen to reclassify advance payments made to suppliers to “Prepaid expenses” from “Accounts Receivable” as it better reflects the nature of the asset.
(iv) During the year the Company redelivered all remaining Boeing 737 Classic aircraft and released all related C- Check provisions against expenses incurred. The C-Checks on the Boeing 737-700 NG aircraft are significantly less expensive than the C-Checks on the Classic aircraft and occur over a longer period. In line with industry standards, the Company no longer accrues for C-Checks based on hourly utilisation but rather they are expensed as incurred. The net loss would have been approximately 290 thousand EUR higher had this change in accounting practice not occurred.
(b) Revenues Passenger revenue include the base fare and surcharges earned on scheduled and unscheduled flights and is recognised either when transportation is provided or when the ticket expires unused. Tickets sold but not yet used are included in the accompanying balance sheets as unearned revenue.
Ticket related ancillary revenues include credit card and bank payment fees, call-centre and airport sales service fee, excess baggage charges, sporting equipment fees, animal transportation fees, and charges for assigned seating and change fees. Non-ticket related ancillary revenues includes commissions received from services sold such as car rental, hostel and hotel bookings, income from onboard catering and advertising, travel insurance, shuttle bus services and cargo revenue. These are recognised on the date that the right to receive consideration occurs.
Revenues are stated net of certain taxes, including value-added and other state and federal taxes that are collected from customers and transferred to the appropriate government entities. Taxes collected from customers are recorded in current liabilities prior to submission to the appropriate government entity.
(c) Barter transactions The Group participates in barter transactions whereby advertising services provided by parties external to the Group are exchanged for air tickets. Ticket revenue from barter transactions is only recognised to the extent that the fair value attributed to those transactions can be measured reliably by reference to non-barter transactions, (i.e. non-barter air ticket revenues), that meet the criteria of IAS 18, Revenue. SkyEurope l Annual Report 2007 47
(d) Aircraft maintenance costs With respect to aircraft operating lease agreements, the Group has a commitment to maintain and return the aircraft in a specific condition. A provision is made for the obligation during the lease term based on the estimated future costs of major airframe and material engine maintenance checks by making appropriate charges to the income statement. These are calculated by reference to the number of hours or cycles operated during the relevant period and considering the requirements for aircraft redelivery at the end of the operating lease term.
Payments made for aircraft and engine maintenance, as stipulated in the respective operating lease agreements, are made to specific bank accounts in the names of the lessors. Aircraft and engine maintenance, also as stipulated in the respective operating lease agreements, is funded from these deposits. The deposits are non- interest bearing and are expensed on a monthly basis in the income statement category “maintenance expense”. It is estimated that the deposits paid to the lessor will be adequate to substantially cover the actual costs to perform the aircraft maintenance and the provisions above are reduced accordingly.
The Group’s maintenance program on its Boeing 737-700 NG aircraft stipulates “C-check” airframe maintenance checks must be performed every 4,000 to 6,000 flight hours. Such costs are expensed as incurred.
All other maintenance costs are expensed as incurred, refer to note 4 (a)(iv).
(e) Advertising Advertising costs, which are included in sales and marketing, are expensed as incurred. As part of the Group’s advertising and promotion programs, tickets are periodically gifted to passengers with limited validity rights and are subject to available seat capacity. No liability or expense is recorded in the financial statements relating to these gift tickets as the incremental cost of transporting these passengers is considered to be negligible.
(f) Foreign currency (i) Foreign currency translation Transactions arising in currencies other than the Euro are translated into Euro at the rates of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are stated at the rates of exchange prevailing at the balance sheet date and all exchange gains or losses are recognised in the income statement.
(ii) Financial statements of foreign operations The assets and liabilities of foreign operations are translated into Euro at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to Euro at an average foreign exchange rate for the period. Foreign exchange differences arising on translation are recognised directly into equity.
(g) Taxation Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences from the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future are not provided for. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
(h) Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and provisions for impairments, if any. Depreciation is calculated so as to write off the cost, less estimated residual value, of assets on a straight line basis over their expected useful lives at the following annual rates:
• Leasehold improvements Over term of lease • Equipment 3-12 years • Fixtures and fittings 2-6 years
Aircraft are depreciated on a straight line basis over their estimated useful lives to estimated residual values. The Company has made a conversion of cycles into years based on both its historical and anticipated future utilisation of the aircraft. Subsequent revisions to these estimates, which can be significant, could be caused by changes to the Company’s maintenance program, changes in utilisation of the aircraft (actual cycles during a given period of time), governmental regulations on aging aircraft, and changing market prices of new and used aircraft of the same or similar types. The Company evaluates its estimates and assumptions each reporting period and, when warranted, adjusts these estimates and assumptions. Generally, these adjustments are accounted for on a prospective basis through depreciation and amortisation expense, as required by IFRS.
The current estimates of useful lives and residual values are:
Aircraft Type Useful Life Residual Value
Boeing 737-700 NG 23 years from date 15% of original cost of manufacture
An element of the cost of an acquired aircraft is attributed on acquisition to its service potential reflecting the maintenance condition of its engines and airframe. This cost, which can equate to a substantial element of the SkyEurope l Annual Report 2007 49
total aircraft cost, is amortised over the shorter of the period to the next check (usually between 8 and 12 years for 737-700 NG aircraft) or the remaining life of the aircraft. The costs of subsequent major airframe and engine maintenance checks are capitalised and amortised over the shorter of the period to the next check or the remaining life of the aircraft.
Advance payments and option payments made in respect of aircraft purchase commitments and options to acquire aircraft where the balance is expected to be funded by mortgage financing are recorded at cost and disclosed separately as property plant and equipment. On acquisition of the related aircraft, these payments are included as part of the cost of aircraft and are depreciated from that date. Where the balance of payment is expected to be funded by lease financing, the advance payments are classified as deposits.
Rotable spare parts held by the Group are classified as property, plant and equipment if they are expected to be used more than one period and are accounted for in the same manner as the related aircraft.
(i) Intangible assets Intangible assets consist of software purchased to support the Group’s operations and are stated at cost less accumulated amortisation and impairment losses. Intangible assets are being amortised over a period of four years.
(j) Leases All of the Group’s lease contracts are of an operating lease nature and the rental charges are charged to the income statement on a straight-line-basis over the term of the lease. For certain aircraft, additional rent is paid based on the monthly usage and is charged to maintenance expense during the period of use (power-by-the- hour).
(k) Inventories Inventories consist of expendable aircraft spare parts and supplies and are stated at the lower of cost or net realisable value. The cost of these items is based on the weighted average method and is charged to expenses when the items are used. An allowance for obsolescence is recorded for obsolete aircraft spare parts and other supplies.
(l) Prepaid expenses and deferred costs Prepaid expenses which relate to more than one accounting period are recognised over the period during which the economic benefit is expected to be received.
(m) Cash and cash equivalents Cash is comprised of cash in hand and deposits repayable on demand.
(n) Impairment The carrying amounts of the Group’s assets, other than deferred tax assets (note 4 (g)) and inventories, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. The recoverable amount of the Group’s receivables are calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted.
The recoverable amount of other assets is the greater of their fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
(o) Trade and other payables Trade and other payables are stated at cost on initial recognition and subsequently measured at amortised cost.
(p) Trade and other receivables Trade and other receivables are stated at cost, being original invoice amount less impairment losses.
(q) Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
(r) Financial income and expenses Financial income and expenses recorded in the income statement consists of interest income, interest expenses, foreign exchange gains and losses, and any gains or losses on hedge transactions where the hedge is considered ineffective or does not meet the criteria for hedge accounting. Financing expenses incurred on interest-bearing loans that are directly attributable to the acquisition of aircraft are capitalised as part of the cost of that asset. Capitalisation of borrowing costs commences when expenditures for the aircraft are incurred and ceases when the aircraft is delivered and put into operation.
(s) Financial instruments Derivative financial instruments are utilised by the Group in the management of its foreign currency (US Dollar) and fuel price exposures. The Group’s policy is not to utilise derivative financial instruments for trading or speculative purposes.
The Group formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm commitments or anticipated transactions.
The Group also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction are highly effective in offsetting changes in fair values or cash flows of hedged items. In the event that a derivative financial instrument is not designated for hedge accounting, does not SkyEurope l Annual Report 2007 51
qualify for a hedge accounting or the event that the hedge is ineffective, changes in the fair value of derivative financial instruments are recorded in other operating income or expense.
Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The fair value of derivatives that are designated as cash flow hedges are recorded in trade and other receivables/payables. The effective portions of unrealised hedges are booked into equity reserves, the ineffective portions are recorded in financial income/expense in the period. The effective portions recorded into equity are recognised into income in the same financial category as the corresponding hedged transaction when the hedged transaction occurs.
(t) Segment reporting The Group presents business segment information in the financial statements on a basis consistent with how the principal activities of the Group are structured, operated and reported.
The Group has two business segments which are the operation of scheduled flights and non-scheduled flights. These segments and the one geographical segment in which the Group operates are considered to be of a similar nature.
(u) Impact of new standards Adoption of standards effective from 1 January 2006
• Amendment to IAS 39 Financial Instruments: Recognition and Measurement – Cash Flow Hedge Accounting of Forecast Intragroup Transactions allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item if certain criteria are met. • Amendment to IAS 39 Financial Instruments: Recognition and Measurement – The Fair Value Option restricts the designation of financial instruments as “at fair value through profit or loss”. • IFRIC 4 Determining whether an Arrangement contains a Lease requires certain arrangements to be accounted for as a lease even if they are not in the legal form of a lease. • IFRIC 9 Reassessment of Embedded Derivatives requires that a reassessment of whether embedded derivative should be separated from the underlying host contract should be made only when there are changes to the contract (effective from 1 June 2006).
Applying these amendments and interpretations to standards, which are applicable to the Group for annual periods beginning on or after 1 January 2006 (i.e. the Group’s annual period beginning 1 October 2006) did not cause significant changes to the accounting principles used previously and did not influence the results.
All changes in the accounting policies have been made in accordance with the transition provisions in the respective standards.
(vi) New pronouncements not yet effective A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 30 September 2007, and have not been applied in preparing these consolidated financial statements:
• IFRS 7 Financial Instruments: Disclosures and the Amendment to IAS 1 Presentation of Financial Statements: Capital Disclosures require extensive disclosures about the significance of financial instruments for an entity’s financial position and performance, and qualitative and quantitative disclosure on the nature and extent of risks. IFRS 7 and amended IAS 1 will be effective for annual periods beginning on or after 1 January 2007. • IFRS 8 Operating Segments requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. It replaces IAS 14 Segment Reporting and will be effective for annual periods beginning on or after 1 January 2009. • IFRIC 10 Interim Financial Reporting and Impairment prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. IFRIC 10 will be effective for annual periods beginning on or after 1 November 2006. • IFRIC 11/IFRS 2 – Group and Treasury Share Transactions. This interpretation provides guidance on applying IFRS 2 Share-based Payment to share-based payment arrangements involving an entity’s own equity instruments or equity instruments of another entity in the same group. It will be effective for annual periods beginning on or after 1 March 2007.
Management has not yet completed its assessment of the effects of these pronouncements on its operations. SkyEurope l Annual Report 2007 53
5 PROPERTY, PLANT, EQUIPMENT AND INTANGIBLE ASSETS
Aircraft Advance Leasehold Equipment Software Total payments improvements for aircraft
Cost As at 1 October 2006 - 15,197 669 2,330 1,311 19,507 Additions in period - 74,170 136 414 406 75,126 Transfers 51,169 (51,169) - - - - Advances classified as short-term - (21,310) - - - (21,310) Disposals in period ------As at 30 September 2007 51,169 16,888 805 2,744 1,717 73,323 Acc. depreciation and amortisation As at 1 October 2006 - (15) (607) (778) (397) (1,797) Charge for period (458) (144) (462) (424) (1,488) Disposals in period - 15 - - - 15 As at 30 September 2007 (458) - (751) (1,240) (821) (3,270) Carrying amount as at 30 September 2007 50,711 16,888 54 1,504 896 70,053
Cost As at 1 October 2005 - 16 721 1,850 464 3,051 Additions in period - 15,181 2 1,448 966 17,597 Disposals in period - - (54) (968) (119) (1,141) As at 30 September 2006 - 15,197 669 2,330 1,311 19,507 Acc. depreciation and amortisation As at 1 October 2005 - (15) (402) (613) (224) (1,254) Charge for period - - (205) (165) (173) (543) As at 30 September 2006 - (15) (607) (778) (397) (1,797) Carrying amount as at 30 September 2006 - 15,182 63 1,551 914 17,710
Aircraft and advance payments made for aircraft include capitalised borrowing costs of EUR 1,090 thousand and EUR 1,551 thousand respectively (2006: EUR 0 thousand and EUR 864 thousand) and are secured by rights under the purchase agreement with Boeing. These rights were assigned to Bank of Scotland as security for the obligations under the loan facilities. Refer to note 13. Aircraft are financed by term loans provided by the Bank of Scotland Corporate and these aircraft are pledged as security against the loans (note 13). Certain advances paid for aircrafts of EUR 21,310 thousand have been classified as short term as these aircraft were sold subsequent to year end (note 23 (a)). 6 DEPOSITS AND OTHER LONG-TERM ASSETS
30 September 30 September 2007 2006 Carrying value of deposits on aircraft operating leasing contracts 4,244 3,591 Unamortised prepaid rent 2,537 1,998 Other long-term receivables and deposits 3,209 2,747 9,990 8,336
Deposits on aircraft leasing contracts Twelve of the Group’s aircraft are leased under operating leasing contracts. The leasing contracts stipulate that the Group is obligated to make certain deposits as guarantees to the leasing companies. These deposits are non-interest bearing, denominated in US Dollars and refundable at the end of the respective lease agreements. At inception, the deposits are initially recognised at their net present value using an effective interest rate and foreign exchange rates at the transaction date. The net present value adjustment is amortised as prepaid rent on a straight line basis over term of lease. The carrying value of the long-term deposits is accreted at each balance sheet date using the original effective interest rate and foreign currency at the average exchange rate for the year.
7 TRADE AND OTHER RECEIVABLES
30 September 30 September 2007 2006 Trade receivables 6,060 6.012 Credit card receivables 13,408 3,090 Receivables from lessors 133 3,118 VAT and other tax receivables 967 1,242 Other 423 93 20,991 13,555 SkyEurope l Annual Report 2007 55
8 PREPAID EXPENSES
30 September 30 September 2007 2006 Prepaid rent 1,458 1,069 Advance payments made to suppliers 5,450 23,504 Other prepaid expenses 1,521 899 8,429 25,472
9 CASH AND CASH EQUIVALENTS
Cash and cash equivalents at 30 September 2007 amounted to EUR 11,579 thousand (30 September 2006: EUR 41,789 thousand). Of this, EUR 379 thousand represents cash on hand (30 September 2006: EUR 137 thousand).
10 EQUITY
(a) Share Capital
Number of shares 30 September 30 September 2007 2006 On issue at 1 October 38,990,000 20,000,000 Issued for cash - 18,990,000 Conversion of Tranche B convertible debt 3,806,000 - On issue at 30 September 42,796,000 38,990,000
Number of shares 30 September 30 September 2007 2006 Authorized capital 14,000,000 14,000,000 Contingent capital 6,194,000 10,000,000
On 14 September 2007, York Global Finance II S.a.r.l. converted its Tranche B Convertible Bonds with an aggregate principal of EUR 6,660,500 into common bearer shares with a par value of EUR 1.00 each. The Tranche B Convertible Bonds were converted into 3,806,000 shares based on a conversion price of EUR 1.75 per share.
All shares outstanding have a par value of EUR 1 and are fully paid. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders meetings of the Company. All shares rank equally with regard to the Company’s residual assets. (b) Currency translation adjustment The currency translation adjustment comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations that are not integral to the operations of the Group.
(c) Reserves – cash flow hedges Effective portions of unrealised gains or losses from derivatives that are designated as cash-flow hedges are recorded into reserves-cash flow hedges. Refer to note 4 (s).
(d) Dividends As at 30 September 2007 and in comparative periods, no funds for distribution of dividends were available due to accumulated losses incurred. Dividends, if any, are to be based on the statutory accounts of the Company.
11 PROVISIONS
Base closure Aircraft Other Total provisions maintenance 1 October 2006 - 3,565 205 3,770 Additional provision recognised 910 3,110 945 4,965 Expenditures made during the period - (4,561) (560) (5,121) Unused provisions released during the period - (1,584) (106) (1,690) Total provision at 30 September 2007 910 530 484 1,924 Less current portion due within next 12 months (910) (314) (484) 1,708 Non-current portion at 30 September 2007 - 216 - 216
Aircraft maintenance The Group incurs liabilities for costs related to the maintenance of its aircraft, which are subject to operating leases, during the course of the lease term. These are a result of legal and constructive obligations in the lease contract in respect of the return conditions applied by lessors, which require aircraft airframes, engines and auxiliary power units to reach at least a specified condition on their return at the end of the lease. This requires significant expenditure, often toward the end of the lease period. The Group pays maintenance reserves to its lessors on a monthly basis in respect of its aircraft, based on usage to cover the costs of future maintenance events should the aircraft be returned without meeting its return conditions. These deposits are returned to the Group when qualifying maintenance expenditures have been incurred. Occasionally, maintenance reserves paid by the Group are insufficient to meet the expected cost of the return conditions imposed. A further amount is provided to cover the costs of redelivery that are not covered by maintenance reserves.
Refer to note 24 for uncertainties relating to maintenance provisions.During the period, the Company redelivered to lessors the remaining 737 Boeing Classic aircraft on operating lease and incurred redelivery expenses to meet the contractual return conditions in the lease contract. As such, all unused redelivery provisions relating to these aircraft were released. SkyEurope l Annual Report 2007 57
Base closure provisions Prior to 30 September 2007, the Management Board approved the reallocation of aircraft capacity from its Krakow and Budapest bases to other existing SkyEurope bases effective 29 October 2007. As a result of this decision, certain employment severance and early contract termination costs have been provided for at 30 September 2007 in accordance with IAS 37. The full amount of the provision is expected to be paid within 6 months of the balance sheet date.
12 TRADE AND OTHER PAYABLES
30 September 30 September 2007 2006 Trade payables 21,022 21,745 Accrued liabilities 14,576 25,845 Advance payments received 161 1,496 Employees and related payables 2,671 1,984 Payables to related companies - 62 Tax payables - 198 Accrued payables to lessors 827 1,174 Cash flow hedge – foreign exchange derivative 2,159 467 Other payables 1,478 259 42,894 53,230 13 INTEREST-BEARING LOANS AND BORROWINGS AND CONVERTIBLE BONDS
This note provides information about the contractual terms of the Group’s interest- bearing loans and borrowings and convertible debt. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 21.
(a) Interest- bearing loans and borrowings (current and non-current):
Terms and debt repayment schedule
2007 2006
Nominal Year of Face Carrying Face Carrying Long term Currency interest rate Maturity Value value Value value
Term loans EUR EURIBOR + 1 .75% 2022 43,218 41,647 - -
Predelivery financing loan USD LIBOR + 2% 2009 4 ,334 3 ,952 12,317 10,876 47,552 45,599 12,317 10,876 Short term
Term loans EUR EURIBOR + 1 .75% 2008 5,108 5,108 - -
Predelivery financing loan USD LIBOR + 2% 2008 27,541 25,943 - - 32,649 31,051 - -
(i) In January 2007, the Group amended its existing Pre-Delivery Payment US Dollar term loan facility to include an additional five Boeing 737-700 NG for a total of nine aircraft. The loan is disclosed net of EUR 382 thousand of transaction costs and bears an interest rate of LIBOR plus 2% with interest due monthly and is secured by rights under purchase agreements with Boeing. Prior to year end, a portion of the Pre-delivery payment loan relating to two aircraft was refinanced by long-term loans upon delivery of the aircraft as noted below.
(ii) On 24 August 2006, the Group secured 15 year, EUR denominated variable term loan facilities relating to the financing of four Boeing 737-700 NG Aircraft. At 30 September 2007 term loans were drawn for two of the four aircraft.
The term loans are disclosed net of EUR 1,570 thousand of transaction costs and bear interest rate of EURIBOR plus 1.75% with interest due quarterly and are secured by pledges over the aircraft. The current portion of interest-bearing loans and borrowings represent amounts of term loans due to be repaid within the next 12 months, pre-delivery payment financing on aircraft to be delivered within the next 12 months where no term loan financing has been arranged, and pre-delivery payments of EUR 16,272 thousands on aircraft held for sale (note 23 (a)). SkyEurope l Annual Report 2007 59
(b) Convertible bonds
On 28 September 2006 the Company issued to York Global Finance II S.a.r.l., convertible bonds in two tranches:
2007 2006
Nominal Year of Face Carrying Face Carrying Currency interest rate Maturity Value value Value value
Convertible debt - Tranche A EUR EURIBOR + 4 t o 6% 2016 18,773 5,314 17,008 4,146
Convertible debt - Tranche B EUR Not int erest bearing 2007 - - 6,660 6,099 18,773 5,314 23,668 10,245
Tranche A B Total Notional from issue of convertible bonds 17,000 6,661 23,660 Discount (600) (600) Transaction costs (1,150) - (1,150) Net proceeds 15,250 6,661 21,911 Amount classified as Equity before deferred tax effect (11,108) (567) (11,675) Accreted interest 1,172 567 1 ,739 Conversion of bond - (6,661) (6,661) Carrying amount of liability at 30 September 2007 5,314 - 5,314
The amount of Convertible Bonds classified as equity of EUR 11,675 thousand was reduced by deferred taxes
A B Total
Amount classified as Equity 11,108 567 11,675 Deferred Taxes (2,777) (141) (2,918) Net portion of convertible bonds deducted from equity 8,331 426 8,757
The Convertible Bonds shall mature on 30 September 2016, with a put option exercisable by the holder thereof on any date on or after 30 September 2011. On the exercise of such put option, the Issuer shall be obliged to redeem the Convertible Bonds at par, plus accrued interest due and payable up until 30 September 2011. The Company shall ensure sufficient available conditional capital to satisfy any conversion rights. To the extent only that the Company does not have sufficient available conditional capital to satisfy any exercise of conversion rights, the Company may elect to satisfy the conversion by paying a cash alternative amount in lieu of delivering shares. As of 30 September 2007 the Company has sufficient capital available. The initial carrying amount of the equity component EUR 11,675 thousand equals the residual amount of the proceeds of the Convertible Bond after deducting the fair value of the liability component. The fair value of the liability was determined by discounting the expected cash flows with an estimated interest rate for an equivalent unsecured financing of 19% (note 24).
The price for conversion of Tranche A Convertible Bonds is set at EUR 2.25 per share to be adjusted for dividends, stock splits, returns of capital, combinations, mergers or similar events. The subscriber may at any time, convert all or any portion of the principal (including interest) of the Tranche A into shares subject to the approval of applicable regulatory authorities. The issuer may at absolute discretion elect not to pay accrued interest in cash. If the related interest is not paid, it will be added to the carrying value of the convertible debt.
If the Net Income Test is not satisfied, the annual interest rate (EURIBOR +4.00%) shall be increased by 2.00%. The Net Income Test is defined as, positive income before income tax in respect of the twelve month period ending on the Interest Payment Date immediately preceding the relevant Interest Payment Date, prepared in accordance with IFRS. The Net Income Test was not satisfied as at 30 September 2007.
The Company assumes repayment of principal and accumulated interest of Tranche A on 30 September 2016.
The Tranche B Convertible Bonds was converted to shares on 14 September 2007 at a conversion price at EUR 1.75. Refer to note 10 (a).
14 ADMINISTRATIVE EXPENSES
30 September 30 September 2007 2006 Office and other rental costs 2,001 3,352 Advisory services 1,802 2,564 Travel expenses 1,358 1,959 Telecommunication costs 1,213 1,892 Office supplies 1,172 2,155 Training expenses 882 1,054 Other fees 665 58 Representation 193 83 Other 4,038 4,701 13,324 17,818 SkyEurope l Annual Report 2007 61
15 NET FINANCIAL (INCOME) EXPENSES
30 September 30 September 2007 2006 Unrealised foreign exchange losses 1,397 355 Realised foreign exchange (gains) losses (4,559) 1,807 Interest on Convertible Bonds (note 13) 1,729 10 Other financial expenses 723 431 Net financial (income) expenses (710) 2,603
16 SALARIES, WAGES AND BENEFITS
30 September 30 September 2007 2006 The average number of employees, including the executive directors, during the period, analyzed by category, was as follows: Flight and cabin crew 459 378 Sales, operations and administration 468 488 927 866 The aggregate payroll costs of these persons were as follows: Wages, salaries and related costs 19,305 16,286 Social welfare costs 4,740 3,977 Other personnel costs 1,787 2,149 25,832 22,412
17 DIRECTORS’ EMOLUMENTS
30 September 30 September 2007 2006 Compensation paid to directors 1,163 967 Compensation paid to Supervisory Board Members 160 46 1,323 1,013
Directors’ compensations include all compensation payments made to the Company’s key management including the Company Chairman, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Commercial Officer and Chief People Officer. Salaries and fees paid to key management were paid through the Group’s payroll or to consultancy companies owned by each of the directors (see note 20). 18 TAXATION
(a) The components of the income tax expense (credit) were as follows:
30 September 30 September 2007 2006 Current corporate income tax Current tax 42 Write-off of benefit of tax losses previously recognised 3,863 - Benefit of tax losses recognised - (790) Income tax expense/(credit) 3,867 (788)
(b) Reconciliation of accounting to tax
30 September 30 September 2007 2006 Loss before tax (20,203) (58,080) Tax loss using the estimated effective corporate tax rate (17.50%) (3,536) (17.50%) (10,164) Non-deductible expenses 4.50% 909 3.36% 1,954 Tax losses recognised in prior periods derecognised in the current year (note 23b) (19.12%) 3,863 (3.42%) 1,986 Change in other deductible temporary differences - - (1.32%) 766 Current year losses not recognised for tax purposes (13.02%) 2,630 (9.36%) 4,670 Tax expense (credit) recognised during the period (19.14%) 3,867 (1.36%) (788)
(c) Recognised deferred tax assets and liabilities:
30 September 30 September 2007 2006 Deductible temporary differences Tax value of loss carry-forwards 6,238 9,251 Other deductible temporary differences - - Equity related transaction costs 2,969 2,918 9,207 12,169 Taxable temporary differences Taxable temporary differences Convertible Bond related difference (2,969) (2,918) Deferred tax assets 6,238 9,251
Refer to note 24 for description on uncertainties relating to the recoverability of the deferred tax asset. SkyEurope l Annual Report 2007 63
19 LOSS PER SHARE
Basic loss per share The calculation of basic loss per share was based on the net loss attributable to ordinary shareholders for the period and a weighted average number of ordinary shares outstanding during the periods presented and is calculated as follows:
Net loss attributable to ordinary shareholders
30 September 30 September 2007 2006 Net loss attributable to ordinary shareholders (24,070) (57,292)
Weighted average number of ordinary shares
30 September 30 September 2007 2006 Balance at beginning of period 38,990,000 20,000,000 Effect of shares issued in September 2007 166,838 208,110 Weighted average number of ordinary shares at period end 39,156,838 20,208,110
Diluted loss per share The calculation of basic loss per share was based on the net loss attributable to ordinary shareholders for the period and a weighted average number of ordinary shares outstanding during the periods presented and is calculated as follows:
20 RELATED PARTIES Purchases/expenses
30 September 30 September 2007 2006 York Global Finance II S.a.r.l.,*** Interest on Convertible 1,739 4 Bond (note 13) Danube Consulting, s.r.o.** Consulting 251 300 SkyEurope Holding, a.s* Consulting - 38 Blue Invest S.A.** Consulting 28 48 2,018 390 Payables/liabilities
30 September 30 September 2007 2006 Company Description York Global Finance II S.a.r.l., 1 Convertible Bond (note 13) 5,314 10,245 SkyEurope, a.s 3 Advance for services paid - 20 SkyEurope Holding, a.s 3 Consulting - 18 Danube Consulting, s.r.o. 2 Consulting - 20 Blue Invest S.A. 2 Consulting - 4 5,314 10,307
1 29.9% shareholder of the Group and holder of Convertible Bond (note 13b) 2 Entities controlled by former Group directors active during the period (Danube Consulting, s.r.o. – Christian Mandl; Blue Invest S.A. – Alain Skowronek) 3 Former Shareholders
Transactions with shareholders are completed on an arms length basis. No sales to related parties were made in the periods presented.
(i) Transactions with directors and management Other than as noted above and in note 17, the Group is not involved in any transactions with directors and management.
21 FINANCIAL INSTRUMENTS
(a) Credit risk At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.
(b) Fair values The nominal value less estimated credit adjustments of trade and long-term receivables and trade and long-term payables are considered to approximate to their fair values. The fair value of the liability portion of the Convertible Bond was determined by discounting future cash flows expected on the Convertible Bond. An effective interest rate of 19% was used in the calculation representing the estimated market interest rate for a similar unsecured financial instrument. The carrying amount approximates the fair value
(c) Interest rate risk The Group’s investments in variable rate borrowings (Pre-Delivery finance loan, aircraft term loans and Convertible Bond) are exposed to a risk of change in interest expense and cash flows due to changes in interest rates. SkyEurope l Annual Report 2007 65
(d) Foreign currency risk The Group is exposed to foreign currency risks on lease and maintenance contracts denominated in EUR and US Dollars for the aircraft leased by the Group under operating leases and on fuel purchases in US Dollars. The Group periodically uses financial instruments, including foreign exchange forward contracts and options, to manage its exposure.
The Group entered into forward contracts during the period to purchase USD 122,275 thousand at an average exchange rate of 1.3052 (EUR/USD) to hedge the Group’s committed US Dollar payments. For the year ended 30 September 2007, the Group recognised a net loss of EUR 2.5 million (USD 3.5 million) resulting from hedging transactions.
Additionally, the Group has entered into contracts to purchase USD 89,013 thousand at an average exchange rate of 1.3768 (EUR/USD) for the payment period from 1 October 2007 to 29 September 2008 to hedge the Group’s committed US Dollar payments during the same period. The estimated fair market value of the contract as at 30 September 2007 is negative EUR 2,159 thousands. The Group has also secured a treasury line with the Bank of Scotland Corporate of USD 5 million (EUR 3.5 million) used for the trading of fuel and foreign exchange derivatives. At 30 September 2007, this treasury line was drawn in the amount of USD 3 million (EUR 2,159 thousand).
(e) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. The Group is financed through equity and long-term convertible debt and as at 30 September 2007 does not have external working capital credit facilities (see note 13). The put option in the Tranche A Convertible Bond, exercisable at the discretion of the bond holder between 2011 and 2016 could have an impact on the Group’s future liquidity position during that period if exercised. Refer to Note 3 for material uncertainties existing regarding the Group’s liquidity.
(f) Fuel risk The Group periodically utilises short-term financial and physical derivative instruments to mitigate its exposure to fluctuations in aircraft fuel prices and accounts for these derivatives as cash flow hedges. For the year ended 30 September 2007, the Group recognised a net gain of EUR 955 thousand (USD 1,268 thousand) in aircraft fuel resulting from hedging transactions.
As at 30 September 2007, the Group had no outstanding hedge contracts for fuel risks. 22 COMMITMENTS AND CONTINGENCIES
COMMITMENTS
(a) Non-cancellable operating leases Lease expenses incurred during the year:
30 September 30 September 2007 2006 Aircraft 29,029 21,020 Aircraft maintenance payments 8,363 10,909 Aircraft hangar 593 259 Leased inventory 115 350 Engine rent 311 796 Office 496 546 Cars 250 193 Other 429 1,185 39,586 35,258
Lease expenses are included within different line items on the face of the income statement.
(b) Future lease commitments
Due within one year 29,814 Due between one and five years 117,273 Due after five years 66,936 Total 214,023
(c) The Group has agreements with GECAS (GE Commercial Aviation Services) for the operating lease of twelve Boeing 737-700 NG aircraft, all with a lease term of 96 months. As at 30 September 2007, all twelve aircraft had been delivered. In order to meet the lease conditions for the aircraft already delivered, the Group must maintain certain liquidity and net worth thresholds. Future lease commitments include EUR 205,025 thousand related to the fixed monthly lease of twelve aircraft noted above. (d) The Group has purchased from The Boeing Company four Boeing 737-700 NG aircraft, two of which were delivered in July and August 2007. These aircraft are financed by long term loans provided by the Bank of Scotland Corporate., refer to note 13. The other two aircraft were sold subsequent to year end (note 23a). SkyEurope l Annual Report 2007 67
In addition to the four aircraft mentioned above, the Group also has negotiated purchase rights for an additional sixteen Boeing 737-700 NG aircraft with The Boeing Company. The exercise of these purchase rights will be dependent on the Group’s future need for aircraft and may be exercised until 2009 for deliveries until 2011. The Group has also exercised ten purchase rights for aircraft deliveries in 2008 through 2010 and is currently exploring financing alternatives.
CONTINGENCIES
(e) The Group is engaged in litigation arising in the ordinary course of its business. Management does not believe that any such litigation will individually or in aggregate have a material adverse effect on the financial condition of the Group. Should the Group be unsuccessful in these litigation actions, management believes the possible liabilities then arising can not be determined but they are not expected to materially adversely affect the Group’s results of operations or financial position.
(f) The Group has significant transactions with a number of its subsidiaries, shareholders and other parties. The tax environments under which the Group operates in the Slovak Republic, the Czech Republic, Hungary and Poland, are dependent on the prevailing tax legislation and practices, which are relatively undeveloped and with little existing precedent. As the tax authorities are reluctant to provide official interpretations with respect to the tax legislation, there is an inherent risk that the taxation authorities may require, for example, transfer pricing or other adjustments of the corporate income tax base. Corporate income tax is levied on each individual legal entity and, as a consequence, there is no concept of Group taxation or relief. The Tax Authorities have broad powers of interpretation of tax laws which could lead to unexpected results of tax examinations. The amount of any potential tax liabilities related to these risks cannot be estimated.
(g) At 30 September 2007, the Group had insurance coverage over property, plant and equipment and inventory in the amount of EUR 3,616 thousand (excluding aircraft related insurance). As the Group’s assets at 30 September 2007 including property, plant and equipment (excluding aircraft and advance payments for aircraft) and inventory totalled EUR 3,634 thousand, the Group is exposed to the risk that if an extraordinary event were to occur, the contractual coverage may not recover all losses incurred.
(h) The Group has agreements with GECAS (GE Commercial Aviation Services) for the operating lease of twelve Boeing 737s aircraft. In order to meet the lease conditions for the aircraft, the Group must maintain certain liquidity and net worth thresholds.
At 30 September 2007, the Group failed to comply with these financial covenants for six of the twelve leased aircraft. An event of default allows GECAS to terminate the leases with immediate effect and either claim damages and/or require immediate redelivery of the aircraft. 23 POST BALANCE SHEET EVENTS
(a) On 2 October 2007, the Group entered into an agreement to sell to a third party 2 aircraft purchased in October and November 2007. Proceeds from the sale of the aircraft will be used to pay down the drawn portion of the pre-delivery payment loan (note 13).
(b) On 28 October 2007, the Group closed its operational bases in Budapest and Krakow and reallocated capacity to other existing bases. An estimated base closure provision of EUR 910 thousand and the resulting EUR 3,863 thousand adjustment to the deferred tax assets recorded based on Hungarian tax losses available for carry forward were recorded as at 30 September 2007.
(c) On 16 October 2007, the Company concluded a conditional sales agreement to sell GroundEurope Kft (Hungarian ground handling subsidiary) to a third party effective 31 October 2007 for EUR 2.5 million, recording a gain on sale of EUR 1.8 million.
(d) Subsequent to year end, the Group has entered into contracts to purchase USD 26,710 thousand at an average exchange rate of 1.4531 (EUR/USD) for the payment period from 13 November 2007 to 29 September 2008 to hedge the Group’s committed US Dollar payments during the same period.
(e) On 21 December 2007, SkyEurope Airlines a.s. secured a EUR 15 million financing facility from shareholder, York Global Finance S.a.r.l.. The loan is due to be repaid on 30 September 2011 and bears interest at a rate of 3 month EURIBOR plus 7%. The loan is secured by a second priority security assignment with respect to two owned aircraft arising if/when the first priority mortgages is enforced and additionally, subject to shareholder approval, by a first-ranking pledge over all of SkyEurope Holding AG‘s shares in the Group’s primary operating entity, SkyEurope Airlines a.s.
No other material post balance sheet events occurred from 30 September 2007 to 21 December 2007.
24 ACCOUNTING ESTIMATES AND JUDGMENTS
Key sources of estimation uncertainty:
(a) Recoverability of deferred tax assets Uncertainties exist with respect to the recoverability of the deferred tax asset recorded. The recognition of the deferred tax asset for the year ending 30 September 2007 is based on the assumption that sufficient future taxable profits will be generated to utilise the tax losses that are eligible to be carried forward. This is supported by Group financial projections. The tax losses eligible for carry forward expire through 2012 and according to the Group’s projections, it is expected that taxable profits will be generated in order to realise the tax losses.
Realization of the deferred tax asset is also dependent on the favourable resolution of material uncertainties surrounding the Group’s ability to continue as a going concern including the Group’s ability to attain projected yields and passenger volumes despite increasing competition; and to mitigate future increases in the prices SkyEurope l Annual Report 2007 69
of fuel. Refer to Note 3 for a description of material uncertainties relating to the Group’s ability to continue as a going concern.
(b) Provisions for aircraft maintenance The Group makes advance payments to lessors to cover the costs of certain future maintenance events which are claimed back by the Group from the lessors when the maintenance event occurs. Management estimates that these advance maintenance payments will cover the cost of future maintenance events and has recorded a provision for the amounts expected to be paid for certain future maintenance events where the costs may be in excess of the advance payments made to lessors. Due to the limited experience of the Group with heavy maintenance and redelivering on the Group’s aircraft, uncertainties exist as to whether the provision recorded for redelivery or heavy maintenance events is sufficient to cover the risk. Outcomes within the next financial year if different from assumptions could require a material adjustment to the carrying amount of the asset or liability.
(c) Convertible Bond Certain estimates and assumptions were used in the initial measurement and recognition of the Convertible Bond as disclosed in note 13. Different assumptions could render results that are different from those used to record the Convertible Bond at 30 September 2007.
(d) Aircraft useful lives When depreciating aircraft, the Group estimates the useful life of aircraft by converting cycles into years based on both its historical and anticipated future utilisation of the aircraft. Subsequent revisions to these estimates could be significant. Refer to note 4(h).
25 SUBSIDIARY UNDERTAKINGS
The following are the principal subsidiary undertakings of SkyEurope Holding AG:
Name SkyEurope Airlines, a.s. SkyEurope Asset Management Hungary Kft. SkyEurope Airlines Hungary Kft SkyEurope Airlines, A.S., Spolka Akcyjna, Oddzial w Polsce SkyEurope Airlines, a.s.- organizaãní sloÏka GroundEurope Kft. SkyEurope Asset Management (Ireland)
In accordance with the basis of the Group’s consolidation policy in the statement of accounting policies, the subsidiary undertakings referred to above have been consolidated in the financial statements of SkyEurope Holding AG for the periods presented. UNQUALIFIED AUDITOR’S REPORT WITH EXPLANATORY PARAGRAPH
Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of SkyEurope Holding AG, Vienna, Austria, for the financial year from 1 October 2006 to 30 September 2007. Those financial statements comprise the balance sheet as at 30 September 2007, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with laws and regulations applicable in Austria and Austrian Standards on Auditing and International Standards on Auditing, issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluation the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion Our audit did not give rise to any objections. Based on the results of our audit in our opinion the consolidated financial statements present fairly, in all material respects, the financial position of the group as of 30 September 2007 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. SkyEurope l Annual Report 2007 71
Without qualifying our opinion, we draw our attention to:
Note 3 of the consolidated financial statements which indicates the existence of material uncertainties regarding the group’s ability to continue as a going concern that relate to the impact of historical operating losses, related negative cash flows from operations and the ability to generate positive cash flows and obtain further financing to fulfill its working capital commitments.
Note 18 of the consolidated financial statements, which indicates that the group has recorded a deferred tax asset of TEUR 6,238 as at September 30, 2007, which relates to the recognition of tax deductible losses carried forward at that date. The valuation of this asset depends primarily on future taxable profits.
Report on Other Legal Requirements Law and regulation applicable in Austria require us to perform audit procedures whether the group management report is consistent with the consolidated financial statements and whether the other disclosures made in the group management report do not give rise to misconception of the position of the group. In our opinion, the Group Management Report is consistent with the consolidated financial statements.
Vienna, 21 December 2007
KPMG Austria GmbH Wirtschaftsprüfungs - und Steuerberatungsgesellschaft
Mag. Yann-Georg Hansa Mag. Helmut Kerschbaumer
Wirtschaftsprüfer und Steuerberaten (Austrian Chartered Accountants) REPORT OF THE SUPERVISORY BOARD
In four meetings held in the financial year 2007, the Supervisory Board performed all duties assigned to it by law or by the Company’s Articles of Association. The Management Board reported comprehensively, both in writing and verbally, about the course of business and the position of the Company. The Audit Committee of the Supervisory Board held two meetings in the financial year 2007.
The financial statements and the consolidated financial statements as at 30 September 2007 were audited by the auditors KPMG Austria GmbH, Vienna, who had been appointed according to sec. 270 of the Austrian Commercial Code (”HGB”). As the final findings of their audit did not give rise to any objections the auditors issued an unqualified audit opinion and added an explanatory paragraph.
The consolidated financial statements for the financial year 2007 ended with a net loss for the period after taxes of EUR 24.1 million.
The Supervisory Board approved the financial statements for 2007 which are hereby adopted. The Supervisory Board took note of the consolidated financial statements and of the management report.
The Supervisory Board
Iordanis Karatzas Chairman
Vienna, 16 January 2008 SkyEurope l Annual Report 2007 73
GLOSSARY
Administrative expenses Includes principally administrative costs and operational costs not included elsewhere, including some salary expenses, compensation paid to passengers and certain other items such as the profit or loss on the disposal of fixed assets.
Aircraft rental Aircraft rental includes the fixed monthly operating leasing expense paid to the Company’s lessors (excluding maintenance reserves).
Aircraft utilisation Represents the average number of block hours per day per aircraft operated during the relevant period.
Ancillary revenue Ancillary revenue includes fees and charges (including credit card surcharges, excess baggage charges, seat assignment fees, sporting equipment charges, infant fees, change fees), profit share from in-flight sales (including food, beverages, and boutique items), cargo, and commissions received from products and services sold (such as hotel bookings, car rental bookings and travel insurance).
ASK Available seat kilometre is an indicator used by management to measure units of productive output. It represents the seating capacity of our aircraft multiplied by the number of kilometres flown.
CASK Cost per available seat kilometre represents total operating expenses divided by ASKs and management considers movements in cost per available seat kilometre to be the best indicator of management's performance in keeping unit costs low.
Charter revenue Charter revenue consists of aircraft capacity sold to third parties or tour operators
EBIT Earnings before interest and taxes
EBITDAR Earnings before interest, taxes, depreciation, amortisation and lease payments (excluding the maintenance reserve component of operating lease payments). Maintenance reserve costs are charged to the cost heading "maintenance".
FY Financial year (Fiscal year: was from 1 October to 30 September)
Load Factor Load factor represents the average percentage of aircraft seating capacity that is actually utilised, calculated by dividing revenue passenger kilometres by available seat kilometres. Maintenance, materials and repairs Maintenance, materials and repairs consists primarily of the cost of routine maintenance and spare parts; provisions for the estimated future cost of heavy maintenance and engine overhauls on aircraft; and advance maintenance payments made to operating lessors charged based on the number of flight hours and cycles flown during the month.
RASK Revenue per available seat kilometre represents total passenger revenue divided by ASKs and is considered by management one of the best measures of revenue. It is a compensating indicator between load factor and average revenue per passenger.
Sales and Marketing Sales and marketing expenditures include marketing costs, fees paid to credit card providers, external call centres, reservation system providers, and other sales and marketing related costs.
Salaries, wages and benefits Salaries wages and benefits include all crew, maintenance, sales and overhead salaries and related costs.
Segments Represents the number of one-way revenue flights.
Scheduled revenue Scheduled revenue includes the base fare and booking fees/surcharges net of any implied government taxes.
Q1 (Q2, Q3, Q4) First (second, third, fourth) quarter of SkyEurope’s financial year
Yield Represents the passenger revenue divided by the number of passengers carried. IMPRINT
SkyEurope Holding AG Wipplingerstrasse 24–26 A-1010 Vienna
Information SkyEurope Holding AG Nick Manoudakis, CFO Fax +421 2 4850-1000 [email protected] www.skyeurope.com
Reservations Phone +421 2 3301 7301 www.skyeurope.com
The English translation of the SkyEurope Annual Report is for convenience only. Only the German text is binding. SkyEurope l Annual Report 2007 75
FINANCIAL CALENDAR
7 FEBRUARY 2008 ANNUAL GENERAL MEETING
29 FEBRUARY 2008 1ST QUARTER 2008 RESULTS
30 MAY 2008 2ND QUARTER 2008 RESULTS
28 AUGUST 2008 3RD QUARTER 2008 RESULTS
28 NOVEMBER 2008 PRELIMINARY RESULTS 2008
23 JANUARY 2009 ANNUAL REPORT 2008 www.skyeurope.com