There have been volatile times in recent years and as such, it seems pertinent to speak to a treasurer who has had first-hand experience with the increasingly strategic role of treasury, including the necessity to shield cash flows against volatility, and advising both the board and team on how best to do so.
easyJet’s first flight was in November 1995 and less than ten years later, in 2004, the company had exceeded a £1bn turnover for the first time. Now, as Europe’s leading airline, easyJet operates on over 750 routes across more than 30 countries with a fleet of over 220 Airbus aircraft.
Asides from being synonymous with the colour orange, easyJet is known for its no thrills approach to commercial flying – and this is something which shouldn’t be understated. The value of systems and processes which reliably work without the pressure to fuss over innovation for innovations sake is perhaps overlooked in this day and age. And a treasurer who is focused on continuous improvement with an eye for what is – and isn’t – fit for purpose is therefore someone to take note of. Mike Hirst, Group Treasurer of easyJet, meets these criteria.
“Why is it like that? Why does it have to be like that? Is there a better way to do this?” These are all reasonable questions to drive improvement and to challenge the status quo, Hirst says. It is with this type of “enquiring mind” that he approaches tasks, and the benefits are clear to see in easyJet’s recent performance: in January this year, Moody’s and Standards & Poor’s assigned first-time stable ratings to the company (Baa1 stable and BBB+ stable respectively) and off the back of this, easyJet launched its first public bond.
Catching the bug
For someone who came across corporate treasury quite by chance, Hirst seems to have found his fit. “My undergraduate degree is in electrical engineering and when I graduated, it was very hard in general to find a job. I realised that whatever path I wanted to go down, some sort of business qualification would be beneficial,” he recalls. Hirst therefore did his accountancy training with Coopers & Lybrand (now PwC), based at the firm’s regional Cambridge office. “I was in audit and one of the most interesting clients, for me, was Thomas Cook. I was responsible for auditing Thomas Cook’s travellers’ cheques in their Peterborough office which was and still is home to the company’s intensive treasury operation.”
What followed Hirst’s “first taste” of corporate treasury is extensive. Twelve months doing financial controls at J.P. Morgan’s middle office and ten years at Tesco working in numerous different roles and projects – including as Financial Director for Tesco Stores Malaysia and assisting in the negotiations and implementation of chip and pin. Later followed by time at UK Power Networks building treasury capability after separation from EDF Energy Plc, it is evident that Hirst has racked up quite the experience since catching the bug early on.
In this time, he has also seen the industry change as a result of the financial crisis in 2008 – and consequently the role of treasury evolve too. “After the Lehman collapse, corporates (rightly so) have required a more granular look at what drives cash flow and in particular what could cause volatility in cash flow,” Hirst says. “Therefore, treasurers have to be risk managers.”
And it is well known that risks have been intensifying over the last few years. The price of oil, an example pertinent to the airline industry, has been volatile for some time. “If you look at the business risk of easyJet, it can be split into operational and financial risk. Given the sector we operate in, there is already a lot of operational leverage in the business, the airline industry being cyclical,” he says. Therefore, the board’s appetite to take on additional financial risk beyond a certain point can be limited.
Hirst sees his role as three-fold in this regard. Firstly, he must assist the board in identifying the size of all financial risks they are exposed to and, secondly, it’s about “helping the board guage whether they are in appetite or beyond their appetite”, he says. Once this has been articulated, you have a gap between the risks you are taking and the level of risk that the board would like, he explains. “It’s my job to then put together strategies for how that risk can be brought within appetite and execute the risk management strategy.”
In terms of oil, the policy is clear, transparent and easily accessible online. This is intentional: easyJet wants its investors, both equity investors and debt investors, to understand what the company is doing and why, explains Hirst. “Any hedging policy should be consistently applied. You can’t just keep changing your mind because your stakeholders won’t know where you are and what you are about.”
The role of hedging
The commodity price risk that easyJet runs as a business is, of course, quite substantial and could have a considerable impact on available cash if treasury did not hedge. “Cash flow volatility risk is one of the financial risks we are mandated to control and not hedging would put that risk beyond the appetite of the board.” Therefore, treasury hedge forward 65-85% of year one jet fuel and 45-65% of year two. The same policy is applied for FX.
“It’s my job to then put together strategies for how that risk can be brought within appetite and execute the risk management strategy.”
Hirst describes this as “semi-active”. Whilst, if you take the base line (65% in year one; 45% in year two), the monthly activity involves going to market and topping up the hedging profile across the curve, the second part, deciding whether to go from the base line upwards, necessitates treasury monitoring the market and making recommendations to the CFO. “Recently, where we have seen jet fuel price coming down, we have recommended topping up over hedging profiles over the course of those two years to take advantage of lower rates,” says Hirst.
This combination delivers what is required in terms of smoothing cash flow volatility, while retaining the flexibility necessary to take advantage of market movements. “This all plays into the strength of our balance sheet – and credit rating – as you effectively remove these financial risks.” And having a solid investment grade rating allows the bank to extend easyJet more credit line, Hirst explains, which in turn enables treasury to hedge using outright jet forwards. “We keep it as simple as possible and the strength of the balance sheet helps us to do this. You can see it as a circular argument – hedging supports the balance sheet and vice versa.”
Changes to finance
Historically, easyJet had no formal banking group for these activities. “When I first joined, the banking group was fairly amorphous – we had a lot of counterparty banks.” It’s easy to forget this business is only 20 years old, he adds, and there has been a certain degree of maturity gained over the last five years. Where the airline previously funded its expansion with aircraft mortgage deals, it has since stepped away from that and recently put together a revolving credit facility (RCF) with a syndicate of 12 core relationship banks. Hirst had been with the airline for less than a year at the time but had clearly understood the financial flexibility and diversity of funding needed by easyJet; the fact he is committed to the company being a repeat issuer on the bond market going forward (market condition dependent) is further indication of this.
The RCF has achieved two things, Hirst says. “It allows us to support our liquidity buffer. As an airline, we like to keep a bit of cash on the balance sheet in case of short-term shock events. The RCF facility is a much more efficient way of doing that.” It is secured on aircraft that easyJet have unencumbered on the balance sheet and it only draws if a short-term shock event actually occurs. The structure also avoids any financial covenants.
“Recently, where we have seen jet fuel price coming down, we have recommended topping up over hedging profiles over the course of those two years to take advantage of lower rates.”
Secondly, treasury have been able to corral and pull together a much tighter banking group than they were dealing with before. In addition to the 12 banks in the RCF, easyJet work with three specialist banks. In terms of managing banking relationships, this makes it a lot easier. “Generally the idea is that the whole wallet around FX, cash management, deposits, jet fuel hedging and so on goes to that banking group on the basis that they’ve stumped up some balance sheet,” Hirst says.
As banks only made incredibly fine margins on lending, which requires significant balance sheet commitments from a regulatory perspective, they want ancillary wallets, clarifies Hirst. “My view is that getting the best out of your banking group is about knowing the size of your wallet and making sure you have the range of banks with the capability of supporting that – but not being beholden to one or two, that’s what keeps them on their toes.” But the relationship is also facilitated by transparency. “We give our banks feedback on share of wallet and we are very fair over how we allocate business.”
Technology as an enabler
When it comes to electronic dealing on platforms, Hirst sees technology as facilitating banking relationships further. What he doesn’t want is those responsible for trading simply logging on, clicking and executing the trade. The purpose of such technology, according to him, is to enable them to go and have “quality open dialogue” with the banks about different trading strategies or different services that they could provide, for instance.
In fact, technology in general is something which Hirst sees as an enabler to allow the capability from a people perspective to be stepped up. “What I really want my team to be spending time on is thinking about what we are doing, the strategies and products that we are using to mitigate risks, how we approach the banking group to leverage their expertise and how we price the deal,” he says. “The execution almost becomes the press of a button – and having automated processes in place is key to supporting that.” A big part of what Hirst expects of his team, then, is not just the execution of the day-to-day but to challenge the stIatus quo and look at the processes and systems for slicker ways to operate.
From his perspective, overseeing the front and middle office with a lot of cross-functional work with the back office (which doesn’t report to Hirst for segregation of duty purposes), he believes in the team being given space to get on with this. But he also acknowledges that treasurers must be prepared to “go back to grass roots occasionally” – this involves getting into the details and boasting a proper understanding of what every person in your team is up to, what their challenges are and what value they are adding. “Individuals appreciate a group treasurer who understands the problems they are facing and someone who, as a consequence of that, can help to make changes,” Hirst says. That is part of his commitment to perpetually improve.
Systems in place
And it is a commitment which should be praised; a continued focus on improvement and the open conversations that facilitate this amidst the current climate’s volatility is admiral. Whilst it is clear that what drives this is the belief that execution in treasury should be slick and effortless, this is an experience easyJet clearly want their customers to have as well. “The company is not just an airline, but a large .com business. Therefore, I have heavy involvement in customer payments – how we take and settle payments, control the risk of fraud and all of the commercial arrangements associated with accepting card over the web,” Hirst says.
Alongside this is the upcoming priority that airlines need to comply with the Payment Card Industry Data Security Standard (PCI DSS) by December 2017 – an extended deadline owing to the fact that airlines receive payments through common use infrastructure based at airports, which is not actually owned or supported by one particular airline. PCI DSS is “designed to make the transmission, storage and use of card holder data very secure such that it cannot be stolen, compromised and used to perpetrate fraud”, explains Hirst.
Although this is indeed a matter of compliance, Hirst has pitched it as a piece of risk management. “We take care of our card holder data that our customers are entrusting us with whether there be PCI standard or not, but we don’t just stop there. We’ve got a whole programme of work going on at the moment to reduce the amount of systems we use to take and process cards and further secure the way we transmit and store data so that we minimise the risk of data breach.”
For example, implementing a new customer payments switch has centralised all of the card data processing out of individual distribution sales channels to one piece of code for easyJet to handle payments. “Getting that data centralised has helped enormously on the PCI programme, by significantly reducing the number of systems in scope of PCI,” says Hirst.
Keeping up the pace
In terms of other projects, Hirst, like any good treasurer, keeps his eye on technology developments. For him, it is about leveraging technology so that ultimately treasury has more time for “quality thinking”; it is not about “innovation for innovations sake”. In order to do this, Hirst says, you need to challenge the status quo and challenge yourself. It is certainly clear that Hirst isn’t one to rest on his laurels and his personal philosophy has clearly served him well in his career to date. Indeed, being a champion of your own advice sets a standard in treasury teams which can only result in the perpetual improvement Hirst is after.