As the budget airline announces that it’s currently trading ahead of target, we’ve uncovered some lessons for SMEs under the seats.
In its latest trading update (released March 26th), easyJet was able to please both analysts and investors with news that it was likely to beat its target for the six months to 31st March. Pats on the back all round and a round of drinks on the FD after work then? Perhaps.
Those with the time or inclination to delve beneath the headlines, however, will find the reason for this success without too much trouble. The opening paragraph of easyJet’s release states: “easyJet expects to deliver a first half performance ahead of the guidance given in the 27th January 2015 trading statement primarily due to the movement of exchange rates in the second quarter.”
The cause of this improved performance? Movements in currency markets. And reading a little further reveals something even more interesting. The company notes that it expects its ‘foreign exchange impact’ for the half year to 31st March to be “favourable”; to the tune of £20m in fact. However, it also notes that it expects the impact for the full year to be “adverse” to the by-now-familiar-sounding tune of £20m. Such are the slings and arrows of the currency markets.
So, what is going on?
Euro slumps in face of ongoing Greek tragedies
Currencies rise and fall against each other every day based on things like unemployment figures, budget announcements and interest rate calls. But recently, the poor old euro has tended to lose more often than not. With fierce debate and politicking surrounding Greece’s membership of the single currency in recent months, the euro has slumped. Today, the pound is worth around 15% more against the euro than it was a year ago.
Improving economy and promise of interest rate rises sees US dollar strengthen
The volatility in currency markets has spread beyond the Eurozone too. As the US economy continues to improve, and both analysts and commentators whip themselves into a frenzy about the possibility that the Federal Reserve might raise interest rates, the US dollar has risen. The pound is worth about 10% less against the US dollar than it was a year ago. So that’s all clear then?
So, what can small business owners learn from easyJet?
If you buy or sell abroad, the movements between pairs of currencies can affect your business – in other words, it’s not just a ‘big business’ problem. Hedging could be the answer. The way to do that is to buy a ‘forward contract’ which allows you to buy or sell a foreign currency at today’s prices for a specified period of time. It’s a great way to help you plan and forecast so that you don’t get caught out.
Jeremy Cook, Chief Economist at World First, explains: “Regardless of the size of your company, dealing internationally brings risks as well as rewards. Hedging these risks away allows a business to focus on the rewards of international sales and expansion as opposed to staring at charts of currencies and worrying about what may come. The first three months of this year have been volatile and, with the outcome of the UK election uncertain, Q2 is likely to be so too. Hedging can protect your business from this volatility and save your bottom line.”
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