Airways Annual Report 2019



Interest rate risk Airways is exposed to interest rate risk through: a) differences between cost of debt assumptions used when setting air traffic management (ATM) service pricing for three-yearly periods, and actual interest rates available when debt is drawn down b) fluctuations in interest rates on unhedged, floating debt. Airways’ primary objective in managing interest rate risk is to secure interest rates below pricing assumptions and the long term average cost of debt, ensuring revenue from customers is sufficient to cover interest costs. This is achieved using interest rate swaps to secure fixed debt funding costs for forecast positions, subject to the following limits: ATM service pricing period Minimum hedging levels Maximum hedging levels Maximum swap rates Current pricing period 25% forecast debt 90% forecast debt Current pricing cost of debt assumption Next pricing period None 30% forecast debt Current 10-year government bond rate, plus the current pricing debt margin

To ensure these policies are adhered to, Airways operate the following controls: • Maintaining and monitoring forecast debt levels to identify required hedging activity • CFO approval is required for all hedging decisions.

Airways’ exposure to interest rate risk is set out in the charts below, which show the extent of hedging in place to cover the total floating rate borrowing at year end of $50 million (2018: $40 million). Further interest rate swaps were also in place to hedge highly probable future debt.

2019 $000’s

2018 $000’s

As at 30 June

Hedged borrowings

44,500 38,000

Un-hedged borrowings



Total term borrowings

50,000 40,000

The effective interest rate on borrowing in the current year was 5.28% (2018: 5.56%). Possible fluctuations in interest rates are not expected to have a material impact on Airways’ financial position or performance.


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