38. Overview

The Group has exposure to the following risks from its use of financial instruments:
- credit risk
- liquidity risk
- market risk

This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies, and processes for measuring and managing risk, and the Group's management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework. The Board has established the Risk Management Commitee, which is responsible for developing and monitoring the Group's risk management policies. The committee reports regularly to the Board of Directors on its activities.

The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Group Audit Committee oversees how management monitors compliance with the Group's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers.

Trade and other receivables

The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer.

Credit risk is linked to both investment of liquid assets, the management of those assets and agreements with financial institutions related to financial operations, e.g. hedging. The risk involved is directly related to the fulfilment of outstanding obligations of the Group’s counterparties. The Group is aware of potential losses related to credit risk exposure and chooses its counterparties subject to business experience and satisfactory credit ratings. The Group is committed to only trade derivatives with trusted parties. The counterparty risk that arises from trading derivatives, used in risk management, is therefore minimised.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.
Guarantees

The Group's policy is to provide financial guarantees only to wholly-owned subsidiaries.

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

								Notes		2007		2006
Long-term receivables and deposits								22		1.788		2.689
Trade and other receivables								24		7.284		6.149
Receivables from sale of aircrafts								25		1.753		1.094
Cash and cash equivalents								27		2.006		2.776
										12.831		12.708

Impairment losses

The aging of trade receivables at the reporting date was:

						Gross		Impairment		Gross		Impairment
						2007		2007		2006		2006
Not past due						4.643		0		4.333		0
Past due 0-30 days						266		0		484		0
Past due 31-120 days						40		(10)		61		(14)
More than one year						450		(231)		393		(248)
						5.399		(241)		5.271		(262)

The movement in the allowance for impairment in respect of trade receivables during the year was as follows:

Balance at January										262		200
Impairment loss (reversed) recognised										(21)		62
Balance at 31 December										241		262

Based on historical default rates, the Group believes that no impairment allowance is necessary in respect of trade receivables not past due or past due by 30 days; a significant part of the balance relates to customers that have a good track record with the Group.

The allowance account in respect of trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount is considered irrecoverable and is written off against the financial asset directly.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

The Group policy is to divide liquid assets into two classes depending on duration and match them against the Group’s liquidity preferences laid out by the management on annual basis. Tier one includes the estimated minimum of accessible funds for operational liquidity. Tier two includes assets of longer duration for strategic liquidity, such as shorter term investments. The amounts in each class of assets are targeted once a year with reference to a number of economic indicators such as the estimated turnover, the annual amount of fixed costs and the interest rate levels. In addition to limit its risk, the Group maintains lines of credit amounting to ISK 250 million at year end.

The following are the contractual maturities of financial liabilities, including estimated interest payments and payments of off-balance sheet items.

		Carrying		Contractual		Within 12
2007		amount		cash flows		months		1-2 years		2-5 years		After 5 years
Non-dervative
financial liabilities
Unsecured bond issue		8.358		(8.383)		(8.383)		0		0		0
Secured bank loan		14.851		(17.895)		(3.501)		(1.836)		(8.247)		(4.311)
Convertible notes		1.889		(3.411)		(304)		(336)		(2.771)		0
Trade and other payables		12.591		(12.591)		(12.591)
Operating lease payments		0		(26.053)		(6.272)		(5.951)		(12.612)		(1.218)
Pre delivery payments		0		(12.712)		(2.943)		(3.156)		(6.613)		0
		37.689		(81.045)		(33.994)		(11.279)		(30.243)		(5.529)

		Carrying		Contractual		Within 12
2006		amount		cash flows		months		1-2 years		2-5 years		After 5 years
Non-dervative
financial liabilities
Unsecured bond issue		1.945		(1.955)		(1.955)		0		0		0
Secured bank loans		30.961		(37.633)		( 5.556)		( 6.212)		( 20.609)		( 5.256)
Convertible notes		1.860		(3.435)		( 350)		( 294)		( 2.791)		0
Trade and other payables		12.428		( 12.428)		( 12.428)
Operating lease payments		0		( 24.308)		( 4.979)		( 4.709)		( 11.019)		( 3.601)
Pre delivery payments		0		( 14.486)		0		( 3.354)		( 11.132)		0
		47.194		( 94.245)		( 25.268)		( 14.569)		( 45.551)		( 8.857)

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and fuel price will affect the Group's operations. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The Group uses derivatives in order to manage market risks. All such transactions are carried out within the guidelines set by the Board of Directors. Generally the Group seeks to apply hedge accounting in order to manage volatility in profit or loss.

Currency risk

The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of Group entities.

The Group seeks to reduce its foreign exchange exposure arising from transactions in various currencies through a policy of matching, receipts and payments in each individual currency. Then internal trades across the range of subsidiaries are arranged by the Group as far as possible. Nevertheless, the USD cash inflow falls short of USD outflow due to fuel costs, lease and capital related payments which are to a large extent denominated in USD. This shortage is financed by a surplus of European currencies, most importantly EUR and Scandinavian currencies. The Group follows a hedging policy of 40-80% of net exposure with a 12 month horizon and uses a portfolio of instruments, mainly forwards and collar options.

Exposure to currency risk

The Group's exposure to foreign currency risk was as follows based on notional amounts in major currencies:

2007				USD		EUR		DKK		SEK		NOK
Net balance sheet exposure				1.046		(2.404)		192		169		133
Estimated forecast revenue				16.210		6.450		1.830		1.857		1.769
Estimated forecast purchases				(23.991)		(4.296)		(1.195)		(277)		(326)
Forward FX contracts				2.969		(2.969)		0		0		0
Net currency exposure				(3.766)		(3.219)		827		1.749		1.576

2006
Net balance sheet exposure				2.876		(1.695)		211		197		(48)
Estimated forecast revenue				19.699		7.813		2.025		1.952		1.558
Estimated forecast purchases				(28.727)		(4.114)		(1.184)		(305)		(304)
Forward FX contracts				4.380		( 4.380)		0		0		0
Net currency exposure				( 1.772)		( 2.376)		1.052		1.844		1.206

The following significant exchange rates applied during the year:

						Average rate				Reporting date spot rate
						2007		2006		2007		2006
USD						64,21		70,02		62,62		71,36
EU						87,85		89,00		92,20		93,79
DKK						11,76		11,76		12,36		12,57
SEK						9,47		9,48		9,74		10,37
NOK						10,94		10,90		11,57		11,38

Sensitivity analysis

A 10% strengthening of the ISK against the following currencies at 31 December would have increased (decreased) post-tax equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. This analysis is performed on the same basis for 2006.

												Profit or
										Equity		loss
2007
USD										137		309
EUR										212		264
DKK										(68)		(68)
SEK										(143)		(143)
NOK										(129)		(129)
2006
USD										(9)		145
EUR										179		195
DKK										(86)		(86)
SEK										(151)		(151)
NOK										(99)		(99)

A 10% weakening of the ISK against the above currencies would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

Interest rate risk

The largest share of outstanding long term loans, carrying 3-6 months floating interest rates are directly related to aircraft financing and denominated in USD. That is a consequence of the fact that the most liquid market for commercial aircraft denominates prices in USD. The Group follows a policy of hedging 40-80% of interest rate exposure. Swap contracts are mainly used to exchange floating rates for fixed up to 5 years ahead, which currently amounting to USD 107 million and carry on average 4% interest rates. In recent years the contracts have proved favourable as the floating rates have exceeded the fixed rates.

At the reporting date the interest rate profile of the Group´s interest bearing financial instruments was:

										Carrying amount
										2007		2006
Fixed rate instruments
Financial assets										1.525		1.769
Financial liabilities										(10.325)		(6.808)
										(8.800)		(5.039)
Variable rate instruments
Financial liabilities										(14.773)		(26.013)

Fair value sensitivity analysis for fixed rate instruments

The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the Group does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at he reporting date would not affect profit or loss.
A change of 100 basis points in interest rates would have increased or decreased equity by 255 million (2006: 306 million).

Fair value sensitivity analysis for variable rate instruments

A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2006.

										Equity
										100 bp		100 bp
										increase		decrease
2007
Variable rate instruments										130		(125)
Total										130		(125)
2006
Variable rate instruments										150		(156)
Total										150		(156)

Fuel price risk

The jet fuel price has a lot of influence on cost of operations. Price development for the past five years has been characterized by a steep upward trend, generated by excessive world demand and periodic cycles which have added to the price volatility. In 2007 the monthly average of jet fuel prices reached a record level of 920 USD/t in November, having continuously rallied from 550 USD/t in January. Since November prices have maintained their achieved levels. The Group maintains a policy of hedging fuel price exposure by a ratio of 40-80% by using swaps and options. The average hedge ratio in 2007 was roughly 55-60%. Although prices did exceed the budgeted levels considerably towards the end of the year, the realized total fuel costs were close to budget due to the seasonality of fuel consumption and hedging activities.

Capital management

The Board’s policy is to maintain a strong capital base so as to sustain future development of the business.

The Board’s target is that managers of the Group hold the Company’s ordinary shares. The Board has entered into share option agreements with managers for that purpose. At year-end 2007 the managers of the Group hold ISK 21.5 million of the shares and have entered into share option agreements for ISK 34.6 million as disclosed in note 43.

The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position.