英國dissertation網_英國航空公司年報及賬目管理_British Airways Plc-Annual Report and Ac

British Airways Plc Annual Report and Accounts for the year ended March 31, 2006
Registered in England and Wales No. 1777777
Registered Office: Waterside, PO Box 365, Harmondsworth UB7 0GB
Certain statements included in this Report and Accounts may be forward-looking and may involve risks and uncertainties that could cause actual
英國dissertation網results to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements include, without
limitation, projections relating to results of operations and financial conditions and the Company's plans and objectives for future operations,
including, without limitation, discussions of the Company’s business and financing plans, expected future revenues and expenditures and
divestments. All forward-looking statements in this report are based upon information known to the Company on the date of this report. The
Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future
events or otherwise. It is not reasonably possible to itemise all of the many factors and specific events that could cause the Company’s forwardlookingstatements to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operatingin the global economy.
British Airways Plc has disclosed on its website www.bashares.com significant ways in which its corporate governance practices differ from those
mandated for US companies under NYSE listing standards.
British Airways 05/06 Annual Report 1
CONTENTS
Key Results 2
Chairman’s Statement 3
Directors’ Report and Business Review 4
Board members 4
Corporate governance 5
Company information 9
Aircraft fleet 11
Organisational structure 19
Development and performance of the business 21
Critical accounting policies 24
Key performance indicators 26
Outlook 27
Principal risks and uncertainties 28
Resources and relationships 31
Receipts and returns to shareholders 37
Operating and financial statistics 43
Remuneration Report 45
Statement of Directors’ Responsibilities 55
Report of the auditors to the members
of British Airways Plc 55
Group consolidated income statement 56
Balance sheets 57
Cash flow statements 58
Statements of changes in equity 59
Notes to the Accounts 60
Shareholder information 110
Glossary 111
2 British Airways 05/06 Annual Report
2005-06 2004-05
Group results
Revenue £m up 9.6% 8,515 7,772
Operating profit £m up 26.8% 705 556
Profit before tax £m up 20.9% 620 513
Attributable profit for the year £m up 19.6% 451 377
Net assets £m up 48.5% 2,074 1,397#p#分頁標題#e#
Basic earnings per share p up 14.8% 40.4 35.2
Key financial statistics
Airline operations yield p/RPK up 1.3% 6.10 6.02
Operating margin % up 1.1 points 8.3 7.2
Net debt/total capital ratio % down 23.5 points 44.2 67.7
Group operating statistics
Passengers carried ‘000 down 0.2% 35,634 35,717
Revenue passenger kilometres m up 3.7% 111,859 107,892
Revenue tonne kilometres m up 2.4% 16,105 15,731
Available tonne kilometres m up 2.4% 23,106 22,565
Passenger load factor % up 0.8 points 75.6 74.8
Key Results
future. We will be on our guard against any attempt to settle for a
less ambitious arrangement that fails to deliver the benefits we
seek.
Over the next 12-18 months, the CAA and the Competition
Commission will decide the level of airport charges that will
apply after 2008, when we are occupying Terminal 5.
We believe there is a settlement option which delivers much
better value for Heathrow users than the current price cap, which
has allowed charges to rise at 6.5 per cent above inflation.
This should not be achieved by cutting back on necessary
investment, but by setting a much more realistic cost of capital
and pressing the airport operator to deliver much greater cost
efficiencies, in line with the efforts British Airways and other
airlines have had to make.
The bid frenzy around BAA suggests there is a lot of value to be
unlocked in the BAA business. We expect the regulator to ensure
that it is the airport users - ultimately the passengers – who see
the benefits of cost efficiencies and lower financing costs, rather
than delivering a windfall to BAA shareholders.
Another key issue for us all is the environment. British Airways’
environmental progress is reported in detail on page 36. We
continue to support the inclusion of aviation in emissions trading,
and allowing the market - rather than regulators - to decide the
right balance between cuts in emissions from aircraft and
reductions on the ground.
In recent months, airlines have been targeted as the largest
contributors to environmental concerns. While it is crucial that the
whole industry faces up to its environmental responsibilities more
energetically, the issue must be seen in context. The contribution
of UK aviation to global emissions is around 0.1 per cent.
While this does not absolve us of our responsibility to the
environment, it clearly shows that we are not – as many
commentators would like to suggest – the biggest polluters, and
ignores the other side of the equation, the great benefit to
lifestyle, globalisation and gross domestic products contributed
by the sector.
Another vital issue is local air quality which was described in the
Government’s White Paper in 2003 as the "most difficult issue" in#p#分頁標題#e#
relation to potential expansion of runway capacity at Heathrow.
Air quality monitoring by the National Environmental Technology
Centre, supported by British Airways, shows that levels of
nitrogen dioxide around Heathrow are coming down to levels
within the proposed new EU legal limits. This is encouraging
evidence as the Government prepares to issue its own technical
analysis based on the Project for Sustainable Development of
Heathrow.
The data also shows that it is London’s air quality that has a
detrimental effect on Heathrow – not the other way round, as
many people think.
It remains for me to thank all our staff for their contribution to
these results. We depend on all our people to put the customers
first and are grateful for their commitment and dedication to
British Airways.
Martin Broughton, Chairman
Chairman’s Statement
This has been a year of transition and renewal during which the
airline has made steady progress towards its key financial goals
and in developing new customer products to provide service that
matters.
Willie Walsh took over as Chief Executive and quickly made his
mark, building on our core strategies – tackling unprofitable parts
of our business, re-setting the dial on controlling costs with a
management restructure and preparing for the vital move to
Terminal 5 – now less than 700 days away.
The line up on the Board changed too with an all new executive
team who together with three new non-executives, will bring
fresh ideas and thinking to our business.
In the unique world of aviation the International Air Transport
Association’s narrowing of its red ink forecast for airline losses in
2006, from $4.3 billion to $2.2 billion, has led to talk of cautious
optimism emerging in the industry.
Our operating profit for the year, of £705 million and £620
million pre-tax, is a good result and compares favourably with
our principal competitors. But soaring fuel costs – Brent crude
reached an all time high of $72 a barrel in May - continue to
stalk the industry and there is no sign this will change.
I am encouraged that we achieved an operating margin of 8.3 per
cent, which triggered a well deserved bonus for our staff. However
we remain committed to achieving our ten per cent goal by 2008.
Another highlight is that our shorthaul business is back in the black
for the first time in ten years but there is still much to be done.
The other challenge is our pension deficit. The stark reality is
that your Company has the biggest deficit of any company in the
FTSE 100 relative to its size and it is growing, despite equities at
a five year high. Not surprisingly, commentators have described
British Airways as a ‘pension fund with wings’.#p#分頁標題#e#
We have shared our proposal for tackling the deficit in the New
Airways Pension Scheme (NAPS) with our staff, trustees and
trade unions and once it is agreed we hope to implement it next
year. It is an issue that must be tackled if we are to grow our
business, invest in new aircraft and restore the dividend.
Investments that will come to fruition this year for our customers
include the rollout of an upgraded in-flight entertainment system
and our new Club World and First class offering which I am
confident will set a new industry benchmark in the air. We are
now truly an Internet age airline with online systems and features
that make the travel experience simple and hassle free. More of
these will be introduced ahead of our move to Terminal 5.
Providing superb customer service and products our customers
want is at the heart of our business.
As you know, aviation is a highly regulated business – with
governments controlling where we fly and when we fly our ability
to grow and expand like other global industries is prevented. Our
frustration at this is well documented.
We have been ardent supporters of the European Union’s own
Open Aviation Area and support the extension of that into a new
aviation treaty with the United States. Such a deal could break
the current mould of restrictive bilateral agreements, and set a
template for the rest of the world to follow. Recent protectionist
tendencies on both sides of the Atlantic however seem likely to
delay any prospect of a good deal being reached in the near
British Airways 05/06 Annual Report 3
4 British Airways 05/06 Annual Report
Directors’ report and
business review
The directors present their Report, Business Review and
Accounts for the year ended March 31, 2006. The accounts are
set out on pages 56 to 109.
Results for the year
Profit for the year attributable to members of British Airways Plc
(‘the Company’) amounted to £451 million, against a profit on
the same basis of £377 million in the previous year. No interim
dividend was paid during the year. Consistent with the priorities
agreed with major investors, in order to continue to strengthen
the Company’s balance sheet, the Board has again decided not to
recommend payment of a dividend.
Directors
The names and details of the current directors are set out below.
During the financial year 2006 there were a number of changes
to the membership of the Board. At the conclusion of the annual
general meeting in July, 2005, Dr Ashok Ganguly, Captain
Michael Jeffery and Lord Renwick of Clifton retired from the
Board. Ken Smart CBE and The Right Honourable the Baroness
Symons of Vernham Dean were appointed as non-executive
directors and Martin George was appointed as an executive#p#分頁標題#e#
director at the annual meeting in July, 2005. Chumpol
NaLamlieng was appointed to the Board in November, 2005 and
Keith Williams was appointed as Chief Financial Officer and an
executive director on January 1, 2006. Both will seek election by
shareholders at the annual general meeting to be held on July 18,
2006. Martin Broughton and Martin Read will retire and seek reelection
in accordance with the Company’s Articles of
Association at the annual general meeting. Biographical notes
about the directors seeking election and re-election are set out in
the explanatory notes of the Notice of annual general meeting.
Directors’ membership of Board Committees appears below.
Details of the directors’ remuneration and share interests are set
out in the Remuneration report on pages 50 to 54.
During the financial year 2006 the business of the Company was
directed by a Board of Directors which, as detailed below,
comprised 11 members at both the start and end of the year. All
Directors are subject to retirement every three years and are
eligible for re-election by the shareholders. The directors of the
Company (and their respective ages) are:
BOARD MEMBERS as at May 18, 2006
CHAIRMAN
Martin Broughton (59)
Board Member since May, 2000. Deputy Chairman from
November, 2003 becoming non-executive Chairman in July,
2004. At the time of his appointment, Martin met the
independence criteria set out in paragraph A.3.1 of The
Combined Code on Corporate Governance (July, 2003). Safety
Review Committee and Chairman of the Nominations
Committee. Martin Broughton is Chairman of the British
Horseracing Board.
CHIEF EXECUTIVE
Willie Walsh (44)
Executive Board Member since May, 2005, becoming Chief
Executive on October 1, 2005. Formerly Chief Executive of Aer
Lingus, he is a non-executive director of Fyffes Plc.
CHIEF FINANCIAL OFFICER
Keith Williams (50)
Executive Board Member since January, 2006. Having joined the
airline in 1998 as Head of Taxation and additionally appointed
Group Treasurer in 2000, Keith was appointed Chief Financial
Officer on January 1, 2006. He is a chartered accountant.
COMMERCIAL DIRECTOR
Martin George (44)
Executive Board Member since July, 2005. Martin joined the
airline in 1987, becoming Commercial Director in August, 2004.
He is responsible for worldwide sales, marketing, revenue
management, development of the airline’s website – ba.com,
worldwide cargo, global PR, and in-flight service.
NON-EXECUTIVE DIRECTORS
Maarten van den Bergh (64)
Independent non-executive director since 2002, senior
independent non-executive director since July, 2004. Audit,
Nominations and Remuneration Committees. He was Chairman
of Lloyds TSB Group Plc until May 11, 2006. He is Chairman of#p#分頁標題#e#
the Supervisory Board of Akzo Nobel NV, a non-executive
director of BT Group plc, and Royal Dutch Shell PLC.
Denise Kingsmill (59)
Independent non-executive director since November, 2004.
Audit and Safety Review Committees. Until December, 2003,
she chaired the Department of Trade and Industry’s accounting
for people task force and was deputy chairman of the
Competition Commission. She is also non-executive director
with the Home Office and is a senior advisor to the Royal Bank
of Scotland.
Chumpol NaLamlieng (59)
Independent non-executive director since November, 2005.
Audit and Safety Review Committees. He is a member of the
Board of Directors and Chairman of the Management Advisory
Committee of the Siam Cement Public Company Limited, nonexecutive
Chairman of Singapore Telecommunications Ltd and
Executive Committee Member of the World Business Council for
Sustainable Development.
Dr Martin Read (56)
Independent non-executive director since May, 2000. Chairman
of the Remuneration Committee. Martin Read is Group Chief
Executive of LogicaCMG plc and a non-executive director of the
Boots Group PLC.
Alison Reed (49)
Independent non-executive director since December, 2003.
Remuneration Committee and Chairman of the Audit Committee.
Alison Reed is Group Finance Director of Standard Life.
Ken Smart (60)
Independent non-executive director since July 2005. Audit
Committee and Chairman of the Safety Review Committee. He is
a member of the Board of Trustees of the UK Confidential
Human Factors Incident Reporting Programme, European
President of the International Society of Air Safety Investigators
and a Visiting Professor at Cranfield University.
British Airways 05/06 Annual Report 5
Baroness Symons (55)
Independent non-executive director since July, 2005. Audit and
Safety Review Committees. The Right Honourable the Baroness
Symons of Vernham Dean is a senior member of the House of
Lords. Created a life peer in 1996, she served as a Minister in the
Foreign and Commonwealth Office, the Ministry of Defence and
the Department of Trade and Industry and was Minister of State
for the Middle East and Deputy Leader of the House of Lords
until she resigned from the Government in May, 2005. She was a
non-executive director of The Peninsular and Oriental Steam
Navigation Company from December 1, 2005 until its sale on
March 8, 2006.
COMPANY SECRETARY
Alan Buchanan (47)
Joined the airline in 1990 as Principal Legal Adviser Finance,
becoming Company Secretary in April, 2000. In addition, he
became Head of Risk Management from October 1, 2005.
LEADERSHIP TEAM
Robert Boyle (40)
Director of Planning. Joined the airline in 1993 in Corporate
Finance, becoming General Manager Network Development in#p#分頁標題#e#
1998, taking on responsibility for Fleet Planning in 2002.
Paul Coby (49)
Chief Information Officer. Joined the airline in 1996 as
Information Management Systems Supply Board Manager,
becoming Chief Information Officer in 2000.
Lloyd Cromwell Griffiths (61)
Director of Flight Operations. Joined the airline in 1973 as a
pilot, becoming Director of Flight Operations in 2001.
Alan McDonald (55)
Director of Engineering. Joined the airline in 1966 as an
Apprentice Engineer, becoming Director of Engineering in 2001.
Roger Maynard (62)
Director of Investments and Alliances. Joined the airline in 1987
as Vice-President Commercial Affairs North America, becoming
Director of Corporate Strategy in May, 1991.
Neil Robertson (52)
Director for People. Joined the airline in 1976 as a graduate
trainee, becoming Director for People in 2002.
Geoff Want (53)
Director of Ground Operations. Joined the airline in 1976 as an
Aircraft Performance Engineer, becoming Director of Ground
Operations in September, 2005.
Robert Webb QC (56)
General Counsel. Joined the airline in 1998 and has
responsibility for Legal, Government and Industry Affairs, Safety,
Security, Community Relations and the Environmental
departments of the airline.
CORPORATE GOVERNANCE
The Company is committed to high standards of corporate
governance. The Board is accountable to the Company’s
shareholders for good corporate governance. The Company has
complied throughout the year with the code of best practice set
out in Section 1 of the Combined Code (issued in July, 2003)
appended to the Listing Rules of the Financial Services Authority
(the ‘Combined Code’).
The role of the Board is to provide entrepreneurial leadership of
the Company within a framework of prudent and effective
controls, which enables risk to be assessed and managed. The
Board sets the Company’s strategic aims, ensures that the
necessary financial and human resources are in place for the
Company to meet its objectives and reviews management
performance. The Board sets the Company’s values and
standards and ensures that its obligations to its shareholders and
others are understood and met.
The Board of the Company routinely meets eight times a year
and additionally when necessary to consider all matters relating
to the overall control, business performance and strategy of the
Company, and for these purposes the Board has drawn up a
schedule of matters reserved for Board decision. Broadly, the
Board has reserved to itself major strategic and financial
decisions, including investment and divestment decisions,
approval of significant alliance or codeshare partnerships and
capital commitments of greater than £10 million. The Board has#p#分頁標題#e#
also drawn up a schedule of matters which must be reported to it.
These schedules are reviewed at least annually. A statement of
the directors’ responsibilities in respect of the financial
statements is set out on page 55 and a statement on going
concern is given on page 9.
The Board is led by the Chairman and the executive management
of the Company is led by the Chief Executive. Their respective
roles are more fully described in the corporate governance
section of the Company’s website www.bashares.com. At the start
of the financial year under review, the Board consisted of 11
members. The number rose to 12 during May, 2005 before
falling to ten in October and returning to 11 in November, 2005.
Of the 11 members serving at the year end, excluding the
Chairman, three were executive directors and seven were nonexecutive
directors. The seven non-executive directors are drawn
from a diversity of business and other backgrounds, bringing a
broad range of views and experiences to Board deliberations.
Maarten van den Bergh is the Board’s senior independent
director. The Board has included six or more fully independent
non-executive directors throughout the year under review.
Although they are eligible for non-contractual travel concessions
in addition to their fees, this is not considered to affect their
independence.
All directors receive a regular supply of information about the
Company so that they are equipped to play as full a part as
possible in Board meetings. Papers for Board and Committee
Meetings are typically distributed in the week prior to the
relevant meeting. All Board members have access to the
Company Secretary for any further information they require. In
addition, the Secretary ensures that the Board members receive
appropriate training as necessary. The appointment and removal
of the Secretary is a matter for the Board as a whole. Nonexecutive
directors are encouraged to visit the Company’s
operations and to speak to customers and employees.
Independent professional advice would be available to directors
in appropriate circumstances, at the Company’s expense. All
directors are required to submit themselves for re-election every
three years. New directors are appointed to the Board on the
recommendation of the Nominations Committee whose terms of
reference are described on page 6.
In the day-to-day running of the Company, the Chief Executive is
supported by the Leadership Team, the members of which are
described opposite.
6 British Airways 05/06 Annual Report
The Company has arranged appropriate insurance cover in
respect of legal action against its directors and officers. The
Company has granted rolling indemnities to the directors and the
Secretary, uncapped in amount but subject to applicable law, in#p#分頁標題#e#
relation to certain losses and liabilities which they may incur in
the course of acting as officers of companies within the Group.
These indemnities also set out the terms on which the Company
may, in its discretion, advance defence costs. A specimen
indemnity is available for view on the Company’s investor
relations website, www.bashares.com by clicking on the heading
Corporate Governance.
The Board has four standing Board Committees which meet
regularly under terms of reference set by the Board. Copies of
these are also available on www.bashares.com. Each of the
Committees has authority to take external advice as required.
The Audit Committee meets at least quarterly under the
chairmanship of Alison Reed and consists solely of independent
non-executive directors. At the beginning of the year its other
members were Maarten van den Bergh, Ashok Ganguly (until
July, 2005) and Denise Kingsmill. Ken Smart and Baroness
Symons joined the Committee in July, 2005 and Chumpol
NaLamlieng joined the Committee in November, 2005. The
Board is satisfied that Alison Reed has recent and relevant
financial experience for the purposes of paragraph C.3.1 of the
Combined Code. The external and internal auditors, the General
Counsel and the Company Secretary normally attend meetings of
the Committee and have rights of access to it. Executives attend
as required. In addition, the Committee has held closed meetings
and has also met privately with each of the external and internal
auditors. The Committee reviews the Company’s financial
statements to ensure that its accounting policies are the most
appropriate to the Company’s circumstances and that its financial
reporting presents a balanced and understandable assessment of
the Company’s position and prospects. It also keeps under review
the Company’s system of internal control, including compliance
with the Company’s codes of conduct and the scope and results
of the work of internal audit and of external audit, together with
the independence and objectivity of the auditors. The Committee
is responsible for overseeing the performance, as well as the
objectivity and independence, of the external auditor which it
does by requiring reports from the auditor, a requirement to preapprove
fees for non-audit work and by ensuring that fees for
non-audit work remain lower than those for audit work. The
Committee is also responsible for oversight of the Company’s
policy on whistleblowers and the Risk Group (see Internal
Control on page 8).
The Safety Review Committee meets at least four times per year
under the chairmanship of Ken Smart who succeeded Captain
Michael Jeffery as Chairman on July 19, 2005. Its other members
are Martin Broughton (from May 12, 2005), Denise Kingsmill,#p#分頁標題#e#
Baroness Symons (from July 19, 2005) and Chumpol NaLamlieng
(from March 20, 2006). The Committee considers matters
relating to the operational safety and security of the airline and
subsidiary airlines as well as health and safety issues. Throughout
the year under review, the Committee was advised by an external
expert, Sir Michael Alcock GCB KBE FREng.
The Safety Review Committee reviews reports from the various
safety boards within the airline. For the purposes of the Air
Operators Certificate and the Joint Airworthiness Requirements -
Operations (JAR-Ops), the Chief Executive is the named
Accountable Manager for the Company. As the Accountable
Manager, he chairs meetings at bi-monthly intervals of the five
Nominated Postholders (the executives responsible to the Civil
Aviation Authority (CAA) for safety in the various operational
departments of the Company) along with the General Counsel,
the Head of Safety and Security and the Head of Safety. These
meetings review operational compliance, quality and safety;
monitor the effectiveness of the corporate safety management
system and agree cross-departmental policy as appropriate. The
Accountable Manager’s meetings allow him to review any issues
with the Nominated Postholders and seek the necessary
assurances that the Company is compliant with the relevant
regulations.
The Nominations Committee meets at least once a year, and
additionally if required, to consider the balance of the Board’s
membership, to identify any additional skills or experience
which might enhance the Board’s performance, and to interview
candidates and recommend appointments to or, where
necessary, removals from, the Board. The Committee also
reviews the performance of any director seeking re-election at
the forthcoming annual general meeting. The Committee’s remit
also includes review of corporate governance. Martin Broughton
chairs the Committee and its other members are Maarten van
den Bergh and Martin Read. All non-executive Board members
are invited to attend its meetings, however, no Board member
participates in any discussion of his or her own performance.
In relation to the appointment of new Board members, the
process used for the nomination of new candidates commences
with the identification of the skills and experience needed to
maintain or enhance the diversity of skills and experience on the
Board. Whilst in most cases this will result in the use of an
independent search firm, this is not always the case. An
independent search firm was used in relation to the appointment
of Chumpol NaLamlieng, the only non-executive director
appointed since the last annual general meeting.
The Remuneration Committee of the Board meets at least twice
a year, and additionally if required, to establish the Company’s#p#分頁標題#e#
policy on remuneration for the executive directors, members of
the Leadership Team listed on page 5, the Chairman and the
Company Secretary, to determine that remuneration and to
consider and decide grants under the Company’s long term
incentive plans. The Report of the Remuneration Committee on
pages 45 to 54 gives full details of the remuneration policy as
well as the policies on notice periods and termination. The
Committee consists solely of independent non-executive
directors and is chaired by Dr Martin Read. Its other members
are Maarten van den Bergh and Alison Reed. No director is
involved in deciding his or her own remuneration. The fees for
the non-executive directors are fixed by the executive directors
on the recommendation of the Chairman.
During the financial year under review, a performance evaluation
of the Board, relating to the prior year was undertaken through a
questionnaire and one-to-one interviews by the Secretary. The
results of this exercise were presented to, and considered by, the
Board. Given the new executive team, the next full evaluation
has been deferred to mid-2006. The Chairman and nonexecutive
members typically meet without any executives present
on at least two occasions during each financial year. At least once
a year, the non-executive members of the Board meet under the
chairmanship of the senior independent director during which,
and taking account of the views of the executive directors, they
review the performance of the Chairman.
British Airways 05/06 Annual Report 7
The Company maintains regular contact with its larger
institutional shareholders through its investor relations team and
through meetings with the Chief Executive, the Chief Financial
Officer and the Chairman as well as annual institutional investor
events. The Board receives regular feedback on investors’ views.
The presentations from these institutional investor events are
also available to private shareholders through the Company’s
investor relations website, www.bashares.com. The annual
investor day in March, 2006 was attended by the Chairman and
four other non-executive directors and major investors were
given the opportunity to discuss corporate governance matters
with those directors in one-to-one meetings. Private shareholders
receive the British Airways Investor magazine twice annually and
are encouraged to attend the annual general meeting and to
express their views by completing and returning a freepost Issues
of Concern card, the main themes of which are reported to the
Board and responded to in the Chairman’s address at the annual
general meeting.
In order to protect the operating rights of the Company, the
number of ordinary shares held by non-UK nationals is#p#分頁標題#e#
monitored, as is the number of ordinary shares held by persons
who are not nationals of states comprising the European
Economic Area. At March 31, 2006, 39 per cent of the ordinary
shares of the Company were held by non-UK nationals (2005: 38
per cent) and 23 per cent of the ordinary shares were held by
persons who were not nationals of states comprising the
European Economic Area (2005: 23 per cent). Although there
are no large interests of single or associated non-UK nationals,
the directors cannot rule out the possibility that they may be
required to exercise their powers to restrict non-UK or non-EEA
share ownership in order to protect the Company’s operating
rights.
Director Audit Nominations Remuneration Safety Review
Board Meetings Committees Committees Committees Committees
attended in attended in attended in attended in attended in
the period or the period or the period or the period or the period or
period of service period of service period of service period of service period of service
Scheduled Non-Scheduled
Meetings Meetings
9 2 6 5 11 5
Martin Broughton 9/9 2/2 5/5 5/5
Willie Walsh 1 8/8 2/2
Keith Williams 7 2/2 2/2
Martin George 3 6/6 2/2
Rod Eddington 4 5/5
Mike Street 4 5/5
John Rishton 6 7/7
Maarten van den Bergh 8/9 2/2 5/6 5/5 10/11
Dr Ashok Ganguly 2 2/3 0/1 1/2
Captain Michael Jeffery 2 3/3 2/2
Denise Kingsmill 8/9 1/2 5/6 5/5
Dr Martin Read 8/9 0/2 5/5 6/6
Alison Reed 8/9 2/2 6/6 6/6
Lord Renwick of Clifton 2 5/5 2/2 3/3
Ken Smart 3 6/6 2/2 3/3 3/3
Baroness Symons 3 6/6 0/1 3/3 3/3
Chumpol NaLamlieng 5 5/5 0/1 2/2 1/1
1 joined the Board in May, 2005
2 retired from the Board July 19, 2005
3 joined the Board in July, 2005
4 retired from the Board in September, 2005
5 joined the Board in November, 2005
6 resigned from the Board in December, 2005
7 joined the Board in January, 2006
Board attendance
The number of Board and Committee meetings attended by each director during the year is shown in the table below:
8 British Airways 05/06 Annual Report
Internal control
The directors are responsible for the Company’s system of
internal control, including internal financial control, which is
designed to provide reasonable, but not absolute, assurance
regarding: (a) the safeguarding of assets against unauthorised use
or disposition, and (b) the maintenance of proper accounting
records and the reliability of financial information used within the
business or for publication.
There is an on-going process to identify, assess and manage risk.
This process has been in place throughout the year to which
these statements apply and up to the date of their approval.
The Company operates a risk management process that was#p#分頁標題#e#
introduced into the Company during 2002/03 which
encompasses the business continuity activity. The process is
aligned with the associated activities of Risk Finance, Insurance
and Internal Control. The General Counsel chairs a high level
Risk Group, whose function is to develop risk strategy and
associated policies for the Group, which submits written progress
reports to the Audit Committee regularly. Beneath this sits a
committee of risk leaders, each of whom represents parts of the
Group and is responsible for identifying risks, determining their
level of impact and likelihood, and for developing mitigation
strategies. The resultant departmental and corporate risk
registers, which have been refined and developed during the year
remain subject to regular review by the Risk Group. More details
are on pages 30 and 31.
For the financial year 2006, the key procedures that the directors
established to provide effective internal controls were as follows:
The Company has a Statement of Business Principles applicable
to all employees. This has been in place since 2000 and is shortly
to be replaced, following a review of the Company’s Standing
Instructions, by a refined version which describes the ethical
values and expected norms of business behaviour. The Company
also has a Code of Business Conduct and Ethics which also
applies to all employees. These are two of a number of Standing
Instructions to employees of the Group designed to enhance
internal control. Along with the Finance Standing Instructions,
these are regularly updated and made available to staff through
the Company’s intranet.
A clear organisational structure exists detailing lines of authority
and control responsibilities. The professionalism and competence
of staff is maintained both through rigorous recruitment policies
and a performance appraisal system which establishes targets,
reinforces accountability and control consciousness and identifies
appropriate training requirements. Action plans are prepared and
implemented to ensure that staff develop and maintain the
required skills to fulfil their responsibilities, and that the
Company can meet its future management requirements.
Information systems are developed to support the Company’s
long-term objectives and are managed by a professionally staffed
Information Management department. Appropriate policies and
procedures are in place covering all significant areas of the
business. During the year under review, the Company has worked
to enhance controls in relation to IT risks.
The business agenda is determined by the business plan which
represents the operational and financial evaluation of the
corporate strategy, setting out the agreed targets for financial
return and service standards, identifying and prioritising#p#分頁標題#e#
improvement opportunities to deliver those targets and the
agreed capital and manpower requirements. The business
planning process confirms that the targeted results can be
achieved, satisfies departments that their plans are robust and
establishes performance indicators against which departments
can be evaluated. The business plan is approved by the Board on
an annual basis. The latest business plan covering the period
April 1, 2006 to March 31, 2008 was launched in March, 2006
and focuses on four themes: building a competitive cost base,
delivering world-class customer service, preparing to be ready for
the move to Terminal 5 and to be fit for growth.
A comprehensive management accounting system is in place
providing financial and operational performance measurement
indicators to management. Detailed management accounts are
prepared monthly to cover each major area of the business.
Variances from plan are analysed, explained and acted on in a
timely manner. As well as regular Board discussions, monthly
meetings are held by the Leadership Team to discuss
performance with specific projects being discussed as and when
required. The Capital Investment Committee and Manpower
Control Group remain instrumental in maintaining tight control
of capital expenditure and headcount respectively. All major
corporate projects are audited regularly.
Business controls are reviewed on an on-going basis by the
internal audit department which operates internationally and to a
programme based on risk assessment. The department is
managed by professionally qualified personnel with experience
gained from both inside and outside the industry. The
department includes dedicated resources for regular audits of
major projects, arrangements with third parties (suppliers, agents,
partners), IT controls as well as internal departments and
processes. All areas of the Company are audited over the course
of a standard four year cycle. The standards of internal controls
in different parts of the business are measured and rated
satisfactory or unsatisfactory. Major projects are measured
against four criteria: well controlled, on time, within budget and
benefits delivered. During the financial year essential work
necessary to achieve compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 to which the Company is subject by
virtue of its listing on the New York Stock Exchange has
continued and the Board is confident of meeting the revised
deadline imposed by the Securities and Exchange Commission.
An analysis of all the requirements for Section 404 compliance
has been completed and the required remediation projects are
well advanced. This work has already resulted in significant
strengthening of the Group’s internal control systems; the key#p#分頁標題#e#
controls necessary in each of the business’ core processes have
been identified and tested. The Audit Committee considers
significant control matters raised by management and both the
internal and external auditors and reports its findings to the
Board.
The directors have reviewed the effectiveness of the Company’s
internal control system considering the processes set out above
and make this statement pursuant to the revised guidance for
directors issued in October, 2005.
Political donations
At the annual general meeting in 2002, shareholders passed a
resolution to approve donations to EU political organisations and
EU political expenditure (as such terms are defined in section
347A of the Companies Act, 1985 (as amended)) not exceeding
£250,000 per annum for four years. The Board has repeatedly
stressed that it does not make donations to political parties in the
ordinary meaning of those words and that it has no intention of
British Airways 05/06 Annual Report 9
The Company is one of the world's leading scheduled
international passenger airlines. The Group's principal place of
business is London, one of the world's premier airport locations,
which serves a large geographical area and a comparatively high
proportion of point-to-point business. The Group also operates a
worldwide air cargo business in conjunction with its scheduled
passenger services. The Group currently operates one of the
world's most extensive international scheduled airline route
networks, comprising 148 destinations in 75 countries at March
31, 2006. In the financial year 2006, the Group carried more
than 35 million passengers on its services.
The Group’s airline network generates economic value by
meeting the demand for business and leisure travel. The Group
provides vital arteries for trade and investment, as well as leisure
travel opportunities for individuals and families. In 2005/06, the
Company earned over £8.5 billion in revenue, 9.6 per cent up on
the previous year. 80 per cent of this revenue was generated
from passenger traffic, 6 per cent from cargo and 14 per cent
from other activities (including fuel surcharges). 795,000 tonnes
of cargo was carried to destinations in Europe, the Americas and
throughout the world. At the end of March, 2006, we had 284
aircraft in service, compared to 290 in March, 2005. The
Company aims to manage its business responsibly. Our key
responsibility to our shareholders is to ensure that we generate a
sustainable return on the capital employed in our business and
can invest for future growth. The Company has set a target of a
ten per cent operating margin to ensure an adequate financial
return and continues to make progress towards this goal. The
Company also has responsibilities to other stakeholders – our#p#分頁標題#e#
employees, our customers, the communities affected by our
operations as well as having regard to the impact our business
has on the environment.
doing so. Shareholders are being asked to pass a further
resolution at the annual general meeting to be held on July 18,
2006 to extend this approval on a precautionary basis at the rate
of £100,000 per annum for a further four years. The amount
expended in the period from April 1, 2005 to March 31, 2006
was £ nil (2005: £10,000).
Going concern
After making enquiries, the directors consider that the Company
has adequate resources to continue operating for the foreseeable
future. For this reason, the going concern basis has been adopted
in preparing the accounts.
COMPANY INFORMATION
The Company was incorporated in 1983 with Registered Number
1777777. It is domiciled in England and has its registered offices
at Waterside, PO Box 365, Harmondsworth UB7 0GB, England,
Telephone: +44 (0) 870 850 9 850. It is a public limited company
organised and operating under the laws of England and Wales. Its
agent in the US is Paul C. Jasinski, 75-80 Astoria Boulevard,
Jackson Heights, NY 11370.
Overview of the business
Principal activities
The main activities of the Company and its subsidiaries are the
operation of international and domestic scheduled and charter air
services for the carriage of passengers, freight and mail and the
provision of ancillary services.
British Airways and Global Traffic Trends
Revenue Passenger Kilometres: % change on year earlier
-15
-10
-5
0
5
10
15
2000 2001 2002 2003 2004 2005
Global Air Transport British Airways
Source: ICAO and IATA,
world scheduled airline
10 British Airways 05/06 Annual Report
In terms of the industry in which the Company operates the
International Air Transport Association (IATA) estimated that the
airline industry during calendar year 2005 lost approximately
£5.5 billion in aggregate.
Despite modest capacity growth, the Group’s passenger traffic
volumes (RPK’s) rose by 3.7 per cent in 2005/06 as a whole,
resulting in a 0.8 point rise in passenger seat factor to 75.6 per
cent on capacity 2.6 per cent higher in ASKs. Cargo volumes for
the full year were down 0.4 per cent compared with 2004/05.
Passenger yields, excluding fuel surcharge, were up 1.3 per cent.
Overall load factors were unchanged from the prior year.
However, even after four years of growth, the Company’s traffic
remains well below its level in 2000/01. Along with other
airlines, the Company has had to battle against stiff cost
headwinds. Fuel costs at £1.6 billion were 45 per cent more than
in 2004/05. Employee costs rose by five per cent to £2.3 billion.#p#分頁標題#e#
The airline’s profitability improved again in 2005/06. The
operating margin (operating profit as a percentage of revenue)
rose to 8.3 per cent, up from 7.2 per cent in 2004/05.
Objectives
Building a sustainable business remains key for the Company. In
2005/06 the Company made further progress towards financial
sustainability, by increasing its operating profit margin to 8.3 per
cent. A ten per cent operating margin remains the financial
target. However, the Company will only achieve and sustain this
if it can work successfully in partnership with all its key
stakeholders and effectively manage the risks associated with the
business.
In conjunction with its employee engagement programme, the
Company developed the ’BA Way’ success formula supported by
values and goals. The success formula recognised that the
Company is a British network airline which provides “service that
matters to people who value how they fly” based on five essential
ingredients: (i) the best UK based network, (ii) understanding our
customers better than competitors, (iii) a powerful brand that
people know and trust, (iv) a competitive cost base and (v)
working together as one team.
A key principle underpinning the ’BA Way’ is the active
engagement and support of all our stakeholders – investors,
employees, customers and the communities in which we operate.
The ’BA Way’ which has been widely communicated across the
Company is under review and will be refined to reflect the
changed priorities in line with the business plan 2006/08.
Strategic developments and investments
Background
To mitigate the effects of the economic downturn prior to the
events of September 11, 2001, the Group adopted a strategy of
tight capacity management and cost control. After the events of
September 11, 2001, as it became apparent that more drastic
action was necessary, the Group undertook a comprehensive
review of its cost structures, network operation, fleet
complement and business strategies. In February, 2002, the
results of this review were announced as part of a major package
of measures designed to return the Group to profitability. This
programme, known as Future Size and Shape (‘FSAS’), signalled a
significant change in the size of the Company which took further
steps to restructure its cost base over the two years to March 31,
2004. The FSAS programme set out to simplify the business, to
drive cost reduction (particularly manpower), to restructure the
European shorthaul business to provide a competitive response
to the no frills carriers, to endorse and accelerate the Group’s
existing fleet and network strategy unveiled in 1999 and to
accelerate the strategy to ‘de-hub’ operations at Gatwick.#p#分頁標題#e#
Recent business plans
Given the challenging trading environment that the airline
industry continues to face, the focus on controlling costs has not
ended with the completion of FSAS. In conjunction with its
annual business plan process, the Company has announced
further cost saving programmes. The first measure, £450 million
by March, 2005, focused on reducing external spend and further
simplification, in particular giving customers and staff more
online access to systems and procedures. This programme was
completed on schedule. The second programme from March,
2005 to March, 2007 placed continued emphasis on reducing
the Company’s cost base and achieving a ten per cent operating
margin. It established the ‘Fit for Five’ programme to ensure that
staff were ready for the move to Terminal 5 and made a targeted
investment in products and training for employees. Plans to
remove £300 million of employee costs across the business by
March, 2006 were deferred to March, 2007.
Business plan 2006/08
The business plan for the two-year period ending in March, 2008
identifies four priority areas. The first is building a competitive
cost base with a target to make savings of £450 million over two
years and achieve a ten per cent operating margin. Secondly,
there will be a renewed emphasis on customer service through
significant key areas including ba.com and the airline’s longhaul
premium classes. Thirdly, the focus on being ‘Fit for Five’
continues as this business plan takes the airline right up to the
opening day of Terminal 5. The final priority area is ‘Fit for
Growth’ which highlights that the airline needs to consider future
fleet investment but must address its cost base and, in particular,
its NAPS pension fund deficit before it can take delivery of new
longhaul aircraft.
Restructuring of the shorthaul business
Significant changes have been made to the shorthaul business.
These included changes to the shorthaul pricing structure,
offering passengers lower fares and greater flexibility, which were
rolled out from May, 2002. This drive continues with the recent
introduction of cheaper one-way fares and the ability to change
bookings for a fee of £30 (€50) up to the last day prior to travel.
As part of the drive to reduce global distribution costs, incentive
payments to travel agents in the UK for shorthaul bookings have
been reduced and the Company’s lowest fares are available on its
website. The website, www.ba.com, was significantly changed and
usage has increased considerably.
Fleet and network strategy
The fleet and network strategy aims to match capacity more
closely to demand, simplify the fleet and reduce exposure to
unprofitable markets whilst selectively growing capacity in#p#分頁標題#e#
profitable markets. Through increased aircraft utilisation and
network restructuring fleet numbers have steadily decreased. This
process is nearing completion and in the financial year 2006 the
number of aircraft in service was reduced by six to 284.
In shorthaul, one Airbus A321 aircraft was delivered during the
year. One Airbus A320 aircraft and one Boeing 737-400 aircraft
returned to service from sublease. Six Avro RJ100s were
British Airways 05/06 Annual Report 11
subleased to Swiss International Air Lines and one de Havilland
Canada DHC-8 turboprop and one Boeing 737-500 aircraft were
returned to lessors. One British Aerospace 146 was sold.
Future fleet commitments
During the financial year 2006, the Company made further
changes through revised delivery dates to future fleet
commitments, to facilitate its continuing strategy to match
capacity more closely to profitable demand and in response to
changes in market conditions and operational requirements.
The Company is to replace ten shorthaul Airbus A320 aircraft
that are leaving the fleet with ten new aircraft from the Airbus
A320 family. The new aircraft will be seven A320s and three
A321s and they will be delivered between September, 2007 and
October, 2008.
Firm orders were placed for six of the aircraft in 1998 and four
aircraft options are being converted into firm orders.
The ten A320s leaving the fleet were inherited following the
merger with British Caledonian and will be, on average, 19 years
old when they leave the fleet by December, 2008.
The Company also has 32 option positions/purchase rights on
the Airbus family aircraft.
Currently the Group has no further orders for wide-bodied
aircraft. On March 9, 2006 the Company announced that it has
reserved space in the Boeing production line at the end of this
decade for ten Boeing 777 aircraft but has not made a firm
commitment to purchase the aircraft. It is reallocating some of
the money used to secure Boeing 777 aircraft options in the late
1990s to create the delivery positions. There is a high demand
Number in service with Group companies at March 31, 2006
On balance Total Changes 2005/06 Average Average
sheet March since March Future revenue hours per age
aircraft Extendible Other 2006 2005 deliveries Options hours flown aircraft/day (years)
Airline operations (Note 1) (Note 7) (Note 8)
Boeing 747-400 57 57 275,548 13.25 11.8
Boeing 777 40 3 43 211,494 13.47 7.3
Boeing 767-300 21 21 71,664 9.39 13.1
Boeing 757-200 13 13 33,363 7.03 11.5
Airbus A319 (Note 2) 21 10 2 33 32 106,809 8.87 5.4
Airbus A320 (Note 3) 9 2 16 27 1 7 79,340 8.24 8.7
Airbus A321 7 7 1 3 20,238 8.33 1.4
Boeing 737-300 5 5 16,929 9.28 16.7
Boeing 737-400 (Note 4) 19 19 1 60,433 9.00 13.6
Boeing 737-500 9 9 (1) 28,157 8.39 13.5#p#分頁標題#e#
Turboprops (Note 5) 8 8 (1) 18,777 5.99 8.6
Embraer RJ145 16 3 9 28 78,341 7.67 6.1
Avro RJ100 (Note 6) 10 10 (6) 34,669 6.38 10.5
British Aerospace 146 4 4 (1) 10,019 6.41 15.1
Hired aircraft 21,087
Group Total 207 25 52 284 (6) 10 32 1,066,868 10.14 9.5
Notes:
(1) Includes those operated by British Airways Plc and BA Connect.
(2) Certain future deliveries and options include reserved delivery positions, and may be taken as any A320 family aircraft.
(3) Includes one Airbus A320 aircraft returned to service from sub-lease to GB Airways.
(4) Includes one Boeing 737-400 aircraft returned to service from sub-lease to Air One.
(5) Comprises eight de Havilland Canada DHC-8s. Excludes five British Aerospace ATPs stood down pending return to lessor, and 12 Jetstream 41s subleased
to Eastern Airways.
(6) Excludes six Avro RJ100s sub-leased to Swiss International Air Lines.
(7) Future deliveries have increased by four to ten to replace ten A320 aircraft due to leave the fleet from 2007.
(8) Excludes secured delivery positions on ten Boeing 777 aircraft.
AIRCRAFT FLEET
Operating Leases
Off balance sheet
12 British Airways 05/06 Annual Report
for new aircraft so the Company is safeguarding delivery
positions in the Boeing production line in case it wishes to place
future orders with the manufacturer. The Company is keen to see
competition between Airbus and Boeing when it renews its
longhaul fleet though there will be no longhaul aircraft joining
the fleet until after its move to Terminal 5 in 2008.
Gatwick Operations
In December, 2000 our plan to ‘de-hub’ Gatwick was announced.
As a result of the changes and simplification introduced, the
capacity flown from Gatwick has more than halved since 1999.
The Company now operates a fleet of 43 aircraft from Gatwick
compared to 68 in 1999.
This year the airline announced plans to make its loss-making
shorthaul operation at Gatwick profitable. A range of initiatives
was introduced at Gatwick to grow revenue and reduce costs.
These include a mixture of sales and marketing activities and a
cost reduction programme.
BA Connect
The Company’s wholly owned subsidiary, British Airways
CitiExpress, was renamed BA Connect on February 1, 2006. The
name change reflects a significant shift in the airline’s business
model, designed to improve profitability and compete more
aggressively in the UK Regions.
BA Connect offers a single class cabin on all aircraft, high quality
buy-on-board hot and cold catering, year round changeable oneway
fares from as little as £25, and a new offering for business
and frequent flyers called BA Connect Plus.
BA Connect’s operating fleet now numbers 50 (2005: 58).
Qantas
The relationship with Qantas is the Company’s longest standing#p#分頁標題#e#
and deepest alliance relationship. Under the Joint Services
Agreement (JSA) there is full strategic, tactical and operational
co-operation on all of British Airways’ and Qantas’ flights that
serve markets between the United Kingdom/Continental Europe
and Southeast Asia/Australia. This co-operation provides
customers with improved flight departure times, routings and
value for money, offering the very best of customer service to all
passengers. In June, 2005, the Australian Competition and
Consumer Commission extended permission for both carriers to
co-operate in this way for a further five years, valid from
February, 2005.
The Company and Qantas continue to co-ordinate sales and
marketing activities worldwide and to share all costs and
revenues on the JSA routes, giving both companies an incentive
to improve the joint business.
American Airlines
The Company and American Airlines continue to codeshare on
points behind and beyond the US and London gateways. The
Company now places its code on more than 120 American
routes, whilst American Airlines applies its code to more than 80
of the Company’s routes.
Iberia
In December, 2004, the Company and Iberia signed a Joint
Business Agreement ('JBA') to establish profit-sharing on two
routes, Heathrow-Madrid and Heathrow-Barcelona. This was
accompanied by joint selling and the co-ordination of schedules
on these routes from Summer 2005.
The Company and Iberia codeshare on more than 65 domestic
and international routings. As well as all UK-Spain routes, this
includes Iberia codesharing on services operated by the
Company’s franchise carriers GB Airways and Comair, and British
Airways codesharing on services operated by Iberia’s franchise
Air Nostrum. Together the airlines carried over 580,000
codeshare passengers during the calendar year 2005.
As at March 31, 2006 a 90 per cent owned subsidiary of the
Company held a ten per cent stake in Iberia. (2005: ten per cent.
Last year the Company reported only the net position, a nine per
cent holding. This presentation has been changed since the
introduction of IFRS.) Iberia's profit before tax for the 12 months
to December 31, 2005 (included in the financial year 2006
result) was €394 million compared to profit before tax in the
previous financial year of €247 million (restated under IFRS).
Alliance benefits/relationships
The oneworld alliance includes eight airline members: British
Airways, Aer Lingus, American Airlines, Cathay Pacific, Finnair,
Iberia, LanChile and Qantas. Co-operation across the alliance in
a number of areas benefits the customer and increases the
airlines’ effectiveness. oneworld offers a substantial package of
customer benefits, including reciprocal reward and recognition#p#分頁標題#e#
programmes, common lounge access, smoother transfers,
increased customer support and greater value.
During the year Royal Jordanian, JAL and Malev announced their
intention to seek membership of oneworld.
In addition to the above mentioned activities, the Company
maintained alliance relationships with Cathay Pacific, LanChile,
Aer Lingus, Finnair, JAL and SN Brussels Airlines. There were no
events of note during the year with these relationships.
The codeshare relationships with Swiss International and America
West were terminated during the year. Both carriers announced
that they were joining the Star Alliance.
Operations
Operational Centres
Heathrow is the Company's principal base, and the Company
carries an estimated 39.7 per cent of the airport's passengers. In
addition, the Company has a second base of operations at Gatwick.
The construction of a fifth passenger terminal, ‘Terminal 5’, at
Heathrow is progressing and the Company expects to consolidate
the majority of its operations into Terminal 5. UK airport policy is
discussed on page 17 Regulation — UK and International Airport
Policy.
Offices, maintenance hangars and other support facilities used by
the Company at Heathrow, Gatwick and other UK airports are
either owned freehold or held under long-term leases from the
respective airport owners, principally BAA plc or its subsidiaries.
In addition, the Company occupies space and desks under lease
or license in airports throughout the UK including (but not
limited to) Manchester, Birmingham, Newcastle, Edinburgh and
Glasgow.
The Company's most important overseas base is at New York's
John F. Kennedy International Airport (‘JFK’), where it leases its
British Airways 05/06 Annual Report 13
terminal building. At other overseas airports, the Company
generally obtains premises as required on a short-term basis from
the relevant authorities.
Details of the Company’s principal non-aircraft properties are
given on page 20 in Property, Plant and Equipment.
Operational Services
In the UK, the Company provides most of the operational
services it requires for the handling of passengers and cargo. At
overseas airports, the Company subcontracts the provision of the
majority of its ground handling requirements.
Runway, ramp and terminal facilities are provided by airport
operators that charge airlines for the use of these facilities,
principally through landing, parking and passenger charges.
Navigation services are provided to aircraft by countries through
whose airspace they fly or by international bodies such as
Eurocontrol. Navigation charges are generally based on distance
flown and weight of aircraft.
The Company’s ability to obtain slots at airports for the purpose#p#分頁標題#e#
of producing schedules attractive to passengers is very important.
Allocation of slots at a significant number of airports where the
Company operates, including Heathrow and Gatwick, is decided
by the Airport Co-ordinator, who acts in accordance with
guidelines laid down by IATA, sometimes supported by the local
Scheduling Committee or Co-ordination Committee. These
committees include representatives from the carriers flying to the
relevant airport who may mediate disputes over slots. The
Airport Co-ordinator makes the initial slot allocations within
IATA guidelines, which give priority to the historic rights of
existing users. Pursuant to Council Regulation (EC) No.
793/2004, which is implemented in accordance with UK
regulations, the UK Government must ensure the Airport
Co-ordinator advises the Company at the biannual IATA
Schedule Co-ordination Conference of its slot allocations. These
provide the basis for slot negotiations with the Airport
Co-ordinator and other airlines. Most congested airports in the
world apply IATA guidelines. Co-ordination of European airports
is governed by the Council Regulation. Pursuant to the Council
Regulation, the UK Government must ensure that the Airport
Co-ordinator acts independently and in a non-discriminatory
manner. Regulations governing the allocation of slots in the US
are different, but the US has stated that it is committed by its
international obligations to treat all carriers in a nondiscriminatory
manner.
Sales
The Company develops and maintains relationships with key
customer groups and intermediaries using account management
teams around the world. This includes large corporations, small
and medium sized enterprises (SMEs), governments and
individual customers. Product information, fares and schedules
are distributed to these customer groups either through travel
agents, both business and leisure, using global distribution
systems (GDS) or direct through the contactBA call centres and
increasingly through the website www.ba.com. The Company
accepts payment through multiple mechanisms but credit card
payments, either lodged or individual, are a significant proportion
of the total. The growth of online penetration throughout the
world provides a good opportunity for us to grow ba.com sales,
improving knowledge of our customers by giving us a direct
relationship with more of them, increasing ancillary sales and
ensuring better compliance to airport processes.
Marketing and Distribution
Executive Club
The Executive Club is the Company’s worldwide customer loyalty
programme designed to attract, grow and retain valuable flyers.
The Executive Club provides members with recognition for their
loyalty in the form of additional service benefits and mileage#p#分頁標題#e#
rewards.
Longhaul Products
To meet the needs of the longhaul customers, the Company has a
range of four cabins: World Traveller, the main cabin, World
Traveller Plus, which offers more space and legroom for economy
customers, Club World, and First.
During the financial year 2006, the embodiment of the Club
World flat bed product and World Traveller Plus cabin was
completed, meaning these are now available on all longhaul
services operated by British Airways. In Club World, softer seats
were introduced and the Club World Sleeper Service was
extended to include flights from Washington Dulles airport
throughout the year.
To further improve our customers' experience over the course of
the last year, noise cancelling headsets were introduced in First
and a refurbished check-in facility opened at Heathrow's Terminal
4. A Molton Brown Spa was also opened at New York's JFK
airport for the use of our First and Club World customers.
To support the increase in services to India, the Company
introduced a series of enhancements to the customer experience
on the ground and in the air in these markets.
During the financial year 2006, British Airways announced its
intention to launch an all new Club World product, an upgraded
entertainment system in all longhaul cabins and upgrades to its
First product.
Shorthaul Products
On shorthaul services the Company provides a choice of two
cabins: Club Europe, its business class cabin and Euro Traveller,
its economy cabin. On UK domestic and BA Connect services
only a single cabin is available.
During the financial year 2006, shorthaul customers benefited
from the continued development of ba.com. This included the
extension of online check-in across the majority of shorthaul
routes.
As discussed in more detail on page 12, in January, 2006, the
Company announced a change to the name and business model
for its British Airways CitiExpress subsidiary. The business was
re-branded BA Connect and moved to a single cabin with lower
prices and buy-on-board catering to improve its offering in UK
regions with effect from March 26, 2006.
Franchising
As at March 31, 2006, the Company had five franchise partner
airlines: Loganair, GB Airways, BMED, Sun Air of Scandinavia
and Comair of South Africa.
These five carriers carried approximately 4.69 million passengers
during the financial year to 85 destinations (66 destinations in
addition to the mainline network) in the UK, continental Europe,
the Middle East and Africa, using BA flight numbers. In addition
to providing connecting passengers to the Company’s mainline
14 British Airways 05/06 Annual Report
services, the franchisees pay a franchise fee and pay for any
services provided to them by the Company.#p#分頁標題#e#
Computer Systems
High performing IT and telecommunications systems are vital to
the running of the Group's business. Most areas of the
Company’s business are facilitated by IT systems, which are
closely interconnected.
Many of these systems have been developed, and most of them
integrated, by the Company’s Information Management (Im)
department. The majority of systems are operated within the
Company’s two data centre facilities at Heathrow. Major
exceptions to this are Reservations, Departure Control (checkin),
Inventory, Flight Planning and other transaction processing
facility (TPF) platform systems, which are operated by Amadeus
SA in Germany.
The following major technical infrastructure elements are
provided to the Company by third party suppliers:
• The wide-area data network – provided by SITA and other
telecommunications suppliers
• The campus network in London – provided by Kingston
Communications (Hull) plc
• Desktop, provision and support – provided by Specialist
Computer Centres (SCC) in the UK and SITA for overseas.
A core element of the IT strategy has been to support
simplification of the airline’s business processes through effective
use of IT. The Company has achieved this by providing online
selling and check-in, the ability to upgrade and manage booking
facilities online. The aim is to make the Company so easy to do
business with that customers choose to serve themselves. The
Company also applies the same principles internally for its
employees through its Employee Self Service (ESS) programme.
For instance, the ‘Manage My Booking’ feature on ba.com gives
our customers the ability to be more prepared for their journey
before arriving at the airport. They can complete their APIS
(Advanced Passenger Information Service) data in advance,
check-in online and print their boarding pass, exercise upgrade
options and know their baggage allowance.
Another important element is the use of e-ticket and the
introduction of self-service kiosks at key airports around the
world. The airline has now installed around 235 kiosks in airports
such as Heathrow, New York JFK and Charles De Gaulle. The use
of e-tickets continues to grow. During the year ended March 31,
2006, 87 per cent of all passenger journeys ticketed by the
Company worldwide were issued on e-tickets (2005: 77 per
cent).
The delivery of the Sabre Airflite solution has provided improved
capability to manage the airline’s flight schedules and has enabled
the retirement of legacy technology. In addition, the delivery of
Next Generation Revenue Management (NGRM) for BA World
Cargo has provided increased capability to make the best use of
cargo capacity.#p#分頁標題#e#
Cargo
The Company’s cargo business is operated as a contribution
centre. The majority of its cargo is carried in the holds of
passenger aircraft, the balance on leased or part-chartered
freighter aircraft where market conditions allow their deployment.
This allows the Group to maximise the use of its scheduled route
network to provide a worldwide cargo service. The Group utilises
trucks to feed cargo to its major hubs in Europe and the United
States.
Seasonal Variations
Traditionally, the Group earns most of its operating profit
between April and October each year, as demand is higher
during this period, whilst the majority of the Group's costs are
incurred more evenly throughout the year. Accordingly, as a
result of seasonality of demand, operating results have and are
expected to vary significantly from period to period within the
financial year. Various other factors, including those set forth in
this report, can also cause operating results to vary significantly
from period to period and year to year. These variations in results
and other factors may cause the price of the Company's securities
to fluctuate significantly.
Regulation
The international airline industry is subject to a high degree of
global, European and UK government regulation covering most
aspects of airlines' operations. This framework governs
commercial activity (for example route flying rights, fare setting
and access to airport slots) as well as operational standards
(relating to areas such as safety, security, aircraft noise,
immigration and passenger rights). British airlines are also
affected by wider EU and UK policies, laws and regulation,
particularly in relation to competition, airports and air traffic
control.
The UK civil aviation industry is regulated by the Secretary of
State for Transport and the CAA, an independent statutory body.
Under the UK Civil Aviation Act 1982 and various statutory
instruments, the CAA has a wide range of functions in relation to
British airlines, including supervision of many aspects of their
financial condition, management and operations. European
airlines are also subject to a number of EU regulations, drawn up
under the provisions of the European Treaty (chiefly Article 71).
Responsibility for enforcement is shared between the European
Commission and the relevant Member States.
The present basis for international regulation of airline operations
derives from the Chicago Convention of 1944, to which nearly all
countries are parties. The Convention also established the
International Civil Aviation Organization (ICAO), a specialised
agency of the United Nations, to foster the planning and
development of international air transport. Under the auspices of
ICAO, rules establishing minimum operational standards are#p#分頁標題#e#
normally agreed on a multilateral basis. Airlines' rights to fly over,
or make stops in, foreign countries for technical reasons in
operating their international scheduled services are generally
derived from the International Air Services Transit Agreement of
1944, to which most countries are parties. However, rights to
carry traffic between countries and the regulation of fares are
normally agreed on a bilateral basis between governments. A
notable exception is the multilateral single market arrangements
which apply within the EU.
British Airways 05/06 Annual Report 15
Route flying rights
The Company’s traffic rights to carry scheduled passengers and
cargo on particular international routes outside Europe generally
derive from air services agreements between the UK Government
and the governments of foreign states concerned. Under these
agreements, each government grants to the other the right to
designate an airline or airlines of its state to operate scheduled
services between specified points in their respective countries,
and sometimes to or from points in third countries, although this
also requires the agreement of the third country's government.
In order to comply with EU law, all new or revised bilateral
agreements should now contain a Community designation clause
in place of the nationality clause (which requires that designated
airlines are substantially owned and effectively controlled by the
government or its nationals). This will allow any EU airline, not
just those with the nationality of the EU state, to apply for
available traffic rights on a non-discriminatory basis. Currently,
most UK agreements still reserve traffic rights to UK airlines, but
this is changing as the agreements are renegotiated and updated.
Once an agreement has been reached, it is for the UK
government to designate the airline or airlines which will operate
the agreed services. As well as being designated, the Group must
obtain the necessary operating permits from the foreign
Governments concerned. These are unlikely to be withheld so
long as the Group meets the required international safety
standards. One ground on which a contracting government
usually has the right to prevent the Group from operating the
agreed services is if it is not satisfied that the Group is
substantially owned and effectively controlled by the other
government or its nationals (or by EU citizens if there is a
Community clause). For this reason, the Company’s
Memorandum and Articles of Association (the ‘Articles’) contain
provisions that could be used to limit the rights of non-UK and
non-European nationals who own shares in the Company.
In 2003 the EU Council granted two mandates to the European
Commission, one to negotiate an Open Aviation Area with the#p#分頁標題#e#
US on behalf of all EU Member States, and the other to amend
existing bilaterals between Member States and third countries to
bring them into compliance with EU law. A general framework
was developed covering all other third country relationships and
the processes whereby Member States may continue to negotiate
bilaterally whilst remaining within EU law as clarified by the
judgement of the European Court of Justice of November, 2002.
This judgement made it clear that Member States could no
longer negotiate bilaterally with third countries on any subject
which is covered by EU law. These subjects include ownership
and control of airlines, pricing on intra-community routes and
rules concerning computer reservation systems.
The European Commission began active negotiations with the US
government in September, 2003 to agree the terms of a new
multilateral agreement covering air services between the EU and
the US. A text for the first stage of a new agreement was
finalised in November, 2005 which removed all restrictions on
transatlantic flights by EU and US airlines, and granted rights for
EU airlines to carry passengers and freight from the US to third
countries on services that originate in the EU, and reciprocally
for US airlines to carry passengers and freight from EU countries
to third countries (both within and beyond the EU) on services
that originate in the US.
To address a perceived imbalance in the text, the EU has asked
the US to remove restrictions on the foreign ownership and
control of US airlines. In November, 2005 the US published a
Notice of Proposed Rulemaking which purports to allow foreign
investors to exercise greater control of US airlines than the
current interpretation of legislation allows. When it is issued in its
final form the European Commission will assess whether it is
effective in removing ownership and control restrictions so as to
balance the bilateral text and if so will recommend ratification by
the EU Council.
In the EU, there is a single internal market for air transportation.
The most significant elements of the single market legislation are
a liberal pricing regime, free access to all routes within the EU for
airlines and a carrier licensing procedure. Certain constraints
continue to apply for infrastructure reasons. Under a separate
agreement, EU single market policies have been extended to the
European Economic Area (‘EEA’) comprising all the countries of
the EU and the countries of the European Free Trade Area
except Switzerland. Agreement has been reached between
Switzerland and the EU, which has the effect of bringing
Switzerland into the same arrangements.
Under the UK Civil Aviation Act 1982, the CAA must balance a
number of objectives in making air transport or route licensing#p#分頁標題#e#
decisions where applications to operate a particular route are
contested. These include encouraging British airlines to provide
air services at the lowest fares consistent with safety; an
economic return to efficient operators and the sound
development of the UK air transport industry; furthering the
reasonable interests of users; ensuring that British airlines
compete as effectively as possible with other airlines on
international routes; and securing the most effective use of UK
airports.
The CAA will grant global route licenses for scheduled and
charter air services. The absence of the necessary bilateral rights
will not result in refusal to grant a licence application. If scarce
bilateral capacity arises, this will be addressed through a process
designed to deal with such a situation.
In its June, 2002 policy review, the CAA said that the interests of
users will be best served if airlines are free to operate air services
in competition with one another according to their commercial
judgements, subject only to the application of normal
competition policy.
Specific route licences are no longer required with respect to
routes to, from and within the EU.
Charter operations are not generally covered by air services
agreements. The CAA adopts a broadly liberal policy towards
applications from British airlines for charter flying rights. It is
then for the airline to seek the consent of the other government.
Within the EEA no distinction is drawn between charter and
scheduled operations.
Government/regulatory issues
Fare Setting
It is a provision of some bilateral air services agreements that the
fares, rates and charges for scheduled services on the agreed
routes must be filed with, and approved by, both governments
concerned or their agencies. These requirements are increasingly
being relaxed in accordance with UK Government policy. It is a
condition of the air transport and route licenses granted to
British airlines by the CAA that the tariffs to be charged for
international carriage and the commissions to be paid by the
airline to any agent shall be filed with and approved by the CAA.
16 British Airways 05/06 Annual Report
In practice, the CAA only regulates a limited number of fares and
does not require commissions to be filed. Under some air
services agreements, airlines are required to co-ordinate fares
through IATA, (whose role in setting fares is described under
Competition below), though this is now rare. Pricing on intra-
Community air routes is covered by EU Regulation.
Notwithstanding this regulatory position, it is a widespread
英國dissertation網practice among airlines to sell a substantial proportion of their
seats and cargo space in many parts of the world at tariffs lower#p#分頁標題#e#
than the approved levels or on other unapproved special terms,
the Company is no exception. See Competition opposite. The
Group responds competitively to market conditions and a large
proportion of its revenue is derived from such sales.
Safety
Safety standards are generally agreed on a multilateral basis under
the auspices of ICAO. The country of registration of an aircraft is
generally responsible for ensuring that the aircraft and its crew
meet these guidelines, leading to variations and differences on
specific requirements between States. European countries first
attempted to harmonise their safety requirements through the
Joint Aviation Authorities (JAA) and non-binding Joint Aviation
Requirements. Certification of compliance by the state of registry
is normally recognised by all other members of ICAO.
In September, 2003, airworthiness and maintenance standards,
based largely on ICAO and JAA standards, were adopted into
EU law and a new independent European Aviation Safety
Agency was set up to advise the Commission and Member
States on safety matters. The new safety framework is
consistent with ICAO requirements. Member States are still
responsible for supervision and compliance but they can no
longer unilaterally vary standards in these areas except to
respond to an immediate safety problem or to facilitate a short
term operational need provided that safety is not compromised.
Other areas of aviation safety, starting with operations and
licensing, are expected to come under the new EU framework
within the next few years.
British airlines are still required, except in limited circumstances,
to operate British registered aircraft. All British airlines are
required to hold a UK Air Operator's Certificate (AOC) issued by
the UK CAA acting as a member of the JAA. The AOC confirms
the competence of the holder to operate and maintain its aircraft
safely. Each aircraft operated under an AOC may only be flown if
it has a certificate of airworthiness confirming compliance with
the EU regulations. All flight crew and certain maintenance staff
must be licensed.
To continue to improve high safety standards is a primary
objective of the Group. All departments, especially engineering,
flight operations and ground operations, pay continual attention
to operational safety and the health and safety of employees.
Specific responsibility for advising on safety matters rests with a
separate department under the Director of Safety and Security. A
formal safety management system is in place, and a
comprehensive monitoring system exists within the Company to
ensure that incidents are reported and action is taken whenever
appropriate.
Security
In the UK, the Secretary of State for Transport has the power to#p#分頁標題#e#
direct the aviation industry to take measures to prevent acts of
criminal violence. The measures so directed often exceed both
the international standards developed by ICAO and the
regulations adopted in the EU following September 11, 2001
which set minimum required standards across the EU for the first
time. Responsibility for implementing the measures and meeting
their costs falls on both airlines and airport authorities. A number
of foreign countries have also developed aviation security
programmes which place an onus on the Company to meet
specified security standards. The Company’s own security
department continuously assesses the threat to its operations,
develops policies for the protection of the Company’s operations
and assets, and directs its staff or agents to implement
appropriate countermeasures while monitoring their
effectiveness. There are also circumstances in which governments
may seek to prevent airlines from flying to or from various
destinations or otherwise hinder their operation. Similarly
changes in customs, immigration or other regulation may have
the same effect.
Widespread passenger disclosure requirements are being
introduced by various governments as a means of helping to
control terrorism and illegal immigration. This creates conflicts
with EU data protection laws designed to protect personal
privacy. The Company has introduced passenger disclosure
arrangements as required by the US and Canada. These have
been approved by the European Commission and the Council,
but the arrangements are still likely to be challenged in the
European Court of Justice. EU airlines have asked their
governments and the Commission to ensure that security
arrangements avoid the industry being caught between conflicting
legal requirements in different jurisdictions.
Passenger rights
The Montreal Convention applies to EU registered airlines by
virtue of a EU regulation. This governs the maximum
compensation to be paid for loss, delay or damage to baggage
and also governs liability to passengers in the event of an
accident. Airlines are required to carry sufficient insurance to
cover their liability.
New EU denied boarding compensation rules came into force in
February, 2005, extending compensation to cancelled flights and
imposing passenger care requirements for long delays and
cancelled flights. The European Court of Justice has declared the
rules compatible with EU law.
Domestic US disabled passenger legislation has been extended to
foreign airlines. The EU passed legislation setting out rules for
treatment of disabled passengers which is expected to be
published in the Official Journal in Spring 2006, and come into
force 12 months later. There are conflicts between the EU and#p#分頁標題#e#
US rules.
Environmental regulation
The Company's environmental management system commits the
Group to working constructively with those concerned for the
environment and to observing rules and regulations aimed at
protection of the environment. The Group's activities are covered
by a comprehensive network of regulations at local, national and
international levels, affecting emissions to the local and global
atmosphere, disposal of solid waste and aqueous effluents, noise
and other relevant parameters. The Group’s strategy takes
compliance as the baseline of environmental performance and
aims to exceed standards and regulations in a number of key areas.
British Airways 05/06 Annual Report 17
The Group’s aircraft fleet meets existing internationally agreed
noise standards and we are subject to departure noise and night
flight restrictions at many airports worldwide. Major changes to
current noise management systems are subject to the
requirements of the ‘Balanced Approach’ established by ICAO,
designed to ensure that noise restrictions are balanced and well
targeted. At the Company’s main bases at Heathrow and
Gatwick, the current night noise restrictions expire at the end of
the Summer 2006 season, and a new regime – which is subject to
consultation - is expected to operate from Winter 2006 to 2010.
As with the current regime, this is likely to impose significant
operating restrictions between the hours of 23:00 and 07:00.
The Company is proactively involved in a number of areas aimed
at mitigating the impact of aircraft noise, including voluntary
measures to reduce noise on approach to airports.
The Group is playing an active role in promoting understanding
of, and minimising the effects of, aircraft emissions to the
atmosphere. This has included the sharing of ‘best practice’ to
minimise fuel use and emissions, and championing emissions
trading as the best possible way to mitigate emissions of
greenhouse gases. The Company is a member of the UK
emissions trading scheme and supports the inclusion of aviation
in the EU scheme. The Company is also involved in discussions
within ICAO to establish guidelines for international emissions
trading within aviation.
Aircraft engines are also regulated for low altitude emissions, and
areas around many airports have to meet stringent air quality
limits. The Company is actively involved with defining aircraft
emissions characteristics at ICAO, through the Government’s
Project for the Sustainable Development of Heathrow and
through its support for a number of additional research
programmes. The Group has also been one of the driving forces
behind the UK’s Sustainable Aviation initiative.
UK and International airport policy#p#分頁標題#e#
Responsibility for airport policy in the UK lies with the UK
Government and is defined in "The Future of Air Transport"
White Paper published in December, 2003. This paper
encouraged the sustainable development of commercial air
transport and supported the expansion of several UK airports
over a 30 year period. In South East England, new runway
developments were supported at both Stansted and Heathrow,
provided they met certain environmental requirements, chiefly
relating to noise and air quality limits and the provision of new
public transport links. These requirements are challenging and
may necessitate action by airlines to reduce noise and/or
emissions if Heathrow is to get a new runway by 2015, which is
likely to be the earliest date possible (subject also to securing
planning permission). The UK Government is also committed to
consult in 2006 on fuller use of Heathrow’s existing runways
which, if implemented, would over several years create the
opportunity to reduce delays and/or increase capacity by some
10-15 per cent. The costs of airport expansion must be paid for
by the users of each airport through user charges. It was agreed
that Stansted should continue to cater for its local market and
should not be developed as a second hub for London.
As discussed on page 13, obtaining slots is a necessary condition
for providing service to many airports. The availability of slots
generally is often beyond the control of a carrier and can be
subject to capacity limits, government regulation and market
conditions, including the actions of competitors. The Company
believes that it has sufficient slots to operate its existing routes
and generally has been able to obtain slots in connection with its
previous route changes and expansions. However, the Company
can provide no assurance that it will be able to obtain desired
slots in the future.
Slots at UK airports are allocated under EU rules. Technical
revisions came into effect in July, 2004 and more substantive
changes are still under consideration by the European
Commission. The Company is attempting to ensure that a market
oriented approach is maintained under any new rules, so that
essential flexibility and the possibility of exchanges between
carriers remains. Although the Commission is unsure that slot
exchanges in the UK are consistent with existing EU rules, the
UK Government has written to the Commission defending the
UK system and pointing to a ruling from the UK High Court that
declares the current UK slot exchange practice compatible with
EU law.
Competition
Most of the markets in which the Company operates are highly
competitive. The Company faces competition from other airlines
on the same city-pair routes, from indirect flights, from charter#p#分頁標題#e#
services and from other forms of transport. The intensity of the
competition varies from route to route, depending on the number
and nature of the competitors, particularly whether or not they
are state-owned or state-supported, and on the regulatory
environment and other factors. At one extreme, there are a few
international routes on which competition is limited to the other
state's designated airline and fares are regulated. At the other
extreme, there is a free market for internal flights within the
whole of Europe allowing any European airline to operate on any
route, setting whatever fares they wish, subject only to
infrastructure constraints and competition law.
On many of the routes with multiple carriers, the Company's
pricing decisions are affected by competition from other airlines,
some of which have cost structures that are lower than the
Company's or other competitive advantages and could therefore
operate at lower fare levels.
It has been UK Government policy since at least 1984 to
liberalise markets progressively and to encourage fair and equal
competition wherever possible. The presence of state aid, in all
its forms, and in several different markets, distorts competition
and is generally incompatible with policies and regulations
designed to open up markets.
The CAA from time to time issues statements of the policies it
intends to carry out in pursuit of its statutory licensing role. The
current statement came into force in June, 2002. This confirmed
that the CAA would give greater weight to the interests of users
in balancing the interests of the users on the one hand and the
airlines on the other. Additionally, the CAA considered that
competition, where possible, is the most effective way of ensuring
that passengers' interests are met. The new policy also removed
the requirement for air carriers to be licensed on individual
routes.
Tariff Co-ordination
The Company, along with many other airlines that participate in
the multi-lateral interline system administered by the IATA,
participates in IATA tariff conferences to agree multi-lateral
interline passenger tariffs for scheduled journeys and tariffs for
cargo interline services where it is lawful to do so.
18 British Airways 05/06 Annual Report
The European Commission announced in November, 2005 that it
intends to discontinue the exemption from the EU competition
rules of IATA passenger tariff conferences for routes within the
EU with effect from January 1, 2007, with a transitional period
until December 31, 2006 to permit IATA and tariff conference
member airlines to develop an alternative tariff-setting
mechanism for multi-lateral interline fares which is consistent
with EU Competition rules. The European Commission proposes#p#分頁標題#e#
to extend the exemption for passenger tariff co-ordination on
routes between the EU and non-EU countries until June 30, 2008.
Certain air services agreements require airlines to co-ordinate or
agree fares before approval by the governments concerned.
Where such co-ordination is a legal requirement, the Company
discusses fares bi-laterally with other airlines.
Commercial arrangements
The Company has commercial arrangements with other airlines
covering scheduled passenger and cargo services on a small
number of its international routes. Commercial arrangements can
govern, among other things, capacity offered by each airline over
flight approvals, the apportionment of revenues between airlines
and the co-ordination of schedules. In very few cases, some
commercial arrangements between the Company and other
airlines are required under the relevant air services agreements.
US
While the US domestic airline industry has been largely
deregulated, routes between the UK and the US are still subject
to regulation of market access, capacity and fares under an air
service agreement known as Bermuda 2. However, both
countries have adopted a relatively liberal approach to fare
approval and other regulatory matters. In addition, the Company
faces further competition from airlines operating other routes
between the US and continental Europe, including a number of
carriers operating on these routes with antitrust immunity. The
Company has responded with both price and service initiatives
and has continued to carry more passengers between the UK and
the US than any other carrier.
As discussed on page 15, the European Commission has been
granted a mandate to negotiate with the US government a liberal
set of air services arrangements to replace the bilateral agreements
concluded by the EU Member States as discussed above (under
"Route Flying Rights"). The outcome may provide a better
environment for industry consolidation, especially in Europe.
The business and operations of the Group are conducted within the Company and its subsidiaries.
The following table sets forth the principal investments of the Group as at March 31, 2006.
Investments in subsidiaries
Country of incorporation
and registration
Principal activities and principal operations
Air Miles Travel Promotions Ltd * Airline marketing England
BA & AA Holdings Ltd * Holding company England
(90 per cent of equity owned)
Britair Holdings Ltd * Holding company England
British Airways 777 Leasing Ltd * Aircraft financing England
British Airways Capital Ltd * Airline finance Jersey
British Airways Holdings Ltd * Airline finance Jersey
British Airways Holidays Ltd * Package holidays England
British Airways Leasing Limited * Aircraft financing England#p#分頁標題#e#
British Airways Maintenance Cardiff Ltd * Aircraft maintenance England
British Airways Regional Ltd * Air travel services England
British Airways Travel Shops Ltd * Travel agency England
CityFlyer Express Ltd * Aircraft financing England
British Regional Air Lines Group Plc Holding company England
Speedbird Insurance Company Ltd ** Insurance Bermuda
BA Connect Ltd Airline operations England
The Plimsoll Line Ltd * Holding company England
(Holding company of British Regional Air Lines Group Plc)
Investments in associates
Percentage of Country of incorporation
equity owned Principal activities and principal operations
Iberia, Lineas Aéreas de España, S.A. ('Iberia')*** 10.0 Airline operations Spain
Comair Ltd 18.3 Airline operations South Africa
Other investments
Percentage of Country of incorporation
equity owned Principal activities and principal operations
Airline Group Ltd * 16.7 Air traffic control holding company England
Opodo Ltd * 5.9 Internet travel agency England
WNS (Holdings) Ltd * 16.8 Flight Services Holding company Jersey
* Owned directly by British Airways Plc
** Previously British Airways CitiExpress Ltd
*** Held by a 90 per cent owned subsidiary company
ORGANISATIONAL STRUCTURE
British Airways 05/06 Annual Report 19
20 British Airways 05/06 Annual Report
Property, Plant and Equipment
The following table sets forth the principal property, plant and equipment of the Group. The table does not include the Group's fleet of
aircraft, which are described under Aircraft Fleet on page 11.
Approximate
Gross Size
Principal Properties Description Nature of Title (square feet)
Heathrow Airport, London
No. 1 Maintenance Area East offices, hangars, workshops Lease1 2,400,000
No. 1 Maintenance Area West offices, hangars, workshops Lease1 1,300,000
Ascentis New Cargo Centre warehouse and offices Lease 1,000,000
Perishables Warehouse warehouse and offices Lease 70,000
Compass Centre offices for crew reporting and operations centre Lease 250,000
Waterside, Harmondsworth combined business centre Freehold 570,000
Cranebank technical training centre Freehold 440,000
Speedmarque workshops and offices Lease 140,000
Link warehouse and offices Lease 170,000
Gatwick Airport, London
Maintenance Area East offices, hangars and workshops Lease2 495,000
Jubilee House offices Lease 130,000
Gatwick Cargo warehouses Lease 200,000
UK Regions
Newcastle Business Park offices Freehold 200,000
Pioneer House, Manchester offices Lease 64,000
Cardiff Airport, Wales
Maintenance Area offices, hangars and workshops Lease 460,000
New York
Terminal Building passenger terminal Sublease 535,000
John F. Kennedy
International Airport
1 Leasehold interest held from Heathrow Airport Limited for 150 years from April 1995 without restriction on disposal and with wide use provisions.#p#分頁標題#e#
2 These leasehold interests which are held from Gatwick Airport Limited contain restrictions on the disposal and use of the properties.
The Group also has other freehold and leasehold interests in real estate that are less significant to the Group as a whole in numerous countries
throughout the world. See Note 12 to the Financial Statements.
DEVELOPMENT AND PERFORMANCE
OF THE BUSINESS
Financial Performance
Introduction
The following discussion covers the two years ended March 31,
2006 and is based on the Group’s Financial Statements prepared
in accordance with IFRSs (International Financial Reporting
Standards).
Group profit before tax for the financial year 2006 was £620
million, compared with a £513 million profit in the previous year.
Operating profit in the year, at £705 million, was £149 million
better than last year. The operating margin of 8.3 per cent was 1.1
points better than last year. The improvement in operating profit
primarily reflects improvements in revenue – up 9.6 per cent -
partially offset by increased operating costs, in particular fuel.
Segmental Information
The Company’s principal activities are the operation of
international and domestic scheduled air services for the carriage
of passengers and cargo. The Company’s main business is the
provision of network scheduled services, which accounted for
approximately 93 per cent of Group revenue in the year ended
March 31, 2006.
The following tables set out the Group's results by
business segment:
Network Regional Non- Total
airline airline airline Group
business business business Operations
(£ million) Year ended March 31, 2006
Sales to
External Customers 7,922 357 236 8,515
Inter-Segment Revenue 83 6 4 93
Total Turnover 8,005 363 240 8,608
Operating Result 711 (20) 14 705
Network Regional Non- Total
airline airline airline Group
business business business Operations
(£ million) Year ended March 31, 2005
Sales to
External Customers 7,151 394 227 7,772
Inter-Segment Revenue 77 7 6 90
Total Turnover 7,228 401 233 7,862
Operating Result 576 (27) 7 556
Network airline business
Network airline operating profit for financial year 2006 was £711
million compared with £576 million in 2005. The improvement
primarily reflects an increase in revenue partially offset by an
increase in fuel costs.
Regional airline business
Regional airline operating loss for financial year 2006 was £20
million compared with £27 million in 2005. The improvement
reflects lower operating costs, mainly depreciation, due to the
reversal of the write down of BAe 146 aircraft made in the prior
year, following the decision to maintain them in revenue-earning#p#分頁標題#e#
service. Offset against this is a reduction in revenue due to both
lower volume and yield.
Non-airline business
Non-airline operating profit for financial year 2006 was £14
million compared with £7 million in 2005. The improvement is
mainly due to an increase in revenue.
Geographical Analysis
Route Network
The Company’s scheduled route network forms the basis of its
business and is one of the world's most extensive. As of March,
2006, the Company (including subsidiary carrier BA Connect)
served some 148 destinations in 75 countries. Including
codesharing and franchise arrangements, flights with the
Company’s codes served some 340 destinations in 107 countries.
Adding the services of the Company's alliance partners, the
global network served some 608 destinations in 135 countries.
During the year ended March, 2006 the Company introduced
services to Bangalore, Grenoble, Hassi Messaoud, Izmir,
Rekyjavik, Shanghai, Tirana and Varna. Services to Cologne and
between Singapore and Melbourne were discontinued.
The following table sets out the Group revenue by
geographical area:
BA Group
By Area of original sale
(£ million) 2006 2005
Europe 5,406 5,079
United Kingdom 4,169 3,906
Continental Europe 1,237 1,173
The Americas 1,611 1,364
Africa, Middle East and Indian Sub-Continent 826 747
Far East and Australasia 672 582
Total BA Group Revenue 8,515 7,772
British Airways 05/06 Annual Report 21
22 British Airways 05/06 Annual Report
Year by Year Analysis
Year ended March 31, 2006 compared with year ended March
31, 2005
Revenue
Group operating revenue improved in the year by 9.6 per cent to
£8,515 million. Airline operations revenue, excluding fuel
surcharges, improved by 4.8 per cent to £7,318 million on a
flying programme 2.4 per cent larger in ATKs.
Passenger traffic (RPKs) increased by 3.7 per cent, whilst capacity
(ASKs) was 2.6 per cent higher; as a result passenger load factor
increased by 0.8 points compared with financial year 2005 to
75.6 per cent. Passenger yield (pence per RPK) improved by 1.3
per cent for the full year.
Cargo revenue was up 3.3 per cent from £482 million to £498
million. Cargo volumes (CTKs) fell by 0.4 per cent compared
with financial year 2005 with an improvement in yields by 3.8
per cent primarily due to the growth of premium products.
Overall load factor for the full year was flat at 69.7 per cent.
Other revenue improved by 51.5 per cent to £1,197 million,
primarily due to the increase in passenger and cargo fuel
surcharges.
Expenditure
Net operating expenditure (total operating expenditure less other
revenue) increased by 2.9 per cent compared to financial year#p#分頁標題#e#
2005. Unit costs (net operating expenditure per ATK) were 0.5
per cent higher than 2005.
See footnote (6) to the operating statistics on page 43 for the
calculation of total operating expenditure per RTK and per ATK.
Employee costs increased by 5.0 per cent compared with financial
year 2005 to £2,346 million as pension and wage increases were
only partially offset by manpower reductions and other
efficiencies. The average number of employees in the Group, in
manpower equivalents (MPE), fell by 1.0 per cent to 47,012 and
productivity (ATKs per MPE) improved by 3.4 per cent.
The table below summarises total Group operating expenditure
and year on year changes in expenditure over the two financial
years ended March 31, 2006:
Increase/
(£ million) 2006 2005 (decrease)
Employee costs 2,346 2,235 5.0%
Depreciation, amortisation and impairment 717 739 (3.0)%
Aircraft operating lease costs 112 106 5.7%
Fuel and oil costs 1,632 1,128 44.7%
Engineering and other aircraft costs 473 432 9.5%
Landing fees and en route charges 559 556 0.5%
Handling charges, catering and other
operating costs 955 918 4.0%
Selling costs 449 490 (8.4)%
Currency differences (18) 15 Nm*
Accommodation, ground equipment
and IT costs 585 597 (2.0)%
Total Group operating expenditure 7,810 7,216 8.2%
* Nm not meaningful
Depreciation, amortisation and impairment costs reduced by 3.0
per cent compared with financial year 2005 to £717 million. The
decrease resulted from the reversal of the write down of BAe 146
aircraft in the prior year.
Aircraft operating lease costs increased by 5.7 per cent compared
with financial year 2005 to £112 million due to onerous lease
provisions on RJ100 aircraft sub-leased to third parties and
adverse US interest rates and exchange losses.
Fuel and oil costs increased by 44.7 per cent compared with
financial year 2005 to £1,632 million due to a 38 per cent
increase in fuel price (partially offset by hedging benefits), the
impact of the increased flying schedule and adverse exchange
impact of the stronger US Dollar.
Engineering and other aircraft costs increased by 9.5 per cent
compared with financial year 2005 to £473 million primarily
reflecting price increases, additional engine and component
maintenance costs, and cargo freighter activity.
Landing fees and en route charges remained almost flat
compared with financial year 2005 at £559 million. This
primarily reflects the impact of the larger flying programme and
adverse impact of exchange rates, offset by price reductions.
Handling charges, catering and other operating costs increased
by 4.0 per cent compared with financial year 2005 to £955
million. The increase is due to the impact of the disruption#p#分頁標題#e#
caused by industrial action at the Company’s main caterer at
Heathrow, a larger flying programme and the adverse impact of
exchange.
Selling and marketing costs fell by 8.4 per cent compared with
financial year 2005 to £449 million. This primarily reflects the
impact of the restructuring of travel agent commissions and
savings in marketing spend, partially offset by the adverse impact
of exchange.
Accommodation, ground equipment and IT cost reduced by 2.0
per cent compared with financial year 2005 to £585 million. This
reflects general overhead reductions partially offset by adverse
exchange.
Financial Derivatives
Net unrealised gains on fuel derivatives were £19 million in
financial year 2006, reflecting the ineffective portion of
unrealised gains and losses on fuel derivative hedges following
the adoption of IAS (International Accounting Standard) 39
effective from April 1, 2005.
Net finance costs
Net finance costs for financial year 2006 were £128 million, £40
million lower than in 2005. The reduction reflects lower levels of
borrowings, partially offset by higher US interest rates.
Pension financing costs & retranslation expenses
Pension financing costs were £18 million in financial year 2006
compared to £29 million in 2005.
The retranslation of currency borrowings generated a charge of
£13 million, compared with a credit the previous year of £56
million. The movement versus last year is primarily due to the
transitional impact of IAS21 and IAS39.
British Airways 05/06 Annual Report 23
The following table sets out the movements in loans and capital
obligations under finance leases and hire purchase arrangements
for the two year period ended March 31, 2006 (see also Note
24 to the Financial Statements):
Finance
Bank and Lease and
other Purchase Total Total
(£ million) Loans Arrangements 2006 2005
Balance at April 1 1,168 3,324 4,492 5,716
New loans raised 116
Other non cash movements 11 11 3
Repayment of amounts
borrowed (64) (415) (479) (1,271)
Effect of exchange
rate changes 12 45 57 (72)
Balance at March 31 1,116 2,965 4,081 4,492
Profit on sale of fixed assets and investments
Profits on sales of fixed assets and investments for financial year
2006 were £27 million, compared with profits of £71 million in
2005, which included an £86 million gain on the disposal of
Qantas.
The profit on disposal in financial year 2006 primarily reflects the
£26 million gain on the disposal of the Group’s investment in
The London Eye Company Limited in February, 2006.
Share of post-tax profits in associates
The Group’s share of post-tax profits in associates increased#p#分頁標題#e#
by £4 million to £28 million during financial year 2006. This
reflects a share in 2006 of Iberia’s profit on the sale of its
investment in Amadeus, offset by the non-recurrence of
profits from the Group’s investment in Qantas following the
sale in 2005.
Taxation
The analysis of the tax charge is set out in Note 10a to the
Financial Statements.
The Group has used up all of its UK trading losses brought
forward and is now paying tax in the UK and has a UK liability
which, for the year ended March 31, 2006, was £91 million
(2005: £ nil). The Group did not pay significant overseas taxes
during the financial year 2006.
Earnings per share
For the year ended March 31, 2006, profits attributable to
shareholders were £451 million, equivalent to basic earnings of
40.4 pence per share, compared with basic earnings of 35.2
pence per share last year.
Capital Expenditure
Working capital
At March 31, 2006, net current assets were £234 million, up £751
million on last year. This change reflects an increase in current
assets to £3,666 million, up £914 million, partially offset by an
increase in current liabilities to £3,432 million, up £163 million.
The following table summarises Group capital expenditure in the
two years ended March 31, 2006:
Year ended March 31
2006 2005
£m £m
Aircraft, spares, modifications and refurbishments
(net of refund of progress payments) 239 327
Property and equipment 87 37
Landing rights and other intangible assets 8 32
Investments 7 6
341 402
See Notes 12, 15 and 17 to the Financial Statements.
The change in current assets primarily reflects an increase in cash
and non-trade debtors. The increase in current liabilities primarily
reflects an increase in non-trade creditors partially offset by the
conversion of Capital Bonds for ordinary shares.
The Company believes its working capital is sufficient for its
current requirements.
Cash flow
Net cash increase in financial year 2006 was £358 million, an
improvement of £833 million over 2005 due to the improvement
in cash flows from operating and financing activities, partially
offset by an increased cash outflow on investing activities.
Net cash inflow from operating activities for financial year 2006
was £1,339 million, an improvement of £334 million over 2005
primarily due to an improvement in operating profit of £149
million and favourable working capital movements. This was
partially offset by the tax payment of £57 million in 2006
(compared with a nil payment in 2005).
Cash outflow on investing activities for financial year 2006 was
£510 million compared with £302 million for 2005. The increase#p#分頁標題#e#
primarily reflects the sale of the investment in Qantas in financial
year 2005 for £427 million compared with the sale of the
London Eye in 2006 for a net £78 million. Lower levels of
investments in deposits and assets resulted in a reduction in cash
outflow of £183 million.
Cash outflow from financing activities for 2006 was £472 million
compared with £1,160 million for 2005, primarily reflecting a
reduction in the level of capital repayments made on finance
leases and hire purchase agreements of £688 million.
The total of cash, cash equivalents and other interest bearing
deposits at March 31, 2006 of £2,440 million was up £758
million versus last year. Net debt fell by £1,281 million during
the year to £1,641 million reflecting both the increase in cash
and a reduction in borrowings. This is the lowest level since
March 31, 1992, and is down £5.0 billion from the December,
2001 peak.
Leases and other financing arrangements
24 British Airways 05/06 Annual Report
Only one aircraft, an Airbus A321 aircraft was delivered during
the year and it was paid for in cash.
The Company arranged two long-term secured finance facilities
during the year. The first was a syndicated committed Japanese
Yen 75 billion credit facility which puts in place committed
funding to re-finance a series of maturing Yen obligations in
connection with 24 Japanese Leveraged Leases (‘JLLs’) which
mature between March, 2009 and January, 2011. This facility
significantly improves the correlation between projected future
Yen operating income and Yen debt repayments. A second
US$420 million standby facility provides the Company with
additional medium term liquidity. The facility is available for
drawing between 2005 and 2010 and would, if drawn, be
repayable between the date of drawing and 2015. Any drawing
between now and 2010 will be secured against aircraft to be
specified by the Company at the time of drawing, with each
aircraft type and vintage within the Company’s fleet having a
predetermined fixed amount capable of being drawn against it at
the time of such drawing.
For the purposes of the financial statements, foreign currency
debt is translated into Sterling at year-end exchange rates.
Following the adoption of IAS 39 on April 1, 2005, the majority
of debt repayments in US Dollar and Yen are used as a hedge of
the Group’s exposure to fluctuations of the sterling value of
future US Dollar and Yen revenues. As a result, gains and losses
on translation of debt used as a hedge are taken to the fair value
reserve and are released to the income statement on repayment
of the debt. Gains and losses on translation of debt not used as a
hedge are taken to the income statement. Net translation losses#p#分頁標題#e#
of £44 million on US Dollar and Yen denominated debt were
taken to the fair value reserve during the year.
Net debt/total capital ratio
Net debt at March 31, 2006 amounted to £1,641 million, a
reduction of £1,281 million compared with March 31, 2005. This
is net of cash, cash equivalents and other interest bearing
deposits totalling £2,440 million.
The net debt/total capital ratio at March 31, 2006 was 44.2 per
cent, a 23.5 point reduction versus last year mainly due to the
reduction in net debt, the conversion of the Convertible Capital
Bonds 2005 to equity on maturity and the recognition of the fair
value of derivative financial instruments under IAS 39 from April,
2005. Including operating leases, net debt/total capital ratio was
53.0 per cent, a 19.3 point reduction from last year.
CRITICAL ACCOUNTING POLICIES
Introduction
The discussion and analysis of the Company’s financial condition
and results of operations are based on the consolidated Financial
Statements, which have been prepared in accordance with IFRSs.
The preparation of these Financial Statements requires the
development of estimates and judgements that affect the
reported amount of assets and liabilities, revenues and costs and
related disclosure of contingent assets and liabilities at the date
of the Financial Statements. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective
of significant judgements and uncertainties and potentially result
in materially different results under different assumptions and
conditions. It is believed that the Company’s critical accounting
policies are limited to those described below. The Company’s
management has discussed the development of the estimates and
disclosures related to each of these matters with the Audit
Committee.
Note 2 to the Financial Statements provides additional discussion
of the application of these estimates and other accounting
policies.
Passenger revenue
Passenger revenue is initially recorded as a liability for sales in
advance of carriage, with revenue from ticket sales recognised at
the time that the Company provides the transportation. In
respect of unused ticket revenue recognised, the Group makes
estimates based on historical trends regarding liability for tickets
sold but not yet processed, the timing and amount of tickets used
for travel on other airlines and the amount of tickets sold that
will not be used. These are used to determine the timing and
amount of unused ticket revenue recognised. Changes to these
estimation methods could have a material effect on the
presentation of the Group’s financial results.#p#分頁標題#e#
Periodic evaluations are performed of the estimated liability for
tickets sold but not yet processed. Any adjustments, which can
be significant, are included in results of operations for the
periods in which the evaluations are completed. These
adjustments relate primarily to differences between the statistical
estimation of certain revenue transactions and the related sales
price as well as refunds, exchanges, interline transactions and
other items for which final settlement occurs in periods
subsequent to the sale of the related tickets at amounts other
than the original sales price. These amounts have been generally
consistent from year to year.
Frequent flyer programmes
The Group operates a frequent flyer programme known as the
Executive Club, which allows members travelling on the
Company’s (and certain partner airlines’) flights to accumulate
BA Miles that entitle them to various awards, including free
travel. In addition, BA Miles are sold to participating partners to
use in promotional activity.
Air Miles Travel Promotions Limited, a wholly-owned subsidiary,
operates a scheme which allows companies to purchase AirMiles
from the Group for use in promotional incentives.
The estimated direct incremental cost of providing free
redemption services, including free travel, in exchange for
redemption of miles earned by members is accrued as
participants earn miles from the purchase of airline tickets. The
accrued cost is based on various estimates with respect to the
incremental fuel, food and other costs incurred in providing such
schemes. Additional assumptions are made, based on general
customer behaviour, regarding the likelihood of a customer
redeeming the miles on the Company, redeeming the miles for
non-travel benefits, or redeeming the miles on partner carriers.
Changes in cost estimates or accrual methods, among other
factors, could have a significant effect on the Group’s
presentation of its financial results.
The fair value of miles sold to participating partners under both
the AirMiles scheme and the BA Miles scheme is deferred and
recognised on redemption of the miles by the participants to
whom the miles are issued. The incremental cost of providing
British Airways 05/06 Annual Report 25
free redemption services is recognised when the miles are
redeemed.
The total number of BA Miles outstanding at March 31, 2006
was 127,638,125,986 and the total number of AirMiles
outstanding was 7,666,093,423. The Company has recorded a
liability for the awards relating to the flown mileage credits of
£15 million and has deferred revenue of £359 million relating to
the sale of miles that are unflown. The estimate of unflown miles
is reviewed and if necessary adjusted each year. In financial#p#分頁標題#e#
year 2006 this review resulted in the release of £31 million to
other revenue.
The number of frequent flyer RPKs as a percentage of total RPKs
for the years ended March 31, 2006 and 2005 was 2.8 per cent
and 3.2 per cent respectively.
The Company believes that the displacement of revenue
passengers by those travelling on frequent flyer awards is minimal
based on the low percentage of frequent flyer RPKs to total RPKs
and the Company’s ability to manage frequent flyer capacity.
Property, Plant and Equipment
The Group has a net book value of approximately £7.9 billion in
aircraft, property, equipment and other tangible assets as at
March 31, 2006. Depreciation is calculated to write off the cost,
less the estimated residual value, on a straight-line basis.
Changes to the Group’s policies relating to the revaluation of
assets, estimation of useful lives, residual values or other policies
could have a material effect on the presentation of the Group’s
financial position and results of operations. Further information
relating to the Group’s accounting for property, plant and
equipment is provided in Note 2 to the Financial Statements.1
The carrying value of tangible assets is reviewed for impairment
at least annually and when events or changes in circumstances
indicate the carrying value may not be recoverable.
Goodwill and other intangible fixed assets
Under IFRS goodwill is capitalised and tested for impairment
annually and when events or changes in circumstances indicate
the carrying value may not be recoverable.
Intangible assets with finite lives continue to be capitalised and
amortised over their useful economic lives. The Group’s landing
rights have definite useful lives over which the cost is amortised.
The carrying value of finite-lived intangible assets is reviewed for
impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.
Changes to the Group’s valuation methods used for the purposes
of impairment review or estimation of useful economic lives for
finite-lived intangible assets could have a material effect on the
presentation of the Group’s financial position and results of
operations.
Employee benefits
Accounting for pensions and other post-retirement benefits
involves judgement about uncertain events including, but not
limited to, discount rates, life expectancy, future pay inflation,
expected rate of return on plan assets and expected health care
cost trend rates. Determination of the projected benefit
obligations for the Group’s defined benefit pension schemes and
post-retirement plans are important to the recorded amount of
benefit expense in the income statement and valuation of the#p#分頁標題#e#
balance sheet.
Under IFRS, actuarial valuations on pension schemes are
required to be carried out at least annually. These determine the
expense recorded in the income statement, the liability
recognised in the balance sheet and unrecognised in the pension
‘corridor’. Details of the assumptions used are included in Note
31 to the Financial Statements.
Financial instruments and derivative instruments
The Group has elected under IFRS 1 to apply IAS 32 – ‘Financial
Instruments: Disclosure and Presentation’ and IAS 39 – ‘Financial
Instruments: Recognition and Measurement’ effective from April
1, 2005.
Under IAS 39 financial instruments are recorded initially at fair
value. Subsequent measurement of those instruments at the
balance sheet date reflects the designation of each financial
instrument. The measurement of fair value is based on market
observable data, where such information is available, or
alternative valuation methods that can involve the use of
judgements and estimates.
Gains and losses on derivative financial instruments designated
as cash flow hedges and assessed as effective for the period, are
taken to equity in accordance with the requirements of IAS 39.
Gains and losses taken to equity are reflected in the income
statement when either the hedged cash flow impacts income or
its occurrence ceases to be probable. As a result of the
requirement to measure the effectiveness of the hedging
instruments, changes in market conditions or the Group’s
hedging strategy can result in the recognition in the income
statement of unrealised gains or losses on derivative financial
instruments designated as hedging instruments. During financial
year 2006 derivatives were generally found to be effective. The
only ineffectiveness related to fuel hedges where the unrealised
profit being recognised in the income statement for ineffective
hedges was £19 million compared with a recognised realised
hedging profit for 2006 of £303 million.
1 In relation to US GAAP, there has been one change of accounting policy which is explained in the following terms in Note 36 to the financial statements
in the Annual Report on Form 20F which reads as follows: “Under IFRS the Group has applied the component based approach of IAS 16 "Property, Plant
and Equipment" for tangible assets. This resulted in a change in accounting policy for the costs of major engine overhaul as compared to the accounting
previously applied under UK GAAP. Previously, under UK GAAP, the Group had expensed these costs as incurred, but under IAS 16 these costs are
capitalised at the time of expenditure and amortised over the period between major overhauls. As of April 1, 2005, the Group changed its US GAAP
accounting policy for major engine overhaul from 'expense as incurred' to 'capitalise and amortise'. This change represents a change in accounting#p#分頁標題#e#
principle as defined by APB No. 20 "Accounting Changes", and a cumulative effect adjustment is recorded in the 2005/06 Income Statement.
The Group changed its accounting policy under US GAAP because it believes the new policy results in a better matching of revenues and expenses.”
26 British Airways 05/06 Annual Report
KEY PERFORMANCE INDICATORS
The Company’s Key Performance Indicators (KPIs) are derived
from the success measures in the ‘BA Way’ and the performance
criteria in the Remuneration Plans. These are detailed below.
1. Profitability/Operating Margin
Operating margin is defined as Operating Profit/(Loss) divided
by Revenue expressed as a percentage and is the key measure of
financial performance in the Company. The central corporate
financial target approved by the Board under the FSAS review
and subsequent business plans is an average operating margin of
ten per cent per annum across the business cycle.
The Group achieved an operating margin of 8.3 per cent in
financial year 2006, up from 7.2 per cent in 2005. This is still
short of the rate of ten per cent that the Group has set itself as a
target to deliver an adequate return to shareholders over the long
term.
2. Customer Advocacy
Customer Recommendation has been introduced alongside
operating margin to provide an improved focus on this key area
using an objective and measurable customer service metric.
The Company measures Customer Recommendation of
British Airways through our Global Performance Monitor (GPM)
survey, an on-board customer survey augmented by a follow-up
telephone survey that picks up the arrival elements of the
customer’s journey. The survey is carried out on approximately
50,000 customers each month. The data is subject to auditing
and checks by GfK NOP, the independent Market Research
company who run the survey on our behalf, to ensure its
accuracy and independence. The Customer Recommendation
measure is based on the percentage of customers who, when
surveyed, would highly recommend British Airways to friends,
family or colleagues. The Company believes this measure
provides an important linkage between customer experience and
future profitability. The target in 2005/06 was that 65 per cent of
customers are extremely likely or very likely to recommend the
Company.
Customer Recommendation is driven by two factors: whether a
customer is satisfied with their experience with the airline and
whether they think it is good value for money. This year’s results
were 61 per cent Highly Recommend. This figure was heavily
impacted by the disruption to our customer experience in
August, 2005 resulting from the industrial action at Heathrow.
The key elements of the journey that need focus on to improve#p#分頁標題#e#
customer recommendation are the operational basics (especially
punctuality and baggage delivery), providing a speedy departure
experience through the terminal and providing a quality onboard
experience, including from Cabin Crew, catering, cabin
environment and in-flight entertainment.
3. Safety and Security
The Company places the utmost importance on ensuring the
safety and security of its customers and employees in the air and
on the ground. The Company works continuously to ensure that
its customers are safe and secure and its record has been
consistent with that objective.
The target for safety and security is that 95 per cent of customers
feel safe with the Company. Clearly the Company aims to be 100
per cent safe – no other target is acceptable. However, in setting
targets for measuring the perception among people who fly, the
Company has acknowledged that some passengers do not enjoy
air travel, even if they are experienced or frequent flyers.
External events beyond the control of the airline, such as
terrorism and war, impact customers’ perceptions of safety, as
do events that we control, such as a strike or well-publicised
disruption.
The current results for this measure are that 90 per cent of flyers
surveyed in the UK claim to feel safe with the Company. The
Company believes that result was adversely affected by the
impact of the disruptions last August.
The measurement of customers’ perception of safety for the
Company and other carriers comes from the UK Brand Tracker
survey. This is an online survey conducted with approximately
400 flyers in the UK each month. During 2005/6, the
independent Market Research company, IPSOS, conducted this
survey for us.
A number of high profile incidents across the world have been
reported in the year and these can influence individual customer
perception.
The events in London last July show that terrorists continue to
evolve in both how and where they attack. The Company
continues to work with UK and overseas governments to ensure
that our counter measures are appropriate to the prevailing
threat. A team of dedicated security experts frequently visit all
airports that the Company operates from in order to evaluate
security standards and, where required, implement
supplementary measures. If security standards could not be
brought up to a sufficiently high standard the Company would
cease operations to that destination.
40%
Overall
satisfaction
with BA
Likelihood to
recommend BA
Likelihood to
travel BA again
50%
60%
70%
80%
Customer rating (’Extremely/Very satisfied/Likely’)
2004/05 2005/06 Source: GPM
Key customer measures
Overall Performance Measures. All cabins#p#分頁標題#e#
British Airways 05/06 Annual Report 27
Safety is an integral part of the business with all departments
being actively involved in searching for improvements. The
Company works closely with its oneworld and franchise partners
to develop prevention strategies that enhance its safety and drive
industry best practice. Despite the industry being extremely
competitive the Company prides itself on having an open
relationship with respect to sharing safety data. This approach
allows it to force the pace of change in certain sectors to the
benefit of all.
During last year the Company has further evolved its safety and
quality management systems as the organisation has changed to
meet the changing economic demands of the airline industry. Its
safety and security review committees have been streamlined to
provide greater clarity for reviewing every aspect of the
operation. A number of its key customers have also been taken
through this process to explain how the Company manages all
aspects of safety and security, with very encouraging feedback.
In the coming financial year, the Company will begin the process
of obtaining IATA Operational Safety Audit (IOSA) accreditation,
which is a key element of IATA’s six point safety plan for the
airline industry. The Company is a founding member of the IATA
development committee which has produced this new standard
which aims to raise airline safety standards across all operators.
4. Respected Company
The target for ‘Respected Company’ is that 80 per cent of
community, social and environmental stakeholders respect the
Company. The Company aims to be respected by these groups
for the way in which it deals with them and with the issues
affecting them. Research is conducted by an independent Market
Research agency, Opinion Leader Research, with 100 community
stakeholders from the following groups:
• Politics/Government,
• Policy and Non-profit organisations,
• the Media,
• Environment and sustainability groups,
• Local authorities and community groups around Heathrow,
• Groups representing minority interests,
• London and South East economic development
organisations.
The research in August, 2004, concluded that 74 per cent of our
community stakeholders respect the Company. The follow on
study in August, 2005 concluded that 83 per cent of our
community stakeholders respect the Company.
5. Employee Motivation
The fifth and final ‘BA Way’ goal for the year 2005/06 related to
employee motivation. The target here is that 75 per cent of
employees feel motivated to deliver the Company’s business
goals. An employee research programme, called the Employee
Feedback Programme (EFP), conducted by the independent#p#分頁標題#e#
research agency, MORI, began in November, 2004. It was clear
from the first survey and from subsequent work that scores for
employee motivation vary markedly across the business. During
the year, the Company launched a major awareness campaign
designed to inform employees about the consequences of the
pensions deficit and its implications for the members of NAPS.
The decision was made to defer testing and the next full census
survey of all employees will be conducted in Autumn 2006.
Again this online survey will be conducted and hosted by MORI,
with full respondent anonymity guaranteed.
The review of the ‘BA Way’ which was already underway at the
time of this Report is likely to result in changes to this measure
based on the new work carried out in conjunction with MORI.
6. Key Performance Indicators in Incentive Plans
The incentive plans designed by the Remuneration Committee
use the following additional measures to assess and incentivise
management’s performance.
Total Shareholder Return (TSR) measures the financial benefits
of holding a company’s shares and is determined by share price
performance along with any dividends which are paid. For the
purposes of the Long Term Incentive Plan (LTIP), the Company’s
TSR was compared to the TSR of the FTSE 100 group of
companies. In relation to the conditional award made under the
scheme on June 9, 2003 which measured TSR over the three
financial years commencing April 1, 2003, the Company was the
13th highest performing company out of the 93 FTSE 100
companies remaining for the performance period April 1, 2003
to March 31, 2006. This placed the Company on the 86th
percentile.
The LTIP was replaced by the Performance Share Plan (PSP) in
2005. For the purposes of this scheme, the Company’s TSR is
measured against a comparator group of airline companies over a
single three-year performance period which begins on April 1,
prior to the award date. Full details of the scheme are given in
the Remuneration Report.
For the year 2005/06 only, the annual bonus plan for senior
executives also included performance against the Terminal 5
Transition Programme, known internally as ‘Fit for 5’, as a
performance condition. After assessing performance on the hard
measures and taking into account the progress made during the
year, the Remuneration Committee judged the performance to be
ten out of a possible 25.
The Company believes that its Key Performance Indicators must
remain relevant to the needs of the business and they will
therefore be subject to refinement from time to time in
accordance with the needs of the business. As mentioned above,
the ‘BA Way’ is being reviewed and the Key Performance
Indicators may be changed accordingly.#p#分頁標題#e#
OUTLOOK
The airline market in the United Kingdom remains fiercely
competitive. No frills carriers continue to consolidate their
presence in European markets, and now account for more than a
third of all shorthaul flights from London’s airports. As a result,
the Company has seen its share of passengers in the United
Kingdom shorthaul market fall from more than 30 per cent in
1998 to below 20 per cent in calendar year 2005. Even among
business travellers, corporate cost consciousness has allowed no
frills airlines to carry an increasing share of the market, and the
proportion of business travellers flying in the premium cabins of
the network carriers, such as British Airways’ Club Europe, has
continued to decline. Longhaul services also face vigorous
competition. As the market recovers, competitor airlines are
beginning to order new aircraft and start new intercontinental
services. In particular, Middle East carriers are undertaking rapid
expansion of their hubs. Ailing American carriers have been able
to offload costs under the protection of the United States
Chapter 11 bankruptcy laws.
28 British Airways 05/06 Annual Report
Despite the challenging market conditions, the Company’s total
revenue is expected to increase in 2006/07. But there are also
major cost headwinds – particularly in terms of fuel costs. The
Company’s business plan for the two years ending March, 2008
identifies four priority areas. First, the Company needs to
continue to reduce its cost base to ensure it is competitive in the
global airline market. Second, the Company is making targeted
investment in products and in training for employees. This
includes investment in the air and on the ground, where the
Company is applying new technology (such as online check-in) to
ease the travel experience and speed passengers through the
airport. It also includes a renewed focus on training and
employee engagement. Third, is ‘Fit for 5’ – being ready to move
to Terminal 5. Fourth, the Company needs to prepare for future
growth, as long as it remains on track to meet its target return of
ten per cent operating margin.
The Company’s growth plans, however, hinge on infrastructure
development at our Heathrow base. The Company is working to
support the plans for future development laid out in the 2003
White Paper, “The Future of Air Transport”. This recommended
the building of a third runway at Heathrow, and consideration of
better use of the existing runways at Heathrow by ‘mixed mode
operations’. Mixed mode – enabling airlines to use each runway
for both take off and landing – would add to runway capacity
over the longer term and in the short term it could also reduce#p#分頁標題#e#
congestion and delays. The Government is working with key
stakeholders to establish the environmental implications of this
expansion, through its Project for the Sustainable Development
of Heathrow. The Company is actively contributing to this work,
particularly through the monitoring and modeling of the impact
of aircraft on local air quality.
PRINCIPAL RISKS AND UNCERTAINTIES
This section describes some of the risks which could affect the
business operations and results of the Group. There may be
others (see also the cautionary statement regarding forwardlooking
statements contained in the inside front cover).
The commercial airline industry is highly competitive and the
market for air travel has experienced, and will continue to
experience, significant structural change. Further, the Group’s
future performance is likely to continue to be subject to a variety
of factors over which the Group itself has little or no control
including, by way of example only, governmental regulation
whether domestically within the United Kingdom, within the
European Union or worldwide, fluctuations in the price of jet
fuel, acts of terrorism, changes in economic conditions, the
availability or otherwise of financing and fluctuations in currency
and interest rates. The Group’s results may also be affected by
information technology risks as well as by the uncertainties
inherent in labour relations and the uncertainty of pension costs.
There may well be other risks which emerge from time to time
including war, changes in liquidity and capital resources and
restrictions in the availability and scope of insurance.
Factors Generally Affecting Commercial
Strategy & Performance
Planned move to Terminal 5
In 2008, the Company expects to move the majority of its
operations into Terminal 5 at Heathrow. The construction of
Terminal 5 is one of the largest construction projects in Europe.
This project and the planned move bring with them significant
risks and challenges, including completion risk, risks associated
with moving and risks associated with starting operations in a
new facility, such as building, moving and operating.
Commercial strategy/product effectiveness
The Group strives to operate to its strategic and business plans.
By reason of the matters listed above and discussed in this
section, such plans may not always prove able to be implemented
along the lines and in the timescales envisaged.
Competition
The markets in which the Group operates are highly competitive.
The Group faces competition from other airlines on its routes, as
well as from indirect flights, charter services and from other
forms of transport. Some competitors have cost structures that
are lower than the Group’s or have other competitive advantages.#p#分頁標題#e#
Fare discounting by competitors has historically had a negative
effect on the Group’s results because the Group is generally
required to respond to competitors’ fares to maintain passenger
traffic.
Market/economic factors
The Group is dependent on passengers and cargo shippers to be
able and willing to pay for carriage by air. This ability and
willingness is influenced by economic and security conditions.
Alliances, Franchise & Subsidiary effectiveness
Controlled consolidation in the aviation industry has proven
difficult to obtain. Accordingly, Alliances, Franchises and
Subsidiaries are used to expand the Group operation but
necessarily control is or can be looser than in the case of
mainline operations.
Certain business disruption risks
Loss of systems – infrastructure/data
The Group is substantially dependent on IT systems for delivery
of its functions. It believes its IT systems and the systems
provided by third parties to be reliable and well protected but
they require regular updating and maintenance and are under
constant threat from hackers/viruses.
Security
The Group believes its operations to be safe and secure but security
matters have in the past and have the potential in the future to
disrupt the business on temporary or longer term grounds.
Supplier failure
The Group is dependent on third parties for important aspects of
its operation. It is essential that critical supplies should be
maintained; if this were not so operations would be disrupted and
the business and results would suffer.
British Airways 05/06 Annual Report 29
Fleet grounding or restriction
The Group operates a number of aircraft types. An accident or
discovered defect even where this applied to another airline,
could ground significant portions or all of the fleet.
Insurance Market failure
After the events of September 11, 2001, there was a market
failure of the airline insurance market in the UK. It is possible
that a further failure could occur, either wholly or in part.
Constrained operating infrastructure
Most UK airports, and Heathrow in particular, are constrained
and operating beyond their build capacity. This can impair
operations and adversely affect the business and its results.
Health concerns, epidemics and pandemics
Epidemics (e.g. SARS) and pandemics as well as other health
risks may occur and would be beyond the Group’s control.
Health concerns are one of the factors that can adversely affect
demand for air travel. For example, in the Spring of 2003, an
outbreak of SARS caused concerns among many travellers about
the spread of the disease and related health issues. This resulted
in a decline in demand for certain of the Group’s routes, most#p#分頁標題#e#
notably in routes involving the Far East. Future health concerns
that affect the demand for air travel generally, or the demand for
air travel involving a geographic area, could have an adverse
affect on the Group’s operations and financial results.
Loss of key buildings/airport infrastructure
Loss of access to or function of key infrastructure components
such as terminal and hangar facilities would disrupt the business.
Factors that could increase operating and
other costs
Pensions shortfall
There is a substantial deficit in the Group’s pension funds and a
high degree of uncertainty regarding future funding needs. The
introduction of a Pension Regulator and a Pension Protection
Fund in the UK is expected to increase costs.
Operating costs
Operating cost increases are frequently outside the Company’s
control, and can have a significant impact on the results of
operations.
Security costs
These have increased significantly since the events of September
11, 2001 and are a substantial part of the Group’s costs. It is
possible that these will continue to increase at a substantial rate.
Claims against the Group that are not covered by or
exceed insurance
The Group believes its insurance cover would substantially
mitigate the effect of claims likely to be brought against the
Group in foreseeable circumstances but limits can always be
broken or uncovered claims may emerge.
Financial commitments
The Group carries substantial debt which needs to be repaid or
refinanced. The Group’s ability to finance its operations and
capital needs may be affected adversely by various factors
including financial market conditions. Most of the Company’s
debt is asset-related, reflecting the attractiveness of aircraft as
security to lenders and other financiers. However, there can be
no assurance that aircraft will continue to provide attractive
security for lenders.
Fleet maintenance and modernisation
It is essential to the Group’s strategy that it maintains a highquality
fleet and this requires funds sufficient to support the
upgrade and replacement of aircraft. The Group’s ability to follow
this strategy would be jeopardised if the trading climate were to
deteriorate substantially.
Market power and importance of suppliers
In some areas it is difficult for the Group to spread its risk by
sourcing from many alternative suppliers.
Political restrictions
Route rights and landing rights are often determined by the
country of destination. If permissions are withdrawn the
operations would be impaired and the business and results could
be adversely affected.
Risks to reputation/public confidence
Corporate Governance/Corporate Responsibility#p#分頁標題#e#
The Group has detailed corporate governance and corporate
responsibility programmes. Were they to fail, reputation and
public confidence could be damaged.
Adverse publicity
Whether justified or not, adverse publicity can damage public
confidence which in the end can damage the Company’s business
and results.
Inadequate crisis management
If a crisis arises, the Group’s future business and results are likely
to be substantially affected by the quality of its response to the
crisis.
Legal & Regulatory risks
In certain areas, the Group relies on tailored compliance
programmes for appropriate groups of employees to ensure that
it meets its regulatory obligations.
Failure to comply with applicable new or changed laws,
regulations or governance standards or new or changed
regulatory interpretation thereof may harm the business or the
Company’s reputation. Changing laws, regulations and standards
relating to accounting, corporate governance and public
disclosure causes and may continue to cause uncertainty for
companies affected by them unless they are or become
sufficiently certain. Continuing uncertainty regarding compliance
matters and higher costs of compliance could result from
ongoing revisions to such laws, regulations and governance
standards.
30 British Airways 05/06 Annual Report
In particular, the essential work necessary to achieve compliance
with Section 404 of the Sarbanes-Oxley Act of 2002 to which
the Company is subject by virtue of its listing on the New York
Stock Exchange is continuing and, as disclosed on page 8, an
analysis of all the requirements for Section 404 compliance has
been completed and required remediation projects are underway.
Failure to achieve compliance in a timely fashion, or to maintain
compliance once achieved, with Section 404 could harm the
business or the Company’s reputation.
Employment law
Worldwide and within the UK, labour activities and the balance
between workers’ rights and shareholders’ interests is in flux.
Increased labour activity or adverse labour market regulation
could damage the operations and results of the Group.
Industry regulation
Worldwide and particularly in the UK, the airline industry is being
increasingly regulated both directly and indirectly. Such
regulation, including environmental regulation, does not generally
enhance business or financial results and, accordingly, further
increases in regulation could be damaging.
Competition law
Competition law which constrains consolidation opportunities
may restrict the Group’s ability to compete effectively in the
marketplace.
National/International law
The Group operates under a large and complex body of national#p#分頁標題#e#
and international laws and regulations. Were these to cease to
allow it to operate in any particular way or on any particular
route, the Group’s business and results could be damaged.
In certain cases, the regulatory requirements of the US (and other
governments) conflict with EU rules applicable to the Group.
Government intervention and support
State aid for the aviation industry, whilst not technically lawful in
Europe, can still be provided. Also, the differing nature of the
insolvency laws of different countries also distorts aviation
markets. Disparate levels of government assistance between the
Group and other airlines could place the Group at a competitive
disadvantage and adversely affect operations and results.
Workforce/Health and Safety
considerations
Industrial relations
The Group has a large unionised workforce. Collective bargaining
takes place on a regular basis. A breakdown in the bargaining
process could disrupt our operations and adversely affect our
business and results.
Manpower levels/skills
The Group operates a highly technical business; if sufficient
technically qualified staff from pilots to engineers and many
others cease to be available, operations and results could be
adversely affected.
Health & Safety at work
The Group operates in a confined environment carrying out
difficult and specialist tasks 24 hours a day, 365 days a year. A
major incident affecting the health and safety of staff would
disrupt the operations of the Group.
Internal control
The directors are responsible for the Company’s system of
internal control, including internal financial control, which is
designed to provide reasonable, but not absolute, assurance
regarding: (a) the safeguarding of assets against unauthorised use
or disposition, and (b) the maintenance of proper accounting
records and the reliability of financial information used within the
business or for publication.
Risk approach
The Company has put in place a structure and process to
facilitate the identification, assessment, and management of risks.
Each of the Leadership Team directors (detailed on page 5) has
appointed one of his direct reports as the directorate’s Risk
Leader. The role of the Risk Leader is to identify and manage
risks for the directorate, co-ordinating risk management activity
within it and ensuring that risk is on the agenda at his/her
director’s team meetings.
The ten Risk Leaders meet quarterly under the chairmanship of
the Head of Risk Management. This meeting provides an
opportunity to discuss risks which are cross departmental in their
impact and which, therefore, must be managed by a number of
people throughout the organisation under the auspices of the risk#p#分頁標題#e#
owner who is overall accountable for ensuring the risk is
managed effectively. The Risk Leaders will also make
recommendations regarding the management of risks or changes
in process or structure to the Risk Group, to which it reports.
The Risk Group, chaired by the General Counsel, currently
consists of seven of the Leadership Team directors and the heads
of internal control and risk management. It provides policy and
guidance to the Risk Leaders, reviews the Company’s key risks
and will make decisions about risks identified by the Risk Leaders
where there are options as to how the risk may be managed. It
also ensures that the business plan is aligned with the Corporate
Risk Register. This group will be expanded in future so that it
includes all of the Leadership Team directors and will conduct its
business as part of Leadership Team Strategy Days. The
frequency of meetings will remain as quarterly.
A Risk Finance Group, which in future will be chaired by the
Head of Risk Management, supports both the Risk Leaders and
the Risk Group by advising on matters relating to the Group’s
wholly owned insurance company, the Company’s risk appetite
and risk transfer.
The Risk Group reports bi-annually to the Audit Committee.
Each report outlines the principal activities of the Risk Group
during the period including developments it has been responsible
for as well as reporting on the Company’s key risks to aid the
Audit Committee and the Board in their efforts to assess and
manage risk in accordance with the revised guidance for
Directors on the Combined Code (October, 2005).
The roles of Risk Leaders, the Risk Financing Group and the Risk
Group are defined by Terms of Reference in each case.
British Airways 05/06 Annual Report 31
The management of each major area of corporate risk is subject
to audit by an appropriate body. For example safety risks are
audited by the Board’s Safety Review Committee and security
risks by the Corporate Security Board. Changes to the risk
register are made in accordance with the audit body’s decisions.
Each key risk is subject to review in this way at least once per
annum.
The risk management process, including the corporate risk
register, is managed by a small team, reporting to the Head of
Risk Management. This team also provides training and
guidance where required on risk management generally and the
Company’s process and structure specifically and provides
secretarial services to the Risk Leaders and Risk Group and
facilitates the auditing of risks at the relevant audit body risk
review meetings.
The Risk Register
Usually, Risk Leaders are sufficiently close to the business activity
in the Company in general and their Directorate in particular that#p#分頁標題#e#
they are able to capture any new or emerging risks or changes in
the nature of any existing risks. Nevertheless, any employee can
alert any participant in the risk management process if they
become aware of a risk that they believe has not been previously
identified. Where a new risk emerges, the Risk Leader will raise
the matter with his or her Director and, if appropriate, an owner
is allocated. The Risk Leader then enters the risk detail on the
departmental register and the central team updates the Corporate
Risk Register and allocates an appropriate audit body.
The risk register can be presented in a variety of ways to enable
its use as a business tool, for example, by total score, where the
impact and likelihood are multiplied to reach a total score.
Alternatively Risk Registers can be produced with risks sorted by
audit body, directorate, or by grouping risks into six categories –
Commercial Strategy & Performance, Business Disruption, Costs,
Reputation & Public Confidence, Legal & Regulatory Issues and
People Issues.
A register of key risks is also regularly reviewed by the Risk
Group and by the Audit Committee. By reviewing such risks the
Risk Group and the Audit Committee can assess whether such
risks are being satisfactorily monitored and mitigated should their
likelihood suddenly increase.
The Risk Register and other associated documents are classified
‘Confidential’ and as such, access to them is restricted to
individuals on a ‘need to know’ basis. Access is controlled by the
central risk management team in accordance with the Company’s
systems access control policies.
RESOURCES AND RELATIONSHIPS
The ‘BA Way’ also underpins the Company’s corporate
responsibility reporting. A fuller version of the following
information is available on the website
www.ba.com/responsibility
The BA Way in the marketplace
Customers
The airline puts its customers at the heart of everything it does.
Safety and security
The Company believes that excellent ground security is at the
heart of achieving comprehensive security in the air and works
very closely with all relevant airport authorities, government
regulators and security and law enforcement agencies around the
world. Our experienced team of dedicated security experts
frequently audits every airport to which the airline flies. If any
concerns emerge during the audit, we implement additional
security measures to ensure that security levels in place are
commensurate with our own high standards.
The Company promotes an open safety culture among all staff,
who are encouraged to report incidents or concerns at every
opportunity. It is only through the reporting of safety incidents
that trends can be identified and new procedures put in place to#p#分頁標題#e#
enhance further the airline’s safety record.
The safety of our customers, staff and aircraft is absolutely
paramount and will never be compromised. Even the most minor
incident is reported to and assessed by senior managers.
Monitoring customer satisfaction
The Company monitors customer feedback on key stages of their
flights each month, using a sample of passengers seated in
particular positions throughout the aircraft. The findings are
presented monthly to the Leadership Team. This mechanism
ensures that where shortfalls are identified action is taken to
address the issue.
A chart showing customer satisfaction is on page 26.
Customer advocacy
As detailed in the key performance indicators on page 26.
Customer Recommendation is a key measure of customer
satisfaction for the airline. For the year under review, a number of
areas scored particularly highly in customer satisfaction ratings,
however, there are some areas where customers say the airline
must improve. The key issue for customers is making sure flights
depart on time, especially at Heathrow.
• customers rate cabin crew highly, with 83 per cent of
passengers saying they were extremely or very satisfied
with the service they received from cabin crew (against a
target of 83 per cent);
• overall satisfaction with booking on ba.com was 83 per
cent, with leisure travellers and customers aged 55 and
over rating ba.com particularly highly;
• overall customer satisfaction with flight departure was 43
per cent in February, 2006.
www.ba.com
The Company’s website is central to its plans to make travelling
with the airline easier for customers.
ba.com receives more than 20,000 visits every hour – roughly
three times as many people as fly with the airline. Online
bookings now account for 25 per cent of the Company’s total
bookings worldwide. The website is designed to provide
customers with an extensive range of services including up-to32
British Airways 05/06 Annual Report
the-minute information on flight arrivals and departures, the
ability to check-in, allocate seats and print their boarding cards,
order special meals, book hotels and car hire, manage their
Executive Club accounts, search for information on the
destination they are visiting and find advice on wellbeing before,
during and after their flight. Customers can also make enquiries
and complaints via ba.com and, if necessary, trace any latearriving
baggage. Refinements to ba.com during the last 12
months include:
• enabling customers travelling to America to enter the
Advance Passenger Information data required by the US
authorities before arriving at the airport;
• extending the availability of online boarding passes to 180#p#分頁標題#e#
routes;
• allowing customers to pay for tickets with credit cards
billed in a country other than the original departure point,
and to book up to six sectors – for example, for round-theworld
trips - in one transaction.
‘It’s About Time’
To deliver improved customer service the airline acknowledges
that it must also deliver better punctuality. ‘It’s about time’ is the
name given to the airline’s drive on punctuality, introduced at the
end of 2005. Significant focus is being placed on getting each day
off to a good start. The ‘First Wave’ plan stresses how vital it is
that the first services of the day leave on time to prevent knockon
delays disrupting the later schedule.
In-Flight product development
The Company offers one of the airline industry’s most extensive
ranges of in-flight cabins across its longhaul and shorthaul
networks. It is one of only two international airlines to offer four
cabins on longhaul flights and remains firmly committed to
providing an economy and business class cabin on its mainline
shorthaul operation. It means the airline can offer a quality
service and value-for-money fares for all customers.
In-flight entertainment
The airline announced plans in 2005 to carry out a major
upgrade of the airline’s in-flight entertainment systems in all
longhaul cabins. The introduction of ‘audio-visual on-demand’
means that customers can select a programme, film or music
channel and stop or pause as they wish during the flight,
depending on whether they want to rest, eat or work. The
initiative, to be implemented from Summer 2006, will give
customers more choice and greater flexibility by giving them
control over what they watch and when.
A new training programme for our cabin crew, the ‘Premium
Academy’, was introduced in November, 2005 focusing on
quality of service style and consistency of delivery.
Customer relations
The airline has focused heavily during the last three years on
improving service and interaction with customers who experience
service failures. Customers’ overall satisfaction levels with the
way in which complaints were handled rose from 50 per cent to
65 per cent. Satisfaction with staff professionalism has almost
doubled in the last two years to 60 per cent. Customer
satisfaction for the timeliness of responses to complaints also
increased significantly from 30 per cent to 55 per cent. In part,
this reflected a rise in the proportion of responses sent by email
this year – from 15 per cent to 25 per cent.
SMS alerts
Unfortunately, from time to time flights are disrupted. Following a
successful trial, we introduced this year an SMS messaging
system to alert customers if their flight is delayed or cancelled.#p#分頁標題#e#
Customers who register their mobile phone number on ba.com
will receive a message to alert them to any changes to their flight.
Executive Club
The Company’s customer loyalty and reward programme, the
Executive Club, has been running for 20 years. It is designed to
recognise the airline’s most regular and valuable customers and
rewards them by giving them frequent-flyer points (BA Miles),
priority check in, access for Gold and Silver members to 250
airport lounges worldwide, flight upgrades and special offers.
Results from a trial of 1,000 Executive Club members showed
that satisfaction rose by 14 per cent among those members who
received this more personalised service.
Baggage
Sometimes luggage goes missing or does not travel on the same
flight as its owner. Understanding the inconvenience that this
causes customers, the airline has implemented a number of
initiatives that help customers track and recover their bag more
easily. In North America, for example, a dedicated baggage
helpline has been set up so customers can access specific
assistance rather than rely on airport general customer service
teams who may not be able to give baggage inquiries consistent
priority.
Lounges
In July, 2005, a new Molton Brown spa was opened in the
Terraces Lounge at New York’s JFK airport. A major
refurbishment of lounges in India took place in 2005, and an
overhaul of lounges in Heathrow’s Terminals 1 and 4 was
completed in March, 2006.
Health
The information and advice on air travel and health provided for
customers on the Company’s website has been simplified to make
it clearer and more easily understood, with links to
recommended external websites providing more detail. Health
information provided to passengers through onboard
announcements, video and in-flight magazines has also been
reviewed.
The Company maintains a health service whose responsibilities
include the analysis of health-related issues for passengers and
staff and the provision of advice to the Group on appropriate
measures to take in response to such issues. British Airways
Health Services remains constantly vigilant to the threat of
emerging diseases. Experts in communicable diseases have
warned of the risk of a pandemic flu outbreak and the airline has
set up a contingency planning group to address this specific risk.
Members of the group are working with government and nongovernment
organisations, including the World Health
Organisation (WHO), UK Government and IATA, to ensure a coordinated
response.
Heathrow capacity
To ensure Heathrow airport offers customers a global network of
direct routes comparable with hubs in Continental Europe, the
Company strongly supports the sustainable development of the#p#分頁標題#e#
airport’s capacity.
British Airways 05/06 Annual Report 33
In 2005/06 the Government and BAA have continued with
preliminary studies related to the proposals of the 2003 Air
Transport White Paper to build a third runway at Heathrow
(subject to meeting environmental conditions) and to consult on
full use of Heathrow’s existing runways. The Government is
committed to producing a report on progress on implementation
of the White Paper by the end of 2006.
The Company is actively contributing to these projects for the
sustainable development of Heathrow by:
• responding in detail to BAA’s consultation on a draft
interim master plan for Heathrow, and supporting
proposals that protect local property values in areas
potentially affected by Heathrow’s third runway;
• participating in ‘Future Heathrow’, a broadly-based
campaign embracing all the main Heathrow trades unions,
and local and national business organisations seeking
Heathrow’s sustainable modernisation and expansion;
• discussing with local authority representatives and regional
organisations (including the South East England
Development Agency and the London Development
Agency) the strategies for local and regional plans that
would best secure the potential benefits of Heathrow’s
expansion for these areas. There is a major opportunity
for Heathrow’s growth to underpin areas of West London
that the London Plan is seeking to regenerate with the
creation of many thousands more jobs;
• promoting the case to reduce flight delays when
Heathrow’s runway capacity is increased, as this would cut
emissions and noise from aircraft that would otherwise be
held on the ground before take-off and in a stack before
landing.
The Company will continue fully to support the implementation
of the Government’s policies for the sustainable development of
Heathrow, for the unique benefits it can offer customers as the
UK’s global hub.
Suppliers
Ethical procurement
In February, 2006 we tested an ethical procurement survey on
our 50 main suppliers, covering health, safety, environment,
diversity and labour standards as well as business continuity
planning. We are now working to interpret the findings and to
develop a strategy for improving standards where necessary.
Payment performance
We implemented a number of initiatives this year in order to
improve our level of supplier payment performance to our target
of 90 per cent (67 per cent on time payment in 2004/05). As a
result our on time payment has increased to 78 per cent
worldwide in March, 2006 (with 80 per cent on time payment in
the UK). Initiatives are in hand to improve performance further in#p#分頁標題#e#
2006/07.
Supplier performance
August, 2005 saw disruption to our worldwide flight operation
following industrial action by the workforce at the airline’s
primary Heathrow caterer, Gate Gourmet. The Gate Gourmet
dispute resulted in some of our aircraft not being fully catered for
a considerable period. Contingency plans had been put in place
to minimise customer inconvenience during any such disruption
and these worked well for an initial period. The consequences for
the airline were, however, exacerbated by unlawful industrial
action taken by some of the airline’s ground staff. The Company
has now developed a supplier risk log, which proactively
highlights key risk criteria against critical suppliers. The risks are
monitored on a monthly basis allowing us time to mitigate the
level of risk to our operations and forms part of the corporate
risk governance process.
Terminal 5
Terminal 5 provides suppliers with opportunities to innovate
processes and develop strategies to deliver good customer
service. Terminal 5 is subject to specific environmental
planning conditions, supplemented by joint BA and BAA
initiatives to which each supplier must commit. These
initiatives include reducing emissions by the procurement of
new vehicles and equipment and reducing supplier journeys
into the Terminal 5 site.
Payment policy
British Airways is a signatory to the Confederation of British
Industry (CBI) code of practice on supplier payment and is
committed to the payment of its suppliers to agreed terms.
Further information in respect of this code can be obtained from
the CBI at Centre Point, 103 New Oxford Street, London WC1A
1DU. The number of days’ purchases in creditors as at March 31,
2006 in respect of the Company is calculated in accordance with
the provisions of the Companies Act 1985 and was 39 days
(2005: 55 days).
The BA Way in the workplace
As discussed in the fifth of our key performance indicators
(described on page 27), our employees are critical to the success
of the Company. This section outlines some of the developments
in relation to our staff.
Terminal 5 is bringing the ‘BA Way’ to life. The Company’s
planning has one objective: to deliver the best airport customer
service in the world. Customers want speed through the airport
and punctual departure with their bags. The operation is
designed to deliver these goals, using simple, safe and standard
processes assisted by technology. The Company’s people want
fulfilling and secure jobs, a good working environment, fair
reward and personal development. The Company wants them to
come to work, do the job well and be flexible. The move in
March 2008 will be the largest in the Company’s history and is a#p#分頁標題#e#
once-in-a-lifetime opportunity to transform the travel experience
for customers and working conditions for employees.
The Transition Programme is presently structured into
workstreams covering safety and security, baggage and
equipment, passenger preparation, employees, planning and
control. Included in the workstreams is a focus on the cultural
change required to make Heathrow a safer place to work and the
requirement to ensure all passenger gate requests for seat, meal
or other changes are dealt with prior to the passengers’ arrival at
the airport in order to remove the adverse effect on punctuality.
Another workstream is planning methods which will reduce waste
including duplication of effort, queuing and unnecessary
movement around the airport by both people and vehicles.
34 British Airways 05/06 Annual Report
Diversity
The objective of the Company’s diversity programme is to ensure
greater awareness of diversity issues (disability, age, race, religion,
gender and sexual orientation) amongst all employees.
In 2005/06, some of our key activities included:
• a new diversity training programme for managers has been
designed and delivered;
• an audit of work to enable compliance with the
Employment Equality (Age) Regulations 2006 has been
completed and an action plan developed. The Company
participated in the Government’s consultation process and
is embarking on a cultural change programme for
employees;
• the Company has been involved in a reclassification of the
workforce to 2001 census standards. All employees have
been asked to complete online information about their
ethnic minority status and disability using the new diversity
monitoring categories;
• new diversity targets have been agreed in principle by our
Corporate Responsibility Board and implementation will
proceed in 2006;
• the Company has signed up to a joint partnership with our
four main trade unions as part of a national initiative led by
Amicus and the Department of Trade and Industry aimed
at eradicating workplace harassment and bullying. We are
reviewing communication and training on all aspects of this
issue.
The Company welcomes applications from people with
disabilities and has a helpline number on ba.com to arrange any
reasonable adjustments which may be needed, for example
information in alternative format or extra time for tests. This also
enables us to make adjustments to the workplace in advance of
the employee taking up a position.
The Company works with our Disabled Employees Group and
Occupational Health Department on disability issues, and makes
reasonable adjustments for employees who may become
disabled. If reasonable adjustments cannot be made for any#p#分頁標題#e#
reason, an alternative suitable role and re-training will be
considered through our Careerlink redeployment service.
Training for employees is increasingly provided online and
accessibility to e-learning is constantly reviewed.
All front line employees are now being trained in disability
awareness to increase their knowledge about disabled customers
and employees.
Pension Fund
The Company's New Airways Pension Scheme (NAPS) fund
represents most serving UK staff, with just under 34,000 active
members and 35,000 deferred members and pensions. The 2003
actuarial valuation showed a deficit of £928 million and, despite
additional Company contributions since January, 2004, the deficit
and cost of funding future service within the scheme are both
expected to rise at the next actuarial review (March, 2006) due
to lower long-term interest rates and increased life expectancy.
For this reason the Company has proposed changes to future
benefits within NAPS.
In October, 2005 the Company started a three-month face-toface
communications programme with staff, to ensure that all
were aware of the background to the pensions issue. In March,
2006 the Company proposed that, subject to members agreeing
to increase the retirement age, to lower the accrual rate, to cap
pensionable pay awards in line with inflation and to lower the
capping on pension growth in retirement, it would inject an
additional £500 million into the NAPS pension fund. Discussions
with the trustees, trade unions and workforce on this proposal
are still proceeding.
Management reductions
In November, 2005 the Company announced a programme to
reduce the number of senior managers in the business by 50 per
cent and the number of middle managers by 30 per cent by
March, 2008. The objective of this programme is to remove
duplication and complexity, provide greater accountability and to
reduce costs. The initial phase of this programme saw a 23 per
cent reduction in senior managers by March 31, 2006.
Internal employment
As and when the Company has been downsizing its workforce,
displaced employees below senior manager level have the option
of moving to the Careerlink register through which the internal
job market is managed so as to ensure that individuals who are
displaced are considered first for any vacancies. Careerlink
provides a pool of experienced employees who are available for
redeployment but are also eligible for redundancy. During the
financial year 2006, the number of people registered with
Careerlink reduced to 62. A total of 119 people have found
alternative roles within the business or decided to leave the
Company.
Industrial relations
In Summer 2005 the Company received the backlash of the Gate
Gourmet catering dispute when some of our ground support staff#p#分頁標題#e#
took part in unlawful industrial action affecting the operation at
Heathrow for two days. An enquiry known as ‘Focus on Fact’ was
launched to investigate the events leading up to the disruption.
Two employees were dismissed and a third was suspended as a
result. The cost of the disruption to the business was
approximately £40 million.
Last year a programme for Company managers and Trade Union
(TU) representatives called the Industrial Relations Change
Programme (IRCP) was launched to reduce communication
barriers and improve understanding. Over 1,800 managers and
220 TU representatives attended the workshops. Joint work will
continue in 2006/07 to improve relationships.
Tribunal claims and outcomes
During 2005/06 the Group received new Employment Tribunal
claims in respect of 39 matters and one breach of employment
contract claim in the County Court. Of the 40 cases, the
Company is the Respondent in 32 whilst the remaining eight
cases were brought against BA Connect (2 claims), BA
Maintenance Cardiff (5 claims), BA Clubs (1 claim) and BA
Holidays (1 claim).
Eleven of the 40 cases are ongoing. Of the 29 other matters, the
Company has won in Employment Tribunal in two cases and 13
cases have either been withdrawn by the complainant or struck
out by the Employment Tribunal. Another 11 cases have been
settled either with no payment or with a payment of no more
than £5,000, whilst three cases were settled for a sum over
£5,000.
Two of the ongoing claims are multi-claimant cases brought
British Airways 05/06 Annual Report 35
against the Company. The first of these (with 15 claimants) is a
claim under the Sex Discrimination Act. This relates to the terms
of employment applicable to employees whose roles have
become redundant and whom the Company has redeployed to
new positions.
The second multi-claimant matter is a claim relating to holiday
pay entitlements under the Civil Aviation (Working Time)
Regulations 2004. The claim is brought by the Transport &
General Workers Union (TGWU) on behalf of all its members
who are employed by the Company as ground staff. The exact
number of claimants is yet to be confirmed by the TGWU but the
Company estimates that this will be in the region of 10,076. The
Company faced a similar claim in 2004 in respect of which it is
waiting for the Court of Appeal to issue its judgement.
Absenteeism
A new absenteeism policy was introduced in October, 2004
when our absenteeism ran considerably above the industry
average. The policy was reviewed during 2005/06 assisting us to
approach our target of 10 days average absence per employee.
The average stood at 10.5 days in January, 2006.
Training
The British Airways Training Department delivers in excess of#p#分頁標題#e#
200,000 training days per annum worldwide. The majority of our
expenditure is on mandatory and job essential training to ensure
that we continue to meet our objective of being the safe and
secure airline of choice. More than a third of all training is now
available online, reflecting the need for cost-effectiveness.
Terminal 5 will be a focus for the training team during the next
two years. By February, 2008 over 5,000 Heathrow-based staff
will have received training in preparation for the opening of the
new terminal.
Recruitment
The Company aims to ensure that it attracts sufficient numbers of
people, at the required standard to meet its external recruitment
needs. Recruitment is closely monitored to ensure that it is only
authorised if the Company is confident that the business need is
critical, and there are no suitable internal candidates available.
Despite this, the Company has recruited 2,300 people since April,
2005 from 41,000 applications. On average there are over 5,000
visits every day to our job website: www.britishairwaysjobs.com
Employee Involvement
An important part of our strategy is to continue our focus on
Employee Involvement. The Employee Involvement initiative has
created a foundation for developing new ways of communicating,
managing and involving our people. During the past year, several
hundred managers have been trained in communication and
involvement skills in order to engage and mobilise our
employees. A number of departmental sessions have been held
to communicate business issues and invite ideas and debate.
Leadership Team members have increased their visibility, meeting
hundreds of people across the business.
Employee Reward Plan 2005/06
In 2004, the Board approved an Employee Reward Plan (ERP) for
non-management grades, linked to the operating margin the
airline achieves. The initial Board approval was to operate the
ERP for two years. Financial year 2005/06 is the ERP’s second
year. Managers and APPG grade are not included in the ERP.
They have their own existing performance related bonus scheme
linked to the operating margin and individual performance targets and
ratings. This will incorporate an equivalent ERP element. The new
arrangements mean that everyone can benefit from the Company’s
future success as it seeks to work together to improve the business
performance, measured by the operating margin achieved.
Health and safety
The Company is committed to creating a safety culture that uses
behavioural risk management. It is engaged in a number of
initiatives to reduce the risk of employees being injured at work.
In preparation for the move to Terminal 5 the Company has
contracted Marsh to assist in further improving the safety culture
of the Heathrow ramp staff through the introduction of a#p#分頁標題#e#
Behavioural Risk Improvement programme – RAMPsafe. The
overall aim of the programme is to reduce lost time, injuries,
aircraft damage and vehicle damage and to enhance risk
awareness on the ramp areas. It will also aim to improve
communication of the safety message within all areas of the
Company. Specific manual handling training is being provided to
ramp staff. On completion of the training the Company expects
to see a 25 per cent reduction in the risk of injury to ramp
workers. Completion of training for the initial targeted population
will occur in 2007/08. To complement the training initiatives the
Company is also leading the industry in reducing the maximum
permitted weight of a single piece of checked-in baggage.
Employee safety key performance indicators
Number of employee safety incidents by severity:
Minor Serious Major Fatal
2002/03 6,271 454 40 0
2003/04 5,677 405 22 0
2004/05 5,248 594 24 0
2005/06 5,461 741* 15 0
* We are continuing to see a steady reduction in the number of major
injuries. The rise in the number of serious injuries is attributed to changes
in the way that injuries of this type are recorded. A “serious injury” is one
that has the ability to cause an absence. With our focus on reducing
absenteeism the accuracy of recording of injury severity has become even
more important because absence associated with a work related injury is
typically discounted from an employee’s absence record. Incidents are
investigated and analysed for trends. There is no evidence to suggest that
the increase in serious incidents reflects a reduction in the personal safety
of our employees.
Number of 2005/06 fatalities, health and safety offences and
enforcement notices issued:
Issue Number
Fatalities involving BA employees or
contractors at work 0
Health and Safety offences 0
Enforcement notices 0
Working days lost due to work related injuries for 2005 average
4,214 per month per 100,000 employees (see graph overleaf).
The 2004 average was 4,300 days per month. The Health and
Safety Executive has set a target for reducing the number of
major injuries by ten per cent by 2010. The number of major
injuries at the Company has now reduced from 40 since
2002/03 to 15 and we continue with our drive to reduce this
number to zero.
36 British Airways 05/06 Annual Report
0
1000
2000
3000
4000
5000
6000
Number of Lost Days
Rate B A Average
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Working Days lost from Work Related Injury
per 100,000 Employees
Our target is for the number of working days lost due to all causes of injuries to be reduced by 30 per cent by 2010 and the total#p#分頁標題#e#
number of major injuries to be reduced by ten per cent by 2010. (These are targets set by the Health and Safety Executive with the
baseline set at 2001.)
The BA Way in the Community
The Company continues to be a member of both the London
Benchmarking Group (LBG) and Business in the Community’s
Percent Club. The LBG’s benchmarking model is used to assess
the Company’s total contributions to the community. Business
in the Community reported our total contributions for the
financial year 2006 as £5.4 million (2005: £6 million). The
Company’s direct charitable donations (cash donations to
charity) for the financial year 2006 were £898,081 (2005:
£830,000).
British Airways Giving Scheme saw 5,157 of current and retired
United Kingdom employees donate £614,909 directly from their
payroll to their chosen charities. The top charities were Cancer
Research UK, High Flight, Sreepur Village Project, RSPCA and
NSPCC.
In 2006, the Company supported 130 projects worldwide within
five themed priorities: education and youth development,
supporting employees, sustainable tourism, environment and
heritage.
For more information see: www.ba.com/communityrelations
The BA Way in the Environment
The Company is committed to respecting the environment and
improving its environmental performance. The Company focuses
particularly on issues related to the direct impact of aviation on
the environment – climate change, noise and air quality. In
addition it seeks to ensure it minimises waste and makes efficient
use of natural resources throughout its operations.
In 2005, the Company joined a cross-sectoral initiative to
develop a strategy for the long-term development of UK aviation.
The Sustainable Aviation Initiative includes commitments on key
environmental challenges including limitation of climate change,
noise and local emissions.
The Company is reducing the climate change impact of its aircraft
fleet through investment in modern aircraft and operational
measures to minimise fuel consumption. The Company’s aircraft
fuel efficiency has improved by 27 per cent from a 1990 baseline
and remains on target to meet its fuel efficiency target of 30 per
cent improvement by 2010.
The Company has participated in the voluntary UK Emissions
Trading Scheme since 2002. Emissions of carbon dioxide from
UK properties and domestic flights have reduced by 18 per cent
compared to the 1998-2000 baseline. The Company believes it is
the only major airline involved in emissions trading, and has
sought to share its experience with the European Commission
and ICAO as both organisations seek to promote the
involvement of aviation in emissions trading.
81
77 77
73 73#p#分頁標題#e#
76 76
65
Av.
95-00
00-01 01-02 02-03 03-04 04-05 2005
70
75
85
80
Aircraft fuel efficiency (index of fuel use per
Revenue Tonne Kilometre, 1990 =100)
British Airways 2010 target
British Airways 05/06 Annual Report 37
In September, 2005 the Company added to its programme of
initiatives on climate change by launching a voluntary carbon
offset scheme available through ba.com. This offers customers
the opportunity to invest in projects sponsored by Climate
Care which reduce carbon emissions equivalent to those
generated by their flight with the Company.
The Company continues to take steps to reduce the impact on
local communities including reducing aircraft noise. More than
85 per cent of the aircraft fleet now meet the criteria for the
new Chapter 4 international noise standard. The Company is
also constantly reviewing its operating practices and this year
has changed Boeing 777 landing settings at Heathrow and
Gatwick to reduce noise. This change will be progressively
rolled out to other airports.
Local air quality around airports is an increasingly important
issue, particularly at Heathrow where future legal limits mean it
could be a barrier to future expansion. The Company is
working with the UK Department for Transport to help
improve the measurement of the impact of aircraft on local air
quality, including active involvement in the technical work as
part of the Project for the Sustainable Development of
Heathrow.
Road traffic is the major cause of air quality problems around
Heathrow Airport, so the Company continues to look for
opportunities to promote alternative modes of transport for its
employees. In June, 2005, the Company published its second
company travel plan ‘Towards T5’.
The Company launched a waste initiative in January, 2005
and set targets for waste minimisation and increased
recycling. The focus on waste management has continued
with additional initiatives and projects. In calendar year 2005,
segregated recycling at Heathrow and Gatwick increased by
nearly ten per cent and the proportion of waste at Heathrow
and Gatwick disposed to landfill was three per cent less than
the previous year.
Getting ‘Fit for Five’ is a key part of the Company’s current
business plan. This includes ensuring its facilities and operating
practices for Terminal 5 at Heathrow Airport helps the
Company to achieve improved environmental performance. In
particular the Company seeks to make progress in reducing
noise and emissions, exploiting innovative design for energy,
water and waste management, and maximising the use of
sustainable resources.
Key environmental targets
The Company focuses particularly on the specific environmental#p#分頁標題#e#
impacts of aviation on the global atmosphere, and on local
communities, through noise and NOx emissions which
contribute to local air quality problems.
The Company continues to focus on best practice techniques to
mitigate the noise and emissions impacts from its aircraft.
Absolute levels of noise and emissions have, however, increased
slightly as a result of the increased flying programme and
improved aircraft utilisation supported by generally improved
market conditions.
The Company remains on course to meet its target for a 30 per
cent improvement in aircraft fuel efficiency in 2010 compared to
a 1990 baseline. The Company’s fuel efficiency has improved by
27 per cent since 1990, equivalent to a saving of 55 million
tonnes of carbon dioxide. In calendar year 2005, carbon dioxide
emissions from its global flight operations increased slightly,
reflecting increased aircraft utilisation.
Noise from its global flight operations has reduced by 30 per cent
over the past five years as a result of investment in modern, quiet
aircraft technology. In calendar year 2005, its noise indicator
increased slightly, reflecting increased aircraft utilisation.
The Company is revising its approach to the measurement of
NOx in the light of the work carried out for the governmentsponsored
Project for Sustainable Development of Heathrow
(PSDH). However, the Company has invested in an aircraft fleet
which meets high environmental standards. More than threequarters
of its aircraft fleet (76 per cent) meets the highest global
emissions standard (ICAO CAEP/4).
For more information see: www.ba.com/responsibility
RECEIPTS AND RETURNS TO
SHAREHOLDERS
Dividend
The Board has again decided not to recommend the payment of
a dividend. The Company last paid a dividend in July, 2001. The
Board has indicated its intention is to resume the payment of
dividends at an appropriate time.
14
Av.
95-00
00-01 01-02 02-03 03-04 04-05 2005
15
16
17
Aircraft carbon dioxide emissions
(million tonnes)
16.6
15.5
15.2
15.4
15.8
16.1
17.1
0.4
Av.
95-00
00-01 01-02 02-03 03-04 04-05 2005
0.6
0.8
1.0
Total noise energy from British Airways aircraft
(million “Quota Count” equivalents)
1.05
0.57
0.53
0.51 0.52
0.7
0.53
38 British Airways 05/06 Annual Report
Share Issues/Buybacks/Treasury Shares
The authorised Share Capital is unchanged, with a small change
in the issued capital.
No authority has been sought from shareholders to conduct
share buybacks.
The Articles of Association permit the holding of shares in
Treasury but the Company is not able to operate such a scheme#p#分頁標題#e#
without first seeking the authority from shareholders to conduct
share buybacks.
Capital Bond Conversion
The £320 million 9 3/4 per cent Convertible Capital Bonds 2005
issued in 1989 matured on June 15, 2005. On that date
47,979,486 ordinary shares were issued in exchange for
112,317,274 Convertible Capital Bonds on the basis of one
ordinary share for every 2.34 Bonds held.
Shares and Shareholders
The number of shares issued and fully paid as at May 18, 2006
was 1,132,799,225. The increase over March 31, 2006 reflects
the issue of new shares to satisfy a portion of the share options
exercised under the British Airways Share Option Plan 1999.
Capital Structure
The number of shares allotted, called up, and fully paid on
March 31, 2006 was 1,130,882,000 (March 31, 2005:
1,082,903,000). During the year, 10,602,000 shares were issued
on the exercise of options under Employee Share Option
schemes (2005: 2,026,000).
See Note 28 to the Financial Statements.
The following table represents shares exercised during the year under the British Airways Share Option Plan 1999.
Group and Company
Number of shares ‘000s 2006 2005
Share options
Outstanding at April 1 47,114 42,274
Granted in the year 8,242 8,942
Exercised during the year * (10,602) (2,026)
Expired/cancelled (2,707) (2,076)
At March 31 42,047 47,114
Date exercisable 2006 – 2015 2005 – 2014
Price per share 157p – 394p 157p - 465p
Price range of options exercised during the year 157p – 321p 157p - 262p
*Part of the exercise of shares during the year was met through shares previously held by British Airways Employees Benefits Trustees (Jersey) Limited.
Exercise of share options
Size of Percentage of Percentage of
shareholding shareholders shares
1-1,000 87.20 5.21
1,001 - 5,000 11.43 4.40
5,001 - 10,000 0.81 1.09
10,001 - 50,000 0.31 1.22
50,001 - 100,000 0.06 0.80
100,001 - 250,000 0.06 1.96
250,001 - 500,000 0.04 2.87
500,001 - 750,000 0.02 2.42
750,001 - 1,000,000 0.01 2.04
Over 1,000,000 0.06 77.99
100.00 100.00
Classification of Percentage of Percentage of
shareholding shareholders shares
Individuals 98.30 11.30
Bank or Nominee 1.37 85.70
Insurance companies 0.02 0.01
Pension trusts 0.01 0.69
Investment trusts 0.02 0.09
Other corporate bodies 0.28 2.21
100.00 100.00
As at May 18, 2006 there were 232,863 shareholders (May, 2005: 236,786). An analysis is given below.
As at May 18, 2006 Barclays PLC have a non-beneficial interest in 9.98 per cent of the shares of the Company.
British Airways 05/06 Annual Report 39
Treasury policies and objectives
The Board of Directors sets the Treasury policies and objectives
of the Group, and lays down the parameters within which the#p#分頁標題#e#
various aspects of Treasury risk management are operated. The
Board has approved a Treasury governance statement that
outlines the Group’s policies towards management of corporate
and asset financing, interest rate risk, fuel price risk, foreign
exchange risk and cash and liquidity retention. The Treasury
governance statement also lists the financial instruments that the
Group’s Treasury function is authorised to use in managing
financial risks. The governance statement is under on-going
review to ensure best practice in the light of prevailing
conditions.
Responsibility for ensuring that Treasury practices are consistent
and compatible with the agreed governance statement is vested
in the Finance Committee that is chaired by the Chief Financial
Officer.
A monthly Treasury Committee, chaired by the Group Treasurer
and Head of Investor Relations, approves risk management
strategies and reviews major foreign exchange, fuel and interest
rate exposures and actions taken during the month to manage
those exposures.
Group Treasury implements the agreed policies on a day-to-day
basis to meet the Treasury objectives in a risk averse though cost
effective manner. These objectives include ensuring that the
Group has sufficient liquidity to meet its day-to-day needs and to
fund its capital investment programme and other investments;
deploying any surplus liquidity in a prudent and profitable
manner; managing currency, fuel, interest rate and credit
exposures to minimise Group risk; and managing the Group’s
relationship with a large number of banks and other financial
institutions worldwide.
As part of its Treasury and fuel risk management programme, the
Group selectively uses derivative financial and commodity
instruments in order to reduce its exposure to fluctuations in
market rates and prices. The Group uses derivatives only for the
purposes of hedging identified exposures, where appropriate,
and does not invest in derivatives for trading or speculative
purposes. The instruments used include swaps, futures and
forward contracts, options and collars in the currency, interest
rate and fuel markets.
Foreign currency risk
The Group generates a surplus in most of the currencies in
which it does business. The US Dollar can be an exception to
this as capital expenditure, together with ongoing operating
lease and fuel payments denominated in US Dollars, can create a
deficit. In the year to March 31, 2006, the Group had more US
Dollar payments than US Dollar revenues, principally as a result
of its fuel requirements being purchased in US Dollars.
The Group can experience adverse or beneficial effects arising
from exchange rate movements. For example, the Group is likely
to experience an adverse effect from a strengthening in Sterling#p#分頁標題#e#
or the US Dollar and a beneficial effect from a strengthening of
other foreign currencies. The Group seeks to reduce its foreign
exchange exposure arising from transactions in various
currencies through a policy of matching, as far as possible,
receipts and payments in each individual currency. Surpluses of
convertible currencies are sold, either spot or forward, for US
Dollars or Sterling.
The Group has substantial liabilities denominated in Yen, which
consist mainly of purchase option payments falling due under
various Japanese leveraged lease arrangements maturing
between 2006 and 2011. These purchase option payments total
£714 million (Yen 146 billion) but of this £367 million (Yen 75
billion) has been refinanced and will be repaid over five years
commencing on the original purchase option date. The Group
utilises its Yen purchase option and debt repayments as a hedge
of future Yen traffic revenues.
Forward foreign exchange contracts are used to cover near-term future revenues and operating payments in a variety of currencies.
The Group had outstanding forward transactions to hedge foreign currencies as follows:
All Expected to 2006 2005
Mature before Notional Notional
(£ million) March 31, 2007 Gain/(Loss) Gain/(Loss)
To hedge future currency revenues against Sterling
- Pound Sterling equivalents 152 (1) 1
To hedge future operating payments against US Dollars - US Dollars 428 5
To hedge future currency revenues against US Dollars - US Dollars 136 (3) (2)
To hedge debt against Japanese Yen - Pound Sterling equivalents 10
The unrealised gain/(loss) on forward currency transactions has been calculated as the change in the marked to market value between inception
and the reporting date.
40 British Airways 05/06 Annual Report
At March 31, 2006 53 per cent of the Group’s gross borrowings
(after swaps) were at fixed rates of interest and 47 per cent were
at floating rates. This proportion of fixed rate borrowings has
increased from 51 per cent at March 31, 2005.
The Group’s borrowings are predominantly denominated in
Sterling, US Dollars and Yen. Sterling represents the Group’s
natural “home” currency, whilst a substantial proportion of the
Group’s fixed assets are priced and transacted in US Dollars.
Financing and interest rate risk
Most of the Group’s debt is asset related, reflecting the capitalintensive
nature of the airline industry and the attractiveness of
aircraft as security to lenders and other financiers. These factors
are also reflected in the medium to long-term maturity profiles of
the Group’s loans, finance leases and hire purchase
arrangements. Low capital expenditure has meant that the
requirements for new financing have been limited.#p#分頁標題#e#
The currency and interest rate mix of the Group’s gross borrowings is as follows:
Expected final maturity date before March 31
After
March 31, Fair Fair
(£ millions, except percentages) 2007 2008 2009 2010 2011 2011 Total Value 2005 Value
Fixed rate principal (Pounds Sterling) 53 46 92 13 22 914 1,140 1,193 1,298 1,382
Weighted average fixed rate 8.4% 6.4% 8.9% 6.9% 6.4% 6.6% 6.9% 6.1%
Floating rate principal (Pounds Sterling) 32 34 126 458 29 719 1,398 1,398 1,704 1,704
Weighted average floating rate 5.0% 5.4% 5.0% 5.0% 5.2% 4.7% 4.9% 5.2%
Fixed rate principal (US Dollars) 138 159 297 289 275 269
Weighted average fixed rate 3.5% 5.4% 4.5% 4.5%
Floating rate principal (US Dollars) (138) 15 100 555 532 532 571 571
Weighted average floating rate 4.6% 5.0% 5.0% 5.4% 5.5% 3.7%
Fixed rate principal (Japanese Yen) 65 107 62 280 178 22 714 714 756 756
Weighted average fixed rate 1.4% 1.2% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Floating rates of interest are based on LIBOR (London Interbank
Offered Rate) and fixed rates of interest are based on the
contract rates. Fair values of bank and other loans, finance leases
and the non-Yen denominated portions of hire purchase
arrangements carrying fixed rates of interest have been
calculated by discounting the repayments which the Group is
committed to make at the relevant interest rates applicable at
March 31, 2006. Fair values of the Euro-Sterling notes and
Euro-Sterling Bond 2016 are based on the quoted market values
at March 31, 2006. The fair values of floating rate borrowings
are deemed to be equal to their carrying values.
The Yen denominated portions of hire purchase arrangements
carrying fixed rates of interest relate to the tax equity portions of
Japanese leveraged leases which are personal to the Group,
cannot be assigned and could not be refinanced or replaced in
the same cross border market on a marked-to-market basis and,
accordingly, a fair value cannot be determined. The carrying
value has therefore been included as the fair value above.
As part of its Treasury risk management activities, the Company
has entered into a number of swap agreements in order to hedge
its direct exposure to interest rates. The majority of these swaps
are embedded in lease and loan agreements. A smaller number
of interest rate swaps are not associated with specific loans and
leases and are disclosed below.
The unrealised profit on the interest rate swaps was calculated
using discounted cash flow analysis, to determine the amount
the Group would receive or pay to terminate the agreements.
Single currency interest rate swap
Notional principal balance $240 million
Termination dates 2008
- weighted average fixed
rate payable 2.95% - 3.57%
- weighted average variable#p#分頁標題#e#
rate receivable 4.45% - 4.67%
Unrealised profit £4 million
British Airways 05/06 Annual Report 41
Fuel price risk
The Group's fuel risk management strategy aims to provide the
airline with protection against sudden and significant increases in
oil prices while ensuring that the airline is not competitively
disadvantaged in a serious way in the event of a substantial fall in
the price of fuel. In meeting these objectives, the fuel risk
management programme allows for the judicious use of a number
of derivatives available on the Over The Counter (OTC) markets
with approved counterparties and within approved limits.
Derivatives traded on regulated exchanges in London (the
International Petroleum Exchange) and New York (the New York
Mercantile Exchange) are also used.
Derivative financial instruments
The Company uses derivative financial instruments (derivatives)
selectively for Treasury and fuel risk management purposes. The
Group’s policy is not to trade in derivatives but to use these
instruments to hedge anticipated exposures.
Forward foreign exchange contracts and collars are used to cover
near term future net revenues in a variety of currencies. Forward
foreign exchange contracts outstanding at March 31, 2006 are
summarised in Note 27 to the Financial Statements.
The Group considers the purchase of interest rate, foreign
exchange and fuel options as bona fide Treasury exposure
management activities. It would not generally contemplate the
opening of new exposures by selling options, except where the
Set out below are the outstanding fuel contracts at March 31,
2006, which all mature on or before March 31, 2008.
2006 2005
Expected to mature before March 31
2007 2008 Total Total
Swaps
volume (barrels millions) 4.8 2.0 6.8 7.1
- open acquisition
value ($ millions) 382.7 97.3 480.0 282.0
- Unrealised gain ($ millions) 94.1 43.8 137.9 364.0
Collars
volume (barrels millions) 17.4 5.6 23.0 21.4
- open acquisition
value ($ millions) 1,220.1 402.6 1,622.7 987.0
- Unrealised gain ($ millions) 182.0 32.2 214.2 159.0
Total
volume (barrels millions) 22.2 7.6 29.8 37.3
- open acquisition
value ($ millions) 1,602.8 499.9 2,102.7 2,602.5
- Unrealised gain ($ millions) 276.1 76.0 352.1 523.0
- Unrealised gain
(Sterling equivalent millions) 159.0 43.7 202.7 278.0
See Critical Accounting Policy on page 25.
risks arising from selling the option are covered by other
elements of the hedging portfolio or underlying physical position,
for example, as a component of a collar. Other Treasury
derivative instruments would be considered on their merits as
valid and appropriate risk management tools and, under the
Treasury governance framework, require Board approval before#p#分頁標題#e#
adoption.
As derivatives are used for the purposes of risk management,
they do not expose the Group to market risk because gains and
losses on the derivatives offset losses and gains on the matching
asset, liability, revenues or costs being hedged. Counterparty
credit risk is generally restricted to any hedging gain from time to
time and is controlled through mark to market based credit
limits.
Interest cover
The Group’s interest cover for the year ended March 31, 2006
was 5.8 times. The increase in interest cover from last year (3.8
times) reflects the improvement in the operating profitability of
the Group and a reduction in net interest payable. This reduction
principally reflects the lower level of net debt of the Group.
Off-balance sheet arrangements
As part of its Treasury and fuel risk management programme, the
Group selectively uses derivative financial and commodity
instruments in order to reduce its exposure to fluctuations in
market rates and prices. The Group uses derivatives only for the
purposes of hedging identified exposures, where appropriate, and
does not invest in derivatives for trading or speculative purposes.
The instruments used include swaps, futures and forward
contracts, options and collars in the currency, interest rate and
fuel markets.
Under IAS 39 financial instruments are recorded initially at fair
value. Subsequent measurement of those instruments at the
balance sheet date reflects the designation of the financial
instrument. The measurement of fair value is based on market
observable data, where such information is available, or
alternative valuation methods that can involve the use of
judgements and estimates.
Gains and losses on derivative financial instruments designated
as cash flow hedges and assessed as effective for the period, are
taken to equity in accordance with the requirements of IAS 39.
Gains and losses taken to equity are reflected in the income
statement when either the hedged cash flow impacts income or
its occurrence ceases to be probable. As a result of the
requirement to measure the effectiveness of the hedging
instruments, changes in market conditions or the Group’s
hedging strategy can result in the recognition in the income
statement of unrealised gains or losses on derivative financial
instruments designated as hedging instruments. During financial
year 2006 derivatives were generally found to be effective. The
only ineffectiveness related to fuel hedges where the unrealised
profit being recognised in the income statement for ineffective
hedges was £19 million compared with a recognised realised
hedging profit for 2006 of £303 million.
42 British Airways 05/06 Annual Report
The Group has amounts, excluding accrued interest payable, falling due under various debt and other contractual#p#分頁標題#e#
obligations as follows:
Less than More than
(£ millions) 1 year 1 - 5 years 5 years Total 2005
Long-term debt obligations 86 354 676 1,116 1,168
Capital lease obligations 393 1,421 1,151 2,965 3,324
Operating lease obligations 177 414 1,535 2,126 2,119
Total 656 2,189 3,362 6,207 6,611
See also Notes 24 and 27 to the Financial Statements.
Debt and other contractual obligations
Capital commitments
Capital expenditure commitments authorised and contracted for,
but not provided for in the 2006 Financial Statements, amounted
to £249 million for the Group (2005: £143 million), and £249
million for the Company (2005: £142 million), in each case as at
March 31. The outstanding commitments include £222 million
which relates to the acquisition of Airbus A320/A321 aircraft
scheduled for delivery over the next two years. It is intended that
these aircraft will be financed partially by cash holdings and
internal cash flow and partially through external financing,
including committed facilities arranged prior to delivery.
Liquidity
The Group maintained high liquidity throughout the year. Cash
generated from operations together with continued low capital
expenditure and the disposal of the London Eye for a net £78
million, allowed the Company to make scheduled repayments of
£462 million and to repay £17 million of debt early whilst
increasing year end cash balances. The Group continually reviews
liquidity requirements.
At March 31, 2006 the Group had at its disposal short-term
loans and deposits and cash at bank and in hand amounting to
£2,440 million (2005: £1,682 million). In addition, the Group
had undrawn long term committed aircraft financing facilities
totalling approximately US$216 million, further general facilities
of $420 million and Yen 75 billion and undrawn uncommitted
overdraft lines totalling £60 million.
The Group’s holdings of cash and short-term loans and deposits,
together with committed general funding facilities and net cash
flow, are expected to be sufficient to cover the cost of all
outstanding firm aircraft deliveries.
Surplus funds are invested in high quality short-term liquid
instruments, usually bank deposits and money market funds.
Credit risk is managed by limiting the aggregate exposure to any
individual counterparty, taking into account its credit rating. Such
counterparty exposures are regularly reviewed and adjusted as
necessary. Accordingly, the possibility of a material loss arising in
the event of non-performance by counterparties is considered to
be unlikely.
British Airways 05/06 Annual Report 43
Total Group operations 2006 2005 2004 2003 2002
Traffic and capacity
Revenue passenger km (RPK) m 111,859 107,892 103,092 100,112 106,270#p#分頁標題#e#
Available seat km (ASK) m 147,934 144,189 141,273 139,172 151,046
Passenger load factor % 75.6 74.8 73.0 71.9 70.4
Cargo tonne km (CTK) m 4,933 4,954 4,461 4,210 4,033
Total revenue tonne km (RTK) m 16,105 15,731 14,771 14,213 14,632
Total available tonne km (ATK) m 23,106 22,565 21,859 21,328 22,848
Overall load factor % 69.7 69.7 67.6 66.6 64.0
Passengers carried ’000 35,634 35,717 36,103 38,019 40,004
Tonnes of cargo carried ’000 795 877 796 764 755
Frequent flyer RPKs as a percentage of total RPKs (Note 2) % 2.8 3.2 4.0 4.4 3.7
Revenue aircraft km m 659 661 644 635 685
Revenue flights ’000 368 378 391 413 492
Break-even overall load factor % 63.0 64.3 63.6 63.9 65.0
Financial
Passenger revenue per RPK p 6.10 6.02 6.30 6.58 6.67
Passenger revenue per ASK p 4.61 4.51 4.59 4.74 4.69
Cargo revenue per CTK p 10.10 9.73 10.38 11.50 11.98
Average fuel price (US cents/US gallon) 188.22 136.44 94.49 86.01 81.29
Operations
Average manpower equivalent (MPE) 47,012 47,472 49,072 53,440 60,468
RTKs per MPE 342.6 331.4 301.0 266.0 242.0
ATKs per MPE 491.5 475.3 445.4 399.1 377.9
Aircraft in service at year end 284 290 291 330 360
Aircraft utilisation (average hours per aircraft per day) 10.14 9.83 9.21 8.91 8.32
Unduplicated route km ’000 627 623 657 693 814
Punctuality – within 15 minutes % 75 76 81 76 81
Regularity % 98.8 98.8 98.8 98.2 98.6
2006 2005 2004* 2003* 2002*
Financial*
Interest cover (note 3) times 5.8 4.1
Dividend cover times n/a n/a
Operating margin (note 4) % 8.3 7.2
Earnings before interest, tax, depreciation, amortisation
and rentals (EBITDAR) m 1,701 1,581
Net debt/total capital ratio (note 5) % 44.2 67.7
Net debt/total capital ratio including operating leases % 53.0 72.3
Total traffic revenue per RTK p 45.44 44.38
Total traffic revenue per ATK p 31.67 30.94
Net operating expenditure per RTK (note 6) p 41.06 40.85
Net operating expenditure per ATK (note 6) p 28.62 28.48
* Financial ratios are only available under comparative IFRSs from the Group’s transition date of April 1, 2004.
n/a = not applicable
OPERATING AND FINANCIAL STATISTICS (NOTE 1)
For the five years ended March 31, 2006
44 British Airways 05/06 Annual Report
Notes:
1 Operating statistics do not include those of associates
undertakings (Iberia and Comair) and franchisees (BMED,
GB Airways, Loganair and Sun Air (Scandinavia) ). The franchise
relationship with Regional Air was terminated in April, 2005.
2 The carriage of passengers on Frequent Flyer Programme is
evaluated on a ticket by ticket basis.
3 Interest cover is defined as the number of times profit/(loss)
before tax excluding net interest payable covers the net interest
payable. Interest cover is not a financial measure under IFRS or#p#分頁標題#e#
US GAAP. However, management believes this measure is useful
to investors when analysing the Group’s ability to meet its
interest commitments from current earnings.
4 Operating margin is defined as operating profit/(loss) as a
percentage of revenue. Revenue comprises: passenger revenue
(scheduled services and non scheduled services), cargo services
and other revenue. See Note 3 to the Financial Statements for
segment information on revenue.
5 Net debt as a percentage of total capital. Net debt is defined
as the total of loans, finance leases and hire purchase liabilities,
plus Convertible Capital Bonds, net of short-term loans and
deposits and cash less overdrafts. See Note 21 to the Financial
Statements for details of the calculation of net debt.
Total capital is defined as the total of capital, reserves, minority
interests, and net debt. Total capital and the net debt/total
capital ratio are not financial measures under IFRS or US GAAP.
Similarly, net debt adjusted to include obligations under
operating leases is not a financial measure under IFRS or US
GAAP. However, management believe these measures are useful
to investors when analysing the extent in which the Group is
funded by debt rather than by shareholders’ funds.
The following table shows a reconciliation of net interest payable
for each of the two most recent financial years:
Year ended March 31
2006 2005
(£ million (except ratios))
Profit before tax 620 513
Net interest payable (a) (128) (168)
Profit adjusted for Interest Payable (b) 748 681
Interest Cover (b)/(a) 5.8 4.1
6 Net operating expenditure is total operating expenditure less
other revenue. Net operating expenditure, net operating
expenditure per RTK and net operating expenditure per ATK are
not financial measures under IFRS or US GAAP. However,
management believe these measures are useful to investors as
they provide further analysis of the performance of the Group’s
main business activity i.e. airline operations. The Board of
Directors reviews these measure internally on a monthly basis as
an indication of management’s performance in reducing costs.
Directors’ statement as to disclosure of information
to auditor
The directors who are members of the Board at the time of
approving the Directors’ Report and Business Review are listed
on pages 4 and 5. Having made enquiries of fellow directors and
of the Company’s auditor, each of these directors confirms that:
• to the best of each directors’ knowledge and belief there is
no information relevant to the preparation of their report
to which the Company’s auditor is unaware; and
• each director has taken all the steps a director might
reasonably be expected to have taken to be aware of#p#分頁標題#e#
relevant audit information and to establish that the
Company’s auditor is aware of that information.
Approved by the Board and signed on its behalf by
Alan Buchanan
Company Secretary May 18, 2006
The following table shows a reconciliation of net operating
expenditure to total operating expenditure, total operating
expenditure per RTK and total operating expenditure per ATK
for each of the two most recent financial years:
Year ended March 31
2006 2005
(£ million (except ratios))
Total operating expenditure 7,810 7,216
Less: other revenue (1,197) (790)
Net operating expenditure 6,613 6,426
RTKs 16,105 15,731
ATKs 23,106 22,565
Net operating expenditure per RTK (p) 41.06 40.85
Net operating expenditure per ATK (p) 28.62 28.48
The following table shows a reconciliation of total capital to totalshareholders' funds and the net debt/capital ratio for each of thetwo most recent financial years:
At March 31
2006 2005
(£ million (except ratios))
Capital and reserves 1,861 1,185
Add minority interests 213 212
Total shareholders’ funds 2,074 1,397
Net debt (a) 1,641 2,922
Total capital (b) 3,715 4,319
Net debt/total capital percentage (a)/(b) 44.2 67.7
British Airways 05/06 Annual Report 45
Remuneration report
Information not subject to audit
COMMITTEE AND ADVISERS
The Company’s Remuneration Committee determines obehalf of the Board, within the agreed terms of reference, theoverall remuneration packages for the executive directors, themembers of the Leadership Team (listed on page 5), theChairman and the Company Secretary. Its members are allindependent non-executive directors of the Company, none ofwhom has any personal financial interest, other than as ashareholder, in the matters to be decided. Throughout thefinancial year 2006, the Company’s Remuneration Committeewas chaired by Dr Martin Read and its other members wereMaarten van den Bergh, Lord Renwick (until July 19, 2005) and,from July 19, 2005, Alison Reed. The Company Secretary actsas secretary to the Committee.The Company currently participates in three main salary surveysources – run by Hay, Monks, and Towers Perrin. Data isextracted from each of these in determining the Company’sapproach to base pay market rates, and identifying competitive
market practice in respect of the other remuneration elements.
The Remuneration Committee is cognisant of the risk of anupward ratchet of remuneration that can result from the use ofpay surveys.
New Bridge Street Consultants LLP are advisers to the
Remuneration Committee and gave advice to the Committee thatmaterially assisted it. Their terms of reference are available forinspection on the Company’s investor relations website. TowersPerrin, which is the Company’s main adviser in relation toexecutive remuneration, also gave advice to the Committee thatmaterially assisted it. The Chairman, Rod Eddington and WillieWalsh, (each in their capacity as Chief Executive), the CompanySecretary, Neil Robertson, Director for People and ChristopherHunt, Reward Manager, all assisted the Committee in itsdeliberations but none of them participated in any decisionsrelating to their own remuneration. None of those who materiallyassisted the Committee in itsdeliberations was appointed by theRemuneration Committee other than New Bridge StreetConsultants. New Bridge Street Consultants, Towers Perrin, Hayand Monks provided no other services to the Company otherthan advice on remuneration matters during the financial year.Where appropriate, the Committee does consult with investorsabout its proposals.During the year under review, the Committee met on 11occasions and, prior to the 2005 annual general meeting,consulted with investors. Individual attendance details can be#p#分頁標題#e#
found within the Directors’ Report and Business Review on page 7.
he terms of reference of the Committee are available on the
Company’s website.
EXECUTIVE DIRECTORS
Policy
The Company’s remuneration policy was first approved by
shareholders at the annual general meeting in 2001 and remains
unchanged both in relation to the year under review and the
financial year 2007 as well as for the foreseeable future.
The Company’s remuneration policy is to provide compensation
packages at market rates which reward successful performance
and attract, retain and motivate managers. The remuneration
packages offered by the Company are comparable with other
UK based international businesses of similar size and nature to
the Company.
In fixing packages, the Committee has regard to the
compensation commitments which would result in the event of
early termination. During the year under review, the Committee
secured mitigation terms in the contracts of many of the most
senior group of executives.
Remuneration package
The remuneration package for executive directors, consists of a
basic salary, benefits in kind (including private health care, a car
and fuel and non-contractual travel concessions), pension, an
annual bonus scheme (including a deferred element payable in
shares) and participation in the Performance Share Plan. The
proportion of performance related variable remuneration,
through the bonus scheme and awards under the Performance
Share Plan, is approximately 50-55 per cent of total target
remuneration (excluding pension arrangements).
The policy in relation to base salaries aims to target base salaries
at the market median. The strategy for incentive pay is intended
to increase the expected value to make the package more
market-competitive for executive directors, but to retain as its
aim the achievement of a market median value, subject to the
achievement of stretching targets. Recognising the volatility
associated with the airline industry, variable pay focuses on the
achievement of short-term targets providing a clear link between
performance and reward. Between them, the elements of the
remuneration package provide a good balance between the
achievement of short and longer-term goals linked to the creation
of shareholder value.
Basic salary
The basic salary reflects the level of responsibility of the
executive director, his or her market value and individual
performance. The Committee’s objective is to offer basic salaries
around the market median level. In reviewing basic salary,
independent external advice is taken on salaries for comparable
jobs in companies similar to the Company from the three survey
sources referred to previously. The Committee has regard to pay#p#分頁標題#e#
and employment conditions elsewhere in the Group when
determining annual salary increases. The base salaries for the
executive directors are currently:
Willie Walsh £600,000
Keith Williams £375,000
Martin George £375,000
Annual bonus
For the financial year 2006, details of bonuses earned are given
in the table on page 50.
The amount of annual bonus available for distribution to senior
executives was determined by performance against three
performance measures subject to a maximum limit of 100 per
cent of salary. No bonus would have been payable unless the
minimum operating margin target threshold of eight per cent had
been achieved. This threshold having been achieved, 50 per cent
46 British Airways 05/06 Annual Report
British Airways Performance Share Plan 2005
The British Airways Performance Share Plan (PSP) is the new
long-term incentive plan awarded to key senior executives of the
Company, those most directly involved in shaping and delivering
the medium to long-term business goals of the Company. It was
approved by shareholders at the annual general meeting in 2005.
The PSP consists of an award of the Company’s shares which
vest subject to the achievement of pre-defined Company
performance conditions (see below). If the conditions are met,
the shares vest in full or in part at the third anniversary of award.
No payment is required from individuals when the shares are
awarded or when they vest. The Remuneration Committee
supervises the operation of the PSP. Awards worth up to 150 per
cent of an executive’s base salary can be granted although
currently it is only intended that the Chief Executive will receive
this level of award. Other directors will receive awards at the 100
per cent of base salary level.
There are two performance conditions and these operate
independently of each other. This means that meeting either of
the conditions would trigger a payment without the need to meet
the other performance condition. 50 per cent of each award will
be subject to a Total Shareholder Return (TSR) performance
condition, measured against a group of 20 other airline
companies, and the other 50 per cent will be subject to an
average operating margin performance condition. The use of two
separate but complementary performance conditions creates an
alignment to both the airline industry (via the TSR measure) and
also the Company’s internal financial performance measure (via
the operating margin measure). Both of these performance
conditions will be measured over a single three-year performance
period which begins on April 1 prior to the award date. The
awards will not vest until the third anniversary of the date of
Grant as mentioned above. The Remuneration Committee#p#分頁標題#e#
selected these performance conditions because they are
challenging and aligned to shareholders’ interests.
TSR measures the financial benefits of holding a company’s
shares and is determined by share price performance along with
any dividends which are paid. None of the shares that are subject
to the TSR performance condition, will vest unless the
Company’s TSR performance is at the median (50th percentile)
of the airline comparator group. If median performance is
achieved, 25 per cent of the shares (i.e. 12.5 per cent of the total
award) vest. There is then a sliding scale at the top of which all of
the shares vest in full (i.e. the full 50 per cent of shares which are
subject to the TSR performance condition) if the Company’s TSR
performance is at or above the upper quintile (top 20 per cent) of
the comparator group. The comparator group of airlines used in
the 2005/6 award is included in the table below:
AIR CANADA IBERIA
AIR FRANCE LUFTHANSA
AIR NEW ZEALAND NORTHWEST AIRLINES
ALITALIA QANTAS AIRWAYS
ALL NIPPON AIRLINES RYANAIR
AMERICAN AIRLINES SAS
CATHAY PACIFIC AIRWAYS SINGAPORE AIRLINES
CONTINENTAL AIRLINES SOUTH WEST
DELTA AIRLINES UNITED AIRLINES
EASYJET US AIRWAYS
of bonus potential was determined by the achievement of a range
of operating margin targets as this is the Company’s key internal
financial measure. The second measure, for up to 25 per cent of
bonus potential, required the achievement of a customer
recommendation target as this is a key measure of customer
satisfaction and provides a strong link to future profitability. This
element of the bonus was not triggered. The third measure for
the remaining 25 per cent of bonus potential assessed
performance against the Terminal 5 Transition Programme,
known internally as ‘Fit for 5’. This element was only partially
triggered. The Remuneration Committee was satisfied that the
performance of, and outlook for, the business was satisfactory.
While the total amount available for distribution is derived
through the method described, the distribution to individuals is
adjusted to reflect personal performance.
To ensure continued alignment between executives and the
shareholders, 50 per cent of the bonuses earned will be invested
in shares under the Deferred Share Plan (described below) and
deferred for three years, subject to continued employment.
For the financial year 2007, the amount of annual bonus
available for distribution to senior executives will be determined
by performance against four performance measures and will,
again, be subject to a maximum limit of 100 per cent of salary.
No bonus will be payable unless the minimum operating margin
target threshold is achieved. If this threshold is achieved, 50 per#p#分頁標題#e#
cent of bonus potential will be determined by the achievement of
a range of operating margin targets. The second measure for
one-sixth of the bonus potential will require the achievement of a
customer recommendation target. The third measure, for a futher
one-sixth of the bonus potential, will require the achievement of
a punctuality target (relating to mainline network punctuality
performance) and the fourth measure, again for a sixth of the
bonus potential, will assess employee involvement in the mainline
business. In addition to the above targets, the Remuneration
Committee must be satisfied that the performance of, and
outlook for, the business is satisfactory. As was the case in
2005/06, 50 per cent of any bonus earned will be invested in
shares under the Deferred Share Plan (described below) and
deferred for three years, subject to continued employment.
Long term incentive arrangements
A shareholding guideline has been adopted, linked to the two
new share based incentive schemes introduced in 2005, the
Deferred Share Plan and the Performance Share Plan. Executives
will be expected to retain no fewer than 50 per cent of the shares
(net of tax) which vest from these two schemes until they have
built up a shareholding equivalent to 100 per cent of basic salary.
This policy aims to further align the interests of executives and
shareholders.
Current Incentive Plans
British Airways Deferred Share Plan 2005
The British Airways Deferred Share Plan (Plan) was adopted by
the Board on September 16, 2005 and is the mechanism for
delivering the deferred element of the annual bonus. The first
awards under the plan will be made at the end of July, 2006 when
the annual bonuses disclosed on page 50 are due to be paid. An
award of deferred shares to the value of one half of the bonus
earned will be made to executives. Other than on retirement the
shares will be subject to forfeiture if the executive leaves during
the three-year deferral period. On vesting, executives will receive
the benefit of any dividends paid over the deferred period.
British Airways 05/06 Annual Report 47
British Airways All Employee Share Ownership Plans
In July, 2000, the Company obtained shareholders’ approval to
implement any aspect of the new all employee share plans now
known as share incentive plans. The approval permits the
Company to operate a partnership share plan which would allow
employees in the UK to buy shares from their pre-tax salary and
would allow the Company to give matching or free shares to
those participants in the share plan. Financial limitations would
apply to any new plan. The Company has no current intention of
launching such a plan.
For further information regarding the Company's employee share
schemes, see Note 29 to the Financial Statements.#p#分頁標題#e#
Long Term Incentive Plan 1996
The Long Term Incentive Plan operated from 1996 to 2004. It
provided for conditional awards of shares worth up to 75 per
cent of salary each year, subject to a TSR condition measured
against the companies comprising the FTSE 100. The final
tranche of the awards made in 2001 lapsed, however, 90.67 per
cent of the awards made in 2003 have vested as shown on page
54. The Company introduced the Performance Share Plan
detailed on page 46 in place of the 1996 Plan.
Service contracts
Each of the three executive directors who served during the year
under review has a rolling contract with a one year notice
period. As a matter of policy, in the event of new external
appointments, the length of service contracts would be
determined by the Remuneration Committee in the light of the
then prevailing market practice. However, the Remuneration
Committee recognises that, in some cases, it may be necessary
to offer a contract with a notice period in excess of one year in
order to attract a new executive director. In these circumstances,
the Remuneration Committee acknowledges that the notice
period should reduce to one year after the initial period in
accordance with paragraph B.1.6 of the Combined Code. Willie
Walsh joined the Company on May 3, 2005 and his contract
provides that neither he nor the Company shall serve notice of
termination to expire earlier than the second anniversary of the
date of commencement of his employment.
Of the directors proposed for re-election and election at the
forthcoming annual general meeting, Keith Williams has a
service contract which is detailed below. The service contracts
for the serving directors include the following terms:
During the year under review, United Airlines delisted and
therefore could not be included in the comparator group for the
2006/07 award. US Airways was removed from the comparator
group for 2005/06 following its delisting prior to its merger with
America West but the merged entity has been included in the
comparator group for 2006/07. The Committee has discretion to
consider, amongst other matters, the impact of government action
on the performance of carriers included in the comparator group.
For the 50 per cent of the shares that are subject to the
operating margin performance condition in the initial three-year
performance period 2005/06 to 2007/08, no shares will vest
unless average annual operating margin over the three-year
performance period is more than seven per cent. If the average
of seven per cent is achieved, 25 per cent of the shares (i.e. 12.5
per cent of the total award) vest. There is then a sliding scale at
the top of which all of the shares vest (i.e. the full 50 per cent of
shares which are subject to the operating margin performance#p#分頁標題#e#
condition) if average annual operating margin is ten per cent per
annum or above. The equivalent range of operating margin
targets applicable for the second three-year performance period
2006/07 to 2008/09 is eight to ten per cent.
The two performance conditions will be considered separately
when determining vesting. If TSR performance is below median
and average annual operating margin is below the minimum
percentage for the relevant performance period, then the award
will lapse in full.
Prior Incentive Plans
British Airways Share Option Plan 1999
The Plan was closed after the final grant in 2005/2006. The
Plan enabled the Remuneration Committee to grant options to
acquire ordinary shares in the Company or the Company’s
American Depositary Shares at an option price not less than the
market value of the shares on the date of grant. No payment was
due upon the initial grant of options. An individual’s
participation was limited so that the aggregate value of the
shares over which options were granted in any one year would
not exceed basic salary. Exercise of options is subject to a
performance condition, the aim of which was to link the exercise
of options to sustained improvements in the underlying financial
performance of the Company. The performance condition used
for options granted in 2005 requires the Remuneration
Committee to be satisfied that there has been an increase in the
earnings per share (EPS) of the Company which is at least four
per cent per annum more than the increase in the retail price
index during the three consecutive financial years 2004/05,
2005/06 and 2007/08. EPS is calculated as set out in the
Statement of Investment Practice No. 1 of the Institute of
Investment Management and Research as this is a recognised
method in the market. The Remuneration Committee selected
the performance condition because it is challenging and aligned
to shareholders’ interests. Performance against the condition is
assessed by calculating EPS growth of the Company to see if it
exceeds the minimum performance required. In relation to
awards made in 2003, the performance condition used required
the Remuneration Committee to be satisfied that there had been
an increase in the EPS of the Company which was at least four
per cent per annum more than the increase in the retail price
index during the three consecutive financial years 2003/04,
2004/05 and 2005/06. The Remuneration Committee’s base
EPS threshold of 17.3p per share was the applicable reference
point. Gains made on the exercise of these share options during
the year under review are reported on pages 52 and 53.
Executive Director Date of contract Unexpired term/
notice period
Willie Walsh March 8, 2005 terminable on 12 months#p#分頁標題#e#
notice provided that neither
the Company nor the
executive may give notice of
termination to expire earlier
than May 3, 2007
Keith Williams January 1, 2006 terminable on 12
months notice
Martin George February 1, 1997 terminable on
12 months notice
48 British Airways 05/06 Annual Report
There are no express provisions for compensation payable upon
early termination of the Chief Executive’s contract other than
normal payments due during the notice period. In the event of
early termination, the Company’s policy is to act fairly in all
circumstances and the duty to mitigate would be taken into
account. The Remuneration Committee has noted the
ABI/NAPF joint statement; “Best Practice on Executive
Contracts and Severance”. None of the contracts provides for
compensation to be paid in the event of a change of control of
the Company. In relation to Keith Williams and Martin George,
their contracts now expressly include mitigation provisions in the
event of early termination. Copies of all three service contracts
can be viewed on the Company’s website.
The service contracts for the executive directors who left the
business during the year (and therefore have no unexpired term)
were as follows:
External non-executive directorships
The Board encourages executive directors to broaden their
experience outside the Company by taking up non-executive
appointments from which they may retain any fee. The
Company’s consent is required as a matter of contract before an
executive can accept such an appointment and permission will
only be given in appropriate circumstances. During the year in
question, for the proportion of the year they served on the
Board, Willie Walsh earned fees of €36,083, Martin George
earned fees of £14,708, Rod Eddington earned fees of
US$67,500 and A$10,000, John Rishton earned fees of £22,916
and Mike Street earned fees of £8,727.
Pension schemes
The Company has three main pension schemes. Two of these,
Airways Pension Scheme (APS) and New Airways Pension
Scheme (NAPS), are defined benefit schemes and are closed to
new members. The third scheme, the British Airways Retirement
Plan (BARP), has been available to new joiners since April 1,
2003 and is a defined contribution scheme. Mike Street was a
member of NAPS, Rod Eddington and John Rishton were
members of both NAPS and an unfunded unapproved retirement
scheme. Willie Walsh is a member of BARP. Martin George is a
member of NAPS. Keith Williams is a member of both NAPS
and an unfunded unapproved retirement scheme. Provision for
payment of a surviving dependant’s pension on death and lump
sum payments for death in service is also made.
In light of the December, 2003 consultation paper “Simplifying#p#分頁標題#e#
the taxation of pensions: the Government’s Proposals”, the
Committee has carried out a review of the pension arrangements
for senior executives. The Committee has decided that the
Company should not seek to compensate executives for the
effect of changes in taxation. Accordingly, no changes have been
made to the pension arrangements of any of the senior
executives and no new unfunded unapproved retirement
arrangements have been entered into.
NON-EXECUTIVE DIRECTORS
Policy
In relation to the Chairman, the Company’s policy is that the
Chairman should be remunerated in line with the market rate
reflecting his time commitment to the Group. In relation to nonexecutive
directors, the Company’s policy is that their
remuneration should be sufficient to attract and retain worldclass
non-executive directors. The Chairman and the nonexecutive
directors do not receive performance related pay.
Chairman’s and non-executive directors’
fees
The Chairman’s fee is determined by the Remuneration
Committee. It was set at £300,000 in September, 2004 and has
not been reviewed since then. Fees for the non-executive
directors are determined by the executive directors on the
recommendation of the Chairman. For the year in question, the
fees (which were also set in September, 2004) were £35,000 per
annum, with the chairmen of the Audit, Remuneration and
Safety Review Committees and the senior independent nonexecutive
director each receiving £7,500 per annum in addition
to these fees. No other fees are paid for attendance at Board
committees. The Chairman and the non-executive directors are
not eligible
to participate in the long-term incentive plans neither are their
fees pensionable. They are, however, eligible for non-contractual
travel concessions.
Executive Director Date of contract Notice period
Rod Eddington July 7, 2000 terminable on 12
months notice
John Rishton September 1, 2001 terminable on 12
months notice
Mike Street July 1, 2001 terminable on
12 months notice
British Airways 05/06 Annual Report 49
Service Agreements
The dates of the Chairman’s and current non-executive directors’ appointments are as follows:
Except where appointed at a general meeting, directors stand for election by shareholders at the first annual general meeting following
appointment and stand for re-election every three years thereafter under Article 95. There is no express provision for compensation
payable upon early termination. None of the Chairman or the non-executive directors has any right to compensation on the early
termination of their appointment. Copies of the letters of engagement for the Chairman and the non-executive directors are available
for inspection on the Company’s website.#p#分頁標題#e#
£0
£20
£40
£60
£80
£100
£140
£120
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06
Value of Hypothetical £100
Holding
FTSE 100 British Airways
Five-year Historical TSR Performance
Growth in the Value of a Hypothetical £100 Holding over Five-years
FTSE 100 Comparison Based on 30 Trading Day Average Values
Non-executive Date of appointment Date of election/ Expiry date
last re-election
Martin Broughton May 12, 2000 July 15, 2003 2006
Maarten van den Bergh July 16, 2002 July 19, 2005 2008
Denise Kingsmill November 1, 2004 July 19, 2005 2008
Chumpol NaLamlieng November 1, 2005 July 18, 2006 2006
Dr Martin Read May 12, 2000 July 15, 2003 2006
Alison Reed December 1, 2003 July 20, 2004 2007
Ken Smart July 19, 2005 July 19, 2005 2008
Baroness Symons July 19, 2005 July 19, 2005 2008
PERFORMANCE GRAPH
The graph shows the total shareholder return (with dividends reinvested where applicable) for each of the last five financial years of a
holding of the Company’s shares against a hypothetical holding of shares in the FTSE 100.
The FTSE 100 was selected because it is a broad equity index of which the Company is a constituent.
50 British Airways 05/06 Annual Report
Information subject to audit
Directors’ remuneration
The remuneration of the directors was:
`
1 Taxable benefits include a company car, fuel, private health insurance, personal travel and, in the case of Rod Eddington and Willie Walsh,
relocation expenses.
2 Figures shown from date of appointment.
3 Retired from the Board on July 19, 2005.
4 Retired from the Board on September 30, 2005.
5 Resigned from the Board on December 31, 2005. John Rishton retains non-contractual travel benefits for a period equal to his length of service
on the Board.
6 In relation to the year under review, the bonus entitlement was capped at 100 per cent of salary, payable only if stretching targets were achieved and half
of which will be paid in deferred shares under the Deferred Share Plan. 50 per cent of the bonus for the executive directors and senior management was
dependent on the delivery of an acceptable operating margin which is the Company’s key internal financial measure. For the year 2005/2006, the
operating margin target range, determined by the Remuneration Committee, was set at 7.5 per cent to ten per cent on a UK GAAP basis (equivalent to
eight per cent to 10.66 per cent on an IFRS basis). The bonus available for distribution was determined by reference to the achievement of this target
range. For the year under review the operating margin achieved was 8.3 per cent on an IFRS basis. The Remuneration Committee therefore determined
that a bonus should be triggered for the three executive directors.#p#分頁標題#e#
7 Martin Broughton became Chairman of the Company in July, 2004
For 2006, the aggregate compensation paid or accrued (excluding pension benefits) by the Company to all members of the Board
of Directors and its other executive officers named on page 5 during the year for services in all capacities was £5,785,856
(2005: £2,524,084). Also during financial year 2006, pension contributions of £430,638 (2005: £366,951) were paid for the benefit
of members of the Board of Directors and the Company's other executive officers.
Basic salary Taxable Performance Total 2006 Total 2005
and fees benefits1 related bonuses6
Cash Value of
deferred shares
£’000 £’000 £’000 £’000 £’000 £’000
Executive Directors
Rod Eddington4 338 45 0 0 383 917
Willie Walsh 2 548 69 135 135 887 0
Martin George2 276 1 74 74 425 0
Mike Street 4 193 11 0 0 204 453
Keith Williams 2 94 3 82 82 261 0
John Rishton5 288 12 0 0 300 466
Non-executive Directors
Martin Broughton7 300 31 331 229
Maarten van den Bergh 43 43 38
Dr Ashok Ganguly3 11 11 35
Captain Michael Jeffery 3 15 8 23 63
Denise Kingsmill 35 1 36 16
Dr Martin Read 43 43 37
Alison Reed 43 43 37
Chumpol NaLamlieng2 15 1 16
Lord Renwick3 11 11 34
Ken Smart2 30 30
Baroness Symons2 25 1 26
Aggregate emoluments 2,308 183 291 291 3,073 2,325
British Airways 05/06 Annual Report 51
The pension entitlements of the executive directors were:
Increase, before Transfer value*
Accumulated Increase in inflation, in of increase before
accrued benefits accrued benefits accrued benefits inflation, less
March 31, 2006 during the year during the year director’s contributions
£ £ £ £
Rod Eddington 108,333 11,450 10,151 138,873
Mike Street 248,074 8,188 4,971 105,959
John Rishton 88,330 11,790 10,245 85,235
Keith Williams 42,140 12,087 11,276 110,496
Martin George 120,836 28,306 25,808 176,245
The transfer value* of each director’s accrued benefits at the end of the financial year is as follows:
Director’s contributions Movement, less director’s
March 31, 2006 March 31, 2005 during the year contributions
£ £ £ £
Rod Eddington 1,650,151 1,353,657 15,750 280,744
Mike Street 5,636,481 3,839,314 9,026 1,788,141
John Rishton 859,551 688,725 14,582 156,244
Keith Williams 447,506 296,264 12,336 138,906
Martin George 944,260 671,556 30,498 242,206
Rod Eddington, John Rishton, and Keith Williams are members of both the New Airways Pension Scheme (NAPS) and an unfunded unapproved retirement
scheme which, under the terms of their service contracts, will provide a total retirement benefit equivalent to 1/30th (in the case of Rod Eddington) and#p#分頁標題#e#
1/56th (in respect of John Rishton and Keith Williams) of basic salary for each year of service. Mike Street and Martin George are members of NAPS which
provides 1/56th of pensionable pay for each year of service.
* Transfer value represents a liability of the Company, not a sum paid or due to the individual. It is calculated in accordance with “Retirement Benefit
Schemes – Transfer Value (GN11)”.
Willie Walsh is a member of BARP, a defined contribution scheme and the Company paid contributions in relation to him during the year of £74,280.
Directors’ beneficial interests in shares
British Airways Plc
Ordinary Shares
March 31, 2006 ** April 1, 2005 *
Current Board Members
Martin Broughton 49,090 24,090
Willie Walsh 0 0
Keith Williams 0 0
Martin George 6,619 6,619
Maarten van den Bergh 2,000 2,000
Denise Kingsmill 2,000 0
Chumpol NaLamlieng 0 0
Dr Martin Read 8,000 8,000
Alison Reed 10,000 10,000
Ken Smart 0 0
Baroness Symons 0 0
Total 77,709 50,709
Board Members who retired during the year
Rod Eddington 0 0
Mike Street 6,678 6,678
John Rishton 2,039 2,039
Dr Ashok Ganguly 104 104
Capt Michael Jeffery 2,624 2,624
Lord Renwick 32,014 32,014
Total 43,459 43,459
* or date of appointment ** or as at date of retirement/resignation
No director has any beneficial interest in any subsidiary undertaking of the Company. There have been no changes to the shareholdings set out above
between the financial year end and the date of the report.
In addition to the Directors, the executive officers of the Company, as detailed on page 5 held interests in 5,739,232 options as of March 31, 2006
(2005: 4,041,799)
52 British Airways 05/06 Annual Report
Directors’ share options
The following directors held options to purchase ordinary shares of the Company granted under the British Airways Executive Share
Option Scheme 1987 and the British Airways Share Option Plan 1999. In line with market practice at the time, the 1987 scheme is not
subject to any performance condition. The 1999 plan is subject to a performance condition as detailed on page 47.
No consideration was received from the executive directors for the granting of these options:
British Airways Executive Share Option Plan 1987
British Airways Share Option Plan 1999
Martin
George Aug 26, 1999 36,598 394p Aug 26, 2002 Aug 26, 2009 36,598
June 28, 2000 43,421 380p June 28, 2003 June 28, 2010 43,421
June 26, 2001 77,024 321p June 26, 2004 June 26, 2011 77,024
July 1, 2002 136,602 181p 136,602 292.75p 152,652 July 1, 2005 July 1, 2012 Nil
June 25, 2003 162,420 157p June 25, 2006 June 25, 2013 162,420
June 25, 2004 100,248 262p June 25, 2007 June 25, 2014 100,248
June 23, 2005 276p 100,905 June 23, 2008 June 23, 2015 100,905#p#分頁標題#e#
Total 556,313 136,602 152,652 100,905 520,616
Keith
Williams Aug 26, 1999 30,456 394p Aug 26, 2002 Aug 26, 2009 30,456
June 28, 2000 26,315 380p June 28, 2003 June 28, 2010 26,315
June 26, 2001 38,940 321p June 26, 2004 June 26, 2011 38,940
July 1, 2002 91,160 181p July 1, 2005 July 1, 2012 91,160
June 25, 2003 114,649 157p June 25, 2006 June 25, 2013 114,649
June 25, 2004 72,480 262p June 25, 2007 June 25, 2014 72,480
June 23, 2005 276p 69,927 June 23, 2008 June 23, 2015 69,927
Total 374,000 69,927 443,927
Rod **
Eddington May 26, 2000 138,888 360p 138,888 May 26, 2003 Mar 30, 2006 Nil
June 26, 2001 163,551 321p 163,551 354.75p 55,198 June 26, 2004 Mar 30, 2006 Nil
July 1, 2002 290,055 181p 290,055 306p 362,568 July 1, 2005 Mar 30, 2006 Nil
June 25, 2003 350,318 157p 350,318 306p 521,973 Sep 30, 2005 Mar 30, 2006 Nil
June 25, 2004 216,221 262p 216,221 306p 95,137 Sep 30, 2005 Mar 30, 2006 Nil
Total 1,159,033 1,020,145 138,888 1,034,876 Nil
Mike **
Street Aug 26, 1999 71,903 394p 71,903 Aug 26, 2002 Mar 30, 2006 Nil
June 28, 2000 75,605 380p 75,605 June 28, 2003 Mar 30, 2006 Nil
June 26, 2001 95,015 321p 95,015 339p 17,102 June 26, 2004 Mar 30, 2006 Nil
July 1, 2002 168,508 181p 168,508 261.50p 135,648 July 1, 2005 Mar 30, 2006 Nil
June 25, 2003 203,821 157p 203,821 304.50p 300,635 Sep 30, 2005 Mar 30, 2006 Nil
June 25, 2004 125,801 262p 125,801 304.50p 53,465 Sep 30, 2005 Mar 30, 2006 Nil
Total 740,653 593,145 147,508 506,850 Nil
* or date of appointment
** for the directors who retired during the year the exercisable date relates to the date they retired and the expiry date is six months later
Date of
Grant
Number of
Options as
at April 1
2005 *
Exercisable
from
Options
granted
during the
year
Gain made
on exercise
£
Market
price at
date of
exercise
Options
lapsed
during
the year
Options
Exercised
during
the year
Exercise
Price Expiry date
Number of
Options
as at
March 31
2006
Date of
Grant
Number of
Options as
at April 1
2005 *
Exercisable
from
Options
granted
during the
year
Gain made
on exercise
£
Market
price at
date of
exercise
Options
lapsed
during
the year
Options
Exercised
during
the year
Exercise
Price Expiry date
Number of
Options
as at
March 31
2006
Martin
George June 30, 1995 9,876 405p 9,876 June 30, 1998 June 30, 2005 Nil
British Airways 05/06 Annual Report 53
British Airways Share Option Plan 1999 continued
John#p#分頁標題#e#
Rishton Aug 26, 1999 21,852 394p Aug 26, 2002 June 30, 2006 21,852
June 28, 2000 31,578 380p June 28, 2003 June 30, 2006 31,578
June 26, 2001 70,093 321p June 26, 2004 June 30, 2006 70,093
July 1, 2002 124,309 181p 124,309 292p 137,982 July 1, 2005 July 1, 2012 Nil
June 25, 2003 191,082 157p 191,082 June 25, 2006 Dec 31, 2005 Nil
June 25, 2004 117,938 262p 117,938 June 25, 2007 Dec 31, 2005 Nil
June 23, 2005 276p 126,811 126,811 June 23, 2008 Dec 31, 2005 Nil
Total 556,852 124,309 435,831 137,982 126,811 123,523
* or date of appointment
The performance condition applicable to share options granted in June, 2004 and June, 2005 listed above and on page 52 requires the Remuneration
Committee to be satisfied that there has been an increase in the EPS of the Company which is at least four per cent per annum more than the increase in the
retail price index during three consecutive financial years. EPS is calculated as set out in the Statement of Investment Practice No. 1 of the Institute of
Investment Management and Research (IIMR) as this is a recognised method in the market.
In relation to John Rishton, due to the circumstances prevailing at the time of his departure, the Company agreed with him that he should not be able to
exercise any of his vested share options prior to May 19, 2006. Any options not vested on his date of departure lapsed on that date.
For options granted in June, 2004, there is a single opportunity to re-test performance over four years from the same fixed base. There is no retesting of the
options granted in 2005.
Under the performance condition of the plan, the options granted in 2003 were tested at the end of 2005/06. In 2003/04, the Company’s EPS under the
IIMR definition was below the threshold of 17.3p set by the Remuneration Committee which was therefore the applicable base. EPS for 2005/06 using the
IIMR definition were 34.9p. The Remuneration Committee therefore determined that the performance condition had been satisfied in relation to the grants
made in 2003. These options will become exercisable on the third anniversary of the original grant, June 25, 2006.
Directors’ Conditional Awards
The following directors held conditional awards over ordinary shares of the Company granted under the British Airways Long Term
Incentive Plan (LTIP) and the PSP.
Willie Walsh PSP August 30, 2005 319,148 319,148
Total 319,148 319,148
Martin George LTIP June 5, 2000 11,559 11,559 Nil
LTIP June 8, 2001 33,132 16,318 16,814
LTIP June 12, 2002 87,471 87,471 Nil
LTIP June 9, 2003 136,607 136,607
LTIP June 16, 2004 77,250 77,250
PSP August 30, 2005 98,758 98,758
Total 346,019 115,348 98,758 329,429
Keith Williams LTIP June 12, 2002 31,132 31,132 Nil
LTIP June 9, 2003 51,429 51,429
LTIP June 16, 2004 29,788 29,788
PSP August 30, 2005 34,219 34,219#p#分頁標題#e#
Total 112,349 31,132 34,219 115,436
Rod Eddington *** LTIP June 5, 2000 35,028 35,028 Nil
LTIP June 8, 2001 70,350 34,650 35,700
LTIP June 12, 2002 185,731 185,731 Nil
LTIP June 9, 2003 294,643 294,643
LTIP June 16, 2004 166,618 166,618
Total 752,370 255,409 Nil 496,961
* or date of appointment
** or at cessation of appointment
*** reflecting his outstanding contribution to the business, the Remuneration Committee determined that there would be no pro-ration of Rod Eddington’s LTIP awards
Plan Date of award
Number of
awards as at
April 1, 2005 *
Awards made
during the year
Awards lapsing
during the year
Awards vesting
during the year
Number of
awards as at
March 31, 2006 **
Date of
Grant
Number of
Options as
at April 1
2005 *
Exercisable
from
Options
granted
during the
year
Gain made
on exercise
£
Market
price at
date of
exercise
Options
lapsed
during
the year
Options
Exercised
during
the year
Exercise
Price Expiry date
Number of
Options as at
March 31
2006
54 British Airways 05/06 Annual Report
Directors’ Conditional Awards continued
Mike Street LTIP June 5, 2000 20,128 20,128 Nil
LTIP June 8, 2001 40,870 20,130 20,740
LTIP June 12, 2002 107,901 107,901 Nil
LTIP June 9, 2003 171,429 28,572 142,857
LTIP June 16, 2004 96,941 48,471 48,470
Total 437,269 225,202 212,067
John Rishton LTIP June 8, 2001 30,150 30,150 Nil
LTIP June 12, 2002 79,599 79,599 Nil
LTIP June 9, 2003 160,714 160,714 Nil
LTIP June 16, 2004 90,882 90,882 Nil
PSP August 30, 2005 124,113 124,113 Nil
Total 361,345 485,458 124,113 Nil
Captain Michael Jeffery LTIP June 5, 2000 11,364 11,364 Nil
Total 11,364 11,364 Nil
* or date of appointment ** or at cessation of appointment
In relation to awards made in 2000 and 2001, one third of each individual award may vest at the end of the third, fourth and fifth financial years from the
year of the grant if the performance of the Company, measured by TSR from the year of the grant through to the end of the year in question, places the
Company at or above the median percentile when compared with the TSR for each of the companies in the FTSE100 index. In relation to awards made
from 2002 onwards the whole of the award may vest on the third anniversary of the start of the financial year in which the award was made. If the
Company’s TSR for the period to that financial year end is at or below the 50th percentile, no awards will vest. If the Company’s TSR for the period is at
the 50th percentile, 30 per cent of the award (or one third portion in the case of awards in 2000 and 2001) will vest. If the Company’s TSR is at the 75th#p#分頁標題#e#
percentile, 65 per cent of the award (or one third portion in the case of awards in 2000 and 2001) will vest. For performance between 50th and 75th
percentile, the number of options will be determined on a straight-line basis. If the Company’s TSR for the period is at the 90th percentile all of the award
(or one third portion in the case of awards in 2000 and 2001) will vest. For performance between 75th and 90th percentile, the number of options will be
determined on a straight line basis.
On April 1, 2006 the final third of the conditional award made on June 8, 2001 lapsed as the performance condition was not met in the financial years
2001 to 2006. In relation to the conditional award made on June 9, 2003, the Company was the 13th highest performing company out of the 93 FTSE 100
companies remaining for the performance period April 1, 2003 to March 31, 2006. This placed the Company on the 86th percentile meaning that 90.67
per cent of the shares originally awarded vested.
No payment is due upon exercise of options. Options are exercisable for seven years from the date of vesting of the relevant LTIP award. All grants of
options are subject to the Remuneration Committee being satisfied that the Company’s overall financial performance justifies the grant of an option.
The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the 2005 PSP award, (August 30, 2005), was 282p.
The highest and lowest prices of the Company’s shares during the financial year and the share price at March 31 were:
2006 2005
At March 31 353.25p 264p
Highest in the year 362.50p 305.25p
Lowest in the year 236.25p 199.5p
Approved by the Board and signed on its behalf by
Dr Martin Read
Non-executive Director and Chairman of the Remuneration Committee
May 18, 2006
Number of
awards as at
April 1, 2005 *
Number of
awards as at
Plan Date of award March 31, 2006 **
Awards made
during the year
Awards lapsing
during the year
Awards vesting
during the year
British Airways 05/06 Annual Report 55
misstatements or material inconsistencies with the financial statements.
Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) issued by the Auditing Practices Board. An
audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements and the part of the
Directors’ Remuneration Report to be audited. It also includes an
assessment of the significant estimates and judgments made by the
directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the group’s and company’s#p#分頁標題#e#
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial
statements and the part of the Directors’ Remuneration Report to be
audited are free from material misstatement, whether caused by fraud or
other irregularity or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the financial
statements and the part of the Directors’ Remuneration Report to be
audited.
Opinion
In our opinion:
• the group financial statements give a true and fair view, in accordance
with IFRSs as adopted by the European Union, of the state of the
group’s affairs as at March 31, 2006 and of its profit for the year then
ended;
• the parent company financial statements give a true and fair view, in
accordance with IFRSs as adopted by the European Union as applied in
accordance with the provisions of the Companies Act 1985, of the state
of the parent company’s affairs as at March 31, 2006;
• the financial statements and the part of the Directors’ Remuneration
Report to be audited have been properly prepared in accordance with
the Companies Act 1985 and Article 4 of the IAS Regulation; and
• the information given in the directors' report and business review is
consistent with the financial statements.
Ernst & Young LLP
Registered auditor
London
May 18, 2006
The maintenance and integrity of the British Airways Plc web site is the
responsibility of the directors; the work carried out by the auditors does
not involve consideration of these matters and, accordingly, the auditors
accept no responsibility for any changes that may have occurred to the
financial statements since they were initially presented on the web site.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
The directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable United
Kingdom law and those International Financial Reporting Standards
as adopted by the European Union.
The directors are required to prepare financial statements for each
financial year which present fairly the financial position of the
Company and of the Group and the financial performance and cash
flows of the Company and of the Group for that period. In preparing
those financial statements, the directors are required to:
• select suitable accounting policies and then apply them
consistently;
• present information, including accounting policies, in a manner#p#分頁標題#e#
that provides relevant, reliable, comparable and understandable
information; and
• provide additional disclosures when compliance with the specific
requirements in IFRSs is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and
• state that the Company has complied with IFRSs, subject to any
material departures disclosed and explained in the financial
statements.
The directors are responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the financial
position of the Company and of the Group and enable them to
ensure that the financial statements comply with the Companies Act
1985 and Article 4 of the IAS Regulation. They are also responsible
for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
Statement of directors’ responsibilities in relation to the financial statements
Independent auditors’ report to the members of British Airways Plc
We have audited the group and parent company financial statements (the
“financial statements”) of British Airways Plc for the year ended March
31, 2006 which comprise Group Income Statement, the Group and
Parent Company Balance Sheets, the Group and Parent Company Cash
Flow Statements, the Group and Parent Company Statement of Change in
Shareholders' Equity and the related notes 1 to 35. These financial
statements have been prepared under the accounting policies set out
therein. We have also audited the information in the Directors’
Remuneration Report that is described as having been audited.
This report is made solely to the company's members, as a body, in
accordance with Section 235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state to the company's members
those matters we are required to state to them in an auditors' report and
for no other purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the company and
the company's members as a body, for our audit work, for this report, or
for the opinions we have formed.
Respective responsibilities of directors and auditors
The directors are responsible for preparing the Annual Report, the
Directors’ Remuneration Report and the financial statements in
accordance with applicable United Kingdom law and International
Financial Reporting Standards (IFRSs) as adopted by the European Union
as set out in the Statement of Directors’ Responsibilities.
Our responsibility is to audit the financial statements and the part of the
Directors’ Remuneration Report to be audited in accordance with relevant#p#分頁標題#e#
legal and regulatory requirements and International Standards on Auditing
(UK and Ireland).
We report to you our opinion as to whether the financial statements give a
true and fair view, the financial statements and the part of the Directors’
Remuneration Report to be audited have been properly prepared in
accordance with the Companies Act 1985 and Article 4 of the IAS
Regulation and that the information given in the directors' report and
business review is consistent with the financial statements.
We also report to you if, in our opinion, the company has not kept proper
accounting records, if we have not received all the information and
explanations we require for our audit, or if information specified by law
regarding directors’ remuneration and other transactions are not
disclosed.
We review whether the Corporate Governance Statement reflects the
company’s compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are not
required to consider whether the board’s statements on internal control
cover all risks and controls, or form an opinion on the effectiveness of the
group’s corporate governance procedures or its risk and control
procedures.
We read other information contained in the Annual Report and consider
whether it is consistent with the audited financial statements. The other
information comprises only the Directors’ Report and Business Review,
the unaudited part of the Directors’ Remuneration Report, the Chairman’s
Statement and the Corporate Governance Statement. We consider the
implications for our report if we become aware of any apparent
56 British Airways 05/06 Annual Report
Group consolidated income statement
For the year ended March 31, 2006
Group
£ million Note 2006 2005
Traffic revenue
Passenger 6,820 6,500
Cargo 498 482
7,318 6,982
Other revenue (including fuel surcharges) 1,197 790
Revenue 3 8,515 7,772
Employee costs 2,346 2,235
Depreciation, amortisation and impairment 717 739
Aircraft operating lease costs 112 106
Fuel and oil costs 1,632 1,128
Engineering and other aircraft costs 473 432
Landing fees and en route charges 559 556
Handling charges, catering and other operating costs 955 918
Selling costs 449 490
Currency differences (18) 15
Accommodation, ground equipment and IT costs 585 597
Total expenditure on operations 7,810 7,216
Operating profit 4 705 556
Fuel derivative gains* 19
Finance costs 7 (221) (265)
Finance income 7 93 97
Financing income and expense relating to pensions 7 (18) (29)
Retranslation (charges)/credits on currency borrowings 7 (13) 56#p#分頁標題#e#
Profit on sale of fixed assets and investments 8 27 71
Share of post-tax profits in associates accounted for using the equity method 17 28 24
Income relating to fixed asset investments 9 3
Profit before tax for the year 620 513
Tax 10a (153) (121)
Profit after tax for the year 467 392
Attributable to:
Equity holders of the parent 451 377
Minority interest 16 15
467 392
Earnings per share
Basic 11 40.4p 35.2p
Diluted 11 39.8p 34.1p
* Fuel derivative gains reflect the ineffective portion of unrealised gains and losses on fuel derivative hedges required to be recognised through the income
statement under IAS 39.
British Airways 05/06 Annual Report 57
Group Company
£ million Note 2006 2005 2006 2005
Non-current assets
Property, plant and equipment 12
Fleet 6,606 6,944 6,232 6,559
Property 974 1,000 914 929
Equipment 302 385 292 317
7,882 8,329 7,438 7,805
Goodwill 15 72 72
Landing rights 15 115 122 96 102
Other intangible assets 15 46 60 46 60
233 254 142 162
Investments in subsidiaries 17 1,350 1,195
Investments in associates 17 131 126 1 1
Other investments 18 33 30 29 29
Employee benefit assets 31 137 137 137 137
Other financial assets 18 89 38 56
Total non-current assets 8,505 8,914 9,153 9,329
Non-current assets held for sale 14 3 5 3
Current assets and receivables
Expendable spares and other inventories 19 83 84 77 76
Trade receivables 685 685 664 666
Other current assets 20 458 301 518 485
Other current interest bearing deposits 21 1,533 1,133 1,531 1,132
Cash and cash equivalents 21 907 549 835 467
2,440 1,682 2,366 1,599
Total current assets and receivables 3,666 2,752 3,625 2,826
Total assets 12,174 11,671 12,781 12,155
Shareholders' equity and liabilities
Shareholders' equity
Issued share capital 28 283 271 283 271
Share premium 888 788 888 788
Investment in own shares (26) (26)
Other reserves 30 690 152 653 138
Total shareholders' equity 1,861 1,185 1,824 1,171
Minority interest 30 213
Total equity 2,074
Equity minority interest 12
Non-equity minority interest 200
Minority interests 212
Non-current liabilities
Interest bearing long-term borrowings 24 3,602 4,045 3,697 4,124
Employee benefit obligations 31 1,803 1,820 1,750 1,769
Provisions for deferred tax 10 896 816 792 719
Other provisions 26 135 112 102 75
Other long-term liabilities 23 232 212 177 156
Total non-current liabilities 6,668 7,005 6,518 6,843
Current liabilities
Current portion of long-term borrowings 24 479 447 453 419
Convertible borrowings 112
Trade and other payables 22 2,822 2,642 3,877 3,699
Current tax payable 75 36 72 14
Short-term provisions 26 56 32 37 9#p#分頁標題#e#
Total current liabilities 3,432 3,269 4,439 4,141
Total equity and liabilities 12,174 11,671 12,781 12,155
Willie Walsh Chief Executive Officer
Keith Williams Chief Financial Officer
May 18, 2006
Balance sheets
At March 31, 2006
58 British Airways 05/06 Annual Report
Group Company
£ million Note 2006 2005 2006 2005
Cash flows from operating activities
Operating profit 705 556 709 575
Depreciation, amortisation and impairment 717 739 686 673
Operating cash flow before working capital changes 1,422 1,295 1,395 1,248
Decrease/(increase) in inventories, trade and other receivables 23 (71) (65) (60)
Increase in trade and other payables and provisions 150 15 182 369
Other non-cash movements 12 8 12 8
Cash generated from operations 1,607 1,247 1,524 1,565
Interest paid (211) (242) (187) (209)
Taxation (57) (31)
Net cash flow from operating activities 1,339 1,005 1,306 1,356
Cash flows from investing activities
Purchase of property, plant and equipment (275) (356) (268) (340)
Purchase of intangible assets (8) (32) (8) (32)
Purchase of interest in associate (5)
Purchase of other investments (2) (2)
Proceeds from sale of associated companies 427
Proceeds from sale of other investments 1 1
Proceeds from sale of property, plant and equipment 9 57 6 58
Costs of disposal of subsidiary company (6) (12) (6) (12)
Proceeds from sale of interest in the London Eye Company Ltd 78 100
Interest received 78 78 76 77
Dividends received 22 23 4 57
Increase in interest bearing deposits (402) (487) (401) (489)
Net cash flow from investing activities (510) (302) (498) (681)
Cash flows from financing activities
Proceeds from long-term borrowings 116 116
Repayments of borrowings (64) (168) (44) (147)
Capital elements of finance leases and hire purchase arrangements repaid (415) (1,103) (417) (1,107)
Exercise of share options 21 4 21 4
Distributions made to holders of perpetual securities (14) (14)
Other financing income 5 10
Net cash flow from financing activities (472) (1,160) (440) (1,124)
Net increase/(decrease) in cash and cash equivalents 357 (457) 368 (449)
Net foreign exchange difference 1 (18) (34)
Cash and cash equivalents at April 1 549 1,024 467 950
Cash and cash equivalents at March 31 21 907 549 835 467
Cash flow statements
For the year ended March 31, 2006
British Airways 05/06 Annual Report 59
Statements of changes in equity
For the year ended March 31, 2006
Investment Other Total Non-equity
Group Issued Share in own reserves shareholders’ Minority Total minority
£ million Note capital premium shares (Note 30) equity interest equity interest
At April 1, 2005 271 788 (26) 152 1,185 12 1,197 200
Effect of adopting IAS 39 and IAS 32 35 183 183 200 383 (200)#p#分頁標題#e#
Profit for the period 451 451 451
Exchange differences and other movements 2 2 1 3
Net movement on cash flow hedges (117) (117) (117)
Cost of share based payment 12 12 12
Deferred tax effect of share options 7 7 7
Share of other movements in reserves of associates 5 5 5
Total income and expense for the period 360 360 1 361
Exercise of share options 26 (5) 21 21
英國dissertation網Conversion of Convertible Capital Bonds 2005 12 100 112 112
At March 31, 2006 283 888 690 1,861 213 2,074
For the year ended March 31, 2005
Investment Other Total Non-equity
Group Issued Share in own reserves shareholders’ Minority minority
£ million capital premium shares (Note 30) funds interest interest
At April 1, 2004 271 788 (31) (231) 797 10 200
Profit for the period 377 377
Exchange differences and other movements (22) (22) 2
Cost of share based payment 8 8
Exchange written back on disposals 21 21
Total income and expense for the period 384 384 2
Exercise of share options 5 (1) 4
At March 31, 2005 271 788 (26) 152 1,185 12 200
For the year ended March 31, 2006
Investment Other
Company Issued Share in own reserves Total
£ million Note capital premium shares (Note 30) equity
At April 1, 2005 271 788 (26) 138 1,171
Effect of adopting IAS 39 and IAS 32 35 189 189
Profit for the period 429 429
Cost of share based payment 12 12
Deferred tax effect of share options 7 7
Net movement on cash flow hedges (117) (117)
Total income and expense for the period 331 331
Exercise of share options 26 (5) 21
Conversion of Convertible Capital Bonds 2005 12 100 112
At March 31, 2006 283 888 653 1,824
For the year ended March 31, 2005
Investment Other
Company Issued Share in own reserves Total
£ million capital premium shares (Note 30) equity
At April 1, 2004 271 788 (31) (133) 895
Profit for the period 272 272
Exchange differences and other movements (8) (8)
Cost of share based payment 8 8
Total income and expense for the period 272 272
Exercise of share options 5 (1) 4
At March 31, 2005 271 788 (26) 138 1,171
60 British Airways 05/06 Annual Report
1 Authorisation of financial statements and compliance with IFRSs
The Group's and Company's financial statements for the year ended March 31, 2006 were authorised for issue by the Board of Directors on May 18, 2006
and the balance sheets were signed on the Board's behalf by Willie Walsh and Keith Williams. British Airways Plc is a public limited company incorporated
and domiciled in England & Wales. The Company's ordinary shares are traded on the London Stock Exchange.
From April 1, 2005, as required by the European Union's IAS Regulation and the Companies Act 1985, the Group has prepared its consolidated financial#p#分頁標題#e#
statements in accordance with International Financial Reporting Standards (‘IFRSs’)* as adopted by the European Union (EU). IFRSs as adopted by the
EU differ in certain respects from IFRSs as issued by the International Accounting Standards Board (IASB). However, the consolidated financial
statements for the periods presented would be no different had the Group applied IFRSs as issued by the IASB. References to 'IFRS' hereafter should be
construed as references to IFRSs as adopted by the EU. The principal accounting policies adopted by the Group and by the Company are set out in note
2. The financial statements comprise the first complete set of financial statements presented by the Group that comply with IFRSs.
The Company has taken advantage of the exemption provided under section 230 of the Companies Act 1985 not to publish its individual income
statement and related notes.
* For the purposes of these statements, IFRS also include International Accounting Standards (IAS).
2 Accounting policies
Accounting convention
The accounting policies and basis of preparation differ from those set out in the Report and Accounts for the year ended March 31, 2005 which were
prepared in accordance with United Kingdom accounting standards and the Companies Act 1985 (UK GAAP).
A preliminary summary of the significant accounting policies used in the preparation of these financial statements under IFRSs and the impact of the
change from UK GAAP to IFRS on comparative periods as required by IFRS 1 - 'First-time adoption of International Financial Reporting Standards' were
included in the Group's 'Release of financial information for 2004/05 under International Financial Reporting Standards' published on July 4, 2005. The
release included the results for the year ended March 31, 2005 restated under IFRSs and a summary of the significant differences to UK GAAP. The
release also included restated balance sheets at March 31, 2005 and April 1, 2004, the Group's transition date to IFRSs. Reconciliations to IFRSs from
the previously published UK GAAP financial statements are summarised in note 35.
As permitted under IFRS 1, the Group elected to apply the requirements of IAS 32 - 'Financial Instruments - Disclosure and Presentation' and IAS 39 -
'Financial Instruments - Recognition and Measurement' from April 1, 2005. As a consequence certain assets and liabilities are required to be recognised
and measured at fair value. As a result of the application of IAS 39 the opening net assets of the Group increased by £183 million at April 1, 2005. The
increase represents the fair value of financial instruments and available-for-sale financial assets (£193 million, net of deferred tax), partially offset by the
impact of the Group's share of the opening reserves adjustments of associates (£10 million). The adoption of IAS 32 had no impact on the reserves or
net assets of the Group except for minor presentational differences between minority interests and shareholders' equity.#p#分頁標題#e#
These financial statements have been prepared on a historical cost convention except for certain financial assets and liabilities, including derivative
financial instruments and available-for-sale financial assets, that are measured at fair value. The carrying value of recognised assets and liabilities that are
subject to fair value hedges are adjusted to record changes in the fair values attributable to the risks that are being hedged.
The Group and Company financial statements are presented in Pounds Sterling and all values are rounded to the nearest million pounds (£m) except
where indicated otherwise.
Basis of consolidation
The Group accounts include the accounts of the Company and its subsidiaries, each made up to March 31, together with the attributable share of results
and reserves of associates, adjusted where appropriate to conform with British Airways' accounting policies. The Group's share of profits less losses of
associates is included in the Group income statement and its share of the post-acquisition results of these companies is included in interests in associates
in the Group balance sheet. Certain associates make up their annual audited accounts to dates other than March 31. In the case of Iberia and Comair,
published results up to the year ended December 31 are included. In other cases, results disclosed by subsequent unaudited management accounts are
included. The attributable results of those companies acquired or disposed of during the year are included for the periods of ownership. In the case of the
Group's investment in Qantas, results up to the year ended June 30, 2004 are included in the comparative year.
In addition, the Group has consolidated The London Eye Company Limited for the period to February 8, 2006 when, as a result of the sale of the
Group's interest to The Tussauds Group, the Group lost control (see Note 14). Prior to this, the substance of the relationship between the Group and
The London Eye Company Limited indicated that it was controlled by the Group, through a combination of voting rights and the rights available to it as
the main provider of funding, whereby it was able to control its financial and operating policies.
Notes to the accounts
British Airways 05/06 Annual Report 61
2 Accounting policies continued
Revenue
Revenue is recognised when the transportation service is provided. Passenger ticket and cargo waybill sales, net of discounts, are recorded as current
liabilities in the ‘sales in advance of carriage’ account until recognised as revenue. Unused tickets are recognised as revenue using estimates regarding the
timing of recognition based on the terms and conditions of the ticket and historical trends. Other revenue is recognised at the time the service is provided.
Commission costs are recognised at the same time as the revenue to which they relate and are charged to cost of sales.#p#分頁標題#e#
Revenue recognition - Mileage programmes
The Group operates two principal loyalty programmes. The airline frequent flyer programme operates through the airline's 'Executive Club' and allows
frequent travellers to accumulate 'BA Miles' mileage credits which entitle them to a choice of various awards, primarily free travel. The estimated direct
incremental cost of providing free redemption services, including British Airways' flights, in exchange for redemption of miles earned by members of the
Group's 'Executive Club' is accrued as members of the scheme accumulate mileage. These costs are charged to selling costs.
In addition, 'BA Miles' are sold to commercial partners to use in promotional activity. The fair value of the miles sold is deferred and recognised as
revenue on redemption of the miles by the participants to whom the miles are issued. The incremental cost of providing free redemption services is
recognised when the miles are redeemed.
The Group also operates the AIRMILES scheme, operated by the Company's wholly-owned subsidiary Airmiles Travel Promotions Limited. The scheme
allows companies to purchase miles for use in their own promotional activities. Miles can be redeemed for a range of benefits, including flights on British
Airways and other carriers.The fair value of the miles sold is deferred and recognised as revenue on redemption of the miles by the participants to whom
the miles are issued. The incremental cost of providing free redemption services is recognised when the miles are redeemed.
Segmental reporting
The Group's primary reporting segments comprise business segments and the secondary format is based on geographic segments. Business segments are
based on the internal management structure and system of internal financial reporting. They reflect components of the Group with distinguishable
revenues, costs and assets and are subject to risks different from those of other reportable segments due either to the products they provide or the
markets in which they operate. The nature of the primary business segments is set out below.
a Business segments
The network airline business segment comprises the Group's main scheduled passenger and cargo operations and revenues ancillary to the provision of
those services. The network airline business utilises the Group's aircraft assets flexibly across the worldwide route network.
The regional airline business segment comprises the Group's scheduled regional operation and revenues ancillary to the provision of those services. The
regional airline business utilises a dedicated fleet of aircraft to provide services from United Kingdom regional airports principally to shorthaul destinations
within the UK and Europe.
Non-airline businesses include principally Airmiles Travel Promotions Ltd, BA Holidays Ltd, Speedbird Insurance Company Ltd and The London Eye
Company Ltd.
All segments relate to continuing operations. Transfer prices between business segments are set on an arm's length basis.#p#分頁標題#e#
b Geographical segments
i) Turnover by origin: The analysis of turnover by origin is derived by allocating revenue to the area in which the sale was made.
ii) Geographical analysis of net assets: The major revenue-earning asset of the Group is the aircraft fleet, the majority of which are registered in the
United Kingdom. Since the Group's aircraft fleet is employed flexibly across its worldwide route network, there is no suitable basis of allocating such
assets and related liabilities to geographical segments.
Intangible fixed assets
a Goodwill
Where the cost of a business combination exceeds the fair values attributable to the net assets acquired, the resulting goodwill is capitalised and tested for
impairment annually and, in addition, whenever indicators exist that the carrying value may not be recoverable. Prior to the adoption of IFRS 3, which was
applied prospectively from April 1, 1999, any goodwill that had been recognised on acquisition was amortised over a period not exceeding 20 years. Prior
to March 31, 1998 goodwill was set off against reserves on the acquisition of a business or an equity interest in an associate. Such goodwill is not
recognised on transition to IFRS. Any goodwill arising on the acquisition of equity accounted entities is included within the cost of those entities.
b Landing rights
Landing rights acquired from other airlines either directly or as a result of a business combination are capitalised at cost or at fair value and amortised on
a straight line basis over a period not exceeding 20 years.
Notes to the accounts continued
62 British Airways 05/06 Annual Report
2 Accounting policies continued
c Software
The costs of purchase or development of computer software that is separable from an item of related hardware is capitalised separately and amortised
over a period not exceeding 4 years on a straight line basis.
The carrying value is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable.
Property, plant and equipment
Property, plant and equipment is held at cost. The Group has a policy of not revaluing tangible fixed assets. Depreciation is calculated to write off the cost
less estimated residual value, on a straight line basis over the useful life of the asset. Residual values, where applicable, are reviewed annually against
prevailing market values for equivalently aged assets and depreciation rates adjusted accordingly on a prospective basis.
The carrying value is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable and the
cumulative impairment losses are shown as a reduction in the carrying value of tangible fixed assets.
The Group has taken advantage of the exemption in IFRS 1 that allows it to carry forward property at deemed cost after taking account of revaluations#p#分頁標題#e#
carried out at March 31, 1995.
a Capitalisation of interest on progress payments
Interest attributed to progress payments, and related exchange movements on foreign currency amounts, made on account of aircraft and other significant
assets under construction is capitalised and added to the cost of the asset concerned.
b Fleet
All aircraft are stated at the fair value of the consideration given after taking account of manufacturers' credits. Fleet assets owned, or held on finance lease
or hire purchase arrangements, are depreciated at rates calculated to write down the cost to the estimated residual value at the end of their planned
operational lives on a straight line basis.
Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of five years and the remaining life
of the aircraft.
Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as tangible fixed
assets and generally depreciated in line with the fleet to which they relate.
Major overhaul expenditure, including replacement spares and labour costs, is capitalised and amortised over the average expected life between major
overhauls. All other replacement spares and other costs relating to maintenance of fleet assets (including maintenance provided under 'power-by-the-hour'
contracts) are charged to the income statement on consumption or as incurred respectively.
c Property and equipment
Provision is made for the depreciation of all property and equipment, apart from freehold land, based upon expected useful lives, or in the case of
leasehold properties over the duration of the leases if shorter, on a straight line basis.
d Leased and hire purchase assets
Where assets are financed through finance leases or hire purchase arrangements, under which substantially all the risks and rewards of ownership are
transferred to the Group, the assets are treated as if they had been purchased outright. The amount included in the cost of tangible fixed assets represents
the aggregate of the capital elements payable during the lease or hire purchase term. The corresponding obligation, reduced by the appropriate proportion
of lease or hire purchase payments made, is included in creditors. The amount included in the cost of tangible fixed assets is depreciated on the basis
described in the preceding paragraphs and the interest element of lease or hire purchase payments made is included in interest payable in the income
statement. Total minimum payments, measured at inception, under all other lease arrangements, known as operating leases, are charged to the income
statement in equal annual amounts over the period of the lease. In respect of aircraft, certain operating lease arrangements allow the Group to terminate
the leases after a limited initial period, normally 5 to 7 years, without further material financial obligations. In certain cases the Group is entitled to extend#p#分頁標題#e#
the initial lease period on pre-determined terms; such leases are described as extendible operating leases.
Inventories
Inventories, including aircraft expendables, are valued at the lower of cost and net realisable value.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand and deposits with any qualifying financial institution repayable on demand or maturing within three
months of the balance sheet date.
British Airways 05/06 Annual Report 63
2 Accounting policies continued
Employee benefits
Employee benefits, including pensions and other post-retirement benefits (principally post-retirement healthcare benefits) are presented in these financial
statements in accordance with IAS 19 - 'Employee Benefits'. For the Group's defined benefit plans, post-retirement obligations are measured at discounted
present value whilst plan assets are measured at fair value at the balance sheet date. The cost of current service costs are recognised in the income
statement so as to recognise the cost of providing the benefit on a straight line basis over the service lives of the employees using the projected unit credit
method. Past service costs are recognised when the benefit has been given. The financing cost and expected return on plan assets are recognised within
financing costs in the periods in which they arise. The accumulated effect of changes in estimates, changes in assumptions and deviations from actuarial
assumptions (actuarial gains and losses) that are less than 10% of the higher of pension benefit obligations and pension plan assets at the beginning of the
year are not recorded. When the accumulated effect is above 10% the excess amount is recognised in the income statement over the estimated average
remaining service period.
Amounts paid to defined contribution post-retirement schemes are recognised within the income statement when the payments fall due.
Other employee benefits are recognised when the obligation exists for the future liability.
Share-based payment
The fair value of employee share option plans is measured at the date of grant of the option using a binomial valuation model. The resulting cost, as
adjusted for the expected and actual level of vesting of the options, is charged to income over the period in which the options vest. At each balance sheet
date before vesting the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate
of the achievement or otherwise of non-market conditions, of the number of equity instruments that will ultimately vest. The movement in cumulative
expense since the previous balance sheet date is recognised in the income statement with a corresponding entry in equity. The Group has taken advantage
of the transitional provisions of IFRS 2 in respect of the fair value of equity settled awards so as to apply IFRS 2 only to those equity-settled awards#p#分頁標題#e#
granted after November 2002 that had not vested before January 1, 2005.
Taxation
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and
laws that are enacted or substantively enacted at the balance sheet date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the
financial statements, with the following exceptions:
- Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination
that at the time of the transaction affects neither accounting nor taxable profit or loss;
- In respect of taxable temporary differences associated with investments in subsidiaries or associates, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and
- Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible
temporary differences, carried forward tax credits or tax losses can be utilised.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is
realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is recognised in the
income statement.
Provisions
Provisions are made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated.
Restructuring provisions are made for direct expenditures of a business reorganisation where the plans are sufficiently detailed and well advanced, and
where appropriate communication to those affected has been undertaken at the balance sheet date. If the effect is material, expected future cash flows are
discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the
provision due to unwinding the discount is recognised as a finance cost.
Foreign currency translation
Transactions in foreign currencies are initially recorded in the functional currency, Sterling, by applying the spot exchange rate ruling at the date of the
transaction. Monetary foreign currency balances are translated into Sterling at the rates ruling at the balance sheet date. All other profits or losses arising
on translation are dealt with through the income statement except where hedge accounting is applied. The net assets of foreign operations are translated#p#分頁標題#e#
into Sterling at the rate of exchange ruling at the balance sheet date. Profits and losses of such operations are translated into Sterling at average rates of
exchange during the year. The resulting exchange differences are taken directly to a separate component of equity until all or part of the interest is sold
when the relevant portion of the cumulative exchange is recognised in income.
Under IFRS 1, exchange differences arising prior to April 1, 2004 are deemed to be zero.
Notes to the accounts continued
64 British Airways 05/06 Annual Report
2 Accounting policies continued
Derivatives and financial instruments
IAS 32 and IAS 39 were adopted from April 1, 2005.
Under IAS 39 - 'Financial Instruments - Recognition and Measurement', financial instruments are recorded initially at fair value. Subsequent measurement
of those instruments at the balance sheet date reflects the designation of the financial instrument. The Group determines the classification at initial
recognition and re-evaluates this designation at each year-end except for those financial instruments measured at fair value through profit or loss.
Other investments (other than interests in associates) are designated as available-for-sale financial assets and are recorded at fair value. Any change in the
fair value is reported in equity until the investment is sold when the cumulative amount recognised in equity is recognised in income. Any provisions for
impairment of the carrying value are reflected in income when they arise. Exchange gains and losses on monetary items are taken to income unless the
item has been designated and is assessed as an effective hedging instrument in accordance with the requirement of IAS 39. Exchange gains and losses on
non-monetary investments are reflected in equity until the investment is sold when the cumulative amount recognised in equity is recognised in income.
Long-term borrowings are recorded at amortised cost. Certain leases contain interest rate swaps that are closely related to the underlying financing and, as
such, are not accounted for as an embedded derivative.
Derivative financial instruments, comprising interest rate swap agreements, foreign exchange derivatives and fuel hedging derivatives (including options,
swaps and futures) are measured at fair value on the Group balance sheet.
Cash flow hedges
Changes in the fair value of derivative financial instruments are reported through operating income or financing according to the nature of the instrument
unless the derivative financial instrument has been designated as a hedge of a highly probable expected future cash flow. Gains and losses on derivative
financial instruments designated as cash flow hedges and assessed as effective for the period, are taken to equity in accordance with the requirements of
IAS 39. Gains and losses taken to equity are reflected in the income statement when either the hedged cash flow impacts income or its occurrence ceases#p#分頁標題#e#
to be probable.
Certain loan repayment instalments denominated in US dollars and Japanese yen are designated as cash flow hedges of highly probable future foreign
currency revenues. Exchange differences arising from the translation of these loan repayment instalments are taken to equity in accordance with IAS 39
requirements and subsequently reflected in the income statement when either the future revenue impacts income or its occurrence ceases to be probable.
Prior to the adoption of IAS 39 and IAS 32 the Group's accounting policy for derivatives was to defer and only recognise in the Group income statement
gains and losses on hedges of revenues or operating payments as they crystallised. The fair value of derivative financial instruments was not recognised
on the Group balance sheet.
Amounts payable or receivable in respect of interest rate swap agreements were recognised in the net interest payable charge over the period of the
contracts on an accruals basis. Cross currency swap agreements and forward foreign exchange contracts taken out to hedge borrowings were brought into
account in establishing the carrying values of the relevant loans, leases or hire purchase arrangements in the balance sheet. Gains and losses on forward
exchange contracts to hedge capital expenditure commitments are recognised as part of the total Sterling carrying cost of the relevant tangible asset as the
contracts mature or are closed out. This policy has been applied to the comparative information presented for periods commencing prior to April 1, 2005.
IFRS transitional arrangements
The Group has applied the optional transitional exemptions under IFRS 1 in the preparation of these financial statements as follows:
a The accumulated actuarial gains and losses in relation to employee defined benefit retirement plans have been recognised in full at April 1, 2004.
b The provisions of IFRS 3 - 'Business Combinations' have been applied prospectively from April 1, 1999.
c The carrying value of revalued assets at April 1, 2004 has been taken as the deemed cost.
d The cumulative translation difference on foreign operations at April 1, 2004 is deemed to be zero.
e The provisions of IFRS 2 - ' Share based payment' are applied only to awards made after November 7, 2002.
f Comparative information for IAS 32 - 'Financial Instruments - Disclosure and Presentation' and IAS 39 - 'Financial Instruments - Recognition and
Measurement' is not restated for 2004/05. The provisions of the two Standards have been applied from April 1, 2005 and comparative information
for 2004/05 has been presented under the previous UK GAAP basis for transactions within the scope of IAS 32 and IAS 39.
British Airways 05/06 Annual Report 65
2 Accounting policies continued
New standards and interpretations not applied
During the year ended March 31, 2006, the IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of#p#分頁標題#e#
these financial statements:
International Accounting Standards (IFRS) Effective Date
IFRS 1 Amendments relating to IFRS 1 and IFRS 6 1 January 2006
IFRS 4 Insurance Contracts (Amendments to IAS 39 and IFRS 4 - Financial Guarantee Contracts) 1 January 2006
IFRS 6 Exploration for and Evaluation of Mineral Assets 1 January 2006
IFRS 6 Amendments relating to IFRS 1 and IFRS 6 1 January 2006
IFRS 7 Financial Instruments: Disclosures 1 January 2007
IAS 1 Amendment - Presentation of Financial Statements : Capital Disclosures 1 January 2007
IAS 19 Amendment - Actuarial Gains and Losses, Group Plans and Disclosures 1 January 2006
IAS 39 Amendments to IAS 39 - Fair Value Option 1 January 2006
IAS 39 Amendments to IAS 39 - Transition and Initial Recognition of Financial Assets and Financial Liabilities 1 January 2006
IAS 39 Amendments to IAS 39 - Cash Flow Hedge Accounting of Forecast Intragroup Transactions 1 January 2006
IAS 39 Amendments to IAS 39 and IFRS 4 - Financial Guarantee Contracts 1 January 2006
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 4 Determining whether an arrangement contains a lease 1 January 2006
IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds 1 January 2006
IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment 1 December 2005
IFRIC 7 Applying the Restatement Approach under IAS 29 'Financial Reporting in Hyperinflationary Economies' 1 March 2006
IFRIC 8 Scope of IFRS 2 1 May 2006
IFRIC 9 Reassessment of Embedded Derivatives 1 June 2006
The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group's financial statements.
Certain of these standards and interpretations will require additional disclosures over and above those currently included in these financial statements in
the period of initial application.
Notes to the accounts continued
66 British Airways 05/06 Annual Report
3 Segment information
a Business segments
Network Regional Non- Total
airline airline airline Group
£ million business business business Unallocated operation
For the year ended March 31, 2006
Revenue
Sales to external customers 7,922 357 236 8,515
Inter-segment sales 83 6 4 93
Segment revenue 8,005 363 240 8,608
Segment result 711 (20) 14 705
Unallocated income 19 19
Profit before tax and finance costs 711 (20) 14 19 724
Net finance costs (159) (159)
Profit on sale of assets 26 1 27
Share of associates' profit 28 28
Income tax expense (153) (153)
Net profit for the year 467
Assets and liabilities
Segment assets 11,701 211 131 12,043
Investment in associates 131 131
Total assets 11,701 211 131 131 12,174#p#分頁標題#e#
Segment liabilities 4,628 76 344 5,048
Unallocated liabilities 5,052 5,052
Total liabilities 4,628 76 344 5,052 10,100
Other segment information
Tangible assets - additions 320 3 3 326
Intangible assets - additions 8 8
Depreciation, amortisation and impairment 708 2 7 717
Exceptional items (Note 4b) 45 (9) 36
For the year ended March 31, 2005
Revenue
Sales to external customers 7,151 394 227 7,772
Inter-segment sales 77 7 6 90
Segment revenue 7,228 401 233 7,862
Segment result 576 (27) 7 556
Unallocated income 3 3
Profit before tax and finance costs 576 (27) 7 3 559
Net finance costs (141) (141)
Profit on sale of assets 71 71
Share of associates' profit 24 24
Income tax expense (121) (121)
Net profit for the year 392
Assets and liabilities
Segment assets 11,119 217 209 11,545
Investment in associates 126 126
Total assets 11,119 217 209 126 11,671
Segment liabilities 4,427 125 378 4,930
Unallocated liabilities 5,344 5,344
Total liabilities 4,427 125 378 5,344 10,274
Other segment information
Tangible assets - additions 354 3 7 364
Intangible assets - additions 32 32
Depreciation, amortisation and impairment 694 34 11 739
Exceptional items (Note 4b) 30 16 46
British Airways 05/06 Annual Report 67
3 Segment information continued
b Geographical segments
Group
By area of original sale
£ million 2006 2005
Europe 5,406 5,079
United Kingdom 4,169 3,906
Continental Europe 1,237 1,173
The Americas 1,611 1,364
Africa, Middle East and Indian sub-continent 826 747
Far East and Australasia 672 582
Revenue 8,515 7,772
4 Operating profit
a Operating profit is arrived at after charging/(crediting):
Depreciation, amortisation and impairment of fixed assets
Group
£ million 2006 2005
Owned assets 348 300
Finance leased aircraft 128 154
Hire purchased aircraft 165 183
Other leasehold interests 59 66
Impairment (reversals)/charges on property, plant and equipment (12) 16
Amortisation of intangible assets 29 20
Total depreciation, amortisation and impairment expense 717 739
Operating lease costs
Group
£ million 2006 2005
Minimum lease rentals - aircraft 113 116
- property 138 139
Sub-lease rentals received (11) (11)
Onerous lease costs 11
251 244
Cost of inventories
Group
£ million 2006 2005
Cost of inventories recognised as an expense, mainly fuel 1,484 1,359
includes: - write-down of inventories to net realisable value 2 3
b Exceptional items
Group
£ million 2006 2005
Recognised in operating profit from continuing operations:
Employee costs - restructuring costs 48 30
Depreciation - impairment of tangible fixed assets 1 16#p#分頁標題#e#
Depreciation - reversal of impairment of tangible fixed assets (13)
36 46
During the year the Group incurred restructuring costs in relation to organisational changes across the business including costs associated with the
reduction in management numbers announced in November 2005.
Notes to the accounts continued
68 British Airways 05/06 Annual Report
5 Auditors’ remuneration
Group
£’000 2006 2005
Group auditors - Audit fees
- Statutory audit 1,829 1,675
- Audit-related regulatory reporting 262 117
2,091 1,792
Further assurance services, including S.404 and International Financial Reporting Standards related work 1,029 1,069
Tax services
- Compliance 44 67
- Advisory 10 27
54 94
Other services 82
3,174 3,037
Of the above fees, £3,124,000 relates to the United Kingdom (2005: £2,954,000) and £50,000 relates to overseas (2005: £83,000).
The audit fees payable to Ernst & Young LLP are approved by the Audit Committee having been reviewed in the context of other companies for cost
effectiveness. The committee also reviews and approves the nature and extent of non-audit services to ensure that independence is maintained.
6 Employee costs and numbers
a Staff costs
Group
Number 2006 2005
The average number of persons employed in the Group during the year was as follows:
United Kingdom 42,963 43,070
Overseas 6,994 7,256
49,957 50,326
Group
£ million 2006 2005
Wages and salaries 1,558 1,518
Social security costs 161 154
Costs related to pension schemes benefits 248 200
Other post-retirement benefit costs 4 3
1,971 1,875
In addition, included in employee costs is a total expense of share-based payments of £12 million (2005: £8 million) that arises from transactions
accounted for as equity-settled share-based payment transactions.
b Directors' emoluments
Group
£’000 2006 2005
Fees 613 597
Salary and benefits 1,873 1,340
Bonus 582 496
Aggregate gains made by directors on the exercise of options 1,832
4,900 2,433
During the year two directors accrued benefits under defined benefit pension schemes and one director accrued benefits under defined contribution
pension schemes. The directors' remuneration report discloses full details of directors' emoluments and can be found on pages 45 to 54.
British Airways 05/06 Annual Report 69
7 Finance costs and income
Group
£ million 2006 2005
a Finance costs
On bank loans 42 44
On finance leases 74 86
On hire purchase arrangements 55 71
On other loans, including interest of £2 million (2005: £11 million) on Convertible Capital Bonds 2005 52 64
Interest expense 223 265
Interest capitalised (1)#p#分頁標題#e#
Change in fair value of interest rate swaps (1)
221 265
Interest costs on progress payments are capitalised at a rate based on LIBOR (London Interbank Offered Rate) plus 0.5 per cent to reflect the average cost
of borrowing to the Group unless specific borrowings are used to meet the payments in which case the actual rate is used.
Group
£ million 2006 2005
b Finance income
Bank interest receivable 93 83
Other financing income 14
93 97
c Financing income and expense relating to pensions
Net financing expense relating to pensions 17 29
Amortisation of actuarial losses on pensions 1
18 29
d Retranslation (charges)/credits on currency borrowings (13) 56
8 Profit on sale of fixed assets and investments
Group
£ million 2006 2005
Net profit on disposal of investment in Qantas 86
Net profit on dispoal of interest in The London Eye Company Limited 26
Net profit/(loss) on sale of other investments 5 (2)
Net (loss) on sale of property, plant and equipment (4) (13)
27 71
The tax effect on the sale of the Group's interest in The London Eye Company Limited was a charge of £1 million. The tax effect on the sale of other fixed
assets and investments was a charge of nil (2005: £14 million charge relating to the sale of the interest in Qantas).
9 Income and charges relating to fixed asset investments
Group
£ million 2006 2005
Income from fixed asset investments 2 3
Amounts written off investments (2)
3
Notes to the accounts continued
70 British Airways 05/06 Annual Report
10 Tax
a Tax on profit on ordinary activities
Tax charged in the income statement
Group
£ million 2006 2005
Current income tax
United Kingdom corporation tax 92 1
Less: relief for foreign tax (1) (1)
UK tax 91
Foreign tax 4 29
Effects of current year events on prior period balances 1 1
Total current income tax charge 96 30
Deferred tax
Origination and reversal of fixed asset related temporary differences (75) 2
Pensions 6 18
Associates’ earnings 2 (11)
Utilisation of tax losses 102 89
Recognition of advance corporation tax previously written off (20)
Other temporary differences 47
Effects of current year events on prior period balances (5) (7)
Total deferred tax charge 57 91
Tax charge in the income statement 153 121
Tax relating to items credited / (charged) to equity
Deferred tax
Deferred tax on net movement on revaluation of cash flow hedges 51
Deferred tax on share options 7
Net movement on hedges of net investment (8)
Tax credit/(charge) reported directly in reserves 58 (8)
b Reconciliation of the total tax charge
The current tax charge for the year is less than the profit at the standard rate of corporation tax in the UK (30%). The differences are explained below:#p#分頁標題#e#
Group
£ million 2006 2005
Accounting profit before income tax 620 513
Accounting profit multiplied by standard rate of corporation tax in the UK of 30% (2005: 30%) 186 154
Effects of:
Non-deductible expenses 8 8
Untaxed profits on disposals (9) (12)
Overseas tax rate differences (4) (11)
Overseas tax suffered net of double taxation relief 3 10
Tax effect arising from associate profit being disclosed on an after tax basis (8) (10)
Tax on associates’ unremitted earnings 2 (11)
Current year losses not recognised 1 2
Losses not previously recognised (2)
Effect of current year events on prior period balances (4) (6)
Recognition of previously written-off advance corporation tax (20)
Other differences (3)
Total tax charge for the year (Note 10a) 153 121
British Airways 05/06 Annual Report 71
10 Tax continued
c Unrecognised tax losses
No deferred tax asset has been recognised in respect of tax losses of £290 million gross (2005: £286 million) with a value of £87 million (2005: £86
million) as the utilisation of such losses is uncertain or not currently anticipated as they are principally UK capital losses that can only be offset against
future UK capital gains and no suitable transactions are currently envisaged.
The Group has £74 million (2005: £94 million) of advance corporation tax previously written off which may be utilised against future taxable profits. This
may reduce future UK tax payments and the tax charge in future years.
The Group has not provided deferred tax in relation to its investments in subsidiaries and associates other than in relation to the unremitted earnings of
associates where it does not control the dividend policy. This is on the basis that the Group can control the timing and realisation of these temporary
differences. Quantifying the unprovided temporary differences is not practical but on the basis that the Group can control the timing and realisation of
these temporary differences, no material tax consequences are expected to arise.
There are no income tax consequences attaching to the payment of dividends by the Group to its shareholders.
d Deferred tax
The deferred tax included in the balance sheet is as follows:
Group Company
£ million 2006 2005 2006 2005
Fixed asset related temporary differences 1,310 1,360 1,188 1,250
Pensions (482) (488) (469) (475)
Tax losses carried forward (92) (88)
Exchange differences on funding liabilities 57 71 57 71
Advance corporation tax recoverable (20) (20)
Tax on associates’ unremitted earnings 11 9
Other temporary differences 20 (44) 36 (39)
896 816 792 719
Movement in provision:
Group Company
£ million 2006 2005 2006 2005
Balance at April 1 816 717 719 648
Effect of adopting IAS 32 and IAS 39 81 81#p#分頁標題#e#
Deferred tax charge in profit and loss (Note 10a) 57 91 50 63
Deferred tax charge/(credit) reported directly in reserves (Note 10a) (58) 8 (58) 8
Balance at March 31 896 816 792 719
11 Earnings per share
Group
Profit Earnings per share
2006 2005 2006 2005
£m £m Pence Pence
Profit for the year attributable to shareholders and basic earnings per share 451 377 40.4 35.2
Interest on Convertible Capital Bonds 2 8
Diluted profit for the year attributable to shareholders and earnings per share 453 385 39.8 34.1
Weighted average number of shares for basic EPS ('000) 1,116,178 1,071,126
Dilutive potential ordinary shares:
Convertible Capital Bonds ('000) 9,863 48,007
Employee share options ('000) 12,504 7,352
Weighted average number of shares for diluted EPS ('000) 1,138,545 1,126,485
Basic earnings per share are calculated on a weighted average number of ordinary shares in issue after deducting shares held for the purposes of Employee
Share Ownership Plans including the Long Term Incentive Plan.
The Group has granted additional options over shares to employees that were not dilutive during the period but which may be dilutive in the future.
Details of the Group's share options can be found in note 29.
Notes to the accounts continued
72 British Airways 05/06 Annual Report
12 Property, plant and equipment
a Group
£ million Fleet Property Equipment Group total
Cost
Balance at April 1, 2004 11,065 1,434 1,002 13,501
Additions - net of refund of progress payments (Note 12d) 327 13 24 364
Disposals (123) (42) (112) (277)
Reclassifications (20) (13) (52) (85)
Reclassifications to assets held for sale (Note 14) (37) (1) (38)
Balance at March 31, 2005 11,212 1,391 862 13,465
Additions - net of refund of progress payments (Note 12d) 239 58 29 326
Disposals (140) (22) (110) (272)
Reclassifications (2) (1) (3)
Reclassifications from assets held for sale (Note 14) 29 29
Reclassifications to assets held for sale (Note 14) (20) (20)
Balance at March 31, 2006 11,318 1,427 780 13,525
Depreciation and impairment
Balance at April 1, 2004 3,851 354 523 4,728
Charge for the year 563 76 64 703
Disposals (109) (38) (110) (257)
Impairment 16 16
Reclassifications (20) (1) (21)
Reclassifications to assets held for sale (Note 14) (33) (33)
Balance at March 31, 2005 4,268 391 477 5,136
Charge for the year 573 69 58 700
Disposals (129) (7) (56) (192)
Impairment 1 1
Reversal of impairment charge (13) (13)
Reclassifications 2 (1) 1
Reclassifications from assets held for sale (Note 14) 27 27
Reclassifications to assets held for sale (Note 14) (17) (17)
Balance at March 31, 2006 4,712 453 478 5,643
Net book amounts
March 31, 2006 6,606 974 302 7,882
March 31, 2005 6,944 1,000 385 8,329#p#分頁標題#e#
Analysis at March 31, 2006
Owned 2,649 929 287 3,865
Finance leased 1,792 1,792
Hire purchase arrangements 2,112 2,112
Progress payments 53 45 15 113
6,606 974 302 7,882
Analysis at March 31, 2005
Owned 2,768 959 372 4,099
Finance leased 1,906 1,906
Hire purchase arrangements 2,222 2,222
Progress payments 48 41 13 102
6,944 1,000 385 8,329
Group total
2006 2005
The net book amount of property comprises:
Freehold 292 303
Long leasehold 278 335
Short leasehold* 404 362
974 1,000
* Short leasehold relates to leasehold interests with a duration of less than 50 years.
As at March 31, 2006, bank and other loans of the Group are secured on fleet assets with a cost of £440 million (2005: £527 million).
Included in the cost of tangible assets for the Group is £333 million (2005: £339 million) of capitalised interest.
British Airways 05/06 Annual Report 73
12 Property, plant and equipment continued
b Company
Company
£ million Fleet Property Equipment total
Cost
Balance at April 1, 2004 10,595 1,335 842 12,772
Additions - net of refund of progress payments 324 10 19 353
Disposals (120) (41) (107) (268)
Net transfers to subsidiary undertakings (103) (103)
Reclassifications (23) (13) (49) (85)
Reclassifications to assets held for sale (Note 14)
Balance at March 31, 2005 10,673 1,291 705 12,669
Additions - net of refund of progress payments 237 58 24 319
Disposals (133) (12) (23) (168)
Net transfers to subsidiary companies (6) (6)
Reclassifications (2) (1) (3)
Reclassifications to assets held for sale (Note 14) (20) (20)
Balance at March 31, 2006 10,749 1,337 705 12,791
Depreciation and impairment
Balance at April 1, 2004 3,757 329 443 4,529
Charge for the year 534 71 49 654
Disposals (108) (37) (105) (250)
Net transfers to subsidiary companies (48) (48)
Reclassifications (21) (1) 1 (21)
Reclassifications to assets held for sale (Note 14)
Balance at March 31, 2005 4,114 362 388 4,864
Charge for the year 544 65 48 657
Disposals (124) (4) (22) (150)
Net transfers to subsidiary companies (3) (3)
Impairment 1 1
Reclassifications 2 (1) 1
Reclassifications to assets held for sale (Note 14) (17) (17)
Balance at March 31, 2006 4,517 423 413 5,353
Net book amounts
March 31, 2006 6,232 914 292 7,438
March 31, 2005 6,559 929 317 7,805
Analysis at March 31, 2006
Owned 2,336 869 279 3,484
Finance leased 1,791 1,791
Hire purchase arrangements 2,052 2,052
Progress payments 53 45 13 111
6,232 914 292 7,438
Analysis at March 31, 2005
Owned 2,445 889 304 3,638
Finance leased 1,905 1,905
Hire purchase arrangements 2,161 2,161
Progress payments 48 40 13 101#p#分頁標題#e#
6,559 929 317 7,805
Company total
2006 2005
The net book amount of property comprises:
Freehold 241 249
Long leasehold 276 325
Short leasehold* 397 355
914 929
* Short leasehold relates to leasehold interests with a duration of less than 50 years.
Included in the cost of tangible assets for the Company is £330 million (2005: £336 million) of capitalised interest.
Notes to the accounts continued
74 British Airways 05/06 Annual Report
12 Property, plant and equipment continued
c Depreciation
Fleets are generally depreciated over periods ranging from 15 to 25 years after making allowance for estimated residual values. Effective annual depreciation
rates resulting from those methods are shown in the following table:
Group
% 2006 2005
Boeing 747-400 and 777-200 3.7 3.7
Boeing 767-300 and 757-200 4.7 4.7
Airbus A321, A320, A319, Boeing 737-400 4.9 4.9
Embraer RJ145, British Aerospace 146 4.9 4.8
Property, apart from freehold land, is depreciated over its expected useful life subject to a maximum of 50 years. Equipment is depreciated over periods
ranging from 4 to 25 years, according to the type of equipment.
d Analysis of Group tangible asset additions
Group total
£ million Fleet Property Equipment 2006 2005
Cash paid 228 19 28 275 356
Capitalised interest 1 1
Capitalised provisions 38 38
Accrual movements 11 1 12 8
239 58 29 326 364
13 Capital expenditure commitments
Capital expenditure authorised and contracted for but not provided in the accounts amounts to £249 million for the Group (2005: £143 million) and
£249 million for the Company (2005: £142 million).
The outstanding commitments include £222 million which relates to the acquisition of Airbus A320 family aircraft scheduled for delivery over the next
two years. It is intended that these aircraft will be financed partially by cash holdings and internal cash flow and partially through external financing,
including committed facilities arranged prior to delivery.
14 Assets held for sale
Assets held for sale comprise non-current assets and disposal groups that are held for sale rather than for continuing use within the business. The carrying
value represents the estimated sale proceeds less costs to sell.
During the year ended March 31, 2006, assets with a fair value (less costs to sell) of £3 million were sold. In addition, four BAe 146 aircraft with a fair
value of £2 million that were classified as assets held for sale as at March 31, 2005 were reclassified back to property, plant and equipment as the Group
decided to retain the aircraft in service. During the year ended March 31, 2006 an impairment charge of £13 million was reversed arising from the
reclassification.
During March 2006 aircraft with a fair value of £3 million were reclassified from property, plant and equipment to assets held for sale.#p#分頁標題#e#
On February 8, 2006, the Group announced the completion of the disposal of its entire interests in The London Eye Company Limited to The Tussauds
Group. The disposal included both the one third share of the equity of the company and the outstanding balance on the loan owed by The London Eye
Company Limited to the Group.
The gain on disposal comprises the following amounts:
£ million 2006
Cash proceeds received 100
Cash and cash equivalents disposed of (22)
Net cash flow arising on the disposal 78
Property, plant and equipment (61)
Receivables (2)
Trade and other payables 11
(52)
Gain on disposal 26
British Airways 05/06 Annual Report 75
15 Intangible assets
a Group
£ million Goodwill Landing Software Group
rights total
Cost
Balance at April 1, 2004 88 112 65 265
Additions 32 32
Reclassifications 62 62
Balance at March 31, 2005 88 144 127 359
Additions 8 8
Balance at March 31, 2006 88 144 135 367
Amortisation
Balance at April 1, 2004 16 16 53 85
Charge for the year 6 14 20
Balance at March 31, 2005 16 22 67 105
Charge for the year 7 22 29
Balance at March 31, 2006 16 29 89 134
Net book amounts
March 31, 2006 72 115 46 233
March 31, 2005 72 122 60 254
b Company
£ million Landing Software Company
rights total
Cost
Balance at April 1, 2005 86 65 151
Additions 32 32
Reclassifications 62 62
Balance at March 31, 2005 118 127 245
Additions 8 8
Balance at March 31, 2006 118 135 253
Amortisation
Balance at April 1, 2004 11 53 64
Charge for the year 5 14 19
Balance at March 31, 2005 16 67 83
Charge for the year 6 22 28
Balance at March 31, 2006 22 89 111
Net book amounts
March 31, 2006 96 46 142
March 31, 2005 102 60 162
Notes to the accounts continued
76 British Airways 05/06 Annual Report
16 Impairment of goodwill
Goodwill acquired through business combinations has been allocated for the purposes of impairment reviews to two cash-generating units with separately
identifiable cash inflows and which are reportable business segments. The two segments are the network airline cash generating unit and the regional airline
cash generating unit.
The amount of goodwill allocated to the cash generating units is as follows:
Group
£ million 2006 2005
Carrying amount of goodwill allocated to the network airline cash generating unit 40 40
Carrying amount of goodwill allocated to the regional airline cash generating unit 32 32
72 72
The recoverable amounts of both the network airline and regional airline units have been measured on the basis of their value in use by applying cash flow
projections based on the financial budgets approved by the Board covering a two-year period. Cash flows beyond the two-year period are projected to#p#分頁標題#e#
increase by the long-term growth rate of 2.5%. The pre-tax discount rate applied to the cash flow projections is 8.9% (2005: 8.9%).
The calculation of value in use for both income generating units is most sensitive to the following assumptions:
- Operating margin
- Discount rates
- Long term growth rate
Operating margins are based on the estimated effects of planned business efficiency and business change programmes approved and enacted at the
balance sheet date and adjusted for the volatile trading conditions that have impacted both cash-generating units over the past three years. The trading
environment is subject to both regulatory and competitive pressures that can have a material effect on the operating performance of the business.
Forseeable events are unlikely to result in a change in the projections of a significant nature so as to result in the unit's carrying amount to exceed its
recoverable amount.
The discount rate reflects management's estimate of the long-run return on capital employed for the business units. Changes in the cash-generating units’
sources of funding or the cost of that funding could result in changes to the discount rates used. An increase in discount rates by 1.5 points and 4.0 points
would result in the regional airline unit's and network airline unit's carrying amount respectively being equal to its recoverable amount.
17 Investments
a Group
Investments in associates
Group
£ million 2006 2005
Balance at April 1 126 443
Impact of the adoption of IAS 39 and IAS 32 (10)
Exchange movements 1 (17)
Additions 5 6
Share of attributable results 4 14
Share of movements on other reserves 5
Disposals (320)
Balance at March 31 131 126
Market value of listed associates above:
Group total
£ million 2006 2005
163 171
Details of the investments that the Group accounts for as associates using the equity method are set out below:
Country of
Percentage of Principal incorporation and
equity owned activities Holding principal operations
Iberia, Lineas Aéreas de España, S.A. ('Iberia')* 10.0 Airline operations Ordinary shares Spain
Comair Ltd** 18.3 Airline operations Ordinary shares South Africa
* Held by a 90% owned subsidiary company
** Held by a subsidiary company
The Group accounts for its investments in Iberia and Comair as associates although the Group holds less than 20% of the issued share capital as the
Group has the ability to exercise significant influence over the investment due to the the Group's voting power (both through its equity holding and its
representation on key decision-making committees) and the nature of the commercial relationships with the associates.
British Airways 05/06 Annual Report 77
18 Non-current financial assets
Group Company
£ million 2006 2005 2006 2005#p#分頁標題#e#
Other investments 33 30 29 29
Prepayments and accrued income 33 38
Derivative financial assets 56 56
89 38 56
122 68 85 29
17 Investments continued
The following summarised financial information of the Group's investments in associates is shown based on the Group's share of results and balance sheet:
Group
£ million 2006 2005
Non-current assets 188 170
Current assets 205 239
Current liabilities (124) (113)
Non-current liabilities (156) (186)
Share of net assets 113 110
Goodwill attributable to investments in associates 18 16
Revenues 375 777
Net profit after tax 28 24
b Company
Investments in subsidiaries
Cost Provisions Company total
£ million Shares Loans Shares Loans 2006 2005
Balance at April 1 1,870 48 (723) 1,195 1,194
Exchange movements 1 1 2
Additions 195 195
Repayment (1)
Disposal (48) (48)
Reversal of provisions 7 7
Balance at March 31 2,066 (716) 1,350 1,195
Investments in associates
Balance at April 1 1 1 29
Reclassification to long term investments (28)
1 1 1
The additional shares acquired in subsidiary companies reflect the conversion of loans previously owed to the Company into equity shares.
The Company accounts for its investments in subsidiaries and associates using the cost method.
The Group's and Company's principal investments in subsidiaries, associates and other investments are listed in the Directors’ Report and Business Review
on page 19.
Notes to the accounts continued
78 British Airways 05/06 Annual Report
18 Non-current financial assets continued
Other investments
Other investments comprise non-current investments that are classified as available-for-sale and measured at fair value. For quoted investments the fair
value comprises the market price at the balance sheet date. For other investments the fair value is estimated by reference to the discounted cash flow
analysis or by reference to other valuation methods. Investments are quoted net of provisions for impairment arising from reductions in the fair value due
to factors that are not expected to reverse.
Other investments include investments in listed ordinary shares, which by their nature have no fixed maturity date or coupon rate.
The Group's and Company's principal investments in subsidiaries, associates and other investments are listed in the Directors’ Report and Business Review
on page 19.
19 Inventories
Group Company
£ million 2006 2005 2006 2005
Expendables and consumables 83 84 77 76
20 Other current assets
Group Company
£ million 2006 2005 2006 2005
Amounts owed by subsidiaries 112 234
Other debtors 67 32 65 30
Prepayments and accrued income 214 269 164 221
Derivative financial assets 177 177#p#分頁標題#e#
458 301 518 485
21 Cash, cash equivalents and other interest bearing deposits
a Cash and cash equivalents
Group Company
£ million 2006 2005 2006 2005
Cash at bank and in hand 84 78 62 57
Short-term deposits falling due within 3 months 823 471 773 410
Cash and cash equivalents 907 549 835 467
Other current interest bearing deposits maturing after 3 months 1,533 1,133 1,531 1,132
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for periods up to three months depending on
the cash requirements of the Group and earn interest based on the floating deposit rates. The fair value of cash and cash equivalents is £907 million for
the Group (2005: £549 million) and for the Company £835 million (2005: £467 million).
The Group and Company have no material outstanding bank overdrafts (2005: £ nil).
Other current interest bearing deposits are made for periods in excess of three months with a maturity typically within 12 months and earn interest based
on the LIBOR interest rate relevant to the term and currency concerned.
At March 31, 2006 British Airways had undrawn committed aircraft financing facilities of US$216 million (expires May 2008) (2005: US$228 million
expiring May 2008) and further general facilities of $420 million (expires June 2010) (2005: $232 million expiring August 2013) and ¥75 billion
(expires January 2011) (2005: £ nil) together with unused overdraft facilities of £46 million (2005: £21 million) and €20 million (2005: £ nil). No undrawn
uncommitted money market lines were held as at year end (2005: £25 million).
British Airways 05/06 Annual Report 79
21 Cash, cash equivalents and other interest bearing deposits continued
b Reconciliation of net cash flow to movement in net debt
Group
£ million 2006 2005
Increase/(decrease) in cash and cash equivalents during the year 357 (457)
Net cash outflow from decrease in debt and lease financing 479 1,155
Increase in current interest bearing deposits maturing after 3 months 402 487
Changes in net debt resulting from cash flows 1,238 1,185
New loans and finance leases taken out and hire purchase arrangements made (11) (12)
Conversion of Convertible Capital Bonds 112
Non cash refinancing 9
Exchange (58) 54
Movement in net debt during the year 1,281 1,236
Net debt at April 1 (2,922) (4,158)
Net debt at March 31 (1,641) (2,922)
c Analysis of net debt
Group
Balance at Net Other Balance at
£ million April 1 Cash flow non-cash Exchange March 31
Cash and cash equivalents 549 357 1 907
Current interest bearing deposits maturing after 3 months 1,133 402 (2) 1,533
Bank and other loans (1,168) 64 (12) (1,116)
Finance leases and hire purchase arrangements (3,324) 415 (11) (45) (2,965)#p#分頁標題#e#
Convertible Capital Bonds 2005 (112) 112
Year to March 31, 2006 (2,922) 1,238 101 (58) (1,641)
Year to March 31, 2005 (4,158) 1,185 (3) 54 (2,922)
22 Trade and other payables
Group Company
£ million 2006 2005 2006 2005
Trade creditors 752 897 711 854
Unredeemed frequent flyer liabilities 15 3 15 3
Amounts owed to subsidiary companies 1,416 1,424
Derivative liabilities 17 17
Other creditors
Other creditors 455 301 451 296
Other taxation and social security 42 43 42 43
497 344 493 339
Accruals and deferred income
Sales in advance of carriage 1,045 880 1,013 853
Accruals and deferred income 496 518 212 226
1,541 1,398 1,225 1,079
2,822 2,642 3,877 3,699
Notes to the accounts continued
80 British Airways 05/06 Annual Report
23 Other long-term liabilities
Group Company
£ million 2006 2005 2006 2005
Other creditors 10 8
Derivative liabilities 9 9
Accruals and deferred income 213 204 168 156
232 212 177 156
24 Financial liabilities
Group Company
£ million 2006 2005 2006 2005
a Current
Loans, finance leases and hire purchase arrangements
Bank and other loans 86 63 66 43
Finance leases 105 96 104 95
Hire purchase arrangements 288 288 283 281
479 447 453 419
b Non-current
Loans, finance leases and hire purchase arrangements
Bank and other loans 1,030 1,105 743 797
Finance leases 1,418 1,493 1,418 1,493
Hire purchase arrangements 1,154 1,447 1,125 1,414
Loans from subsidiaries 411 420
3,602 4,045 3,697 4,124
Bank and other loans are repayable up to the year 2019. Bank and other loans of the Group amounting to US$175 million (2005: US$194 million), and
£554 million (2005: £592 million) and bank loans of the Company amounting to US$175 million (2005: US$194 million) and £246 million (2005: £263
million) are secured on aircraft. Euro-sterling notes, other loans and loans from subsidiary companies are not secured. Finance leases and hire purchase
arrangements are all secured on aircraft or property assets.
c Convertible long-term borrowings
The terms of the 9.75 per cent Convertible Capital Bonds allowed the holders to convert into British Airways Plc ordinary shares during the period June
1993 to June 2005 on the basis of one ordinary share for every 2.34 (adjusted for the effect of the 1993 rights issue) Bonds held. On June 15, 2004,
39,000 ordinary shares were issued in exchange for 93,000 Bonds . On June 15, 2005 the Bonds reached maturity and 112,317,274 bonds were
converted into 47,979,486 ordinary shares.
d Bank and other loans
Bank and other loans comprise the following:
Group Company
£ million 2006 2005 2006 2005
£250m fixed rate 7.25% eurobonds 2016 248 247 248 247
£100m fixed rate 10.875% eurobonds 2008 61 61 61 61#p#分頁標題#e#
Floating rate Sterling mortgage loans secured on aircraft 227 237 170 177
Floating rate US Dollar mortgage loans secured on aircraft 101 104 101 104
Fixed rate Sterling mortgage loans secured on aircraft 325 354 75 86
Floating rate Sterling mortgage loans not secured on aircraft 15 18 15 18
Floating rate US Dollar mortgage loans not secured on aircraft 55 54 55 54
Sterling loan notes 3 3
European Investment Bank loans 84 90 84 90
1,116 1,168 809 840
Less: current instalments due on bank loans 86 63 66 43
1,030 1,105 743 797
British Airways 05/06 Annual Report 81
24 Financial liabilities continued
£250 million fixed rate 7.25% unsecured eurobonds 2016 are repayable in one instalment on 23 August 2016 and currently bear interest at 8.75% based
on the Company's credit rating.
£100 million fixed rate 10.875% unsecured eurobonds 2008 are repayable in one instalment on 15 June 2008.
Floating rate Sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.42% and 0.57% above LIBOR.
The loans are repayable between 2015 and 2016.
Floating rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.41% and 0.8% above LIBOR.
The loans are repayable between 2009 and 2016.
Fixed rate Sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 7.35% and 10.5% . The loans are
repayable between 2007 and 2012.
European Investment Bank loans are secured on certain property assets of the Group and bear interest of between 4.38% and 6.11%. The loans are
repayable between 2007 and 2017.
e Total loans, finance leases and hire purchase arrangements
Group Company
£ million 2006 2005 2006 2005
Loans
Bank - US dollar $271m $297m $271m $297m
- sterling £651m £699m £344m £371m
807 857 500 529
Euro-sterling notes - sterling 309 308 309 308
Other - sterling 3 3
Loans from subsidiary companies - euro €300m €300m
- sterling £202m £213m
411 420
Finance leases - US dollar $1,041m $1,089m $1,040m $1,088m
- sterling £923m £1,010m £923m £1,010m
1,523 1,589 1,522 1,588
Hire purchase arrangements - Japanese yen ¥145,906m ¥152,070m ¥145,906m ¥152,070m
- US dollar $128m $205m $118m $194m
- sterling £655m £870m £626m £836m
1,442 1,735 1,408 1,695
4,081 4,492 4,150 4,543
f Obligations under finance leases and hire purchase contracts
The Group uses finance leases and hire purchase contracts principally to acquire aircraft. These leases have both renewal options and purchase options.
These are at the option of British Airways. Future minimum lease payments under external finance leases and hire purchase contracts are as follows:#p#分頁標題#e#
Group Company
£ million 2006 2005 2006 2005
Future minimum payments due:
Within one year 516 526 511 519
After more than one year but within five years 1,740 1,893 1,713 1,861
In five years or more 1,534 1,669 1,531 1,667
3,790 4,088 3,755 4,047
Less: Finance charges allocated to future periods 825 764 825 764
Present value of minimum lease payments 2,965 3,324 2,930 3,283
The present value of minimum lease payments is analysed as follows:
Within one year 393 384 387 376
After more than one year but within five years 1,421 1,544 1,394 1,513
In five years or more 1,151 1,396 1,149 1,394
2,965 3,324 2,930 3,283
Notes to the accounts continued
82 British Airways 05/06 Annual Report
25 Operating lease commitments
The Group has entered into commercial leases on certain properties, equipment and aircraft. These leases have durations ranging from 5 years for aircraft
to 150 years for ground leases. Certain leases contain options for renewal. There are no restrictions placed upon the lessees by entering into these leases.
a Fleet
Group Company
£ million 2006 2005 2006 2005
The aggregate payments, for which there are commitments under operating leases as at the
end of the year, fall due as follows:
Within one year 112 107 73 68
Between one and five years 240 250 157 150
Over five years 51 83 47 71
403 440 277 289
b Property and equipment
Group Company
£ million 2006 2005 2006 2005
The aggregate payments, for which there are commitments under operating leases as at the
end of the year, fall due as follows:
Within one year 65 65 62 60
Between one and five years 174 185 162 169
Over five years, ranging up to the year 2145 1,484 1,429 1,472 1,401
1,723 1,679 1,696 1,630
The Group sub-leases surplus rental properties and aircraft assets held under non-cancellable leases to third parties. These leases have remaining terms of
1 to 9 years and the assets are surplus to the Group's requirements. Future minimum rentals receivable under non-cancellable operating leases are as
follows:
Group Company
£ million 2006 2005 2006 2005
Aircraft
Within one year 8 2
Between one and five years 23 4
Over five years 2
33 6
Property and equipment
Within one year 9 8 8 8
Between one and five years 25 28 24 26
Over five years 23 32 22 28
57 68 54 62
British Airways 05/06 Annual Report 83
26 Provisions for liabilities and charges
Group
Onerous lease Restoration and Insurance
£ million contracts handback provision provisions Severance Other Total
At April 1, 2005
Current 8 15 8 1 32
Non-current 28 48 27 9 112
36 63 27 8 10 144
Arising during the year 11 9 48 1 69
Utilised (11) (9) (31) (51)
Release of unused amounts (5) (5)#p#分頁標題#e#
Movement due to disposal of
The London Eye Company Limited (4) (4)
Provided and capitalised in the period 38 38
At March 31, 2006 36 97 22 25 11 191
Analysis
Current 8 22 25 1 56
Non-current 28 75 22 10 135
36 97 22 25 11 191
Company
Onerous lease Restoration and
£ million contracts handback provision Severance Other Total
At April 1, 2005
Current 8 1 9
Non-current 19 47 9 75
19 47 8 10 84
Arising during the year 1 8 44 1 54
Utilised (3) (5) (29) (37)
Provided and capitalised in the period 38 38
At March 31, 2006 17 88 23 11 139
Analysis
Current 13 23 1 37
Non-current 17 75 10 102
17 88 23 11 139
The onerous lease provision relates to the sub-lease of 12 Jetstream 41 aircraft to Eastern Airways, 6 Avro RJ100 aircraft to Swiss International Air Lines
and the grounding of the ATP fleet, which included the sub-lease of 3 aircraft to Loganair in the prior year. This provision will be fully utilised by October
2011. In addition, the provision includes amounts relating to properties leased by the Group that are either sub-leased to third parties or are vacant with
no immediate intention to utilise the property. This provision will be fully utilised by April 2045.
Restoration and handback costs include provision for the costs to meet the contractual return conditions on aircraft held under operating leases. The
provision also includes amounts relating to leased land and buildings where restoration costs are contractually required at the end of the lease. Where
such costs arise as a result of capital expenditure on the leased asset, the restoration costs are also capitalised. This provision will be utilised by March 2145.
Insurance provisions relate to provisions held by the Group's captive insurer, Speedbird Insurance Company Limited, for insured but not reported losses.
Such provisions are held until such time as further claims are considered unlikely under the respective insurance policies.
The severance provision at March 31, 2006 relates to committed early retirement and voluntary severance costs expected to be paid during the next
financial year.
Other provisions principally include staff leaving indemnities relating to amounts due to staff under various overseas contractual arrangements.
Notes to the accounts continued
84 British Airways 05/06 Annual Report
27 Financial instruments
An explanation of the Group's objectives, policies and strategies for the role of derivatives and other financial instruments in creating and changing the risks
of the Group in its activities can be found in the Directors' Report and Business Review on pages 39 to 41.
a Interest rate risk profile of financial assets and financial liabilities
The interest rate profile of the financial assets and liabilities of the Group is as follows:
Group#p#分頁標題#e#
Weighted average Within More than Total
£ million fixed rate (%) 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years 5 years 2006
Fixed rate
Loans, leases and hire
purchase arrangements:
Sterling 6.86 53 46 92 13 22 914 1,140
US dollar 4.50 138 159 297
Japanese yen 1.30 65 107 62 280 178 22 714
Floating rate
Cash and cash equivalents:
Sterling 790 790
US dollar 33 33
Japanese yen 49 49
Euro 20 20
Other 15 15
Short-term deposits maturing
over 3 months:
Sterling 1,431 1,431
Japanese yen 102 102
Loans, leases and hire
purchase arrangements:
Sterling 32 34 126 458 29 719 1,398
US dollar (138) 15 100 555 532
Floating rate instruments are repriced at intervals of less than 12 months based on prevailing market rates of interest. The classification of financial assets
and liabilities as either fixed or floating reflects the economic impact of any interest rate swap arrangements that are in place.
The other financial instruments of the Group are excluded as they are non-interest bearing and therefore are not exposed to interest rate risk.
The interest rate profile of the financial assets and liabilities of the Company is as follows:
Company
Weighted average Within More than Total
£ million fixed rate (%) 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years 5 years 2006
Fixed rate
Loans, leases and hire
purchase arrangements:
Sterling 7.05 51 33 86 707 877
US dollar 4.49 138 159 297
Japanese yen 1.30 65 107 62 280 178 22 714
Euro 6.75 209 209
Floating rate
Cash and cash equivalents:
Sterling 754 754
US dollar 15 15
Japanese yen 49 49
Other 17 17
Short-term deposits maturing
over 3 months:
Sterling 1,429 1,429
Japanese yen 102 102
Loans, leases and hire
purchase arrangements:
Sterling 26 42 130 458 40 831 1,527
US dollar (138) 15 94 555 526
British Airways 05/06 Annual Report 85
27 Financial instruments continued
The Group and Company had the following outstanding single currency interest rate swap arrangements that are accounted for separately from the
underlying financing and the effect of these swaps is included in the table above. The objective is to reduce interest rate risk so as to change the interest
payable elements of certain loans and lease obligations from variable to fixed rates.
Notional Termination Interest rates
principal balance dates Fixed payable
At March 31, 2006
US dollar $240m 2008 2.95% - 3.57%
b Credit risk
There are no significant exposures to credit risk within the Group as credit risk exposures on financial assets and liabilities are managed through the use
of counter-party credit limits approved by the Board and monitored by the Group's Treasury Committee. Credit risks arising from acting as guarantor are#p#分頁標題#e#
disclosed in note 32.
c Fair values of financial assets and financial liabilities
The fair values of the Group's financial assets and liabilities at March 31, 2006 is set out below:
Group Company
£ million Carrying value Fair value Carrying value Fair value
Financial assets:
Cash and cash equivalents 907 907 835 835
Other liquid deposits maturing over 3 months 1,533 1,533 1,531 1,531
Other investments 33 33 29 29
Interest rate swap arrangements 4 4 4 4
Forward currency contracts 5 5 5 5
Fuel derivatives 203 203 203 203
Financial liabilities:
Interest bearing loans and borrowings:
Finance lease and hire purchase obligations 2,965 2,950 3,132 3,118
Fixed rate borrowings 654 714 613 650
Floating rate borrowings 462 462 405 405
Forward currency contracts 4 4 4 4
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:
Available-for-sale financial assets and loan notes
- listed fixed asset investments are stated at market value as at March 31, 2006. For other investments the fair value is estimated by reference to
discounted cash flow analysis or by reference to other valuation methods. Investments are quoted net of provisions for impairment arising from reductions
in the fair value due to factors that are not expected to reverse.
Bank and other loans, finance leases, hire purchase arrangements and the non Japanese yen denominated portions of hire purchase arrangements carrying
fixed rates of interest
- the repayments which the Group is committed to make have been discounted at the relevant interest rates applicable at March 31, 2006.
Japanese yen denominated portions of hire purchase arrangements carrying fixed rates of interest
- these amounts relate to the tax equity portions of Japanese leveraged leases which are personal to the Group, cannot be assigned and could not be
refinanced or replaced in the same cross border market on a marked-to-market basis and accordingly, a fair value cannot be determined. The carrying
value of £714 million has therefore been included as the fair value above.
Euro-sterling notes and Euro-sterling Bond 2016
- quoted market value.
Notes to the accounts continued
86 British Airways 05/06 Annual Report
27 Financial instruments continued
c Fair values of financial assets and financial liabilities continued
Interest rate swaps
- discounted cash flow analysis, to determine the estimated amount the Group would receive or pay to terminate the agreements.
Forward currency transactions
- the marked-to-market value of the instrument.
Over the counter (OTC) fuel derivatives
- the marked to market value of the instruments.
d Hedges
i) Cash flow hedges
At March 31, 2006 the Group and Company held four principal risk management activities that were designated as hedges of future forecast transactions.#p#分頁標題#e#
These were:
A hedge of a proportion of future long-term revenue receipts by future debt repayments in foreign currency hedging future foreign exchange risk.
A hedge of certain short-term revenue receipts by foreign exchange contracts (forwards or swaps) hedging future foreign exchange risk.
A hedge of certain short-term foreign currency operational payments by forward exchange contracts (forwards or swaps) hedging future foreign
exchange risk.
A hedge of future jet fuel purchases by forward crude, gasoil and jet kerosene derivative contracts hedging future fuel price risk.
To the extent that the hedges were assessed as highly effective, a summary of the amounts included in equity and the periods in which the related cash
flows are expected to occur are summarised below:
Group
Within More than Total
£ million 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years 5 years 2006
Debt repayments to hedge future revenue (4) (4) (4) (3) (3) (26) (44)
Forward contracts to hedge future revenue (4) (4)
Forward contracts to hedge future payments 5 5
Hedges of future fuel purchases 148 31 179
145 27 (4) (3) (3) (26) 136
Related deferred tax charge (40)
Total amount included within equity 96
Notional value of financial instruments used as cash flow hedging instruments:
Group Company
Notional amount Notional amount
- to hedge future currency revenues against US dollars $136m $136m
- to hedge future currency revenues against sterling £152m £152m
- to hedge future operating payments against US dollars $428m $428m
- hedges of future fuel purchases $2,617m $2,617m
- debt repayments to hedge future revenue - Japanese yen ¥125,215m ¥125,215m
- US dollars $1,233m $1,233m
ii) Fair value hedges
The Group has no hedges designated as fair value hedges.
iii) Net investments in foreign operations
The Group has no hedges designated as hedges of net investments in foreign operations.
British Airways 05/06 Annual Report 87
27 Financial instruments continued
Company
The Company undertakes hedging activities on behalf of other companies within the Group and performs the Treasury activities of the Group centrally.
As a result the disclosures above apply to the Company as for the Group.
e Year ended March 31, 2005 - UK GAAP disclosures
The following disclosures are included, as at March 31, 2005, to meet the requirements of Financial Reporting Standard 13 - 'Derivatives and Other
Financial Instruments: Disclosures'. With the exception of the analysis of currency exposures, the disclosures below exclude short-term debtors and creditors.
Interest rate risk profile of financial liabilities
Group
2005
Fixed rate borrowings
Weighted
Weighted average
average rate Total
years % £ million £ million £ million#p#分頁標題#e#
Sterling 9.9 6.11 1,298 1,704 3,002
US Dollar 12.9 4.50 275 571 846
Japanese Yen 4.0 1.34 756 756
Total 2005 8.3 4.37 2,329 2,275 4,604
The borrowings are stated after taking into account the various interest rate swaps entered into by the Group. Floating rates of interest are based on
LIBOR (London Interbank Offered Rate). Fixed rate borrowings include £112 million relating to the Convertible Capital Bonds 2005.
The terms of the 9.75 per cent Convertible Capital Bonds allowed the holders to convert into British Airways Plc ordinary shares during the period June
1993 to June 2005 on the basis of one ordinary share for every 2.34 (adjusted for the effect of the 1993 rights issue) Bonds held. On June 15, 2004,
39,000 ordinary shares were issued in exchange for 93,000 Bonds. The terms also provided that on maturity in 2005, the Company may require
remaining bondholders to convert their Bonds into ordinary shares of the Company which would be sold on their behalf. If the proceeds of such a sale
were less than the issue price of the Bonds, the Company had to fund any deficit from its own resources. Full conversion of the remaining Bonds would
require the issue of 47,999,000 ordinary shares.
The mid market closing prices of the Bonds and the ordinary shares at March 31, 2005 as quoted in the London Stock Exchange Daily Official List were
117.0p and 264.0p each respectively.
Excluded from the above table are long-term creditors and provisions for liabilities and charges amounting to £384 million on which no interest is payable.
Interest rate arrangements
To reduce interest rate risk, the Group entered into single currency interest rate swap arrangements so as to change the interest payable elements of
certain loans and lease obligations from variable to fixed rates and, accordingly, accounted for such swaps as hedges.
Outstanding single currency interest rate swap arrangements are summarised as follows:
Notional Termination Interest rates
principal balance dates Fixed payable
At March 31, 2006
US Dollar $240m 2008 2.95% - 3.57%
Sterling £53m 2006 5.27% - 5.36%
Non-equity minority interest
The non-equity minority interest represented €300 million of 6.75 per cent fixed coupon euro perpetual preferred securities issued by British Airways
Finance (Jersey) L.P. in which the general partner is British Airways Holdings Limited, a wholly owned subsidiary of British Airways Plc. The holders of
these securities have no rights against Group undertakings other than the issuing entity and, to the extent prescribed by the subordinated guarantee, the
Company. The effect of the securities on British Airways Group as a whole, taking into account the subordinate guarantee and other surrounding
arrangements, is that the obligations to transfer economic benefits in connection with the securities do not go beyond those that would normally attach to#p#分頁標題#e#
preference shares issued by a UK company.
Floating
rate
borrowings
Notes to the accounts continued
88 British Airways 05/06 Annual Report
27 Financial instruments continued
e Year ended March 31, 2005 - UK GAAP disclosures continued
Interest rate risk profile of financial assets
The interest rate profile of the financial assets of the Group as at March 31, 2005, was as follows:
£ million Group
Sterling 1,407
US dollar 18
Japanese yen 199
Other 58
1,682
Floating rate financial assets above comprise cash and cash deposits on money market deposit at call and at short term rates for periods typically with
maturity of less than 12 months.
In addition, the Group had fixed asset investments (excluding associates and investments in own shares) amounting to £30 million.
Currency exposures
£ million Group
Net foreign currency assets/(liabilities)
Functional currency US dollar Euro Japanese yen Other 2005
Sterling 154 (13) (566) 198 (227)
Total March 31, 2005 154 (13) (566) 198 (227)
The table above shows the monetary assets and liabilities of the Group that are not denominated in the functional (or 'operating') currency of the
operating unit involved other than certain non-sterling borrowings treated as hedges of aircraft accounted for as foreign currency assets, and of netinvestments in overseas subsidiaries.
Amounts also take into account the effect of derivatives entered into to manage these currency exposures.
Forward Transactions
The Group had outstanding forward transactions to hedge foreign currencies and fuel purchases at March 31, 2005 as follows:
In currency Sterling equivalents
Maturing within one year
- to hedge future currency revenues against US dollars $87m
- to hedge future currency revenues against sterling £57m
- to hedge future operating payments against US dollars $255m
- to hedge future fuel costs in US dollars $1,333m £709m
- to hedge debt ¥9,719m £49m
Maturing after one year
- to hedge future fuel costs in US dollars $418m £222m
Borrowing facilities
At March 31, 2005 British Airways had undrawn committed aircraft financing facilities of US$228 million (expires May 1, 2008) and a further
US$232 million general facility (expires November 19, 2013) together with unused overdraft facilities of £21 million. An undrawn uncommitted money
market line of £25 million was held as at year end.
British Airways 05/06 Annual Report 89
27 Financial instruments continued
e Year ended March 31, 2005 - UK GAAP disclosures continued
Fair values of financial instruments
Primary financial instruments held or issued to finance the Group's operations
2005
£ million Carrying amount Fair value
Cash at bank and in hand and overdrafts 78 78#p#分頁標題#e#
Short-term loans and deposits 1,604 1,604
Fixed asset investments (excluding associates and investments in own shares) 30 33
Bank and other borrowings (860) (888)
Finance leases (1,589) (1,585)
Hire purchase arrangements (1,735) (1,737)
Euro-sterling notes (61) (70)
Convertible Capital Bonds 2005 (112) (132)
Euro-sterling Bond 2016 (247) (270)
Derivative financial instruments held to manage the interest rate and currency profile
Fair value
£ million 2005
Interest rate swaps 2
Forward currency transactions (1)
Fuel derivatives 278
No carrying amounts are shown as all items are held off balance sheet.
Included within forward currency transactions are derivative financial instruments held to hedge the currency exposure on expected future sales.
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:
Fixed asset investments
- listed fixed asset investments are stated at market value as at March 31, 2005. All other fixed asset investments are stated at carrying value less any
provisions for permanent diminution in value.
Bank and other loans, finance leases, hire purchase arrangements and the non Japanese yen denominated portions of hire purchase arrangements carrying
fixed rates of interest
- the repayments which the Group is committed to make have been discounted at the relevant interest rates applicable at March 31, 2005.
Japanese yen denominated portions of hire purchase arrangements carrying fixed rates of interest
- these amounts relate to the tax equity portions of Japanese leveraged leases which are personal to the Group, cannot be assigned and could not be
refinanced or replaced in the same cross border market on a marked-to-market basis and accordingly, a fair value cannot be determined. The carrying
value of £756 million has therefore been included as the fair value above.
Euro-sterling notes, Convertible Capital Bonds 2005 and Euro-sterling Bond 2016
- quoted market value.
Off balance sheet interest rate swaps
- discounted cash flow analysis, to determine the estimated amount the Group would receive or pay to terminate the agreements.
Off balance sheet forward currency transactions
- the marked-to-market value of the instrument.
Off balance sheet over the counter (OTC) fuel derivatives
- the marked to market value of the instruments.
The fair value of all other assets and liabilities is deemed to be equal to their carrying value unless stated otherwise in the relevant note to the accounts.
Hedges
The instruments used to hedge future exposures are interest rate swaps, forward currency contracts and fuel derivatives.
At March 31, 2005 there were unrecognised gains of £281 million and unrecognised losses of £2 million relating to hedges of future exposure. Of the#p#分頁標題#e#
unrecognised gains £228 million were expected to occur within one year and £53 million after one year, and of the unrecognised losses £2 million were
expected to occur within one year.
Impact of IAS 32 and IAS 39 adoption on comparative information
The nature of the main adjustment that would make the comparative information comply with IAS 32 and IAS 39 would be the recognition at fair value of
financial instruments classified as available for sale.
Notes to the accounts continued
90 British Airways 05/06 Annual Report
28 Share capital
Group and Company
2006 2005
Number of Number of
Ordinary shares of 25p each shares '000 £ million shares '000 £ million
Authorised
At April 1 and March 31 1,508,000 377 1,508,000 377
Allotted, called up and fully paid
At April 1 1,082,903 271 1,082,845 271
Conversion of Convertible Capital Bonds 47,979 12 39
Exercise of options under Employee Share Option Schemes 19
At March 31 1,130,882 283 1,082,903 271
On June 15, 2005 47,979,486 shares were issued in exchange for 112,317,274 Convertible Capital Bonds 2005 on the maturity of those instruments.
29 Share options
The Group operates share-based payment schemes as part of the total remuneration package provided to employees - these schemes comprise both share
option schemes where employees acquire shares at a grant price and share award plans whereby shares are issued to employees at no cost, subject to the
achievement by the Group of specified performance targets. Details of the performance criteria to be met for each of the schemes, and details of the
awards to the directors, are set out in the Remuneration Report on pages 46 to 47.
Share Option Plan 1999
The British Airways Share Option Plan granted options to qualifying employees based on performance at an option price which was not less than the
market price of the shares at the date of the grant (or the nominal value if shares are to be subscribed and this value is greater than the market value). The
options are subject to a 3-year vesting period. Upon vesting, options may be exercised at any time until the 10th anniversary of the date of grant. If the
performance condition is not met then it may be re-tested over any three consecutive years ending before the 10th anniversary of the date of grant with
the exception of grants made during 2004/05 when there will be a single re-test after a further year which will measure performance of the Group over
the four year period from the date of grant. No further grants of options under the Share Option Plan will be made other than those during 2005/06 in
relation to performance during 2004/05 (for which there will be no re-testing).
Long Term Incentive Plan
The Long Term Incentive Plan awarded options to senior executives conditional upon the Company's achievement of a performance condition measured#p#分頁標題#e#
over three financial years. If granted, all options are immediately exercisable for seven years and no payment is due upon exercise of the options. No
further awards under the Long Term Incentive Plan have been made since June 16, 2004.
Performance Share Plan
From 2005 the Group introduced a performance share plan for senior executives. Options over shares will be awarded conditional on the achievement of
a variety of performance conditions and will vest after three years subject to the executive remaining employed by the Group. A further award will be
made that will vest based on the achievement of performance conditions over the following three financial years. No payment is due upon exercise of the
options. Executives awarded shares under the Performance Share Plan will be expected to retain no fewer than 50% of the shares (net of tax) which vest
from the new schemes until they have built up a shareholding equivalent to 100% of basic salary.
British Airways 05/06 Annual Report 91
29 Share Options continued
Group and Company
Performance Share Plan Long Term Incentive Plan Share Option Plan
Number of Weighted Number of Weighted Number of Weighted average Weighted
shares '000 fair value shares '000 fair value shares '000 exercise price fair value
Outstanding at April 1, 2004 * 7,409 42,274 2.41
Granted in the year 1,960 1.57 8,942 2.62 1.23
Exercised during the year **/*** (2,026) 1.70
Expired/cancelled (1,505) (2,076) 3.44
Outstanding at March 31, 2005 7,864 47,114 2.43
Granted in the year 2,128 2.45 8,242 2.76 0.99
Exercised during the year **/*** (10,602) 1.90
Expired/cancelled (339) (3,469) (2,707) 3.39
At March 31, 2006 1,789 4,395 42,047 2.57
Range of exercise prices at March 31, 2006 1.57 - 3.94
Options exercisable:
At March 31, 2005 1,431 2.45
At March 31, 2006 2,758 18,143 3.02
* Included within this balance are options over 14,573,295 (2005: 27,758,686) shares that have not been recognised in accordance with IFRS 2 as the
options were granted on or before November 7, 2002. These options have not been subsequently modified and therefore do not need to be accounted
for in accordance with IFRS 2.
** The weighted average share price at the date of exercise for the options exercised is £2.94 (2005: £2.38).
*** Part of the exercise of shares during the year was met through shares previously held by British Airways Plc Employees Benefits Trustees (Jersey) Limited.
For the share options outstanding as at March 31, 2006, the weighted average remaining contractual life is 7 years (2005: 7 years). For options granted
during the year the weighted average option life was 9 years (2005: 10 years).
The fair value of equity-settled share options granted is estimated as at the date of grant using a binomial lattice or Monte-Carlo model, taking into
account the terms and conditions upon which the options were granted. The following table lists the inputs to the models for the options granted in the year:#p#分頁標題#e#
2006 2005
Dividend yield (%) 3.0 3.0
Expected share price volatility (%) 47 58
Historical volatility (%) 47 30-40
Expected comparator group volatility (%) 23-138 40
Expected comparator correlation (%) 25 20
Risk-free interest rate (%) 4.2 5.1
Expected life of options (years) 7 7
Weighted average share price 2.79 1.94
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility
reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.
No other features of options grant were incorporated into the measurement of fair value.
The share-based payment charge has been recorded in the income statement as follows:
£ million 2006 2005
Employee costs 12 8
Notes to the accounts continued
92 British Airways 05/06 Annual Report
30 Other reserves and minority interests
a Group
Group
Profit and Unrealised gains Currency Minority
£ million loss account and losses translation Total interests
Balance at April 1, 2004 (231) (231) 10
Profit for the period attributable to shareholders 377 377
Exchange and other movements (22) (22) 2
Exchange written back on disposals 21 21
Cost of share-based payment 8 8
Total income and expense for the period 385 (1) 384 2
Exercise of share options (1) (1)
Balance at March 31, 2005 153 (1) 152 12
Effect of implementing IAS 32 and IAS 39 (34) 217 183 200*
119 217 (1) 335 212
Profit for the period attributable to shareholders 451 451
Exchange differences and other movements 2 2 1
Cost of share-based payment 12 12
Deferred tax effect of share options 7 7
Changes in fair value of cash flow hedges 191 191
(Losses) recycled to income on cash flow hedges (308) (308)
Share of other movements in reserves of associates 5 5
Total income and expense for the period 475 (117) 2 360 1
Exercise of share options (5) (5)
Balance at March 31, 2006 589 100 1 690 213
* Included within minority interests are €300 million of 6.75 per cent fixed coupon euro perpetual preferred securities issued by British Airways Finance
(Jersey) L.P. in which the general partner is British Airways Holdings Limited, a wholly owned subsidiary of British Airways Plc. The holders of these
securities have no rights against Group undertakings other than the issuing entity and, to the extent prescribed by the subordinated guarantee, the
Company. The effect of the securities on British Airways Group as a whole, taking into account the subordinate guarantee and other surrounding
arrangements, is that the obligations to transfer economic benefits in connection with the securities do not go beyond those that would normally
attach to preference shares issued by a UK company.#p#分頁標題#e#
British Airways 05/06 Annual Report 93
30 Other reserves and minority interests continued
b Company
Company
Profit and Unrealised gains
£ million loss account and losses Total
Balance at April 1, 2004 (133) (133)
Profit for the period attributable to shareholders 272 272
Exchange differences and other movements (8) (8)
Cost of share-based payment 8 8
Total income and expense for the period 272 272
Exercise of share options (1) (1)
Balance at March 31, 2005 138 138
Effect of implementing IAS 32 and IAS 39 (24) 213 189
114 213 327
Profit for the period attributable to shareholders 429 429
Cost of share-based payment 12 12
Deferred tax effect of share options 7 7
Changes in fair value of cash flow hedges 191 191
(Losses) recycled to income on cash flow hedges (308) (308)
Total income and expense for the period 448 (117) 331
Exercise of share options (5) (5)
Balance at March 31, 2006 557 96 653
Unrealised gains and losses reserve records fair value changes on available-for-sale investments and the portion of the gain or loss on a hedging
instrument in a cash flow hedge that is determined to be an effective hedge.
The currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries and
associates.
Total shareholders' funds also includes the balance classified as share capital which includes the total net proceeds (both nominal value and share
premium) on issue of the Company's equity share capital, comprising 25p ordinary shares. Investment in own shares consists of shares held by British
Airways Plc Employee Benefits Trustees (Jersey) Limited, a wholly owned subsidiary, for the purposes of the Employee Share Ownership plans including
the Long Term Incentive Plan. At March 31, 2006 the Group and Company held 114,250 shares for the Long Term Incentive Plan and other employee
share schemes (2005: 10,716,400 shares). The purchase of shares was financed by British Airways Plc granting a loan to British Airways Plc Employee
Benefits Trustees (Jersey) Limited.
Notes to the accounts continued
94 British Airways 05/06 Annual Report
31 Pension costs
British Airways operates two funded principal defined benefit pension schemes in the United Kingdom, the Airways Pension Scheme (APS) and the New
Airways Pension Scheme (NAPS) both of which are closed to new members. APS has been closed to new members since March 31, 1984 and NAPS
closed to new members on March 31, 2003. From April 1, 2003 British Airways commenced a new defined contribution scheme, the British Airways
Retirement Plan (BARP), of which all new permanent employees over the age of 18 employed by the Company and certain subsidiary companies in the
United Kingdom may become members. The assets of these schemes are held in separate trustee-administered funds. Benefits provided under APS are#p#分頁標題#e#
based on final average pensionable pay and, for the majority of members, are subject to increases in payment in line with the Retail Price Index. Those
provided under NAPS are based on final average pensionable pay reduced by an amount (the "abatement") not exceeding one and a half times the
Government's lower earnings limit. NAPS benefits are subject to Retail Price Index increases in payment up to a maximum of 5 per cent in any one year.
Most employees engaged outside the United Kingdom are covered by appropriate local arrangements. British Airways provides certain additional postretirement
healthcare benefits to eligible employees in the United States. British Airways participates in a multi-employer defined benefit plan operated in
the United States by the International Association of Machinists (IAM) and presents the plan in the financial statements as if it were a defined
contribution plan as it is not possible to allocate the assets and liabilities of the scheme due to the nature of the scheme. Contributions to the IAM plan
were $3.0 million (2005: $2.5 million).
Pension contributions for APS and NAPS were determined by actuarial valuations made as at March 31, 2003 by an independent firm of qualified
actuaries, Watson Wyatt LLP, using the attained age method for APS and the projected unit method for NAPS. At the date of the actuarial valuation the
market values of the assets of APS and NAPS amounted to £5,421 million and £3,184 million respectively. The value of the assets represented 101%
(APS) and 78% (NAPS) of the value of the benefits that had accrued to members after allowing for assumed increases in earnings. These valuations
showed that an employer's contribution equal to an average of 3.75 times the standard employees' contributions from November 1, 2003 (nil prior to
November 1, 2003) was appropriate for APS. For NAPS the corresponding regular employer's contribution was 2.8 times the standard employees'
contributions from January 1, 2004 (3.0 times from April 1, 2003 to December 31, 2003 including a multiple of 0.5 to cover the deficit contributions) in
addition to deficit contributions of £9.56 million per month increasing each April in line with inflation for a period of 10 years.
Employer contributions in respect of overseas employees have been determined in accordance with best local practice.
Total employer contributions to defined contribution pension plans both in the United Kingdom and overseas for the year were
£14 million (2005: £9 million).
Employee benefit obligations comprise:
Group
£ million 2006 2005
Obligations arising under defined benefit pension plans and post-retirement benefits 1,690 1,714
Obligations arising under post-retirement medical benefit plans 101 93
Total obligations arising under post-retirement benefits 1,791 1,807
Other employee benefit obligations 12 13#p#分頁標題#e#
1,803 1,820
British Airways 05/06 Annual Report 95
31 Pension costs continued
The assets and liabilities of the schemes at March 31 are:
Period ended March 31, 2006
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
Scheme assets at fair value
Equities 4,034 227 4,261 1,984 20 2,004
Bonds 1,107 90 1,197 3,970 16 3,986
Others 691 1 692 696 696
Fair value of scheme assets 5,832 318 6,150 6,650 36 6,686
Present value of defined benefit obligations 7,902 538 8,440 5,867 30 5,897
(2,070) (220) (2,290) 783 6 789
APS irrecoverable surplus 652 652
Net pension (liability)/asset (2,070) (220) (2,290) 131 6 137
Net pension (liability)/asset represented by:
Net pension (liability)/asset recognised (1,587) (204) (1,791) 131 6 137
Cumulative actuarial (losses) not recognised (483) (16) (499)
(2,070) (220) (2,290) 131 6 137
Period ended March 31, 2005
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
Scheme assets at fair value
Equities 3,091 173 3,264 1,956 16 1,972
Bonds 979 92 1,071 3,644 13 3,657
Others 484 1 485 431 431
Fair value of scheme assets 4,554 266 4,820 6,031 29 6,060
Present value of defined benefit obligations 6,523 488 7,011 5,603 24 5,627
(1,969) (222) (2,191) 428 5 433
APS irrecoverable surplus 296 296
Net pension (liability)/asset (1,969) (222) (2,191) 132 5 137
Net pension (liability)/asset represented by:
Net pension (liability)/asset recognised (1,612) (195) (1,807) 132 5 137
Cumulative actuarial (losses) not recognised (357) (27) (384)
(1,969) (222) (2,191) 132 5 137
The pension plans have not invested in any of the Group's own financial instruments nor in properties or other assets used by the Group.
Notes to the accounts continued
96 British Airways 05/06 Annual Report
31 Pension costs continued
The amounts recognised in the Income Statement for the year are analysed as follows:
Period ended March 31, 2006
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
Current service cost 201 14 215 22 1 23
Past service cost 10 1 11 3 3
Recognised in arriving at operating profit 211 15 226 25 1 26
Expected return on scheme assets (338) (20) (358) (352) (2) (354)
Immediate recognition of (gains)/losses and the
effect of the Asset Ceiling 60 60
Interest costs on defined benefit obligations 348 27 375 293 1 294
Amortisation of actuarial losses in excess of the corridor 1 1
Other finance cost 10 8 18 1 (1)
Period ended March 31, 2005
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total#p#分頁標題#e#
Current service cost 164 12 176 20 1 21
Past service cost 4 4 1 1
Recognised in arriving at operating profit 168 12 180 21 1 22
Expected return on scheme assets (286) (18) (304) (329) (2) (331)
Immediate recognition of (gains)/losses and the
effect of the Asset Ceiling 42 42
Interest costs on defined benefit obligations 309 24 333 288 1 289
Amortisation of actuarial losses in excess of the corridor
Other finance cost 23 6 29 1 (1)
The amount of unrecognised cumulative actuarial gains and losses is as follows:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total Other schemes Total
Amount of unrecognised actuarial losses at April 1, 2004
Actual return on scheme assets 469 11 480 4 4
Less: Expected return on scheme assets (286) (18) (304) (2) (2)
183 (7) 176 2 2
Other actuarial gains/(losses) (540) (20) (560) (2) (2)
Cumulative unrecognised actuarial losses at March 31, 2005 (357) (27) (384)
Actual return on scheme assets 1,132 55 1,187 7 7
Less: Expected return on scheme assets (338) (20) (358) (2) (2)
794 35 829 5 5
Other actuarial gains/(losses) (920) (25) (945) (5) (5)
Amortisation of actuarial losses in excess of the corridor 1 1
Cumulative unrecognised actuarial losses at March 31, 2006 (483) (16) (499)
Scheme assets and liabilities are measured by qualified actuaries. Scheme assets are stated at their market values at the respective balance sheet dates and
overall expected rates of return are established by applying published brokers' forecasts to each category of scheme assets.
British Airways 05/06 Annual Report 97
31 Pension costs continued
Group Group
At March 31, 2006 At March 31, 2005
per cent p.a NAPS APS Other schemes NAPS APS Other schemes
Inflation 2.8 2.8 2.5 - 4.0 2.8 2.8 3.0 - 4.0
Rate of increase in salaries 2.8* 2.8* 1.5 - 4.0 2.8* 2.8* 1.5 - 6.0
Rate of increase of pensions in payment 2.7 2.7 1.5 - 5.0 2.7 2.7 1.7 - 5.0
Discount rate 5.0 5.0 2.0 - 7.0 5.4 5.4 2.0 - 7.0
Expected rate of return on scheme assets 6.8 5.1 5.0 - 8.3 7.4 6.0 5.0 - 8.3
*Rate of increase in salaries is 2.8 per cent per annum for 2 years and 4.3 per cent per annum thereafter (2005: Rate of increase in salaries is 2.8 per cent
per annum for 3 years and 4.3 per cent per annum thereafter).
Rate of increase in healthcare costs are based on medical trend rates of 12% grading down to 5% over 7 years (2005: 10% to 6% over 5 years).
In the UK, mortality rates are calculated using the PA92 standard mortality tables for APS and the PA80 standard mortality tables for NAPS (the two
largest Group and Company schemes). The standard mortality tables were selected based on the the actual recent mortality experience of members and
were adjusted to allow for future mortality changes. In the US, mortality rates were based on the 1994 GAM Static tables.#p#分頁標題#e#
A one percentage point change in the assumed rate of increase in healthcare costs would have the following effects:
£ million Increase Decrease
Effect on aggregate service cost and interest cost - (increase)/decrease (2) 2
Effect on defined benefit obligation (25) 19
The total contributions for the financial year ending March 31, 2007 will be dependent on the next actuarial review of the two main Group and Company
schemes, APS and NAPS that is due to commence in April 2006 with the results of the review (and the consequential impact on contributions) expected
in the autumn of 2006.
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
As at April 1, 2004 5,595 450 6,045 5,312 21 5,333
Current service cost 164 12 176 20 1 21
Past service cost 4 4 1 1
Interest cost 309 24 333 288 1 289
Benefits paid (145) (20) (165) (340) (1) (341)
Employee contributions 56 2 58 10 10
Actuarial gains and losses 540 20 560 312 2 314
As at March 31, 2005 6,523 488 7,011 5,603 24 5,627
Current service cost 201 14 215 22 1 23
Past service cost 10 1 11 3 3
Interest cost 348 27 375 293 1 294
Benefits paid (158) (17) (175) (349) (1) (350)
Employee contributions 58 58 10 10
Actuarial gains and losses 920 25 945 285 5 290
As at March 31, 2006 7,902 538 8,440 5,867 30 5,897
The defined benefit obligation comprises £5 million (2005: £6 million) arising from unfunded plans and £8,435 million (2005: £7,005 million) from plans
that are wholly or partly funded.
Notes to the accounts continued
98 British Airways 05/06 Annual Report
31 Pension costs continued
Changes in the fair value of plan assets are analysed as follows:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
As at April 1, 2004 3,938 217 4,155 5,821 26 5,847
Expected return on plan assets 286 18 304 329 2 331
Employer contributions 236 56 292 25 25
Employee contributions 56 2 58 10 10
Benefits paid (145) (20) (165) (340) (1) (341)
Actuarial gains and losses 183 (7) 176 186 2 188
As at March 31, 2005 4,554 266 4,820 6,031 29 6,060
Expected return on plan assets 338 20 358 352 2 354
Employer contributions 246 14 260 25 1 26
Employee contributions 58 58 10 10
Benefits paid (158) (17) (175) (349) (1) (350)
Actuarial gains and losses 794 35 829 581 5 586
As at March 31, 2006 5,832 318 6,150 6,650 36 6,686
History of experience gains and losses:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
As at March 31, 2006
Fair value of scheme assets 5,832 318 6,150 6,650 36 6,686#p#分頁標題#e#
Present value of defined benefit obligation (7,902) (538) (8,440) (5,867) (30) (5,897)
APS irrecoverable surplus (652) (652)
(Deficit)/surplus in the schemes (2,070) (220) (2,290) 131 6 137
Experience adjustments arising on plan liabilities (920) (25) (945) (285) (5) (290)
Experience adjustments arising on plan assets 794 35 829 581 5 586
As at March 31, 2005
Fair value of scheme assets 4,554 266 4,820 6,031 29 6,060
Present value of defined benefit obligation (6,523) (488) (7,011) (5,603) (24) (5,627)
APS irrecoverable surplus (296) (296)
(Deficit)/surplus in the schemes (1,969) (222) (2,191) 132 5 137
Experience adjustments arising on plan liabilities (540) (20) (560) (312) (2) (314)
Experience adjustments arising on plan assets 183 (7) 176 186 2 188
As at March 31, 2004
Fair value of scheme assets 3,938 217 4,155 5,821 26 5,847
Present value of defined benefit obligation (5,595) (450) (6,045) (5,312) (21) (5,333)
APS irrecoverable surplus (380) (380)
(Deficit)/surplus in the schemes (1,657) (233) (1,890) 129 5 134
The directors are unable to determine how much of the pension scheme surplus or deficit recognised on transition to IFRSs and taken directly to equity is
attributable to actuarial gains and losses since inception of those pension schemes.
British Airways 05/06 Annual Report 99
32 Contingent liabilities
There were contingent liabilities at March 31, 2006 in respect of guarantees and indemnities entered into as part of, and claims arising from, the ordinary
course of business, upon which no material losses are likely to arise. The Company is under investigation by the European Commission, the US
Department of Justice, the Competition Commission in Canada and the New Zealand Commerce Commission in connection with alleged anti-competitive
activity related to its cargo business. The Company is named as a defendant in a number of lawsuits that have been filed in various parts of the United
States and Canada in connection with these allegations. It is not possible to predict whether these actions will have an adverse effect on the Group's
financial position or results of operations. A number of other lawsuits and regulatory proceedings are pending, the outcome of which in the aggregate is
not expected to have a material effect on the Group's financial position or results of operations.
The Group and the Company have guaranteed certain borrowings, liabilities and commitments which at March 31, 2006 amounted to £204 million (2005:
£259 million) and £410 million (2005: £577 million) respectively. For the Company these included guarantees given in respect of the fixed perpetual
preferred securities issued by subsidiary companies and, for the year ended March 31, 2005, the Convertible Capital Bonds.
33 Related party transactions
The Group and Company had transactions in the ordinary course of business during the year under review with related parties.#p#分頁標題#e#
Group Company
£ million 2006 2005 2006 2005
Associates:
Sales to associates 54 47 53 47
Purchases from associates 149 137 146 137
Amounts owed to associates 10 9 10 9
Subsidiaries:
Sales to subsidiaries 84 87
Purchases from subsidiaries 116 107
Amounts owed by subsidiaries 112 234
Amounts owed to subsidiaries 1,827 1,844
In addition, the Company meets certain costs of administering the Group's retirement benefit plans, including the provision of support services to the
Trustees. Costs borne on behalf of the retirement benefit plans amounted to £1.4 million in relation to the costs of the Pension Protection Fund
levy (2005: nil).
Associates:
Iberia, Lineas Aéreas de España, S.A. ('Iberia')
A 90 per cent owned subsidiary in the Group has a 10 per cent investment in Iberia. Areas of opportunity for co-operation have been identified, and work
continues to pursue and implement these. Sales and purchases between related parties are made at normal market prices and outstanding balances are
unsecured and interest free and cash settlement is expected within the standard settlement terms specified by the IATA Clearing House.
As at March 31, 2006, the net trading balance owed by the Group to Iberia amounted to £0.4 million (2005: £0.3 million).
Comair Limited
The Group has an 18.3 per cent investment in Comair and has a franchise agreement with the company that commenced in October 1996. Sales and
purchases between related parties are made at normal market prices and outstanding balances are unsecured and interest free and cash settlement is
expected within the standard settlement terms specified by the IATA Clearing House.
As at March 31, 2006, the net trading balance due to Comair amounted to £9 million (2005: £8 million).
Subsidiaries:
Transactions with subsidiaries are carried out on an arm's length basis. Outstanding balances that relate to trading balances are placed on inter-company
accounts with no specified credit period. Long-term loans owed to and from the Company by subsidiary undertakings bear market rates of interest in
accordance with the inter-company loan agreements.
Directors' and officers' loans and transactions
No loans or credit transactions were outstanding with directors or officers of the Company at the end of the year or arose during the year that need to be
disclosed in accordance with the requirements of Schedule 6 to the Companies Act 1985.
In addition to the above, the Group and Company also have transactions with related parties which are conducted in the normal course of airline business.
These include the provision of airline and related services.
Neither the Group nor Company have provided or benefited from any guarantees for any related party receivables or payables. During the year ended March
31, 2006 the Group has not made any provision for doubtful debts relating to amounts owed by related parties (2005: nil).#p#分頁標題#e#
Notes to the accounts continued
100 British Airways 05/06 Annual Report
33 Related party transactions continued
Compensation of key management personnel (including directors)
Group Company
£ million 2006 2005 2006 2005
Short-term employee benefits 6 5 6 5
Share-based payment 2 2 2 2
8 7 8 7
34 Foreign currency translation rates
At March 31 Annual average
£1 equals 2006 2005 2006 2005
US dollar 1.74 1.88 1.79 1.84
Japanese yen 204 201 201 197
Euro 1.43 1.45 1.47 1.47
British Airways 05/06 Annual Report 101
35 Transition to IFRSs
For all periods up to and including the year ended March 31, 2005, the Group prepared its financial statements in accordance with United Kingdom
generally accepted accounting practice (UK GAAP). These financial statements are the first the Group is required to prepare in accordance with
International Financial Reporting Standards (IFRS).
Accordingly, the Group has prepared financial statements which comply with IFRSs applicable for periods beginning on or after April 1, 2005 and the
significant accounting policies to meet those requirements are disclosed in Note 2. In preparing these financial statements, the Group has started from an
opening balance sheet as at April 1, 2004, the Group's IFRS transition date, and made those changes in accounting policies and other restatements
required by IFRS 1 for the first time adoption of IFRSs. This note explains the principal adjustments made by the Group in restating its UK GAAP balance
sheet at the transition date and its previously published UK GAAP financial statements for the year ended March 31, 2005. Further information can also
be found in the Group's 'Release of Financial Information for 2004/05 under International Financial Reporting Standards' published on July 4, 2005.
a Exemptions applied
IFRS 1 allows first-time adopters certain exemptions from the general requirements contained in IFRSs. The Group has taken the following exemptions:
- Comparative information on financial instruments has been presented on the basis of UK GAAP and the Group and Company have adopted both IAS 32
'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' from April 1, 2005.
- IFRS 3 'Business Combinations' has not been applied to acquisitions of subsidiaries or of interests in associates that occurred before April 1, 1999.
- Certain items of property were carried in the balance sheet on the basis of valuations performed in 1995, prior to the adoption of FRS 15. As permitted
under IFRS 1 the Group has elected to regard those fair values as deemed cost as at the date of the revaluation.
- The Group has recognised all cumulative actuarial gains and losses on pensions and other post-retirement benefits as at April 1, 2004, directly in equity.
The Group discloses prospectively from April 1, 2004 the information required by IAS 19 regarding future actuarial gains and losses as those arise.#p#分頁標題#e#
- Cumulative currency translation differences for all foreign operations are deemed to be zero as at April 1, 2004.
- IFRS 2 'Share Based Payment' has not been applied to any equity instruments that were granted on or before November 7, 2002, nor has it been applied
to equity instruments granted after November 7, 2002 that vested before April 1, 2005.
- The Group has deemed goodwill arising on the acquisition of subsidiary and associated companies that had been set-off directly to reserves to be zero.
- The Group applied the requirements of IFRS 5 - 'Non-Current Assets Held for Sale and Discontinued Operations' from April 1, 2004.
b Accounting policies applied in the year ended March 31, 2005
The Group and Company adopted IAS 32 and IAS 39 with effect from April 1, 2005, and as permitted by IFRS 1 the Group and Company have not
restated comparative information. The new accounting policies under IAS 32 and IAS 39 are set out in Note 2. For accounting periods up to the year ended
March 31, 2005 the following accounting policies were applied in respect of financial instruments in the financial statements of the Group and the Company.
The Group's accounting policy for derivatives is to defer and only recognise in the Group income statement gains and losses on hedges of revenues or
operating payments as they crystallise.
Amounts payable or receivable in respect of interest rate swap agreements are recognised in the net interest payable charge over the period of the
contracts on an accruals basis. Cross currency swap agreements and forward foreign exchange contracts taken out to hedge borrowings are brought into
account in establishing the carrying values of the relevant loans, leases or hire purchase arrangements in the balance sheet. Gains and losses on forward
foreign exchange contracts to hedge capital expenditure commitments are recognised as part of the total sterling carrying cost of the relevant tangible
asset as the contracts mature or are closed out.
Trade investments in the Group and Company were measured at historic cost.
c Nature of the main adjustments to comply with IAS 32 and IAS 39
Had IAS 32 and IAS 39 been applied from April 1, 2004 the following adjustments would have been necessary:
- all derivative instruments would have been recorded on the balance sheet at fair value;
- available for sale investments and investments held at fair value through profit and loss would have been carried at fair value rather than cost;
- the retranslation of debt repayments classified as a hedge of future revenues would have been reported in equity rather than the income statement.
Notes to the accounts continued
102 British Airways 05/06 Annual Report
35 Transition to IFRSs continued
d Group and Company reconciliation of equity as at April 1, 2004
Group Company
£ million Note UK GAAP Adjustments IFRSs UK GAAP Adjustments IFRSs#p#分頁標題#e#
Non-current assets
Property, plant and equipment (i)
Fleet 7,104 110 7,214 6,727 110 6,837
Property 1,042 38 1,080 968 38 1,006
Equipment 491 (12) 479 411 (12) 399
8,637 136 8,773 8,106 136 8,242
Goodwill (ii) 93 (22) 71
Landing rights (ii) 75 22 97 75 75
Other intangible assets (ii) 12 12 12 12
Investment in subsidiaries 1,194 1,194
Investments in associates (iii) 501 (58) 443 29 29
Other investments 30 30 29 29
Employee benefit assets (iv) 134 134 134 134
Other financial assets (v) 22 22
Total non-current assets 9,336 246 9,582 9,433 282 9,715
Non-current assets held for sale (i) 49 49 49 49
Current assets and receivables
Expendable spares and other inventories 76 76 66 66
Trade receivables 676 676 659 659
Other current assets 343 (22) 321 463 463
Other current interest bearing deposits 1,606 (963) 643 1,558 (914) 644
Cash and cash equivalents (vi) 64 963 1,027 35 914 949
1,670 1,670 1,593 1,593
Total current assets and receivables 2,765 (22) 2,743 2,781 2,781
Total assets 12,101 273 12,374 12,214 331 12,545
Shareholders' equity and liabilities
Shareholders' equity
Issued share capital 271 271 271 271
Share premium 788 788 788 788
Investment in own shares (31) (31) (31) (31)
Other reserves 1,159 (1,390) (231) 972 (1,105) (133)
Total shareholders' equity 2,187 (1,390) 797 2,000 (1,105) 895
Equity minority interest 10 10
Non-equity minority interest 200 200
Minority interests 210 210
Non-current liabilities
Interest bearing long-term borrowings 5,034 5,034 5,216 5,216
Convertible borrowings 112 112
Employee benefit obligations (vii) 1,901 1,901 1,852 1,852
Provisions for deferred tax (viii) 1,137 (420) 717 1,106 (458) 648
Other provisions 80 63 143 53 36 89
Other long-term liabilities (ix) 340 (105) 235 235 (69) 166
Total non-current liabilities 6,703 1,439 8,142 6,610 1,361 7,971
Current liabilities
Current portion of long-term borrowings 682 682 656 656
Trade and other payables (x) 2,308 212 2,520 2,940 75 3,015
Current tax payable 6 6 3 3
Short-term provisions 5 12 17 5 5
Total current liabilities 3,001 224 3,225 3,604 75 3,679
Total shareholders' equity and liabilities 12,101 273 12,374 12,214 331 12,545
British Airways 05/06 Annual Report 103
35 Transition to IFRSs continued
e Group and Company reconciliation of equity as at March 31, 2005
Group Company
£ million Note UK GAAP Adjustments IFRSs UK GAAP Adjustments IFRSs
Non-current assets
Property, plant and equipment (i)
Fleet 6,748 196 6,944 6,358 201 6,559
Property 959 41 1,000 887 42 929
Equipment 445 (60) 385 377 (60) 317
8,152 177 8,329 7,622 183 7,805
Goodwill (ii) 88 (16) 72
Landing rights (ii) 102 20 122 102 102
Other intangible assets (ii) 60 60 60 60#p#分頁標題#e#
Investment in subsidiaries 1,195 1,195
Investments in associates (iii) 120 6 126 1 1
Other investments 30 30 29 29
Employee benefit assets (iv) 137 137 137 137
Other financial assets (v) 38 38
Total non-current assets 8,492 422 8,914 8,949 380 9,329
Non-current assets held for sale (i) 5 5
Current assets and receivables
Expendable spares and other inventories 84 84 76 76
Trade receivables 685 685 666 666
Other current assets 393 (92) 301 539 (54) 485
Other current interest bearing deposits 1,604 (471) 1,133 1,542 (410) 1,132
Cash and cash equivalents (vi) 78 471 549 57 410 467
1,682 1,682 1,599 1,599
Total current assets and receivables 2,844 (92) 2,752 2,880 (54) 2,826
Total assets 11,336 335 11,671 11,829 326 12,155
Shareholders' equity and liabilities
Shareholders' equity
Issued share capital 271 271 271 271
Share premium 788 788 788 788
Investment in own shares (26) (26) (26) (26)
Other reserves 1,432 (1,280) 152 1,213 (1,075) 138
Total shareholders' equity 2,465 (1,280) 1,185 2,246 (1,075) 1,171
Equity minority interest 12 12
Non-equity minority interest 207 (7) 200
Minority interests 219 (7) 212
Non-current liabilities
Interest bearing long-term borrowings 4,045 4,045 4,124 4,124
Employee benefit obligations (vii) 1,820 1,820 1,769 1,769
Provisions for deferred tax (viii) 1,243 (427) 816 1,166 (447) 719
Other provisions 67 45 112 58 17 75
Other long-term liabilities (ix) 301 (89) 212 209 (53) 156
Total non-current liabilities 5,656 1,349 7,005 5,557 1,286 6,843
Current liabilities
Current portion of long-term borrowings 447 447 419 419
Convertible borrowings 112 112
Trade and other payables (x) 2,385 257 2,642 3,585 114 3,699
Current tax payable 36 36 14 14
Short-term provisions 16 16 32 8 1 9
Total current liabilities 2,996 273 3,269 4,026 115 4,141
Total shareholders' equity and liabilities 11,336 335 11,671 11,829 326 12,155
Notes to the accounts continued
104 British Airways 05/06 Annual Report
35 Transition to IFRSs continued
f Group reconciliation of profit and loss for the year ended March 31, 2005
Group
£ million Note UK GAAP Adjustments IFRSs
Traffic revenue
Passenger 6,500 6,500
Cargo 482 482
6,982 6,982
Other revenue (including fuel surcharges) 831 (41) 790
Revenue 7,813 (41) 7,772
Employee costs 2,273 (38) 2,235
Depreciation, amortisation and impairment 687 52 739
Aircraft operating lease costs 106 106
Fuel and oil costs 1,128 1,128
Engineering and other aircraft costs 502 (70) 432
Landing fees and en route charges 556 556
Handling charges, catering and other operating costs 930 (12) 918
Selling costs 488 2 490
Currency differences 15 15
Accommodation, ground equipment and IT costs 603 (6) 597#p#分頁標題#e#
Total expenditure on operations 7,273 (57) 7,216
Operating profit (xii) 540 16 556
Finance costs (273) 8 (265)
Finance income 97 97
Financing income and expense relating to pensions (29) (29)
Retranslation credits on currency borrowings 33 23 56
Profit/(loss) on sale of fixed assets and investments (26) 97 71
Share of post-tax profits in associates accounted for using the equity method 41 (17) 24
Income relating to fixed asset investments 3 3
Profit before tax for the year (xii) 415 98 513
Tax (xii) (149) 28 (121)
Profit after tax for the year 266 126 392
Attributable to:
Equity holders of the parent 251 126 377
Minority interest 15 15
266 126 392
Earnings per share
Basic 23.4p 11.8p 35.2p
Diluted 23.0p 11.1p 34.1p
British Airways 05/06 Annual Report 105
35 Transition to IFRSs continued
g Restatement of equity from UK GAAP to IFRSs
(i) Property, plant and equipment
IAS 16 focuses on the balance sheet cost in prescribing the level at which parts should be determined; in particular it requires that each part of property,
plant and equipment that has a cost that is significant in relation to the overall cost of the item should be depreciated separately. Under UK GAAP, the
emphasis is on the income statement depreciation charge in determining the asset components. Under UK GAAP, the cost of major engine overhaul is
expensed to the income statement. Under IAS 16, major engine overhaul will be treated as a separate asset component with the cost capitalised and
depreciated over the period to the next major overhaul. For the year ended March 31, 2005 this change resulted in higher depreciation costs
(£43 million) and lower engineering costs (£70 million).
Under UK GAAP, certain US dollar-denominated assets and liabilities were treated as a foreign operation ('Branch') with US Dollar as its functional
currency. Exchange movements were therefore taken to reserves rather than through the income statement. IAS 21 provides additional criteria to allow
the functional currency of a foreign operation to be determined. If the functional currency is deemed to be the same as for the parent, then exchange
movements on retranslation of monetary items are taken through the income statement. As a result, the cumulative exchange differences reflected in the
carrying value of the assets previously included in the 'branch' and taken to reserves were unwound. This resulted in increased depreciation of £13 million
and currency gains of £16 million reported through income.
IAS 38 requires IT software that is distinct from any associated hardware to be reclassified from tangible assets to intangible assets.
Under IFRS 5, an asset should be measured at market value and reclassified as an asset held for sale once a decision is made for the asset to be sold and
it is made available for sale. This reduced losses on disposal in the year ended March 31, 2005 by £3 million before tax.#p#分頁標題#e#
Group Company
£ million April 1, 2004 March 31, 2005 April 1, 2004 March 31, 2005
Component accounting for major engine overhaul (34) (6) (34) (6)
Reversal of cumulative exchange differences under IAS 21 235 249 235 249
Reclassification of capitalised IT software (12) (60) (12) (60)
Reclassification of assets held for sale (53) (6) (53)
136 177 136 183
(ii) Intangible assets
Under UK GAAP, goodwill arising on the acquisition of businesses was amortised over a period not exceeding 20 years. The provisions of IFRS 3 -
'Business Combinations' have been applied prospectively from April 1, 1999. IFRS 3 prohibits the amortisation of goodwill, requiring instead that an
annual test for impairment is carried out. IFRS 3 requires that an intangible asset acquired under a business combination should be recognised separately
from goodwill if it is probable that future economic benefits will flow from the asset and its costs can be measured reliably. As a result £22 million of
landing rights acquired with businesses since April 1, 1999 and previously classified as goodwill have been reclassified on transition.
I英國dissertation網AS 38 requires IT software that is distinct from any associated hardware to be reclassified from tangible assets to intangible assets.
Group Company
£ million April 1, 2004 March 31, 2005 April 1, 2004 March 31, 2005
Reversal of amortisation of goodwill on subsidiaries
(after reclassification of landing rights) 4
Reclassification of capitalised IT software 12 60 12 60
12 64 12 60
Notes to the accounts continued
106 British Airways 05/06 Annual Report
35 Transition to IFRSs continued
g Restatement of equity from UK GAAP to IFRSs continued
(iii) Investments in associates
The results of the Group's associated companies, consolidated using the equity method, should be included under the same accounting policies as those
applied by the Group. As a result the carrying value of the associated companies has been reduced in the transition balance sheet, principally in respect of
deferral of frequent flyer revenue and accrual for employee benefit obligations. This also affected the valuation of the net assets disposed of with our share of
Qantas.
Group Company
£ million April 1, 2004 March 31, 2005 April 1, 2004 March 31, 2005
IFRS accounting policies applied to the share of net assets of associates (58) 5
Reversal of amortisation of goodwill on associates 1
(58) 6
(iv) Employee benefit assets
See note (vii) below
(v) Other long-term financial assets
Certain long-term financial assets and prepayments have been reclassified from current to long-term assets. These amounted to £22 million at April 1,
2004 and £38 million at March 31, 2005.
(vi) Cash and cash equivalents#p#分頁標題#e#
The definition of gross cash differs between UK GAAP and IFRS. Under UK GAAP cash comprises cash in hand and on-demand deposits. IFRS includes
short-term highly liquid investments (i.e. those that can be turned into cash with insignificant changes in value) within cash equivalents. Under UK GAAP
these are shown as short-term investments. Consequently balances of £963 million and £471 million at April 1, 2004 and March 31, 2005 respectively
have been reclassified into cash and cash equivalents.
(vii) Employee benefit obligations
Under UK GAAP the measurement and recognition requirements of SSAP 24 were applied to accounting for pensions and post-retirement benefits in the
financial statements, whilst disclosures were provided under FRS 17. IAS 19 takes a balance sheet approach to accounting for defined benefit schemes,
similar to FRS 17. Therefore, on transition, the deficit, similar to that previously disclosed under FRS 17, has been recognised in the balance sheet. From
April 1, 2004 the Group has elected to apply the 'corridor' treatment under IAS 19. The impact will be that actuarial gains and losses are only recognised
to the extent that they exceed 10 per cent of the greater of the scheme assets or liabilities, and in that case are spread over the remaining average service
lives of employees. Therefore, the net actuarial losses on the pension schemes for 2004/05 of £0.4 billion have not been recognised.
Under UK GAAP no provision is currently made for annual leave accrued. Under IAS 19, the expected cost of compensated short-term absences should
be recognised at the time the related service is provided.
Group Company
£ million April 1, 2004 March 31, 2005 April 1, 2004 March 31, 2005
Recognition of defined benefit scheme deficits (1,890) (1,807) (1,841) (1,756)
Recognition of defined benefit scheme assets 134 137 134 137
Provision for compensated short term absences (11) (13) (11) (13)
Reduction in SSAP 24 accrued liability 72 57 63 49
Reduction in SSAP 24 prepayment (54) (54)
(1,695) (1,680) (1,655) (1,637)
British Airways 05/06 Annual Report 107
35 Transition to IFRSs continued
g Restatement of equity from UK GAAP to IFRSs continued
(viii) Provision for deferred taxation
Under UK GAAP, deferred tax was provided on timing differences that had originated, but had not reversed, before the balance sheet date. Under IAS 12,
deferred tax is provided on temporary differences based upon the future recovery or settlement of assets and liabilities recognised in the balance sheet.
Group Company
£ million April 1, 2004 March 31, 2005 April 1, 2004 March 31, 2005
Impact of the adoption of IAS 19 - Pensions 508 503 496 491
Impact of the other adjustments 6 4 (32) (38)
Other temporary differences due to change in methodology (94) (80) (6) (6)
420 427 458 447
(ix) Other long term liabilities#p#分頁標題#e#
Under UK GAAP, certain US dollar-denominated assets and liabilities were treated as a foreign operation ('Branch') with US Dollar as its functional
currency. Exchange movements were therefore taken to reserves rather than through the income statement. IAS 21 provides additional criteria to allow
the functional currency of a foreign operation to be determined. If the functional currency is deemed to be the same as for the parent, then exchange
movements on retranslation of monetary items are taken through the income statement. As a result, the cumulative exchange differences reflected in the
carrying value of the certain deferred income balances included in the 'branch' and taken to reserves were unwound. This resulted in an increase in
liabilities of £12 million and £13 million at April 1, 2004 and March 31, 2005 respectively.
In addition, £102 million (April 1, 2004: £117 million) of long-term liabilities have been reclassified from accruals falling due over one year to other
provisions.
(x) Trade and other payables
IAS 16 focuses on the balance sheet cost in prescribing the level at which parts should be determined; in particular it requires that each part of property,
plant and equipment that has a cost that is significant in relation to the overall cost of the item should be depreciated separately. Under UK GAAP, the
emphasis is on the income statement depreciation charge in determining the asset components. Under UK GAAP, the cost of major engine overhaul is
expensed to the income statement. Under IAS 16, major engine overhaul will be treated as a separate asset component with the cost capitalised and
depreciated over the period to the next major overhaul.
The Group receives revenue from the sale of mileage credits to third parties, including BA Miles that are managed through the Executive Club frequent
flyer programme and Air Miles that are managed through the wholly owned subsidiary Airmiles Travel Promotions Limited. Under UK GAAP, revenue
from the sale of miles is recognised on issue of the mile, with a provision made under FRS 12 for the incremental cost of providing the service on
redemption of the mile. IAS 18 is more prescriptive about the point at which revenue is recognised. Under IAS 18, the fair value of the miles sold is
deferred and recognised on redemption of the mileage credit. The cost of providing free redemption services for those miles is recognised when the miles
are redeemed.
In addition, £16 million (April 1, 2004: £12 million) of short term liabilities have been reclassified from accruals falling due within one year to short term
provisions.
Group Company
£ million April 1, 2004 March 31, 2005 April 1, 2004 March 31, 2005
Component accounting for major engine overhaul (3) (3) (3) (3)
Revenue recognition on the sale of miles (239) (270) (90) (112)
Reclassification of SSAP 24 accrued liability 18 18#p#分頁標題#e#
Reclassification of short term liabilities to provisions 12 16 1
(212) (257) (75) (114)
Notes to the accounts continued
108 British Airways 05/06 Annual Report
35 Transition to IFRSs continued
h Restatement of reported profit for the year ended March 31, 2005 from UK GAAP to IFRSs
(xi) Reclassifications
The reclassifications in the Group income statement for the year ended March 31, 2005 comprise the following:
Group
Currency
£ million Associates differences Total
Currency differences 6 6
Accommodation and ground equipment (6) (6)
Finance costs (8) (8)
Share of post-tax profits in associates accounted for using the equity method 18 18
Profit or loss on sale of fixed assets and investments 4 4
Tax (14) (14)
IAS 21 requires all currency differences to be reported separately. These were previously reported as part of accommodation and ground equipment under
UK GAAP. Under UK GAAP the equity method of consolidation for associates required the Group's share of operating profit, finance costs, profit or loss
on disposal and taxation to be allocated to their respective captions in the profit and loss account. Under IFRS, the Group has applied equity accounting
on a net basis, which requires the Group's share of the post-tax results of the equity accounted associate to be reported in the income statement in a
single line.
(xii) Effect of remeasurement
The effect of the above GAAP differences on reported profit of the Group for the year ended March 31, 2005 is as follows:
Group
Operating Profit before Profit for
£ million profit tax Tax the period
Component accounting for major engine overhaul (see (i)) 27 28 (9) 19
Reversal of cumulative exchange differences under IAS 21 (see (i)) (20) 3 4 7
Reclassification of assets held for sale (see (i)) 3 (1) 2
Reversal of goodwill amortisation (see (ii)) 4 5 5
Impact of IFRSs on the disposal of Qantas (see (iii)) * 97 97
Impact of the application of IAS 19 - Pensions (see (vii)) 44 15 (5) 10
Revenue recognition on the sale of miles (see (x)) (31) (31) 9 (22)
Share based payment expense ** (8) (8) 2 (6)
Tax methodology differences (see (viii)) 14 14
Increase in reported profit for the year 16 112 14 126
* Under IFRSs, the disposal of Qantas results in a £97 million improvement in the income statement for the year ended March 31, 2005, reflecting a
£59 million decrease in the net assets of Qantas (see (iii) above), and the reversal of the requirement to write back goodwill previously written off to
reserves of £59 million, partially offset by the write off of exchange gains arising on the investment since April 1, 2004 of £21 million.
** Under UK GAAP, the Group was either exempt from recognising the cost of providing share options to employees or the cost was measured at zero in#p#分頁標題#e#
the income statement. IFRS 2 requires a charge to be made to the income statement. The expense is calculated as the fair value of the award on the
date of grant and is recognised over the vesting period of the scheme. A binomial lattice model has been used to calculate the fair value of options on
their grant date. The Group has applied the provisions of IFRS 2 only to awards made after November 7, 2002, an option allowed on transition by IFRS 1.
British Airways 05/06 Annual Report 109
35 Transition to IFRSs continued
i Restatement of cash flow statement from UK GAAP to IFRSs
The transition from UK GAAP to IFRSs has no effect upon the reported cash flows generated by the Group. The IFRSs cash flow statement is presented in
a different format from that required under UK GAAP with cash flows split into three categories of activities - operating activities, investing activities and
financing activities. The reconciling items between the UK GAAP presentation and the IFRSs presentation have no net impact on the cash flows generated.
As a result of the treatment of major engine overhaul as a capital item under IFRS £55 million of expenditure previously reported as a deduction in
operating cash flow has now been shown under the purchase of property, plant and equipment.
In preparing the cash flow statement under IFRSs, cash and cash equivalents include cash at bank and in hand, highly liquid interest bearing securities with
original maturities of three months or less, and bank overdrafts. Under UK GAAP highly liquid interest bearing securities were not classified as cash
equivalents.
j Restatement on the adoption of IAS 32 and IAS 39
Group
Unrealised gains Profit and loss
£ million and losses reserve Total
Increase in available-for-sale financial asset to reflect fair value 4 4
Net unrecognised gains on derivative financial instruments 304 (34) 270
Impact of IAS 39 on the share of net assets of associates (10) (10)
Adjustments before taxation 308 (44) 264
Deferred tax on the above adjustments (91) 10 (81)
217 (34) 183
Company
Unrealised gains Profit and loss
£ million and losses reserve Total
Net unrecognised gains on derivative financial instruments 304 (34) 270
Adjustments before taxation 304 (34) 270
Deferred tax on the above adjustments (91) 10 (81)
213 (24) 189
Available-for-sale financial assets
The Group carried listed shares at the lower of cost and realisable value under long term investments. Under IAS 39 these are classified as available-forsale
and carried at fair value. Consequently the carrying value increased by £4 million at April 1, 2005. The gain, net of deferred tax, has been taken
directly to equity until disposal or impairment of the investment, when the cumulative unrealised gains and losses would be recycled through the income
statement.#p#分頁標題#e#
Recognition of derivatives at fair value
Under UK GAAP, gains and losses from derivative financial instruments used for hedging purposes are not recognised in earnings or as adjustments to
carrying amounts until the gains or losses crystallise. IAS 39 requires all derivatives to be recognised at fair value in the balance sheet. Consequently the
fair value of interest rate swap arrangements, forward foreign exchange contracts and fuel hedging contracts have been recognised on the Group and
Company balance sheet at April 1, 2005. Interest rate swap agreements that were outstanding at April 1, 2005 and were not closely related to an
underlying financing transaction have been designated at fair value through the income statement. The fair value at April 1, 2005 was £2 million.
Convertible Capital Bonds 2005
The Group held Convertible Capital Bonds at April 1, 2005 that matured on June 15, 2005. Under IAS 32 these would normally be required to be split
between an equity component and a debt component. As the financial instruments matured in June 2005, the resulting adjustment would have been an
allocation between equity components with no overall change to equity. As a result no change has been made to the presentation of these financial
instruments at April 1, 2005.
Minority interests
The Group previously presented the €300 million of 6.75% fixed coupon euro perpetual preferred securities issued by British Airways Finance
(Jersey) L.P. in which the general partner is British Airways Holdings Limited, a wholly owned subsidiary of British Airways Plc, as a non-equity minority
interest. Such a classification is not recognised under IAS 32 and consequently the euro perpetual preferred securities are presented under the heading
'minority interests'.
110 British Airways 05/06 Annual Report
Shareholder information
General Information
Financial calendar
Financial year end March 31, 2006
Annual General Meeting July 18, 2006
Announcement of 2006-2007 results
First quarter results to June 30, 2006 August 2006
Second quarter results to September 30, 2006 November 2006
Third quarter results to December 31, 2006 February 2007
Preliminary announcement mid May 2007
Report and Accounts June 2007
Registered Office
Waterside, PO Box 365, Harmondsworth, UB7 0GB
Registered number – 1777777
Outside advisers
Company Registrars: Computershare Investor Services Plc, PO Box 82, The Pavilions, Bridgewater Road, Bristol, BS99 7NH
ADR Depositary: Citibank Shareholder Services, PO Box 43077, Providence, RI 02940-3077, USA
Unsolicited mail
British Airways is obliged by law to make its share register available on request to other organisations who may then use it as a mailing list. This may
result in your receiving unsolicited mail. If you wish to limit the receipt of unsolicited mail you may do so by writing to the Mailing Preference Service, an#p#分頁標題#e#
independent organisation whose services are free to you. Once your name and address have been added to its records, it will advise the companies and
other bodies which support the service that you no longer wish to receive unsolicited mail.
If you would like more details please write to: The Mailing Preference Service, FREEPOST 22, London W1E 7EZ.
British Airways asks organisations which obtain its register to support this service.
Sharegift
Shareholders with small numbers of shares may like to consider donating their shares to charity under ShareGift, administered by The Orr Mackintosh
Foundation. Details are available from the Company Registrars.
British Airways 05/06 Annual Report 111
Glossary
Airline Operations This includes British Airways Plc and BA Connect Ltd (CityFlyer Express Ltd, Deutsche BA
Luftfahrtgesellschaft mbH and Go Fly Ltd have been included in historic comparatives).
Available seat kilometres (ASK) The number of seats available for sale multiplied by the distance flown.
Available tonne kilometres (ATK) The number of tonnes of capacity available for the carriage of revenue load (passenger and cargo) multiplied
by the distance flown.
Revenue passenger kilometres (RPK) The number of revenue passengers carried multiplied by the distance flown.
Cargo tonne kilometres (CTK) The number of revenue tonnes of cargo (freight and mail) carried multiplied by the distance flown.
Revenue tonne kilometres (RTK) The revenue load in tonnes multiplied by the distance flown.
Load factor The percentage relationship of revenue load carried to capacity available.
Passenger load factor RPK expressed as a percentage of ASK.
Overall load factor RTK expressed as a percentage of ATK.
Break-even load factor The load factor required to equate total traffic revenue with operating costs.
Frequent flyer RPKs as a percentage The amount of frequent flyer RPKs expressed as a percentage of total RPKs is indicative of the proportion
of total RPKs of total passenger traffic that is represented by redemption of frequent flyer points in the year.
Revenue per RPK Passenger revenue from Airline scheduled operations divided by Airline scheduled RPK.
Total traffic revenue per RTK Revenue from total traffic (scheduled and non-scheduled) divided by RTK.
Total traffic revenue per ATK Revenue from total traffic (scheduled and non-scheduled) divided by ATK.
Punctuality The industry's standard, measured as the percentage of flights departing within 15 minutes of schedule.
Regularity The percentage of flights completed to flights scheduled, excluding flights cancelled for commercial reasons.
Unduplicated route kilometres All scheduled flight stages counted once, regardless of frequency or direction.
Interest cover The number of times profit before taxation and net interest expense and interest income covers the net
interest expense and interest income.#p#分頁標題#e#
Dividend cover The number of times profit for the year covers the dividends paid and proposed.
Operating margin Operating profit/(loss) as a percentage of revenue.
Net debt Loans, finance leases and hire purchase arrangements, plus Convertible Capital Bonds, net of other current
interest bearing deposits and cash and cash equivalents less overdrafts.
Net debt/total capital ratio Net debt as a ratio of total capital, adjusted to include the discounted value of future
(including operating leases) operating lease commitments.
Total capital Total equity plus net debt.
Net debt/total capital ratio Net debt as a ratio of total capital.
Manpower equivalent Number of employees adjusted for part-time workers, overtime and contractors.
EBITDAR Earnings before interest, tax, depreciation, amortisation and rentals.
n/a Not applicable.
Designed by RT Design, Guildford
Produced by Astron
www.ba.com
Our investor relations website is
www.bashares.com
Our website for individual shareholders is
www.bashareholders.com