Edgar Filing: BRITISH AIRWAYS PLC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)
o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: March 31, 2004
or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-9384

BRITISH AIRWAYS Plc
(Exact name of Registrant as specified in its charter)

England and Wales
(Jurisdiction of incorporation or organization)

Waterside, PO Box 365, Harmondsworth, UB7 0GB England
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class		Name of each exchange on which registered

American Depositary Shares		New York Stock Exchange
Ordinary Shares of 25p each		New York Stock Exchange*

* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Ordinary Shares of 25p each

1,082,845,212

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17

Item 18

TABLE OF CONTENTS

			Page

		Introductory Note	3
		Specialist Terms	4
Part I	Item 1.	Identity of Directors, Senior Management and Advisers	5
	Item 2.	Offer Statistics and Expected Timetable	5
	Item 3.	Key Information	5
		Selected Financial Data	5
		Exchange Rates	11
		Risk Factors	11
	Item 4.	Information on the Company	15
		Introduction	15
		Strategic Developments and Investments	15
		Segmental Information	18
		Route Network	19
		Airline Fleet	20
		Capital Expenditures	21
		Operations	21
		Marketing and Sales	23
		Cargo	25
		Ancillary Airline Activities	25
		Seasonal Variations	25
		Health Concerns: Occupational Health Service	25
		Regulation	25
		Competition	30
		Organizational Structure	31
		Property, Plant and Equipment	32
	Item 5.	Operating and Financial Review and Prospects	33
		Introduction	33
		Results of Operations	33
		Year by Year Analysis	33
		Outlook	41
		Other Matters	42
		Critical Accounting Policies and New Accounting Standards	47
	Item 6.	Directors, Senior Management and Employees	51
		Compensation of Directors and Officers	53
		Options to Purchase Securities from Registrant or Subsidiaries	55
		Employees	56
		Pensions	57
		Share Ownership	57
	Item 7.	Major Shareholders and Related Party Transactions	60
	Item 8.	Financial Information	61
		Consolidated Statements and Other Financial Information	61
		Dividends	61
		Legal Proceedings	61
		Significant Changes	61
	Item 9.	The Offer and Listing	61
	Item 10.	Additional Information	62
		Limitations on Voting and Shareholding	62
		Memorandum and Articles of Association	62
		Directors	63
		Material Contracts	67
		Exchange Controls	67
		Tax	67
		UK Income Tax	67
		UK Tax on Capital Gains	69
		UK Inheritance Tax	69
		UK Stamp Duty and Stamp Duty Reserve Tax	69
		US Federal Income Tax	69
		Documents on Display	70
	Item 11.	Quantitative and Qualitative Disclosures about Market Risk	70
	Item 12.	Description of Securities Other Than Equity Securities	74
Part II	Item 13.	Defaults, Dividend Arrearages and Delinquencies	74
	Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	74
	Item 15.	Controls and Procedures	74
	Item 16	[Reserved]	74
	Item 16A.	Audit Committee Financial Expert	74
	Item 16B.	Code of Ethics	75
	Item 16C.	Principal Accountant Fees and Services	75
	Item 16D.	Exemptions from the Listing Standards for Audit Committees	75
	Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	75
Part III	Item 17.	Financial Statements	76
	Item 18.	Financial Statements	76
	Item 19.	Exhibits	76

INTRODUCTORY NOTE

Unless the context indicates otherwise, the “Company”, “BA” or “British Airways” refers to British Airways Plc and “BA Group” or “Group” refers to British Airways, its subsidiaries and its quasi-subsidiary. “Airline” refers to British Airways Plc, British Airways CitiExpress Limited, dba (formerly Deutsche BA Luftfahrtgesellschaft mbh) (until June 30, 2003), and for historical comparatives Air Liberté. “Qantas” refers to Qantas Airways Limited and “Iberia” refers to Iberia Lineas Aéreas de Espana, S.A..

BA publishes its Financial Statements expressed in UK (“UK”) pounds Sterling. In this document references to “US Dollars”, “US $”, or “$” are to US (“US”) Dollars, references to “pounds Sterling”, “Sterling” or “£” and “pence” or “p” are to UK currency, references to “Japanese Yen”, “Yen” or “¥” are to the currency of Japan, references to “Euro” or “€” are to the currency of the European Union and references to “A$” are to Australian Dollars. For the convenience of the reader, this document contains translations of certain pounds Sterling amounts to US Dollars at $1.8400 to £1.00, the noon buying rate in New York City for cable transfers in pounds Sterling as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on March 31, 2004. These translations should not be construed as representations that the pounds Sterling amounts actually represent such US Dollar amounts or could be converted into US Dollars at the rate indicated. The Noon Buying Rate on June 30, 2004 was $1.8124 to £1.00. For historical information regarding rates of exchange between US Dollars and pounds Sterling, see “Item 3 — Key Information — Exchange Rates”. For a discussion of the Group’s exposure to exchange rate fluctuations arising from its operations, see “Item 5 — Operating and Financial Review and Prospects —Other Matters — Foreign Currency Risk” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk”.

Cash dividends, if any, paid by BA will be in pounds Sterling, and exchange rate fluctuations will affect the US Dollar amounts received by holders of American Depositary Shares (“ADS”) on conversion of such dividends. Moreover, fluctuations in the exchange rates between pounds Sterling and the US Dollar will affect the US Dollar equivalent of the pounds Sterling price of the ordinary shares of the Company (the “Ordinary Shares”) on the London Stock Exchange, and, as a result, are likely to affect the market price of the ADS traded on the New York Stock Exchange in the US.

The Company’s fiscal year ends on March 31 of each year, and references herein to “fiscal year” or “fiscal” are to the year ended March 31 of the year specified.

Certain information contained in this report, including, without limitation, in “Item 4 — Information on the Company” and “Item 8 — Financial Information — Legal Proceedings” as well as certain statements made throughout “Item 5 — Operating and Financial Review and Prospects” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk” are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements included in this document and in documents incorporated herein by reference generally may be identified by the words “will”, “expects”, “plans”, “anticipates”, “intends”, and similar expressions that indicate the statement addresses the future. 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 Future Size and Shape (“FSAS”) program, cost reductions, aircraft financing, expected future revenues, financing plans and expected expenditures and divestments. All forward-looking statements in this report are based upon information known to the Company at the time of such statement. 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 practicable to itemize all of the many factors and specific events that could cause the Company’s forward-looking statements to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating in the global economy. Some factors that could significantly affect expected capacity, load factors, yields, revenues, expenses, unit costs, capital expenditures, cash flows and margins include the airline pricing environment, customer demand, fuel and other commodity costs, capacity decisions of other carriers, cost of safety and security measures, actions of the UK and other governments, foreign currency exchange rate fluctuations, inflation, the economic environment of the airline industry, the general economic environment, the commencement or escalation of hostilities, terrorist activities, health scares, the ability to reach labor and wage agreements, industrial actions such as strikes, compensation levels in the industry, the status of the Company’s relationships with the union groups, and other factors discussed herein, including under “Item 3 — Key Information — Risk Factors”.

SPECIALIST TERMS

Available seat kilometers (ASK)	the number of seats available for sale multiplied by the distance flown

Available tonne kilometers (ATK)	the number of tonnes of capacity available for the carriage of passengers and cargo multiplied by the distance flown

Revenue passenger kilometers (RPK)	the number of revenue passengers carried multiplied by the distance flown

Cargo tonne kilometers (CTK)	the number of revenue tonnes of cargo (freight and mail) carried multiplied by the distance flown

Revenue tonne kilometers (RTK)	the number of revenue tonnes of cargo and passengers carried multiplied by the distance flown

Load factor	the percentage relationship of revenue passengers and/or cargo carried to capacity available

Passenger load factor	RPK expressed as a percentage of ASK

Overall load factor	RTK expressed as a percentage of ATK

Frequent flyer RPKs as a percentage of total RPKs	the amount of frequent flyer RPKs expressed as a percentage of total RPKs is indicative of the proportion of total passenger traffic that is represented by redemption of frequent flyer miles in the year

Passenger yield	passenger revenue from airline operations divided by RPK

Total traffic revenue per RTK	revenue from total traffic (passenger scheduled and non-scheduled and cargo) divided by RTK

Total traffic revenue per ATK	revenue from total traffic (passenger scheduled and non-scheduled and cargo) divided by ATK

Codesharing	co-operation between two airlines where one airline sells tickets using its own flight code for the other airline’s flight

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 canceled for commercial reasons

Unduplicated route kilometers	all scheduled flight stages counted once, regardless of frequency or direction

Manpower equivalent (MPE)	number of employees adjusted for part-time workers, overtime and contractors

PART 1

Item 1 — Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2 — Offer Statistics and Expected Timetable

Not applicable.

Item 3 — Key Information

Selected Financial Data

The summarized financial information (expressed in pounds Sterling) set out below is derived from the audited consolidated Financial Statements of the Group presented elsewhere herein or otherwise included in BA’s annual reports and which were audited by Ernst & Young LLP, independent registered public accounting firm. The data should be read in conjunction with, and are qualified in their entirety by reference to, such Financial Statements and accompanying notes included elsewhere in this report.

Group Profit and Loss Account

	Year ended March 31

	2004			2004			2003			2002			2001			2000

	(in millions, except per Ordinary Share amounts)

	$ (1)			£			£			£			£			£
Amounts in accordance with UK GAAP
Turnover		13,910			7,560			7,688			8,340			9,278			8,940
Cost of sales		(12,895	)		(7,008	)		(7,263	)		(8,291	)		(8,757	)		(8,679	)

Gross profit		1,015			552			425			49			521			261

Administrative expenses		(270	)		(147	)		(130	)		(159	)		(141	)		(177	)

Operating profit/(loss)		745			405			295			(110	)		380			84

Share of operating profit in associates		107			58			39			22			64			75

Total operating profit/(loss) including associates		852			463			334			(88	)		444			159

Other income and charges		24			13			(4	)		21			1			5
(Loss)/profit on sales of fixed assets and investments		(85	)		(46	)		60			145			(69	)		249
Net interest payable		(368	)		(200	)		(255	)		(278	)		(226	)		(408	)

Profit/(loss) before tax		423			230			135			(200	)		150			5

Tax		(156	)		(85	)		(50	)		71			(69	)		(56	)

Profit/(loss) after tax		267			145			85			(129	)		81			(51	)

Equity minority interests		(2	)		(1	)		—			(1	)		(2	)		—
Non-equity minority interests		(26	)		(14	)		(13	)		(12	)		(12	)		(11	)

Profit/(loss) for the year		239			130			72			(142	)		67			(62	)
Dividends		—			—			—			—			(193	)		(195	)

Retained profit/(loss) for the year		239			130			72			(142	)		(126	)		(257	)


Earnings/(loss) per Ordinary Share (2)
Basic		0.22			12.1	p		6.7	p		(13.2	)p		6.2	p		(5.8	)p
Diluted		0.22			12.1	p		6.7	p		(13.2	)p		6.2	p		N/a
Basic weighted average number of shares		1,070			1,070			1,073			1,076			1,075			1,075

Diluted weighted average number of shares		1,070			1,070			1,073			1,078			1,085			1,075


Amounts in accordance with US GAAP (3):
Net income/(loss) for the year before cumulative effect of change in accounting principle		729			396			(115	)		(123	)		244			(371	)

Cumulative effect on prior years of adopting SAB 101		—			—			—			—			—			(80	)

Net income/(loss) for the year		729			396			(115	)		(123	)		244			(451	)


Per Ordinary Share (3)
Basic
Net income/(loss) for the year before cumulative effect of change in accounting principle		0.68			37.0	p		(10.7	)p		(114	)p		22.7	p		(34.5	)p

Foot note page 8


Cumulative effect on prior years of adopting SAB 101	—	—		—		—		—		(7.4	)p

Net income/(loss) for the year	0.68	37.0	p	(10.7	)p	(11.4	)p	22.7	p	(41.9	)p


Diluted
Net income/(loss) for the year before cumulative effect of change in accounting principle	0.66	36.1	p	(10.7	)p	(11.4	)p	22.5	p	(34.5	)p
Cumulative effect on prior years of adopting SAB 101	—	—		—		—		—		(7.4	)p

Net income/(loss) for the year	0.66	36.1	p	(10.7	)p	(11.4	)p	22.5	p	(41.9	)p


Per American Depositary Share (4)
Basic
Net income/(loss) for the year before cumulative effect of change in accounting principle	6.80	370	p	(107	)p	(114	)p	227	p	(345	)p
Cumulative effect on prior years of adopting SAB 101	—	—		—		—		—		(74	)p

Net income/(loss) for the year	6.80	370	p	(107	)p	(114	)p	227	p	(419	)p


Diluted
Net income/(loss) for the year before cumulative effect of change in accounting principle	6.64	361	p	(107	)p	(114	)p	225	p	(345	)p
Cumulative effect on prior years of adopting SAB 101	—	—		—		—		—		(74	)p

Net income/(loss) for the year	6.64	361	p	(107	)p	(114	)p	225	p	(419	)p

Footnote on page 8

Balance Sheet

	At March 31

	2004			2004			2003			2002			2001			2000

	(in millions, except per Ordinary Share amounts)
	$ (1)			£			£			£			£			£

Amounts in accordance with UK GAAP

Fixed assets
Intangible assets Goodwill and landing rights		309			168			164			140			84			87

Tangible assets
Fleet, property and equipment		15,892			8,637			9,487			10,474			10,638			10,202

Investments		1,034			562			524			489			426			567


		17,235			9,367			10,175			11,103			11,148			10,856


Current assets		5,088			2,765			2,725			2,559			2,550			2,659

Creditors: amounts falling due within one year		(5,513	)		(2,996	)		(2,904	)		(3,201	)		(3,308	)		(3,366	)


Net current liabilities		(425	)		(231	)		(179	)		(642	)		(758	)		(707	)


Total assets less current liabilities		16,810			9,136			9,996			10,461			10,390			10,149


Creditors: amounts falling due after more than one year		(10,094	)		(5,486	)		(6,553	)		(7,097	)		(6,901	)		(6,728	)

Provisions for deferred tax		(2,092	)		(1,137	)		(1,062	)		(1,031	)		(1,094	)		(1,047	)
Provisions for liabilities and charges		(156	)		(85	)		(107	)		(126	)		(70	)		(81	)


		4,468			2,428			2,274			2,207			2,325			2,293


Capital and reserves
Called up share capital		499			271			271			271			271			270
Reserves		3,582			1,947			1,787			1,745			1,850			1,830


Total equity shareholders’ funds		4,081			2,218			2,058			2,016			2,121			2,100

Equity minority interest		19			10			10			9			18			16
Non equity minority interest		368			200			206			182			186			177


		387			210			216			191			204			193


		4,468			2,428			2,274			2,207			2,325			2,293


Amounts in accordance with US GAAP (3)							Restated (3)			Restated (3)			Restated (3)			Restated (3)

Fixed assets
Intangible assets Goodwill and landing rights		171			93			91			434			395			464

Tangible assets
Fleet, property and equipment		15,871			8,626			9,264			10,073			10,209			9,985

Investments..		1,049			570			530			505			488			706


		17,091			9,289			9,885			11,012			11,092			11,155


Current assets		6,773			3,681			3,370			2,983			2,687			2,607

Creditors: amounts falling due within one year		(5,976	)		(3,248	)		(3,117	)		(3,378	)		(3,326	)		(3,371	)

Net current assets/(liabilities)		797			433			253			(395	)		(639	)		(764	)


Total assets less current liabilities		17,888			9,722			10,138			10,617			10,453			10,391


Creditors: amounts falling due after more than one year		(11,800	)		(6,413	)		(7,058	)		(7,103	)		(6,911	)		(6,743	)

Provision for deferred tax		(2,282	)`		(1,240	)		(1,120	)		(1,117	)		(937	)		(1,077	)

Footnote page 8


Provisions for liabilities and charges	(156	)	(85	)	(107	)	(126	)	(70	)	(81	)


	3,650		1,984		1,853		2,271		2,535		2,490

Capital and reserves
Called up share capital	499		271		271		271		271		270
Reserves	2,765		1,503		1,366		1,809		2,060		2,027


Total equity shareholders funds	3,264		1,774		1,637		2,080		2,331		2,297

Equity minority interests	18		10		10		9		18		16
Non-equity minority interest	368		200		206		182		186		177

	386		210		216		191		204		193

	3,650		1,984		1,853		2,271		2,535		2,490

(1)	Translations of pounds Sterling into US Dollars have been made at the Noon Buying Rate on March 31, 2004 of £1.00 = US$1.8400.

(2)	See Note 12 to the Financial Statements for a discussion of the weighted average number of shares outstanding for basic and diluted calculations for the relevant period.

(3)	BA prepares its Financial Statements in accordance with accounting principles generally accepted in the UK (“UK GAAP”) which differ in certain respects from US generally accepted accounting principles (“US GAAP”). A discussion of the significant differences between UK GAAP and US GAAP and reconciliations of net income and shareholders’ equity from a UK GAAP basis to a US GAAP basis are set out in Note 45 to the Financial Statements.

	Fiscal 2003 to Fiscal 2000 amounts restated to reflect the adoption of FIN 46 – Consolidation of Variable Interest Entities. Fiscal 2003 Balance Sheet restated to reflect minimum pension liability and related intangible asset and deferred tax. See Note 45 to the Financial Statements.

(4)	Each ADS represents ten Ordinary Shares.

Group Operating Statistics (1)

	Year ended March 31

	2004		2003		2002			2001		2000

Airline Operations
*Traffic and capacity*
Revenue passenger km (RPK)(m)		103,092		100,112		106,270			123,197		127,425
Available seat km (ASK)(m)		141,273		139,172		151,046			172,524		183,158
Passenger load factor (%)		73		72		70			71		70
Cargo tonne km (CTK)(m)		4,461		4,210		4,033			4,735		4,584
Revenue tonne km (RTK)(m)		14,771		14,213		14,632			16,987		17,215
Available tonne km (ATK)(m)		21,859		21,328		22,848			25,196		25,840
Overall load factor (%)		68		67		64			67		67
Passengers carried (000)		36,103		38,019		40,004			44,462		46,578
Tonnes of cargo carried (000)		796		764		755			914		909
Frequent flyer RPKs as a percentage of total RPKs (%) (2)		4		4		4			3		2
Financial
Passenger yield see definition under specialist terms (p)		6		7		7			6		6
Cargo revenue per CTK (p)		10		12		12			12		12
Average fuel price (US cents/US gallon)		94		86		81			104		71
*Operations*
Unduplicated route km (000)		657		693		814			755		751
Punctuality (% within 15 minutes)		81		76		81			79		81
Regularity (%)		99		98		99			98		99

Total Group Operations
*Financial*
Interest cover (times)(3)		2.1		1.5		0.4			1.5		1.0
Operating margin (%)(4)		5.4		3.8		(1.3	)		4.1		0.9
Net debt/total capital ratio (%)(5)		53.8		60.7		66.0			64.5		63.9
Scheduled (passenger, freight and mail) and non scheduled services revenue per RTK (p)		47		50		52			50		47
Scheduled (passenger, freight and mail) and non scheduled services revenue per ATK (p)		32		33		33			33		31
Net operating expenditure per RTK (p)(6)		44		48		52			47		47
Net operating expenditure per ATK (p)(6)		30		32		34			32		31
Operations
*Average manpower equivalent (MPE)*		49,072		53,440		60,468			62,844		65,640
RTKs per MPE (000)		301.0		266.0		242.0			270.3		262.3
ATKs per MPE (000)		445.4		399.1		377.9			400.9		393.7
Aircraft in service at year end		291		330		360			338		366
Aircraft utilization (average hours per aircraft per day)		9.21		8.91		8.32			8.79		9.79

(1)	Operating statistics do not include those of associated undertakings (Qantas, Comair and Iberia) and franchisees (British Mediterranean Airways, GB Airways, Loganair, Sun-Air (Scandinavia) and Regional Air). On October 31, 2003 Maersk (UK) ceased to operate as a franchisee.

(2)	The carriage of passengers on Frequent Flyer Programs is evaluated on a ticket by ticket basis.

(3)	The number of times profit/(loss) before tax excluding net interest payable covers the net interest payable. For the purposes of calculating the interest cover ratio, retranslation charges/(credits) are excluded from net interest payable as they are unrealized at year end. Interest cover is not a financial measure under UK GAAP or US GAAP. However, management believes this measure is useful to investors when analyzing the Company’s ability to meet its interest commitments from current earnings.

	The following table shows a reconciliation of net interest payable excluding translation charges/(credits) and the interest cover ratio (before adjustment for retranslation charges/(credits)) for each of the five most recent financial years:

	Year ended March 31

	2004			2003			2002			2001			2000

	(£ millions (except ratios))


Profit before tax		230			135			(200	)		150			5


Net interest payable		(200	)		(255	)		(278	)		(226	)		(408	)
Add back :
Retranslation charges/(credits)		(16	)		8			(46	)		(71	)		136


		(216	)		(247	)		(324	)		(297	)		(272	)

Interest cover (before adjustment for retranslation charges/(credits))		2.1			1.5			0.4			1.5			1.0

(4)	Operating profit/(loss) as a percentage of turnover. Turnover comprises revenue from: passenger revenue (scheduled services and non scheduled services), cargo services and other revenue. See Note 2 to the Financial Statements with respect to turnover.

(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 24 to the Financial Statements for details of the calculation of net debt.

	Total capital is defined as the total of capital, reserves, minority interests, net debt and deferred tax. Total capital and net debt/total capital percentage are not financial measures under UK GAAP or US GAAP. Similarly, net debt adjusted to include obligations under operating leases (as presented in “Item 5 – Operating and Financial Review and Prospects – Results of Operations”) is not a financial measure under UK GAAP or US GAAP. However, management believe these measures are useful to investors when analyzing the extent to which the Company is funded by debt compared to shareholders’ funds. Deferred tax has been added back in calculating total capital.

	The following table shows a reconciliation of total capital to total shareholders’ funds and the net debt/capital percentage for each of the five most recent financial years:

	At March 31

	2004		2003		2002		2001		2000

	(£ millions (except ratios))


Net debt		4,158		5,149		6,294		6,223		5,916

Capital and reserves		2,218		2,058		2,016		2,121		2,100
Add minority interests		210		216		191		204		193

Total shareholders’ funds		2,428		2,274		2,207		2,325		2,293
Add back :
Net debt		4,158		5,149		6,294		6,223		5,916
Provision for deferred tax		1,137		1,062		1,031		1,094		1,047

Total capital		7,723		8,485		9,532		9,642		9,256


Net debt/capital percentage		53.8		60.7		66.0		64.5		63.9

(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 UK GAAP 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 this measure internally on a monthly basis as an indication of management’s performance in reducing costs.

	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 five most recent financial years:

	Year ended March 31

	2004			2003			2002			2001			2000

	(£ millions (except ratios))


Total operating expenditure		7,155			7,393			8,450			8,898			8,856
Less: other revenue		(607	)		(614	)		(769	)		(846	)		(848	)

Net operating expenditure		6,548			6,779			7,681			8,052			8,008

RTKs		14,771			14,213			14,632			16,987			17,215

ATKs		21,859			21,328			22,848			25,196			25,840


Total operating expenditure per RTK		48			52			58			52			51


Total operating expenditure per ATK		33			35			37			35			34

Exchange Rates

The Noon Buying Rate expressed in US Dollars to pounds Sterling as of June 30, 2004 was $1.8124. The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate, expressed in US Dollars to £1.00. For a discussion of the impact of exchange rates on the Group’s business, see “Item 5 — Operating and Financial Review and Prospects — Other Matters — Foreign currency risk” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk – Foreign currency risk”.

Fiscal year	Period End	Average(1)	High	Low

	$	$	$	$
2000	1.59	1.61	1.65	1.58
2001	1.42	1.47	1.56	1.42
2002	1.43	1.43	1.48	1.37
2003	1.58	1.55	1.65	1.43
2004	1.84	1.71	1.90	1.55

Month

January 2004			1.85	1.78
February 2004			1.90	1.82
March 2004			1.87	1.79
April 2004			1.86	1.77
May 2004			1.84	1.75
June 2004			1.84	1.81

(1)	The average of the Noon Buying Rates on the last day of each month during the fiscal year.

Risk Factors

This section describes some of the risks that could affect the Group’s business and results of operations. These factors should be considered in conjunction with the cautionary statement regarding forward-looking statements contained in the “Introductory Note” on page 3.

The commercial airline industry is highly competitive and the market for air travel has experienced, and the Group expects will continue to experience, significant changes. In addition, the Group’s future performance is subject to a variety of factors over which it has little or no control, including adverse governmental regulation in the UK, the European Union (“EU”) or elsewhere, fluctuations in jet fuel prices, terrorism, adverse changes in economic conditions, adverse changes in the demand for air travel, the availability of financing and fluctuations in currency and interest rates. The Company’s results may also be affected by operational and information technology (“IT”) risks as well as by labor relations and pension costs. There are likely to be other risks that the Group has not identified in this report that could have an adverse effect on the Group’s business, revenues, operating profit, net assets, liquidity and capital resources, such as war and changes in the insurance market. Changes in accounting standards may also affect the Company’s reported results. Beginning with the fiscal year 2006, the Company expects to shift from UK GAAP to IFRS for financial reporting purposes. This shift could affect the Company’s reported results and could cause the price of the Company’s securities to fluctuate.

Competition in the Airline Industry

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. The Group’s pricing decisions are affected by many factors, including competition from other airlines, some of which have cost structures that are lower than the Group’s or have other competitive advantages and therefore may be able to operate at lower fare levels. Fare discounting by competitors has historically had a negative effect on the Group’s financial results because the Group is generally required to respond to competitors’ fares to maintain passenger traffic. There can be no assurance that the adverse effects of any future fare reduction or other competitive factors would be offset by increases in passenger traffic, reductions in costs or changes in the mix of traffic that improve yields.

Government Regulation

The Group’s operations are subject to a high degree of EU, UK and foreign government regulation covering most aspects of the airlines’ operations, including route flying rights, fare setting, operational standards (the most important relating to safety, security and aircraft noise), airport access and arrival and departure times at airports (“slots”) availability. Furthermore, British airlines are affected by more general EU, UK and foreign governmental policies and their implementation. Future operating and financial results may vary based upon the effects of such regulation, including the granting and timing of certain governmental approvals needed for new and existing alliances, codesharing agreements and other arrangements with other airlines, restrictions on

competitive practices, and the costs of meeting customer service standards and aircraft noise restrictions. For example BA and AA have been unable to secure US antitrust and EU competition law immunity to further the extent of their co-operation through the oneworld alliance while certain US and EU based airlines in other alliances have received limited immunity.

Changes in the regulation of aviation may also affect the airline’s performance. The UK and other Member States have recently ceded competence to the European Commission for negotiation of route rights to countries outside the EU. It is not possible to predict the terms on which the EU might conclude on an ‘open skies’ agreement with the US and therefore it is not possible to predict its impact on the airline. In relation to slots, the EU is reviewing the slot regulation and has indicated that it does not support the current position under English law. This could affect the Company’s ability to trade in slots in the future.

Government Support for the Group and Competing Airlines

In response to the events of September 11, 2001, the UK government, under the European Union’s program of exceptional support for airlines, granted the Group £22 million in compensation and acted as insurer of last resort for 13 months. The Group is not permitted to conduct many of its operations without insurance. If market conditions similar to those following September 11, 2001 recur, the Group might require further government assistance to avoid impairment or interruption of its operations. A failure to obtain such assistance could have a material adverse effect on the Group’s operations and financial condition. In addition, other governments, including the US government, have and may continue to provide financial and other support for their domestic airlines that is more significant than the government support provided to the Group. State aid for the aviation industry, whilst not technically lawful in Europe, remains on the political agenda, as does the differing nature of the insolvency laws of different countries. Disparate levels of government assistance between the Group and other airlines could place the Group at a competitive disadvantage and have an adverse effect on the Group’s operating and financial results.

Jet Fuel Prices

Jet fuel prices are a significant component of the Group’s cost structure and have been and could be highly volatile. While the Group endeavors to hedge part of the jet fuel price volatility, due to the competitive nature of the airline industry and other factors, including the price-sensitivity of the demand for air travel, increases and fluctuations in the price of jet fuel may have an adverse effect on the Group’s operations and financial performance.

Effects of Terrorist Activities and Similar Events

The events of September 11, 2001 had, and continue to have, an adverse effect on the Group’s operating and financial results. Following these events, the Group experienced significant decreases in turnover, increases in security and other costs, higher ticket refunds, lower yield and load factors and higher insurance costs. The airline industry has not recovered from these shocks and suffered further setbacks with the Iraq war in the spring of 2003. The effects of the events of September 11, 2001, the threat or occurrence of other terrorist attacks or the commencement or escalation of hostilities (or the threat thereof) have had and could continue to have an adverse effect on the demand for air travel and the Group’s operating and financial results.

Following the events of September 11, 2001, airlines found it impossible to obtain adequate insurance cover without government support. Similar disruptions in the insurance market or withdrawal of cover for key risks could have an adverse impact on the Group’s operating and financial results.

Other catastrophic events or natural disasters, not necessarily related to aviation, could also have an adverse impact on the Group’s operating and financial results.

Economic and Other Conditions

The demand for air travel and, accordingly, the Group’s operating and financial results may be affected by changes in local, regional, national and international economic conditions. Significant and prolonged downturns in economic conditions would be likely to have an adverse effect on the Group. In addition, other demand-related factors such as health concerns, perceptions of airline safety and adverse weather conditions could have an adverse effect on the operations and financial results of the Group. For example, the outbreak of SARS in 2003, and the foot and mouth epidemic in 2001, caused declines in demand for certain of the Group’s routes. Claims against the Company and other airlines in relation to deep venous thrombosis are currently subject to litigation in the UK and other countries.

Availability of Future Financing; Interest Rate and Other Financing Risks

In the wake of the events of September 11, 2001, the subsequent war in Iraq and the Severe Acute Respiratory Syndrome (“SARS”) outbreak and because of the resulting adverse operating environment and uncertainty, the Group raised additional funds to increase its liquidity. The Group had, at March 31, 2004, over £2 billion in cash and deposits and committed facilities. Although the Group believes that it would be able to return to the capital markets to raise additional funds, there can be no assurance that the airline industry, fleet and other assets will continue to be as attractive to lenders. In addition, the Group’s ability to access one of its committed facilities of US$393 million is subject to the Group’s Standard & Poor’s corporate credit rating. However, the Group’s corporate rating stands at BB+ (stable), which is well above the lowest level B-, at which the facility can be drawn. Once the facility is drawn there are no ratings covenants.

The airline industry is capital intensive and the Company has significant debt and capital commitments. The Company’s ability to finance its operations and capital needs, and the cost to the Company of financing, may be affected adversely by various factors including financial market conditions. For example, 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. In addition, a significant portion of the Company’s debts are subject to floating interest rates. To manage interest rate risks, the Company enters into swap and other hedging arrangements. Nonetheless, the Company could experience adverse effects from interest or currency rate volatility. The Company’s financing activities are also subject to exchange risks as borrowings and related expenditures may not be denominated in the same currency. For discussion of the Company’s outstanding debt obligations, capital commitments and other obligations as well as interest rate and foreign currency risk, see “Item 5 — Operating and Financial Review and Prospects— Other Matters — Debt and other contractual obligations”, “Item 5 — Operating and Financial Review and Prospects— Other Matters — Foreign currency risk” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk.”

Uncertainty of Future Collective Bargaining Agreements and Events

The airline industry is labor intensive. The Group’s operations could be adversely affected in the event that the Group were not to reach agreement with any labor union representing the Group’s employees or by an agreement with a labor union representing the Group’s employees that contains terms that would prevent the Group from competing effectively with other airlines. As in most labor intensive industries, strikes, work stoppages and other organized labor activities could also have significant adverse effects on operating and financial results.

Pensions

The Group operates two main defined benefit pension schemes in the UK, the Airways Pension Scheme (“APS”) and the New Airways Pension Scheme (“NAPS”). Both are now closed to new members.

Under current UK GAAP and applicable UK pension law, actuarial valuations of the schemes are required to be carried out every three years – these determine the assumptions to be used in valuing the scheme assets and liabilities together with the contributions to be made and the expense to be recorded in the profit and loss account. At the date of the actuarial valuation the market value 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. The actuary determined that annual contributions of £26 million for APS were required from November, 2003. For NAPS, contributions increased by £107 million per year, with effect from January, 2004 plus Retail Price Index inflation in future years. The Group has continued to account for pensions in accordance with SSAP 24. On an FRS17 basis the net pension liability for APS and NAPS together as at March 31, 2004 was £1,067 million (2003: £1,037 million). British Airways remains committed to its existing pension schemes but the funding increases present a substantial additional cost burden. The Company and its unions have engaged in discussions regarding the deficit.

Operational and IT Risks

The Group’s operations, including its ability to deliver customer service, are dependent on the effective operation of its equipment, including its aircraft, maintenance systems and reservation systems, and the commitment of its personnel. BA’s operations are also dependent on the effective operation of the UK National Air Traffic Control Service (NATS), BAA plc and other airport authorities worldwide, and the air traffic control infrastructure in the markets in which the Group operates. Equipment failures, personnel shortages, air traffic control problems, and other factors that could interrupt operations could adversely affect the Group’s operating and financial results and its reputation. The Group is also dependent on its IT systems and strategic suppliers such as Amadeus for the performance of its reservations and other critical systems. The Company’s systems

often suffer attacks from hackers and viruses. Failure of these systems or suppliers could have an adverse impact on the Group’s operating and financial results and its reputation.

Uncertainty in International Operations

A substantial portion of the Group’s business is international. In addition to the effects of, among other factors, terrorism, hostilities and health scares, the Group’s current international activities and prospects could be adversely affected by factors such as reversals or delays in the opening of foreign markets, exchange controls, currency and political risks, tax and changes in international government regulation of the Group’s operations. For further discussion of the foreign currency risks the Group faces, see “Item 5 — Operating and Financial Review and Prospects — Other Matters — Foreign currency risk” and “Item 11 —Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk”.

Franchise Operations

Franchisees are subject to similar operational risks, terrorist and other threats and uncertainty in their operations internationally as described above. Any such events, which have an adverse impact on one of the Company’s franchisees, could also have an adverse impact on the Company. The safety and security of franchise operations are reviewed as appropriate, though the Company can give no absolute assurance in this regard.

Seasonal and Other 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.

Environmental Matters

The Group’s operations are covered by a wide range of environmental regulations at local, national and international levels. These regulations cover, among other things, emissions to the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other activities incidental to the Group’s business. Future operations and financial results may vary as a result of such regulations. Compliance with these regulations is costly and new regulations could increase the Group’s cost base and adversely affect its operating and financial results. In addition, failure to comply with these regulations could adversely affect the Group in a variety of ways, including adverse effects to the Group’s reputation.

Limitations on Foreign Ownership

The Company’s Articles of Association provide the board of directors of the Company the authority to limit the right of non-UK persons and the rights of non-European Economic Area (“EEA”) persons to hold or exercise votes in relation to Ordinary Shares of the Company (or ADS in respect thereof) in circumstances where not limiting such holding or voting rights would adversely affect the Group’s current or future operating rights. Non-EEA persons mean persons or entities that are not nationals of a State in the EEA (comprising all the countries of the European Union and of the European Free Trade Area) (“non-EEA”).

At the Company’s 2002 Annual General Meeting, a special voting share (the “Special Share”) was introduced into the capital of the Company. This Special Share has no economic value and is held by a special purpose subsidiary of The Law Debenture Trust p.l.c.. The sole function of this arrangement is to protect further the Company’s operating rights by ensuring that the votes cast by the UK shareholders of the Company, taken as a whole, represent a majority.

The UK government is currently considering the extent to which the EU’s Takeover Directive will be introduced into UK law, the operation of which could have an adverse effect on the operation of the Special Share.

Accordingly, non-UK and non-EEA persons who hold Ordinary Shares (or ADS in respect thereof) are subject to the risk that their rights in respect of the Ordinary Shares may be limited. For more information, see “Item 10 — Additional Information — Memorandum and Articles of Association — Limitations on Voting and Shareholding”.

Item 4 — Information on the Company

Introduction

British Airways is one of the world’s leading scheduled international passenger airlines. Its main activity is the operation of international and domestic scheduled passenger airline services. 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 154 destinations in 75 countries at March 31, 2004. In fiscal 2004, the Group carried more than 36 million passengers on its services.

British Airways Plc 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 organized 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.

Strategic Developments and Investments

Background

In 2001, 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.

Future Size and Shape

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 program, known as FSAS, signaled a significant change in the size of the Company and took further steps to restructure its cost base over the two years to March 31, 2004.

The FSAS program 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.

Cost Reduction

Cost reduction targets were exceeded for all the FSAS programs – manpower costs, distribution, procurement and information technology.

In addition to the cost programs, targets were also set and achieved for manpower, capital spend and disposals.

Restructuring of the Shorthaul Business

The FSAS program outlined further significant changes 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 and are now substantially complete. As part of the drive to reduce global distribution costs, payments to travel agents in the UK for shorthaul bookings have been reduced and BA’s lowest available fares are now available on its website. The website, www.ba.com, was significantly changed and usage has increased significantly with approximately 50% of shorthaul non-premium point-to-point bookings now made online.

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 profitable markets. Through increased aircraft utilization and network restructuring fleet numbers have steadily decreased. In fiscal 2004 the number of aircraft in service was reduced by 39 to 291, of which 16 related to the disposal of the Company’s German subsidiary, dba, and five related to the retirement of its fleet of Concorde aircraft during the year. The decision to retire Concorde was made for commercial and operational reasons with passenger revenue falling steadily against a backdrop of rising maintenance costs for the aircraft.

The Company’s overhaul of its wide-bodied aircraft is complete. Currently the Group has no further orders for wide-bodied aircraft. In shorthaul, three Airbus A320 aircraft were delivered during the year, replacing Boeing 737 aircraft. During the year the Group rationalized its turboprop operations, reducing from a fleet of 28 aircraft of three different types to a fleet of ten aircraft of a single type.

BA has confirmed future deliveries for three Airbus A319s, three A320s and ten A321s; of these, six A321s will be delivered in fiscal 2005.

See “Item 4 – Information on the Company – Airline Fleet”.

Gatwick Operations

In December, 2000 our plan to ‘de-hub’ Gatwick was announced. As a result of the changes and simplification introduced, the number of seats flying out of Gatwick by March, 2004 has halved since 1999. The Company now operates a fleet of 44 aircraft from Gatwick compared to 68 in 1999.

Simplification

Simplification of the business was a core principal of the FSAS program. It remains a key priority for the Company. While much progress has been made in the areas of fleet, IT, executive club and engineering inventory, to give a few examples, more work needs to be done to make the business less complex for both our customers and our staff.

Current Initiatives

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 two further cost saving programs. 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. As expected, this program was approximately 50% complete by March, 2004. The second program aims to remove £300 million of employee costs across the business by March, 2006. The delivery of these measures remains crucial to the delivery of the Company’s stated target of achieving a 10% operating margin through the business cycle.

British Airways CitiExpress

The Company continues to simplify and strengthen its UK regional operation. British Airways CitiExpress, the wholly owned regional airline subsidiary, operates regional domestic and European services from 13 airports across the British Isles. The airline carries approximately 4.1 million passengers a year on 64 routes with a fleet of 59 aircraft (down from 92 in 2001). In December 2003, British Airways CitiExpress announced its Business Plan targets, including further cost reductions by fiscal 2006.

Alliance Benefits

American Airlines

In November, 2002, BA and American Airlines (“American”) concluded a codeshare agreement for points behind and beyond the US gateways and Heathrow, respectively. This agreement was filed with the US Department of Transportation and approved in a final order issued on May 30, 2003. Implementation was completed in Autumn 2003 and resulted in a roll-out across the two networks. BA now places its code on 104 American routes. At the same time, American applies its code to 68 BA routes across 34 countries. BA and AA have been unable to secure US antitrust and EU competition law immunity to further the extent of their co-operation through the oneworld alliance while certain US and EU based airlines in other alliances have received limited immunity.

oneworld

oneworld was launched in February 1999 and includes eight members: Aer Lingus, American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Lan Chile and Qantas. The benefits of oneworld include: greater rewards and recognition for frequent flyers (for example, earning and redeeming miles on all airlines, access to all lounges in the member network), people from each of the airlines supporting the passengers of any of the member airlines, flexible round the world travel products and smoother transfers between carriers.

Qantas

The BA/Qantas partnership is now entering its eleventh year. Initial approval from the Australian Trade Practices Commission for operation of joint services on the “Kangaroo Routes” (routes between Europe and Australia) expired in May 2000. BA and Qantas received approval from the Australian Competition & Consumer Commission (“ACCC”) to continue the agreement for a further three years until July 21, 2003 and to expand the route group over which the two carriers can co-operate to include the worldwide networks of both airlines. An application has been made to the ACCC to continue joint operations under the Joint Services Agreement beyond July 21, 2003. Interim approval has been received, which allows the parties to continue uninterrupted co-operation until the ACCC reaches a final determination. Application has also been made to the UK Office of Fair Trading and the EU competition authorities.

Iberia

Following the acquisition of a 9% stake in Iberia in March, 2000, various commercial codeshare arrangements were put in place. Further routes were added on three separate occasions during fiscal 2003 and codesharing has been extended to include routes operated by BA franchise partner GB Airways. All routes between London and Spain operated by BA, GB Airways and Iberia (IB) now carry the BA and IB flight designator codes.

In July 2002, BA, GB Airways and Iberia notified their co-operation agreement under EU competition rules. The carriers now co-operate in many areas, including codeshare on parallel routes, joint selling and schedule co-ordination.

Cathay Pacific

During February 2003, codeshare arrangements were implemented with Cathay Pacific on services between Hong Kong and Seoul. Cathay Pacific has also placed its code on selected BA services between London and Copenhagen and Lisbon.

dba (formerly Deutsche BA)

The sale of dba, which was a wholly-owned subsidiary of BA, was completed on June 30, 2003. The entire share capital of dba was sold to Intro Verwaltungesellschaft mbH (“Intro GmbH”), a German aviation consultancy and investment company for €1. As part of the transaction, the Group invested £25 million in dba and agreed to guarantee lease payments in respect of dba’s fleet of 16 aircraft for one year, at a cost of £2 million per month. In exchange, the Group will receive 25% of any dba profits, or 25% of any profit on disposal of dba, to June 2006, up to a maximum of £300 million.

Franchise Partnerships

As at March 31, 2004, the Group had a total of six franchise partners providing feeder traffic onto the BA network of services. See “Marketing and Sales – Franchising” below.

SN Brussels Airlines

BA entered into an alliance relationship with SN Brussels Airlines in July, 2002. As part of the agreement, codesharing was introduced between London and Brussels in October, 2002. Extensive codesharing between UK regional points and Brussels continues between the Group’s wholly owned subsidiary British Airways CitiExpress and SN Brussels.

In July, 2002, BA and SN Brussels Airlines notified their co-operation under EU competition rules. The carriers’ request to co-operate in many areas, including codeshare on parallel routes, joint selling and schedule co-ordination, was subsequently approved for a period of six years.

America West

BA expanded the number of routes in the America West network to which it applies its code. A further nine points were added in November, 2003, bringing the total number carrying the BA code to 21.

Swiss International Air Lines

A commercial agreement with Swiss International Air Lines was concluded in September, 2003, involving the transfer of eight slot pairs to BA and codesharing on the Heathrow Geneva route. A proposal that Swiss would merge its frequent flyer program into the BA Executive Club and go on to join oneworld was rejected by Swiss on June 21, 2004.

Segmental Information

BA’s principal activities are the operation of international and domestic scheduled air services for the carriage of passengers and cargo. BA’s main business is the provision of scheduled passenger services, which accounted for approximately 85% of Group turnover in the year ended March 31, 2004.

The Group also provides other services to outside parties, such as aircraft maintenance. In addition, the Group’s operations include certain ancillary airline activities. See “Ancillary Airline Activities” below.

The following table sets out the Group’s turnover by business activity:

	Year ended March 31

	2004		2004		2003		2002

	(in millions)
	$		£		£		£
Traffic revenue
Passenger revenue		11,941		6,490		6,590		7,088
Cargo		852		463		484		483

		12,793		6,953		7,074		7,571
Other revenue (including aircraft maintenance, package holidays and other airline services)		1,117		607		614		769

		13,910		7,560		7,688		8,340

Geographical Analysis

The following table sets out the Group’s results by geographical area.

	Year ended March 31

	2004			2004			2003			2002

	(in millions)
	$			£			£			£

Turnover by area of original sale(1)
UK		6,865			3,731			3,634			4,101
Continental Europe		2,225			1,209			1,269			1,301

Europe		9,090			4,940			4,903			5,402
The Americas		2,478			1,347			1,482			1,549
Africa, Middle East and Indian sub-continent		1,319			717			733			789
Far East and Australasia		1,023			556			570			600

		13,910			7,560			7,688			8,340

Turnover by area of destination(2)
UK		1,222			664			725			863
Continental Europe		3,634			1,975			2,113			2,345

Europe		4,856			2,639			2,838			3,208
The Americas		5,091			2,767			2,763			2,863
Africa, Middle East and Indian sub-continent		2,305			1,253			1,201			1,262
Far East and Australasia		1,658			901			886			1,007

		13,910			7,560			7,688			8,340

Operating profit/(loss) by area of destination(3)
Europe		(110	)		(60	)		(117	)		(244	)
The Americas		541			294			223			144
Africa, Middle East and Indian sub-continent		386			210			168			91
Far East and Australasia		(72	)		(39	)		21			(101	)

		745			405			295			(110	)

(1)	Turnover by area of original sale is derived by allocating revenue to the area in which the sale was made.

(2)	Turnover from domestic services within the UK is attributed to the UK. Traffic revenue from inbound and outbound services between the UK and overseas points is attributed to the geographical area in which the relevant overseas point lies. Other revenue from the sale of package holidays is attributed to the geographical area in which the holiday is taken, while revenue from aircraft maintenance and other miscellaneous services is attributed on the basis of customer residence.

(3)	Operating profit resulting from turnover generated in each geographical area according to origin of sale is not disclosed as it is neither practical nor meaningful to allocate the Group’s operating expenditure on this basis.

See “Item 5 — Operating and Financial Review and Prospects — Year By Year Analysis — Year ended March 31, 2004 compared with year ended March 31, 2003 – Geographical Analysis” and “Item 5 – Operating and Financial Review and Prospects – Year By Year Analysis – Year ended March 31, 2003 compared with year ended March 31, 2002 - Geographical Analysis.”

Route Network

BA’s scheduled route network forms the basis of its business and is one of the world’s most extensive. As of March, 2004, BA (including subsidiary carrier British Airways CitiExpress) served some 154 destinations in 75 countries. Including codesharing and franchise arrangements, flights with BA codes served some 337 destinations in 107 countries. Adding the services of BA’s alliance partners, the global network served some 551 destinations in 131 countries.

During the year ended March 2004, BA introduced services to Algiers, Bari, Dubrovnik and Turin and reintroduced services to Islamabad. Services to Bremen, Guernsey, Lilongwe, Liverpool, Newquay, Plymouth, San Diego and Zagreb were discontinued.

A major new codesharing agreement with American commenced during September, 2003 which involves BA codesharing on 104 American routes in the Americas, adding 72 new destinations to the BA marketed network. American has placed its code on 68 BA routes in Europe, Africa and the Middle East.

Airline Fleet

Details of the Group’s fleet at March 31, 2004 are set out below:

	Number in service with Group companies at March 31, 2004

	On balance sheet aircraft		Off balance sheet aircraft		Total		Future deliveries		Options		2003-04 revenue hours flown		Average hours per aircraft/ day		Average age (years)

Airline operations (1)
Concorde (2)												1,579		1.53
Boeing 747-400 (3)		57				57						264,486		12.68		9.8
Boeing 777		41		2		43						192,037		12.20		5.3
Boeing 767-300 (4)		21				21						69,067		9.60		11.1
Boeing 757-200		13				13						34,003		7.15		9.5
Airbus A319 (5)		21		12		33		3		51		100,461		8.32		3.4
Airbus A320		9		18		27		3				77,320		8.00		6.7
Airbus A321								10
Boeing 737-300 (6)				5		5						14,271		7.80		14.7
Boeing 737-400 (7)		19		4		23						70,988		7.51		11.6
Boeing 737-500				10		10						28,012		7.65		11.7
Turboprops (8)				10		10						39,893		4.62		8.0
Embraer RJ145		16		12		28				17		73,988		7.22		4.0
Avro RJ100				16		16						41,471		7.06		4.0
BAe 146		5				5						12,557		6.86		17.6
Hired aircraft												15,744

Group total		202		89		291		16		68		1,035,877		9.21		7.7

(1)	Includes those operated by British Airways Plc and British Airways CitiExpress Limited.

(2)	The Concorde fleet was retired from service on October 24, 2003.

(3)	Includes the return to service of one Boeing 747-400 aircraft previously sub-leased to Qantas.

(4)	Includes one Boeing 767-300 aircraft temporarily stood down at year end but returned to service on April 30, 2004.

(5)	Certain future deliveries and options include reserved delivery positions and may be taken as any A320 family aircraft.

(6)	Excludes 16 Boeing 737-300s disposed of with dba (formerly Deutsche BA) and associated utilization data.

(7)	Excludes 4 Boeing 737-400s stood down pending return to lessor.

(8)	Comprises 10 de Havilland Canada DHC-8s. Excludes 5 British Aerospace ATPs stood down pending return to lessor and 3 British Aerospace ATPs sub-leased to Loganair. Excludes 12 Jetstream 41s sub-leased to Eastern Airways.

In the five-year period ended March 31, 2004, 61 new (British Airways Plc, British Airways CitiExpress) aircraft were purchased or acquired under finance leases representing a total capital investment of approximately $3,719 million. 36 new aircraft with an initial purchase price to the lessors of approximately $855 million were obtained under operating leases, and a further 10 used aircraft, with an approximate market value of $320 million, were obtained under short-term operating leases. In the same period, 135 aircraft were disposed of from the BA fleet.

Future Fleet Commitments

During fiscal 2004, BA 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.

BA has confirmed future deliveries for three Airbus A319s, three Airbus A320s and ten Airbus A321s. BA also has 51 option positions / purchase rights on the Airbus family and British Airways CitiExpress has 17 option positions for Embraer RJ145 aircraft.

Aircraft fleet

The number of Group aircraft in service at March 31, 2004 was 291, a reduction of 39 on the prior year. Aircraft returns to lessors comprised five British Aerospace ATP and five ATR72 aircraft. In addition, a further five ATP and four Boeing 737-400 aircraft were stood-down pending return to lessors. The five remaining Concorde aircraft were retired from service in October 2003 and 16 Boeing 737-300 aircraft were disposed of as part of the dba sale in June, 2003. In addition, British Airways CitiExpress sub-leased three ATP aircraft to Loganair. Deliveries comprised three Airbus A320 aircraft whilst one Boeing 747-400 aircraft was returned to service having been previously sub-leased to Qantas.

Financing

A total of three new aircraft were delivered during the year ended March 31, 2004. These were all financed on balance sheet through US Dollar denominated cross border finance leases.

In addition the Company entered into a total of seven sale and leaseback transactions relating to owned aircraft. Of these, five related to the Company’s older A320 aircraft and were carried out to give effect to the Company’s decision to retire these aircraft at the end of the five-year lease period. The other two sale and leaseback transactions were of two newer Boeing 777-200 for a period of ten years and were carried out as part of the Company’s management of its residual exposure to this fleet type.

As at March 31, 2004, the Company had cash and deposits, which in total amounted to £1,670 million. In addition, the Company had undrawn long-term committed aircraft and general financing facilities totaling approximately US$761 million, a committed short-term unsecured revolving credit facility of US$100 million and undrawn money market lines totaling £46 million.

The committed long-term facilities of US$761 million consist of US$421 million, which may be drawn against future aircraft deliveries and US$340 million, which are for general purposes.

The Company believes that its cash and long-term deposits, together with the facilities which are available to be drawn for aircraft deliveries will be more than sufficient to cover its aircraft purchase commitments.

Cash generation during the fiscal year allowed the Company to accelerate debt repayments of £344 million during the year.

Capital Expenditures

See “Item 5 – Operating and Financial Review and Prospects –Year by Year Analysis – Year ended
March 31, 2004 compared with year ended March 31, 2003 – Capital expenditures” and “Item 5 – Operating Financial Review and Prospects – Year by Year Analysis – Year ended March 31, 2003 compared with year ended March 31, 2002 – Capital expenditure”.

Operations

Operational Centers

Heathrow is BA’s principal base, and BA carries an estimated 38% of the airport’s passengers. In addition, BA has a second base of operations at Gatwick. The construction of a fifth passenger terminal (‘Terminal 5’) at Heathrow has commenced and BA expects to consolidate its operations into Terminal 5, in 2008. The strategy at Gatwick is now focused towards direct (point-to-point) business. As a result, BA has significantly reduced longhaul destinations at Gatwick, cancelled certain unprofitable routes and moved others to Heathrow. As at May 31, 2004, BA served 12 longhaul destinations from Gatwick, compared to a peak of 48 destinations served in

1999. UK airport policy is discussed below under “Item 4 — Information on the Company — Regulation — UK and International Airport Policy”.

Offices, maintenance hangars and other support facilities used by BA 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, BA occupies space and desks under lease or license in other airports throughout the UK including (but not limited to) Manchester, Birmingham, Newcastle, Edinburgh and Glasgow.

BA’s most important overseas base is at New York’s John F. Kennedy International Airport (“JFK”), where it leases its terminal building. At other overseas airports, BA generally obtains premises as required on a short-term basis from the relevant authorities.

Details of BA’s principal non-aircraft properties are given under “Item 4 — Information on the Company — Property, Plant and Equipment”.

Operational Services

In the UK, BA itself provides most of the operational services it requires for the handling of passengers and cargo. At overseas airports, BA 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.

BA’s ability to obtain slots at airports for the purpose of producing schedules attractive to passengers is very important. Allocation of slots at a significant number of airports where BA operates, including Heathrow and Gatwick, is decided by the Airport Coordinator, who acts in accordance with guidelines laid down by the International Air Transport Association (“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 Coordinator makes the initial slot allocations within IATA guidelines, which give priority to the historic rights of existing users. Pursuant to Council Regulation (EC) No. 95/93, which is implemented in accordance with UK regulations, the UK government must ensure the Airport Coordinator advises BA at the biannual IATA Schedule Co-ordination Conference of their slot allocations. These provide the basis for slot negotiations with the Airport Coordinator 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 Coordinator acts independently and in a non-discriminatory manner. This regulation remains under review by the European Commission and a revised regulation is expected in the future. 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 non-discriminatory manner.

Fuel

BA obtains aviation fuel, which is priced entirely in US Dollars, from a number of sources and locations throughout its network. In most countries, aviation fuel is supplied under term contracts, generally with major oil companies. Most fuel is purchased from suppliers under contracts, which have a duration of one or two years. Prices under these contracts are determined either by formulae applicable for the duration of the contract or are subject to review by the parties in light of market conditions. If agreement on a price adjustment is not reached, the contracts can normally be terminated. BA also enters into forward contracts and other hedging arrangements in an attempt to counter fluctuations in the price of jet fuel. See “Item 11 — Quantitative and Qualitative Disclosures about Market Risk – Fuel Risk”. In the US, BA is a member of a number of consortia that own or lease fuel distribution facilities at certain airports so that aviation fuel may be purchased from a wide range of suppliers. In both the UK and the US, BA also buys aviation fuel in the spot market and in the futures market. In certain countries, aviation fuel is only obtainable through government sources.

Aircraft Maintenance

The Group’s engineering and maintenance facilities are centered at Heathrow, Gatwick, Glasgow and at three facilities in South Wales: the Boeing 747 maintenance facility at Cardiff Airport, an avionics repair operation in Llantrisant and an aircraft seat and interior repair operation at Blackwood. In addition, maintenance capability exists at most airports served by BA.

The engineering department is a cost center within the Group and approximately 90% of its airframe maintenance capacity is dedicated to maintaining BA aircraft. In addition to supporting BA’s needs, the engineering department pursues third party business with respect to certain maintenance services.

Marketing and Sales

Longhaul Products

On longhaul services, BA has a portfolio of four cabins to suit the needs of different customers: First, Club World with its space-efficient flat beds, World Traveller Plus, which offers more space and legroom for premium economy customers and World Traveller, the standard economy cabin.

During fiscal 2004, BA continued to roll out its Club World flat bed, the new World Traveller Plus cabin and the refurbishment of First. By March 31, 2004, 88% of the longhaul fleet was fully embodied with new products in every cabin, including all of the Heathrow 747 and 777 fleets. These investments have helped BA to maintain market share in a severely depressed business travel market.

Shorthaul Products

On shorthaul services BA provides a choice of two cabins: Club Europe, its business class cabin and Eurotraveller, its economy cabin. On UK domestic services only one cabin is available.

Pricing and inventory management strategies for economy fares were refined on European and UK domestic routes during the year, supported by value advertising campaigns to enable us to compete vigorously with no frills competitors. Further improvements to our website booking engine were also implemented, including the acceptance of debit cards for payment. As a result, market share on these routes has stabilized against aggressive growth by competitors.

The overall European business class market has remained severely depressed but the investment in an improved product in fiscal 2001 has continued to help defend Club Europe market share through fiscal 2004 against other full service carrier competition.

Updated and relocated self-service check-in kiosks have ensured increased usage by customers and helped them move more quickly and efficiently through the airport. In March, 2004,17% of all customers checking-in at self-service European and UK airports used such a kiosk, being almost double the rate of the prior year.

As part of BA’s FSAS program, BA improved the cost efficiency of all of its products and services with the objective of minimizing delivery costs while maintaining quality standards. This was achieved successfully while maintaining or in some cases increasing customer satisfaction scores.

Concorde

Due to the severe economic downturn and the view of Airbus that technical support for Concorde was no longer economically viable, Concorde was retired from service in October, 2003.

Executive Club

The Executive Club is BA’s worldwide customer loyalty program for recognizing, retaining and communicating with our most valuable customers. For people who travel frequently, the Executive Club seeks to provide an exceptional level of service, preferential treatment, enhanced travel related benefits, as well as mileage awards on eligible fares.

As part of the FSAS program, work took place to simplify the Executive Club from five regional programs to a single global program. This improved customer understanding will make it easier and less costly to develop in the future. It is also more cost efficient to run. This was launched to customers in March, 2003 and went live on July 1, 2003.

Sales

British Airways has built and maintains relationships with all its key customer groups around the world (both in countries where it flies as well as selected other countries). This includes large corporations, small and medium sized enterprises, governments, tour operators, individual customers, etc. Relationships are also maintained with business and leisure travel agents and the computer reservation systems and the credit card

companies. In addition, BA itself operates contactBA call centers around the world, airport ticket desks, BA Travel Shops and our on-line booking channel, ba.com.

Franchising

As at March 31, 2004, BA had six franchise partner airlines: Loganair, GB Airways, British Mediterranean Airways, Sun Air of Scandinavia, Comair of South Africa and Regional Air of Kenya.

During the year, Maersk Air UK ceased to be a BA franchise.

These six carriers carried approximately 3.86 million passengers during the fiscal year to 84 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 BA’s mainline services, the franchisees pay a franchise fee and pay for any services provided to them by British Airways.

Computer Systems

IT and telecommunications systems are vital to the running of the Group’s business. Most areas of BA’s business are facilitated by IT systems, which are closely interconnected.

Many of these systems have been developed, and most of them integrated, by BA’s Information Management (IM) department. The majority of systems are operated within BA’s two data centre facilities at Heathrow. Major exceptions to this are Reservations, Departure Control (check-in), 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 BA by third party suppliers:

	•	The wide-area data network – provided by SITA and some other telecommunications
	•	The campus network in London – provided by Omnetica Limited
	•	Desktop, provision and support – provided by Specialist Computer Centres (SCC)

Over the last year a core element of the IT strategy has been supporting simplification of the airline’s business processes through IT. We have achieved this through a number of initiatives including the customer enabled BA (ceBA) program. The vision of this program is to make BA so easy a company to do business with that customers can choose to serve themselves. The same principles are being applied internally for our employees through our employee self-service program.

Over the last year we have increased the capability and functionality of ba.com. In July, 2003 we made the core Executive Club transactions available online and, with the introduction of “manage my booking”, we have introduced the ability for our customers to request a seat and, in many countries, offer our customers the opportunity to check in at home and then pick up their boarding pass at the airport. In certain trial cities customers can also print their boarding pass at home.

Another important element has been the use of e-ticket and the introduction of upgraded self-service kiosks at key airports around the world. The airline has now installed over 200 kiosks in airports such as Heathrow, New York JFK and Paris Charles De Gaulle. E-ticket continues in its growth. By July 1, 2004 e-tickets were being issued on approximately 60% of all BA tickets worldwide, approximately 85% of all journeys are eligible for e-ticket.

Simplifying the way our employees do their business within BA is as important as how our customers do business with us. We have developed a self-service portal, as part of our business plan to reduce our paper based processes. For example, we are replacing payslips with online forms. 85% of staff go online from the workplace or home for a variety of functions including updating personal records, booking training courses, logging faults, asking questions and procurement.

Within BA we have substantially completed a desktop computer refresh program, which has improved speed and reliability. This has resulted in substantial savings by standardizing hardware and software utilized at BA locations around the world. We also achieved savings by reducing the number of laptops by a quarter. The replacement of legacy networks with simpler, internet-based networks has also reduced maintenance support costs. Other improvements introduced include the provision of standardized, licensed software packages with upgrades performed remotely out of office hours. Another key element of this program is that the new desktop PCs also have improved security.

IT security and control has been an increasing area of management focus over the last two years and the IM department is working closely with BA’s Internal Control department to protect BA’s systems, processes
and data.

Cargo

BA’s cargo business is operated as a contribution center. 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 maximize the use of its scheduled route network to provide a worldwide cargo service. In Europe, the Group utilizes trucks to feed cargo from continental Europe to BA’s Heathrow and Gatwick based intercontinental services.

Ancillary Airline Activities

Other Services

The Group provides a variety of services to other airlines. The most important of these are cargo handling at airports, airframe maintenance, computer and communications services and consultancy services.

Eurostar

In 1999, BA took a 10% equity stake in Inter-Capital & Regional Rail Limited (“ICRRL”), a consortium company jointly held with National Express Group plc along with the French and Belgian railway companies, SNCF and SNCB, which was selected by the UK government to manage Eurostar UK Ltd (“EUKL”). EUKL is responsible for operating Eurostar trains between London, Lille, Paris and Brussels. The contract expiry date is December 31, 2010.

Under the terms of the contract with EUKL, ICRRL receives an annual management fee and is subject to a mechanism allowing it to share in the upside or downside of EUKL’s performance by reference to a pre-determined forecast. In February 2004, ICRRL shareholders were required to contribute additional funding to the company to enable it to satisfy its obligations under the performance mechanism for its year ended December 31, 2003. BA’s share of this funding requirement was £968,000. In February 2003, BA’s share of the funding requirement was £1,030,000.

Seasonal Variations

See “Item 3 — Key Information — Risk Factors — Seasonal and Other Variations.”

Health Concerns: Occupational Health Service

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 travelers 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 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.

BA maintains an occupational 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 such as the SARS virus.

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 Civil Aviation Authority (“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 specialized 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 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.

Route Flying Rights

BA’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 likely to change over time 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, an airline 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 a designated airline 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, BA’s Memorandum and Articles of Association (the “Articles”) contain provisions that may limit the rights of Non-UK and Non-European nationals who own shares in the Company. For more information, see “Item 10 — Additional Information — Memorandum and Articles of Association — Limitations on Voting and Shareholding”.

The Council of the EU decided on June 5, 2003 to begin the process of transferring responsibility for third country relations in air transport to the European Commission. The first major manifestations of this are a mandate from the Council to the Commission to negotiate a liberal agreement with the US on behalf of all EU Member States and a general framework covering all other third country relationships and the processes whereby Member States may continue to negotiate bilaterally with them whilst remaining within EU law as clarified by the Judgment of the European Court of Justice of November, 2002. This judgment made it clear that Member States could no longer negotiate bilaterally with third countries on any subject which is covered by EU law. These include ownership and control of airlines, pricing on intra-community routes and rules concerning computer reservation systems.

The European Commission has been in active negotiations with the US government to agree the terms of a new multilateral agreement covering air services between the whole EU and the US. So far, it has not proved possible to conclude a balanced deal, but both sides are determined to reach such an agreement, making the prospect of doing so a high probability. However, the timing and content of the new agreement cannot be predicted. A new agreement is likely to affect BA’s position on North Atlantic markets.

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 (“EFTA”) except Switzerland.

Agreement has been reached between Switzerland and the EU which has the effect of bringing Switzerland into the same arrangements.

Enlargement of the EU in May 2004 extended the scope of the single market to the ten new Member States, effectively eliminating previous competitive restrictions contained in the bilateral air service agreements between these countries and EU States. As a result, new services are being launched, especially by no-frills airlines looking for growth opportunities.

Under the UK Civil Aviation Act 1982, the CAA must balance a number of objectives in making air transport or route licensing 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 services. The absence of the necessary bilateral rights will not result in refusal to grant a license 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 judgments, subject only to the application of normal competition policy.

Specific route licenses 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.

Fare Setting

It is a provision of most 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. 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. Under some air services agreements, airlines are required to co-ordinate fares through IATA, (whose role in setting fares is described under “Item 4 — Information on the Company — 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 practice among airlines to sell a substantial proportion of their seats and cargo space in many parts of the world at tariffs lower than the approved levels or on other unapproved special terms. BA is no exception. See “Item 4 — Information on the Company — Competition” below. 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 harmonize their safety requirements through the Joint Aviation Authorities (“JAA”) and non-binding Joint Aviation Requirements (“JARs”). Certification of compliance by the state of registry is normally recognized 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 Aviation Safety Agency (“ASA”) 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 CAA air operator’s certificate confirming the competence of the holder to operate and maintain its aircraft safely. Each aircraft operated under an air operator’s certificate may only be flown if it has a certificate of airworthiness confirming compliance with the EU regulations. The aircraft’s engines, equipment and all maintenance procedures must also be certificated, and 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 and flight 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, Security and Risk Management. A formal safety management system is in place, and a comprehensive monitoring system exists within BA 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 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 programs which place an onus on BA to meet specified security standards. BA’s own security department continuously assesses the threat to its operations, develops policies for the protection of BA’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 different 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. BA has introduced passenger disclosure arrangements as required by the US. 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 came into effect via an EU regulation affecting all airlines registered in the EU, on June 28, 2004. The main practical effect of this is to increase the baggage claim limit for loss, delay or damage to bags.

New EU denied boarding compensation rules are due to come into force in February 2005 which extend compensation to cancelled as well as delayed flights and which impose passenger care requirements for long delays and cancelled flights.

Domestic US disabled passenger legislation has been extended to foreign airlines. The EU is also developing regulations for disabled passengers and these are expected to be published later in 2004. It is not yet clear whether these will be consistent with US requirements.

Environmental Regulation and Noise

BA’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 atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other relevant parameters. The Group’s strategy takes compliance as the baseline of environmental performance and aims to exceed standards and regulations.

The BA fleet meets existing noise standards and is subject to departure noise and night flight restrictions. The current night noise restrictions expire at the end of the Summer 2005 season. The Government will shortly consult on a new regime to operate from 2005 through 2010. As with the current regime, this is expected to impose significant operating restrictions between the hours of 2300 and 0700 at BA’s main bases at Heathrow

and Gatwick. Any major changes to current arrangements are subject to a consultation process and must meet the requirements of an EU operating restrictions regulation designed to ensure that noise restrictions are balanced and well targeted. The Group is proactively involved in other efforts to mitigate the effect of aircraft noise, including measures to reduce noise on approach to airports.

The Group is playing an active role in development of the understanding of the effects of aircraft emissions to the atmosphere. This has included involvement in the work of the Intergovernmental Panel on Climate Change, co-operating with research programs and promoting discussion of possible ways in which to control emissions of greenhouse gases. The Group is involved in work within ICAO aimed at developing mechanisms to control and mitigate the effect of aircraft engine exhaust emissions. BA is also a member of the UK emissions trading scheme and supports the inclusion of aviation in the EU emissions trading scheme.

Social and Environmental Report

Each year, the Group publishes an environmental report that details progress with particular reference to measurement against headline indicators. In 2000, the report was extended to include both social and economic considerations. In June, 2002, BA issued a new standard for bribery and corruption and an accompanying educational primer. In March 2004, the BA Board adopted a new Code of Business Conduct and Ethics, applicable to all employees. The previous Code, adopted in 2000, will be replaced by a new Statement of Business Principles. Both the new Code of Conduct and the Statement of Business Principles will be incorporated as BA Standing Instructions, which set out policies with which all employees should comply. They will be communicated throughout the Company in summer 2004 and will be available, externally through the BA website.

UK and International Airport Policy

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 airfields 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 2014, which is likely to be the earliest date possible (subject also to securing planning permission). The costs of airport expansion must be paid for by the users of each airport through user charges, which are likely to increase over the long term to pay for growth. It was agreed that Stansted should continue to cater for its local market and should not be developed as a second hub for London.

However, leave for judicial review of the White Paper was granted recently by the UK Courts to a coalition of anti-airport expansion groups, although no date has yet been set for a hearing. If the Government were to lose the case, they would have to reconsult and might have to change their policy in some respects.

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. BA 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, BA can provide no assurance that it will be able to maintain its existing slots or obtain desired slots in the future.

Slots at UK airports are allocated under EU rules. Technical revisions will come into effect in July, 2004 and more substantive changes are expected to be proposed soon by the European Commission, following an unsuccessful earlier attempt. BA 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 UK High Court has ruled that slot exchanges in the UK are consistent with EU slot rules, we understand that the Commission has written to the UK Government contesting this.

Competition

Most of the markets in which BA operates are highly competitive. BA faces competition from other airlines on the same city-pair routes, from indirect flights, from charter 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, BA’s pricing decisions are affected by competition from other airlines, some of which have cost structures that are lower than BA’s or other competitive advantages and could therefore operate at lower fare levels.

It has been UK Government policy since at least 1984 to liberalize 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.

Since March 2000, the UK’s Competition Act has been in force. It outlaws agreements and business practices which have a damaging effect on competition in the UK. Its provisions mirror EU competition rules and can be applied to competition cases within the UK. The Enterprise Act which came into force in June, 2003 introduced a new enforcement regime that includes disqualification of directors and criminal liability for individuals for certain serious infringements of the Competition rules.

Tariff Co-ordination

Certain air services agreements require airlines to co-ordinate fares before approval by the governments concerned. IATA, the trade association for international airlines, provides a forum for tariff co-ordination on international routes by convening traffic conferences. Many international airlines take part in these conferences although, partly reflecting the increase in competition, fewer than in the past.

BA attends traffic conferences and discusses tariffs bilaterally when it is lawful to do so and tariff co-ordination is required under the relevant air services agreement or is commercially necessary.

Commercial Arrangements

BA has commercial arrangements with other airlines covering scheduled passenger and cargo services on a small number of its international routes. Some of these are necessary under the relevant air services agreement. 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.

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, BA 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. BA 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.

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 is expected to provide a better environment for industry consolidation, especially in Europe.

Organizational Structure

The business and operations of the BA Group are conducted within BA Plc and its subsidiaries. The following table sets forth the principal undertakings of the Group as at March 31, 2004:

Subsidiary undertakings	Principal activities	Country of incorporation and registration 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 Capital Ltd* (89 per cent of founders’ shares owned)	Airline finance	Jersey

British Airways Holdings Ltd*	Airline finance	Jersey
British Airways Holidays Ltd*	Package holidays	England
British Airways Maintenance Cardiff Ltd*	Aircraft maintenance	England
British Airways Regional Ltd*	Airline operations	England
British Airways Travel Shops Ltd*	Travel agency	England
CityFlyer Express Ltd*	Airline Leasing	England
British Regional Air Lines Group Plc	Holding Company	England
Speedbird Insurance Company Ltd*	Insurance	Bermuda
British Airways CitiExpress Ltd	Airline operations	England
The Plimsoll Line Ltd* (Holding Company of British Regional Air Lines Group Plc)	Holding Company	England

Quasi-Subsidiary undertaking	Principal activities	Country of incorporation and registration and principal operations

The London Eye Company Ltd* (33 per cent of equity owned)	Leisure Company	England

Associated undertakings	Percentage of equity owned	Principal activities	Country of incorporation and principal operations

Qantas Airways Ltd	18.25	Airline operations	Australia
Iberia, Lineas Aéreas de España, S.A. (‘Iberia’)	9.0	Airline operations	Spain
Comair Ltd	18.3	Airline operations	South Africa
Opodo Ltd*	19.05	Internet travel agency	England

Trade investments	Percentage of equity owned	Principal activities	Country of incorporation and principal operations

The Airline Group*	16.7	Air traffic control holding company	England
WNS (Holdings) Ltd*	16.8	Holding Company	Jersey


* Owned directly by British Airways Plc

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 “Item 4 — Information on the Company — Airline Fleet”.

Principal Properties	Description	Nature of Title	Approximate Gross Size

			(square feet)
Heathrow Airport, London
No. 1 Maintenance Area East	offices, hangars, workshops	Lease(1)	2,400,000
No. 1 Maintenance Area West	offices, hangars, workshops	Lease(1)	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 center	Lease	250,000

Waterside, Harmondsworth	combined business center	Freehold	570,000
Cranebank	technical training center	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	Lease(2)	495,000
Jubilee House	offices	Lease	130,000
Gatwick Cargo	warehouses	Lease	200,000

UK Regions
Newcastle Business Park	offices	Lease	200,000
Pioneer House, Manchester	offices	Lease	64,000
Atrium Court, Glasgow (3)	offices	Lease	90,000
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.

(2)	These leasehold interests which are held from Gatwick Airport Limited contain restrictions on the disposal and use of the properties.

(3)	Notice has been served by BA of its intent to surrender this lease during March 2005.

The BA Group also has other freehold and leasehold interests in real estate in numerous countries throughout the world, that are less significant to the Group as a whole. See Note 17 to the Financial Statements.

Item 5 — Operating and Financial Review and Prospects

Introduction

The following discussion covers the three years ended March 31, 2004 and is based on the Group’s Financial Statements prepared in accordance with UK GAAP which differ in certain respects from US GAAP. The differences between UK GAAP and US GAAP as applicable to the Group are set out in Note 45 to the Financial Statements.

Group profits before tax for the fiscal year 2004 were £230 million, against a £135 million profit in the previous year.

Operating profit in the year, at £405 million, was £110 million more than last year. The operating margin of 5.4% was 1.6 points better than last year. The improvement in operating profit reflects the continuing focus on cost reduction initiatives. All the targets of the FSAS program were delivered; manpower savings, capital expenditure, asset disposals, procurement, information technology and distribution costs.

Turnover was down 1.7% reflecting the impact of the war in Iraq, SARS and economic weakness in the first half of the year. The profit for the fourth quarter included £35 million of one-off credits relating to systems and process improvements that have enabled more accurate assessments to be made of certain balances.

Cash inflow before financing was £874 million for the twelve month period. The closing cash balance of £1,670 million was up £18 million versus last year. Net debt fell by £991 million during the year to £4,158 million - - its lowest level since December 31, 1997 - - and is down £2.4 billion from the December, 2001 peak.

Results of Operations

The following table sets out the year-over-year percentage changes in Group turnover and selected Group operating statistics (volume, capacity and yield) for the three-year period ended March 31, 2004:

	Year ended March 31

	2004			2003			2002

	(Change%)
Group operating revenue		(1.7	)		(7.8	)		(10.1	)
Group operations:
Volume (RTKs)		3.9			(2.9	)		(13.9	)
Capacity (ATKs)		2.5			(6.7	)		(9.3	)
Yield (Revenue/RTK) (1)		(5.4	)		(3.8	)		4.2

(1) Scheduled services (passenger and cargo) and non-scheduled passenger services revenue as a percentage of RTKs

Year by Year Analysis

Year ended March 31, 2004 compared with year ended March 31, 2003

Revenue

Group turnover fell in the year by 1.7% to £7,560 million in fiscal 2004. Passenger and cargo revenue (turnover from airline operations scheduled and non-scheduled services) accounted for approximately 92% of Group operating revenue. For the year, airline operations revenue fell by 1.7% to £6,953 million on a flying program 2.5% larger in ATKs.

Compared with fiscal 2003, in fiscal 2004 airline operations passenger traffic (RPKs) increased by 3%, while capacity (ASKs) was 1.5% higher. As a result passenger load factor increased by 1.1 points compared with fiscal 2003 to 73%. Passenger yield (scheduled and non-scheduled passenger revenue per RPK) declined by 4.3% for the year.

Cargo (i.e. freight and mail) volumes (CTKs) were up 6% compared with fiscal 2003 but yields fell by 9.7%. Cargo revenue was down 4.3% from £484 million to £463 million.

Other revenue fell 1.1% to £607 million.

Expenditure

Net operating expenditure (total operating expenditure less other revenue), decreased by 3.4% compared to fiscal 2003. Unit costs (net operating expenditure per ATK) were 5.7% lower than fiscal 2003.

See footnote (7) to the operating statistics in Item 3 for the calculation of total operating expenditure per RTK and per ATK.

The table below summarizes total Group operating expenditure and year on year changes in expenditure over the three financial years ended March 31, 2004:

	Year ended March 31

	2004			2003			2002			2004		2003		2002

	(% Increase / (decrease))									(£ million)
Employee costs		4			(13	)		1			2,180		2,107		2,409

Depreciation and amortization		(8	)		(5	)		8			679		734		770

Aircraft operating lease costs		(29	)		(5	)		(10	)		135		189		199

Fuel and oil costs		10			(18	)		(7	)		922		842		1,028

Engineering and other aircraft costs		(14	)		(12	)		2			511		592		673

Landing fees and en route charges		(5	)		(6	)		(5	)		549		576		615

Handling charges, catering and other operating costs		(3	)		(13	)		(15	)		934		961		1,110

Selling costs		(22	)		(14	)		(27	)		554		706		824

Accommodation, ground equipment costs and currency differences		1			(17	)		11			691		686		822

Total Group operating expenditure		(3	)		(13	)		(5	)		7,155		7,393		8,450

The operating expenditure for the year ended March 31, 2003 included a charge of £84 million relating to Concorde - - the retirement of the Concorde fleet took place on October 24, 2003

In fiscal 2004, employee costs increased by 3.5% to £2,180 million as pension, wage and National Insurance increases were only partially offset by manpower reductions and other efficiencies together with the disposal of dba. Total Manpower Equivalents (“MPEs”) at Group level were down by 3,798 (7.4%) compared with March, 2003.

Depreciation and amortization costs reduced by 7.5% compared with fiscal 2003 to £679 million reflecting primarily the £58 million prior year charge relating to the impairment of Concorde capitalized engineering modifications and rotable inventory. Increases in depreciation relating to the continuing embodiment of new products on the Boeing 777 fleet were offset by the favorable exchange impact of the weaker US Dollar.

Aircraft operating lease costs reduced by 28.6% to £135 million compared with fiscal 2003 as a result of the return to lessors of Boeing 737-300s, 737-400s and Boeing 757s, the disposal of dba (which reduced leased Boeing 737-300s by 16 aircraft), and exchange impacts. Onerous lease charges in the year were £15 million (relating to the withdrawal of the British Airways CitiExpress ATP fleet), £12 million lower than fiscal 2003 when the sub-lease of the J41 fleet resulted in a charge of £27 million.

Fuel and oil costs increased by 9.5% compared with fiscal 2003 to £922 million due to a 9.9% increase in fuel price, the unwinding of prior year hedging benefits and the impact of the increased flying schedule. These were partially offset by the favorable exchange impact of the weaker US Dollar and the disposal of dba.

Engineering and other aircraft costs reduced by 13.7% to £511 million compared with fiscal 2003, reflecting increased recoveries of insurance costs from franchisees, the disposal of dba and the impact of exchange together with the prior year charge of £26 million relating to the write-down of Concorde stock. This was partially offset by the costs of additional cargo freighter activity.

Landing fees and en route charges fell by 4.7% compared with fiscal 2003 to £549 million. This principally reflects increased recoveries of Passenger Service Charges (including those relating to transfer passengers) as well as efficiencies and the impact of the disposal of dba. These are partially offset by increases in price and the adverse exchange impact of the stronger Euro.

Handling charges, catering and other operating costs decreased by 2.8% compared with fiscal 2003 to £934 million, as a result of a reduction in subcontract costs, efficiencies across the operational areas and the impact of dba, partially offset by the costs of the unofficial industrial action in July, 2003 and costs associated with increased cargo freighter activity.

Selling and marketing costs fell by 21.5% compared with fiscal 2003 to £554 million. The impact of the restructuring of travel agent commissions and the increase in online sales (leading to savings in booking payments) were partially offset by increases in marketing costs.

Accommodation, ground equipment costs and currency differences increased by 0.7% compared with fiscal 2003 to £691 million. Reductions in information management spend, property costs and vehicle contract costs were more than offset by adverse exchange impacts of £29 million, primarily due to the impact of the weaker US Dollar on the balance sheet retranslation.

Geographical analysis

See “Item 4 – Information on the Company – Segmental Information – Geographical Analysis” and Note 3 to the Financial Statements.

With the exception of Asia Pacific, the operating result for the year improved in all regions despite the impact of the Iraq War, SARS and economic weakness at the start of the year. Asia Pacific was most affected by the impact of SARS and fuel price increases.

The short-haul result improved significantly on previous years – overall losses were halved to £60 million. However, new entrant growth on regional routes reduced British Airways CitiExpress results, triggering aggressive cost reduction initiatives. The short-haul result also included a one-off £18 million charge relating to the withdrawal of the ATP fleet.

Share of operating profit in associates

BA’s share of operating profits from associated undertakings improved by £19 million to £58 million during the year, principally due to improvement in the operating profits of Qantas.

In April 2003, Amadeus Global Travel Distribution took a 16.67% stake in Opodo. This resulted in the dilution of the Group’s shareholding from 22.86% to 19.05%, and a profit on deemed disposal of £5 million.

Profit/loss on disposal of fixed assets and investments

Losses on disposals of fixed assets and investments for fiscal 2004 were £46 million, compared to fiscal 2003 when profits of £60 million were generated from disposals of aircraft and rationalization of our property portfolio.

The losses on disposal in this financial year primarily reflect the disposal of dba on June 30, 2003 for a loss in the period of £83 million. This was partially offset by profits on the sale and leaseback of five Airbus A320 aircraft and V2500 spare engines. Other disposals during the year included the sale of a 20% holding in China Aircraft Services, the Speedwing Mobile Communications business and the sale and leaseback of two Boeing 777-200 aircraft.

Net interest payable

Net interest expense for fiscal 2004 was £200 million, £55 million lower than fiscal 2003. This included a credit relating to the revaluation of Yen debts (used to fund aircraft acquisitions) of £15 million, compared to a charge the previous year of £10 million. The revaluation -- a non-cash item required by UK GAAP-- results from the weakening of the Yen against Sterling.

Excluding the revaluation, the improvement in interest expense reflected lower rates, a higher cash balance and lower gross debt, together with exchange benefits.

Other income/charges

Other income of £13 million for fiscal 2004 primarily relates to lease transfer consent fees. This compares to a charge of £4 million in fiscal 2003.

Tax

The analysis of the tax charge is set out in Note 11 to the Financial Statements.

In fiscal 2004, as in fiscal 2003, there is no tax payable on operating results in the UK, as adjusted for taxation. During the fiscal year, the Group has remitted profits to the UK from subsidiaries and associates including those in Australia and Spain. The UK tax charge arising on such profits has been offset partially by credits for taxes paid overseas and by other loss surrenders. No tax arises on profits on disposals as such profits are covered by tax losses from current and prior periods.

Earnings per share

For the year ended March 31, 2004, profits attributable to shareholders were £130 million, equivalent to earnings of 12.1 pence per share, compared with earnings of 6.7 pence per share in the prior year.

Capital expenditure

During the three-year period ended March 31, 2004, capital expenditure and investments totaled approximately £1,527 million for the Group, principally related to the acquisition of aircraft and other equipment.

The following table summarizes Group capital expenditure in the three-year period ended March 31, 2004:

	2004		2003		2002

	(£ million)
Aircraft, spares, modifications and refurbishments (net of refund of progress payments)		154		225		739
Property and equipment (net of refund of progress payments)		67		95		121
Landing rights		14		32		12

		235		352		872
Investments		0		24		44

		235		376		916

See Notes 13, 14 and 17 to the Financial Statements.

Working capital

At March 31, 2004, net current liabilities were £231 million, up £52 million on the prior year. This change principally reflects higher creditors (£92 million) due to increased sales in advance of carriage and reductions in stock. These were partially offset by an increase in debtors, due to improved sales volumes and revenue and an £18 million increase in cash, short-term loans and deposits.

Sales in advance of carriage increased from £783 million to £859 million due to improved forward bookings.

Cash flow

Net cash inflow from operating activities totaled £1,093 million, £92 million less than last year as the improvement in operating profit was more than offset by the reduction in depreciation and the impact of working capital movements.

The net cash flow before management and liquid resources and financing was £874 million, a reduction of £357 million from last year, due to the decrease in operating cash flow and a reduction in disposal proceeds, partially offset by a reduction in capital expenditure.

Leases and other financing arrangements

The following table sets out the movements in loans and capital obligations under finance leases and hire purchase arrangements for the three-year period ended March 31, 2004 (see also note 28):

				Finance leases
				and hire			Total
	Bank and			purchase
	other loans			arrangements			2004			2003			2002


	(£ million)
Balance at April 1		1,332			5,357			6,689			7,401			7,043
New loans raised		81			—			81			13			495
Assumed from subsidiary acquired during the year		—			—			—			—			117
Non-cash refinancing		193			(225	)		(32	)		—			—
Loans, finance leases and hire purchase arrangements undertaken to finance the acquisition of aircraft and other assets		—			97			97			221			512
Repayment of amounts borrowed		(339	)		(576	)		(915	)		(797	)		(712	)
Effect of exchange rate changes		(42	)		(162	)		(204	)		(149	)		(54	)

Balance at March 31		1,225			4,491			5,716			6,689			7,401

Three A320 aircraft were delivered during the year ended March 31, 2004. The aircraft were financed on balance sheet through US Dollar denominated cross border finance leases. Five older A320 aircraft were sold and leased back for a period of five years. Two Boeing 777-200 aircraft were sold and leased back for a period of ten years. These were the first of our Boeing 777-200 aircraft to be taken off balance sheet, thereby starting to manage the Group’s residual value exposure to this aircraft fleet.

For the purposes of the Financial Statements foreign currency debt is translated into Sterling at year-end exchange rates. Gains and losses on translation are recognized in the profit and loss account except for changes in the Sterling value of US Dollar denominated debt that finances US Dollar denominated fixed assets. These gains or losses are taken to reserves, together with the differences arising on the translation of the related assets. The debt translation gain taken to reserves amounted to £169 million (2003: £139 million gain).

Net debt/total capital ratio

Net debt at March 31, 2004 amounted to £4,158 million, including convertible bonds of £112 million and net of cash and short-term loans and deposits totaling £1,670 million. This reduction of £991 million reflected the application of the operating cash flow to the net repayment of debt and exchange effects.

The net debt/total capital ratio stood at 53.8%, a 6.9 point reduction versus last year mainly due to the reduction in net debt. Including operating leases, net debt was 58.2%, a 6.4 point reduction from last year.

Share capital

The number of shares allotted, called up, and fully paid on March 31, 2004 was 1,082,845,000 (March 31, 2003: 1,082,784,000). On June 16, 2003, 11,000 ordinary shares were issued in exchange for 26,000 Convertible Capital Bonds 2005 on the basis of one ordinary share for every 2.34 Bonds held. During the year ended March 31, 2004, 50,000 shares were issued on the exercise of options under Employee Share Option schemes.

Year ended March 31, 2003 compared with year ended March 31, 2002

Revenue

Group turnover fell by 7.8% to £7,688 million in fiscal 2003. Passenger and cargo revenue (turnover from airline operations scheduled and non-scheduled services) accounted for approximately 92% of Group turnover. For the year, traffic revenue fell by 6.6% to £7,074 million on a flying program 6.7% smaller in ATKs.

Compared with fiscal 2002, in fiscal 2003 airline operations passenger traffic in RPKs declined 5.8%, while capacity in ASKs was reduced by 7.9%. Passenger load factor (RPKs/ASKs) increased by 2 points compared with fiscal 2002 to 72%. Passenger yield (scheduled and non-scheduled passenger revenue per RPK) declined by 1.3% for the full year.

Cargo (i.e. freight and mail) volumes (CTKs) were up 4.4% compared with fiscal 2002 but yields (cargo revenue per CTK) fell by 4.0%. Cargo revenue was almost flat, up 0.2% from £483 million to £484 million.

Other revenue fell 20.2% to £614 million, primarily due to a reduction in revenue from the Qantas Joint Services Agreement, as well as deterioration in third party engineering revenue.

Expenditure

Net operating expenditure (total operating expenditure less other revenue) decreased by 11.7% as compared to fiscal 2002. Unit costs (net operating expenditure per ATK) were 5.5% lower than fiscal 2002 (total Group operating expenditure was 12.5% lower than in fiscal 2002).

See footnote (7) to the operating statistics in Item 3 for the calculation of total operating expenditure per RTK and per ATK.

The operating expenditure for the year ended March 31, 2003 includes a charge of £84 million relating to the retirement of the Concorde fleet. See Note 4 to the Financial Statements and “Item 4 – Information on the Company – Marketing and Sales – Concorde”.

In fiscal 2003, employee costs fell by 13% to £2,107 million, primarily reflecting reduced staff numbers due to the FSAS program and other efficiency actions, as well as the FSAS restructuring charge of £80 million in 2002 (see Note 30 to the Financial Statements). Total Manpower Equivalents (MPEs) at Group level, were down by 4,854 at March 2003 compared with March 2002 and by 11,880 compared with August 2001. Compared with fiscal 2002, in fiscal 2003 the average number of employees in the Group, in manpower equivalents (MPE), fell by 11.6% to 53,440 and productivity (ATKs per MPE) improved by 5.6%.

Depreciation and amortization costs reduced by 5% compared with fiscal 2002 to £734 million reflecting primarily the withdrawal of the Boeing 747-200 fleet (including the prior year accelerated depreciation), partially offset by the £58 million charge relating to the impairment of capitalized Concorde engineering modifications and rotable inventory.

Aircraft operating lease costs reduced by 5% compared with fiscal 2002 to £189 million as a result of the return to lessors of Embraer 145s and Dash 8s, as well as Boeing 737-300s. These were partially offset by a £27 million onerous lease provision relating to the sub-lease of the British Airways CitiExpress Limited Jetstream 41 fleet (12 aircraft) to Eastern Airways.

Fuel and oil costs fell by 18% compared with fiscal 2002 to £842 million due to hedging benefits, reduced flying, efficiencies from smaller, newer aircraft and the exchange rate effect of the weaker US Dollar, which more than offset the increase in spot price.

Engineering and other aircraft costs reduced by 12% compared with fiscal 2002 to £592 million, reflecting a volume related reduction in subcontract costs, cost efficiencies and exchange benefits, partially offset by the charge of £26 million relating to the write-down of Concorde stock and committed spend, together with increased costs of hull insurance post September 11, 2001.

Landing fees and en route charges fell by 6% compared with fiscal 2002 to £576 million. This principally reflects benefits from reduced flying and the recovery of passenger service charges from transfer passengers, as well as efficiencies.

Handling charges, catering and other operating costs decreased by 13% compared with fiscal 2002 to £961 million, as a result of reduced passenger numbers, reduction in subcontract costs and efficiencies across the operational areas.

Selling costs fell by 14% compared with fiscal 2002 to £706 million. The introduction of the new agent commission structures, reduced sales volume and exchange rate effects were the main reasons for this reduction, partially offset by increases in advertising and promotional activity to support the launch of the new short-haul pricing model.

Accommodation, ground equipment costs and currency differences fell by 17% compared with fiscal 2002 to £686 million. This reflected a reduction in contractors, reduced information systems spend, reduced property costs, exchange differences and lower bad debt provisions, partially offset by increases in insurance.

Geographical analysis

See “Item 4 – Information on the Company – Segmental Information – Geographical Analysis” and Note 3 to the Financial Statements.

Operating profit improved in all regions compared with the prior year as cost reductions more than offset the deterioration in revenue. Traffic was down in all areas except in the UK where lower prices throughout fiscal 2003, stimulated demand.

The effect of the war in Iraq and terrorism on America’s traffic and yield was more than offset by cost improvements, and despite the impact of the charges relating to Concorde, Americas remained the most profitable region.

In addition to cabin mix benefits and lower fuel prices, Africa and South Asia both benefited from underlying passenger yield improvements.

Reduced capacity on the Far East and Australasia routes and improvements in scheduling had a positive impact on loads and yields.

Short-haul prices fell, reducing yields in an intensely competitive environment, but an 11% reduction in capacity (measured in ASKs) out of London cut volume-related costs and raised passenger load factors. Combined with aggressive cost initiatives and lower fuel prices, this halved the fiscal 2002 loss in Europe.

Share of operating profit from associates

BA’s share of operating profit from associated undertakings improved by £17 million to £39 million during fiscal 2003, principally due to improvement in the operating profits of Qantas.

In November 2002, BA sold its 50% shareholding in accoladia, the joint venture between Thomas Cook Limited and the outbound tour business of British Airways Holidays as the partnership no longer fitted the strategies of either company. The British Airways Holidays brand reverted to the Company’s control. In December, 2002, BA sold its stake in the Australian travel businesses Concorde International Travel and World Aviation Services.

Profit on sale of fixed assets and investments

Profit on disposals of fixed assets and investments for the year ended March 31, 2003 was £60 million, down £85 million from the prior year when our disposal of Go Fly Limited in June, 2001 generated £98 million.

Disposals during fiscal 2003 included Boeing 777-200, 737-400, 757-200 and the sale and leaseback of Airbus A320 aircraft as well as GE90 engines. There was also significant rationalization of our property portfolio including the sale of the New York crew hotel, Astral Towers Crawley and Odyssey Business Park. Where necessary, these property sales were accompanied by the leasing of space from the purchaser for differing periods depending on future business requirements.

Net interest payable

Net interest payable for the year ended March 31, 2003 was £255 million, £23 million lower than the previous year. This included a charge for the retranslation of the Yen debt (used to fund aircraft acquisitions) of £10 million, compared to a credit the previous year of £49 million. The retranslation results from the movement of the Yen against Sterling. See Note 10 to the Financial Statements.

Excluding the retranslation, the improvement in interest payable reflected lower rates, a higher cash balance and lower gross debt, together with foreign exchange benefits.

Other income/charges

Other charges of £4 million for the year ended March 31, 2003 primarily related to the write-down of our investments in the trade exchange Cordiem and The Airline Group (NATS), partially offset by £7 million of lease transfer income.

The £5 million write-down in the value of NATS equity to £7.3 million reflected revised estimates of the future long-term benefits of the investment.

This compared to other income of £21 million in the prior year, relating primarily to £22 million compensation received from the UK Government for the closure of US airspace immediately following September 11, 2001.

Tax

The analysis of the tax charge is set out in Note 11 to the Financial Statements.

There was no tax payable on operating results in the UK. During the year ended March 31, 2003, the Group remitted profits to the UK from subsidiaries and associates including those in Australia and Spain. The UK tax charge arising on such profits was offset partially by credits for taxes paid overseas and by other loss surrenders. No tax arose on profits on disposals as such profits were covered by tax losses from current and prior periods.

Earnings per share

Profit for the year attributable to shareholders was £72 million, equivalent to net earnings per Ordinary Share of 6.7 pence, compared with a loss for the year of £142 million equivalent to a net loss per Ordinary Share of 13.2 pence in the prior year.

Aircraft fleet changes

The number of Group aircraft in service at March 31, 2003 was 330, a reduction of 30 on the prior year. Aircraft disposals and returns to lessors comprised nine Boeing 757-200, two Boeing 777-200, six Boeing 737-300, two Boeing 737-400, four de Havilland Canada DHC-8 and two Embraer RJ145 aircraft. Deliveries comprised 11 Airbus A320 and one Embraer RJ145 aircraft. Of the 12 British Airways CitiExpress Limited Jetstream 41 aircraft, one had been sub-leased and 11 stood down pending sub-lease to Eastern Airways.

Other stand-downs included one Boeing 757-200, and two Boeing 737-400 aircraft pending disposal or return to lessor, together with two Concorde, reflecting the announcement on April 10, 2003 that the fleet would be retired from service in October 2003.

Cash flow

Cash inflow from operating activities in fiscal 2003 totaled £1,185 million, an improvement of £319 million on the prior year principally due to the improvement in operating profit. Tangible fixed assets purchased for cash amounted to £293 million, £452 million less than the prior year and the sale of tangible fixed assets and investments generated proceeds of £351 million. The reduction in capital spend and the continuing asset disposals reflected the ongoing implementation of the FSAS program.

Leases and other financing arrangements

Eleven A320 aircraft were delivered during the year ended March 31, 2003. Five of the aircraft were financed through US Dollar denominated operating leases and two aircraft were financed through UK operating leases. The remaining four aircraft were financed on balance sheet; two through US Dollar denominated cross border finance leases and two through UK finance leases.

Three A319 aircraft that were delivered in the previous year were financed during fiscal 2003, through US Dollar denominated cross border finance leases. Five short-haul Airbus aircraft that had been delivered and financed on operating leases shortly after September 11, 2001 were refinanced during fiscal 2003, at lower rates on US Dollar denominated operating leases. A Boeing 777-200 which had also been delivered and financed in the previous year was refinanced at lower rates through a cross-border US Dollar denominated finance lease.

In June, 2002, US$85 million was raised by way of a 30-year New York municipal bond issue to finance the recently completed renovation of the JFK terminal in New York. The bond represents an unsecured debt obligation of the Company and carries interest at 7.⁵/8%.

Share capital

The number of shares allotted, called up, and fully paid on March 31, 2003 was 1,082,784,000 compared with 1,082,757,000 on March 31, 2002. On June 17, 2002, 24,000 Ordinary Shares were issued in exchange for 57,000 Convertible Capital Bonds 2005 on the basis of one Ordinary Share for every 2.34 Bonds held. During the year, 3,000 shares were issued on the exercise of options under Employee Share Option schemes.

Outlook

Additional security expenditure is expected to continue and our fuel costs for the year ahead are projected to be approximately £150 million higher than 2004. At the same time intercontinental premium travel volumes are recovering steadily, while short-haul premium traffic remains at lower levels. Demand for non premium travel is meeting expectations with the help of competitive offers in most major markets. We continue to forecast a small revenue improvement in the current year. We expect that small yield declines during the year will be more than offset by volume.

Although FSAS is now a reality and that particular strategy phase is complete, competitive pressures emphasize the need to continue simplifying the business and reduce costs further. The ultimate objective is a sustainable annual operating margin of 10%, in order to achieve long-term stability and acceptable rewards for shareholders, employees and customers.

Other matters

Future Size and Shape

Cost reduction targets were exceeded for all the FSAS programs – manpower costs, distribution, procurement and information technology.

In addition to the cost programs, targets were also set and achieved for manpower, capital spend and disposals.

Business Plan

The 2004/06 Business Plan was communicated internally on January 28, 2004 and includes a further savings in employment costs, together with the continuing delivery of the prior year’s Business Plan programs of Customer Enable BA (ceBA), Employee Self Service and External Spend.

British Airways CitiExpress

BA is continuing to simplify and strengthen its UK regional operation.

In October, 2003, British Airways CitiExpress transferred the operation of its Plymouth-Gatwick route to Air Southwest.

As part of the strategy to move to an all-jet regional operation, the entire remaining fleet of eight British Aerospace ATPs has been stood down, five returned to lessor and three sub-leased to Loganair. In March, 2004, the transfer took place of five British Airways CitiExpress intra-Scotland routes to Loganair; the three sub-leased ATPs will be operated on these routes. It has also been announced that British Airways CitiExpress will no longer operate four Isle of Man routes, previously ATP-operated, but will retain routes from London Gatwick and Manchester to the island with different aircraft types.

Alliance benefits

The oneworld alliance includes eight members: BA, Aer Lingus, AA, 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 programs, common lounge access, smoother transfers, increased customer support and greater value.

A commercial agreement with Swiss International Air Lines was concluded in September, 2003, involving the transfer of eight slot pairs to BA and codesharing on the Heathrow-Geneva route. A proposal that Swiss would merge its frequent flyer program into the BA Executive Club and go on to join oneworld was rejected by Swiss on June 21, 2004.

The final US Department of Transportation order, approving the American/BA behind and beyond codeshare, was issued on May 30, 2003. The codeshare commenced in September, 2003, and by February, 2004, all initial phases of the codeshare had been implemented. In total, American have placed their code on 68 BA routes to 58 destinations, spanning 34 countries and using nearly 300 flight numbers. In turn, BA have placed their code on 104 routes to 12 countries serving 85 destinations, of which 72 are new to the BA network. This includes the first transatlantic codeshares introduced – Manchester and Glasgow to Chicago and Manchester to New York.

Outside oneworld, co-operation with Japan Airlines (JAL) continues in the form of Frequent Flyer Program agreements and codesharing. Codesharing commenced in January, 2004, on JAL flights between Tokyo and Seoul, Fukuoka, Osaka and Nagoya. JAL places its code on BA services between Heathrow and Hamburg and Stuttgart.

Subsidiaries

On June 30, 2003, the sale was completed of dba to Intro GmbH, for a loss on disposal of £83 million.

On August 27, 2003, the Group completed the disposal of Speedwing Mobile Communications, which formed part of Speedwing International Limited, to Air Radio Limited. The profit on disposal from this sale was £3 million.

Qantas

Dating from 1993, the relationship with Qantas is BA’s longest standing and deepest alliance relationship. Under the Joint Services Agreement (“JSA”) there is full strategic, tactical and operational co-operation on all of BA’s and Qantas’ flights that serve markets between the UK and Continental Europe, Southeast Asia and Australia. This co-operation continues to strengthen and provides customers with improved flight departure times, routings and value for money, offering the very best of customer service to all passengers.

BA 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. Additional value has been generated with cost saving and revenue co-operation across almost all functions.

Qantas’ pre-tax profit for the six months ended December 31, 2003 (included in the March 31, 2004 result) amounted to A$530.3 million, an increase of 3.4% on the corresponding period in the prior year. Group profit after tax amounted to A$357.8 million, up 1.5%. Revenue for the six months was A$5.8 billion, down 4.4% compared to the prior year. Passenger revenue decreased by 4.8% and was due to a decline in RPKs of 0.8% and a yield deterioration of 5.2%.

In April, 2003 and October, 2003, Qantas issued new shares by way of shareholder placings. On each occasion, BA did not take up its allocation, which resulted in the dilution of the Group’s shareholding from 18.93% to 18.25%.

Iberia

In December 2003, the European Commission granted BA, Iberia and our franchise partner, GB Airways exemption for a period of three years under Article 81 of the EU Treaty. The three airlines have used this exemption to deepen co-operation on routes between the UK and Spain including from London Heathrow and Gatwick, to Madrid and Barcelona.

In addition BA and Iberia have agreed that joint proposals will be developed for field sales co-operation and joint dealing in the UK and Spanish markets, for enhanced co-operation in revenue management, for systems co-operation and for a benefit share on routes between the UK and Spain.

Iberia’s profit before tax for the 12 months to December 31, 2003 (included in the March 31, 2004 result) was €201.7 million, compared to a profit before tax last year of €194.1 million.

Franchising

As at March 31, 2004 there were six franchises operating to 78 destinations of which 60 are additional to the BA (including British Airways CitiExpress) network.

Pensions

We continue to account for our Group pension schemes under the current accounting standard SSAP 24.

However, we are also required to disclose the impact of the new standard FRS 17 in the notes to the Financial Statements. As at March 31, 2004, the accounting valuation of the Group pension schemes under FRS 17 shows a post-tax deficit of £1.2 billion, in line with the previous year’s valuation. The FRS 17 valuation reflects a snapshot of the pension scheme assets and liabilities at March 31, 2004 and does not impact employer’s contributions.

The triennial actuarial review of the main UK pension schemes (APS and NAPS) was completed in October, 2003 and confirmed the cash contributions required to be made into the schemes. For APS, the Company is required to restart contributions at the rate of £26 million per year from November 1, 2003. For NAPS, the increase in the deficit requires additional contributions of £107 million to be made per year commencing from January 1, 2004. As a result, total contributions to APS and NAPS for the year ended March 31, 2004, were £158 million (excluding augmentation payments). Contributions for the financial year ending March 31, 2005 are expected to be approximately £250 million.

Liquidity and investments

The Iraq war and the continuing risk of terrorist attacks led us to maintain high liquidity throughout the year. Cash flow was managed effectively through this period by achievement of the FSAS targets on capital and disposals.

This strong cash generation has allowed us to accelerate debt repayments. During the year ended March 31, 2004, the Group repaid £344 million of debt early and intends to continually review liquidity requirements and repay debt early to utilize long-term surplus liquidity.

At March 31, 2004 the Group had at its disposal short-term loans and deposits and cash at bank and in hand amounting to £1,670 million (2003: £1,652 million). In addition, the Group had undrawn long-term committed aircraft and general financing facilities totaling approximately US$761 million, a committed short-term unsecured revolving credit facility of US$100 million and undrawn uncommitted overdraft and money market lines totaling £46 million.

The Group’s holdings of cash and short-term loans and deposits, together with committed funding facilities and net cash flow, are expected to be sufficient to cover the cost of all future committed aircraft deliveries due in the next three years.

Surplus funds are invested in high quality short-term liquid instruments, usually bank deposits. 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 material loss arising in the event of non-performance by counterparties is considered to be unlikely.

Management of financial and fuel price risks

The Board of Directors sets the treasury policies and objectives of the Group, and lays down the parameters within which the various aspects of treasury risk management are operated. The Board has approved a treasury governance statement that outlines the Group’s policies governing corporate and asset financing, interest rate risk, fuel price risk, foreign exchange risk and cash and liquidity management. The governance statement also lists the financial instruments that the Group’s treasury function is authorized 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 a Finance Committee which is chaired by the Chief Financial Officer.

A monthly Treasury Committee, chaired by the Group Treasurer, 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 program and other investments; deploying any surplus liquidity in a prudent and profitable manner; managing currency, fuel, interest rate and credit exposures; and managing the Group’s relationship with a large number of banks and other financial institutions world-wide.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Financing and interest rate risk

Most of the Group’s debt is asset related, reflecting the capital-intensive 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. The incidence of repayments is shown in Note 27 to the Financial Statements. The Group demonstrated its continuing ability to raise new financing by financing all aircraft deliveries during the year and maintaining committed facilities for all planned aircraft deliveries.

At March 31, 2004 approximately 66% of the Group’s borrowings (after swaps), net of cash, short-term loans and deposits, were at fixed rates of interest and 34% were at floating rates. This proportion of fixed rate borrowings has increased from 58% at March 31, 2003 as the Group chose to focus its early debt repayments on floating rate debt, leaving fixed rate debt intact.

The Group’s borrowings are predominantly denominated in Sterling, US Dollars and Japanese 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. The Japanese Yen liabilities arise as a result of the Group’s substantial Japanese cross-border hire purchase arrangements entered into during the period 1990 to 1999. Details of the currency mix of the Group’s gross borrowings are shown in Note 27 to the Financial Statements.

In July, 2003 the Company’s senior unsecured debt rating was lowered by one notch to sub-investment grade having been put on credit watch due to the Iraq War and SARS. The impact of the downgrade was limited as there are no financial covenants in the existing debt portfolio. Furthermore, the Group’s main source of external funding, being secured aircraft financing, is less sensitive to credit ratings than the unsecured bond market.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

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, 2004 lower levels of US Dollar capital expenditure and US Dollar disposal proceeds resulted in the generation of a surplus.

As a result, the Group can experience adverse or beneficial effects arising from exchange rate movements. For example, the Group is likely to experience beneficial effects from a strengthening of foreign currencies and an adverse effect from a strengthening in Sterling. 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 and 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 2004 and 2011. The Group utilizes its stream of Yen traffic revenues as a natural hedge against these maturing Yen liabilities as they fall due. At times, the Group will also purchase and hold Yen as a partial hedge against the balance sheet translation risk.

The Group’s forward transactions in foreign currency are detailed in Note 38 to the Financial Statements.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Fuel price risk

The Company’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 program allows for the judicious use of a number of derivatives traded on regulated exchanges in London (the International Petroleum Exchange) and New York (the New York Mercantile Exchange) as well as on the Over The Counter (OTC) markets, with approved counterparties and within approved limits.

Derivative financial instruments

BA uses derivative financial instruments (derivatives) with off-balance sheet risk 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.

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 in Note 34 to the Financial Statements.

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, 2004 are summarized in Note 38 to the Financial Statements.

The Company 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 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 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.

See also “Item 11 – Quantitative and Qualitative Disclosures about Market Risk”.

Economic and Monetary Union

The airline is maintaining its corporate readiness for UK entry should a decision to join be taken.

International Financial Reporting Standards

BA will prepare its March 31, 2006, consolidated Financial Statements under International Financial Reporting Standards (“IFRS”). The IFRS convergence project team report quarterly to the Audit Committee and progress continues in accordance with the plan. The detailed implementation planning phase is underway and on track to deliver IFRS compliant information for comparative purposes during 2004/05. Communication to the investor community will commence during the second half of the year.

Interest cover

The Group’s interest cover for fiscal 2004 was 2.1 times. The increase in interest cover from fiscal 2003 (1.5 times) reflects the improvement in the profitability of the Group between fiscal 2004 and fiscal 2003 and a reduction in net interest payable. This reduction principally reflects the lower level of net debt of the Group.

The Group’s interest cover for fiscal 2003 was 1.5 times. The increase in interest cover from fiscal 2002 (0.4 times) reflects the improvement in the profitability of the Group between fiscal 2003 and fiscal 2002 and a reduction in net interest payable. This reduction reflects both the lower level of net debt of the Group and the reduction in pounds Sterling and US Dollar interest rates between fiscal 2003 and 2002.

See Item 3 -footnote (3) on page 9 for the calculation of interest cover.

Debt and other contractual obligations

The Group has amounts falling due, excluding interest payable, under various debt and other contractual obligations as follows:

			Payments due by period
	Total		Less than one year		1-3 years		3-5 years		More than 5 years
	(£ millions)
Long-term debt Obligations		1,225		102		146		217		760
Capital lease Obligations		4,491		580		886		798		2,227
Operating lease Obligations		2,131		196		291		200		1,444

Total		7,847		878		1,323		1,215		4,431

See also Notes 16 and 27 to the Financial Statements.

Capital expenditure commitments authorized and contracted for, but not provided for in the Group’s fiscal 2004 Financial Statements, amounted to £347 million for the Group (2003: £482 million), and £346 million for the Company (2003: £476 million), in each case as of March 31, 2004. These outstanding commitments include £323 million which relates to the acquisition of Airbus A320 family aircraft scheduled for delivery over the next four 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.

Critical Accounting Policies and New Accounting Standards

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 UK GAAP. The preparation of these Financial Statements requires the development of estimates and judgments 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 judgments 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 1 to the Financial Statements provides additional discussion of the application of these estimates and other accounting policies. The critical accounting policies defined below include those used in the reconciliation of the Financial Statements under UK GAAP to US GAAP where relevant; Note 45 to the Financial Statements provides additional discussion of the application of the policies under US GAAP.

Passenger revenue

Passenger revenue is initially recorded as a liability for sales in advance of carriage, with revenue from ticket sales recognized at the time that BA provides the transportation. In respect of unused ticket revenue recognized, 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 recognized. Changes to these estimation methods could have a material effect on the presentation of the Group’s financial results.

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 programs

The Company operates two principal frequent flyer programs. The Executive Club scheme allows travelers to accumulate BA Miles that entitle them to various awards, including free travel. The Airmiles scheme allows companies to purchase Airmiles from the Group for use in promotional incentives.

The Group utilizes various estimates in accounting for the frequent flyer schemes. The direct incremental cost of providing free redemption services, including free travel, is accrued as participants accumulate mileage, based on expected redemptions. 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 behavior, regarding the likelihood of a customer redeeming the miles on BA, 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 financial results.

The total number of BA Miles outstanding at March 31, 2004 was 120,125,363,572 and the total number of Airmiles outstanding was 6,702,991,060. BA has recorded a liability for the awards relating to these mileage credits of £120 million.

The number of frequent flyer RPKs as a percentage of total RPKs for the years ended March 31, 2004, 2003 and 2002 was 4.0%, 4.4% and 3.7%, respectively.

BA believes that the displacement of revenue passengers by those traveling 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.

Under UK GAAP, the Company recognizes revenue from the sale of Airmiles and BA Miles to other companies when the miles are issued to participants in the various schemes. US GAAP specifically requires a proportion of revenue relating from the sale of mileage credits to partners to be deferred and recognized over the period in which the credits are expected to be redeemed for travel. The proportion of revenue that is recognized at the time of sale represents amounts in excess of the fair value of the tickets to be redeemed.

Tangible fixed assets

The Group has a net book value of approximately £8.6 billion in aircraft, property, equipment and other tangible assets as of March 31, 2004. These assets are held at cost, subject to the property revaluations carried out on March 31, 1995, which are being retained in accordance with the transitional provisions of applicable accounting standards. The Group now, however, has a policy of not revaluing tangible assets. Depreciation is calculated to write off the cost or valuation, 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 tangible assets is provided in Note 1 to the Financial Statements.

The carrying value of tangible assets is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

Goodwill and other intangible fixed assets

Under UK GAAP, goodwill arising since April 1, 1998 and other intangible assets are capitalized and amortized over their useful economic lives.

For the purposes of US GAAP, the Group adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 ‘Goodwill and Intangible Assets’ effective from April 1, 2002. In accordance with SFAS No. 142, goodwill and other assets with indefinite lives are capitalized and not amortized, but tested for impairment on an annual basis or on an interim basis when a triggering event occurs. The Group recognized a goodwill impairment charge of £399 million following its first annual impairment review (see Note 45 to the Financial Statements).

With respect to investments in associated undertakings, under UK GAAP goodwill is capitalized and amortized over its useful economic life. Under US GAAP, goodwill and intangible assets arising on the acquisition of an equity stake are capitalized but not amortized but tested for impairment in accordance with the requirements of Accounting Principles Board (“APB”) No. 18 ‘The Equity Method of Accounting for Investments in Common Stock’.

Intangible assets with finite lives continue to be capitalized and amortized over their useful economic lives under both UK GAAP and US GAAP. The Group’s landing rights have definite useful lives and will continue to be amortized over their useful economic lives not exceeding 20 years. 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 reviews, 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.

Pensions and other postretirement benefits

Accounting for pensions and other postretirement benefits involves judgment about uncertain events, including, but not limited to, discount rates, 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 scheme and post-retirement plans are important to the recorded amount of benefit expense in the profit and loss account (and also the balance sheet under US GAAP).

Under UK GAAP, actuarial valuations on the UK pension schemes are required to be carried out every three years – these determine the assumptions to be used and therefore the expense recorded in the profit and loss account. The latest actuarial valuations were made at March 31, 2003. Details of the assumptions used are included in Note 32 to the Financial Statements.

Details of the US GAAP adjustment relating to pensions and other postretirement benefits are included in Note 45 to the Financial Statements. Under US GAAP, the cost of providing pensions is attributed to periods of service in accordance with the benefit formulae underlying the pension plans. The resultant projected benefit obligation is matched against the current value of the underlying plan assets and unrecognized actuarial gains and losses in determining the pension cost or credit for the year; determination of this obligation is therefore important to the recorded amounts for such obligations on the balance sheet and to the amount of benefit expense in the profit and loss account. The assumptions used may vary from year to year, which may affect future results of operations. Any differences between these assumptions and the actual outcome will also affect future results of operations.

Effect of new US accounting standards adopted in year to March 31, 2004

In June 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143 ‘Accounting for Asset Retirement Obligations’ (“SFAS 143”), SFAS 143 requires companies to record liabilities equal to the fair value of their asset retirement obligations when they are incurred, for example recognition of return lease conditions when the aircraft is first utilized. Over time, the liability accredited for the change in present value each period, and the initial capitalized cost is depreciated over the useful life of the related asset. SFAS 143 was effective for accounting periods beginning after June 15, 2002. The provisions of SFAS 143 are similar to the accounting policy used by the Group in preparing its Financial Statements under UK GAAP. There was no impact on the Group as a result of the adoption of SFAS 143.

In April 2003, the FASB issued SFAS No. 149, ‘Amendment of Statement 133 on Derivative Instruments and Hedging Activities’ (“SFAS 149”). The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The Company does not apply the hedge accounting provisions of Statement 133 and has not identified any embedded derivatives requiring separate accounting under Statement 133. As a result there was no impact on the Group as a result of the adoption of SFAS 149.

In February 2003, the FASB issued SFAS No. 150, ‘Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity’ (“SFAS 150”), which was effective for the year ending March 31, 2004. SFAS 150 establishes standards for the classification of liabilities in the Financial Statements that have characteristics of both liabilities and equity. The Group does not hold any financial instruments that are classified within equity and which require to be reclassified as a liability under the provisions of SFAS 150. As a result there was no impact on the Group as a result of the adoption of SFAS 150.

In January 2003, the FASB published Interpretation No. 46 ‘Consolidation of Variable Interest Entities’ (“FIN 46”). Under FIN 46 the party with the majority of the variability in gains and losses of a variable interest entity is the primary beneficiary of the entity and is required to consolidate the variable interest entity.

The Group has an investment in The London Eye Company Limited. The principal activity of the company is the operation of a visitor attraction, British Airways London Eye. Though not fulfilling the legal definition of a subsidiary undertaking, the Group carries substantially all the risk and rewards of ownership and therefore the Group’s investment in The London Eye Company Limited is accounted for as a Quasi-subsidiary under UK GAAP and is therefore fully consolidated as described in the Note 1 Accounting policies.

Previously under US GAAP, the Group accounted for its investment as an associated undertaking. The Group’s investment meets the definition of a ‘variable interest entity’ under FIN 46 and as a result the assets and liabilities of The London Eye Company have been fully consolidated into the Group’s net income and shareholders’ equity as reported under US GAAP. Summarized financial information for The London Eye Company is set out in Note 20 to the Financial Statements.

The Group has financed eight aircraft through operating leases with third party lessors. Under UK GAAP these operating leases are accounted for as finance leases and recorded as assets and liabilities on the Group’s balance sheet. Under US GAAP, the leases were accounted for as operating leases. At inception of the leases, substantially all of the risks and benefits of the assets were transferred to the Group, and as a result the assets and liabilities should be reflected within shareholders’ equity under FIN 46.

In December, 2003, the FASB published a revised version of SFAS No. 132 ‘Employers’ Disclosures about Pensions and Other Postretirement Benefits’ (“SFAS 132”). Under the revised SFAS 132, additional disclosures are required on types of plan assets, investment strategy, measurement date, plan obligations, cashflows and components of net periodic benefit cost recognized during interim periods. The Group has included the additional disclosures as part of the notes to the Financial Statements.

Impact of new US accounting standards not yet adopted

There are currently no US accounting standards that have been issued but have yet to be adopted by the Group.

Impact of new UK accounting standards not yet adopted

In December 2003, the Urgent Issues Task Force (“UITF”) of the Accounting Standards Board issued Abstract 38 “Accounting for ESOP Trusts”. The effect of this UITF Abstract is to require investments held in an entity’s own shares through an ESOP trust to be treated as a deduction in equity rather than recorded as an asset. At March 31, 2004 the Group held £31 million of own shares classified as a fixed asset investment. These shares would be treated as a deduction from equity under the UITF.

Impact of new UK accounting standards not yet adopted

British Airways will prepare its March 31, 2006, under International Financial Reporting Standards (“IFRS”). The IFRS convergence project team report quarterly to the Audit Committee and progress continues in accordance with the plan. The detailed implementation planning phase is underway and on track to deliver IFRS compliant information for comparative purposes during 2004/05. Communication to the investor community will commence during the second half of the year.

Item 6 — Directors, Senior Management and Employees

During fiscal 2004 the business of BA was directed by a Board of Directors which consisted of 12 members. All Directors are subject to retirement every three years and are eligible for re-election by the shareholders. The Directors of BA as at July 20, 2004 (and their respective ages) were:

CHAIRMAN
Lord Marshall of Knightsbridge (70)
Board Member since 1983, Chief Executive 1983-1993, Executive Chairman 1993-1996; Non-executive Chairman since 1996. Chairman of the Nominations Committee until July 20, 2004. He is Chairman of Pirelli UK plc. Lord Marshall retired as Chairman of BA at the Annual General Meeting held on July 20, 2004.

Martin Broughton (57)
Independent non-executive director since May, 2000. Chairman of the Audit Committee and senior independent non-executive director until July 20, 2004. Chairman of the Nominations Committee. Martin Broughton retired as Chairman of British American Tobacco p.l.c during June, 2004. He was appointed Deputy Chairman of British Airways on November 7, 2003 and succeeded Lord Marshall as Chairman on July 20, 2004.

CHIEF EXECUTIVE
Roderick Eddington (54)
Executive Board member since 2000. Rod Eddington joined the airline as Chief Executive in May, 2000. He is a non-executive director of News Corporation and of John Swire & Son Pty Limited.

CHIEF FINANCIAL OFFICER
John Rishton (46)
Executive Board member since September, 2001. Having originally joined the airline in 1994 as Senior Vice-President Finance USA, John Rishton was appointed as Chief Financial Officer in September, 2001. He is a non-executive director of Allied Domecq PLC.

DIRECTOR OF CUSTOMER SERVICE AND OPERATIONS
Michael Street OBE (56)
Executive Board member since December, 2000. Mike Street has been Director of Customer Service and Operations since 1997. He sits on the Council of Buckinghamshire Chiltern University College and is a director and trustee of Airways Charitable Trust Limited. He is a non-executive director of WSH Group Ltd and Kempton Park Racecourse Company Limited.

NON-EXECUTIVE DIRECTORS
Maarten van den Bergh (62)
Independent non-executive director since 2002. Audit, Nominations and Remuneration Committees. He is Chairman of Lloyds TSB Group Plc and a non-executive director of BT Group plc and Royal Dutch Petroleum Company, having previously been President of Royal Dutch Petroleum Company and Vice-Chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group of companies. Maarten van den Bergh was appointed senior independent non-executive director with effect from July 20, 2004.

Dr Ashok Ganguly (68)
Independent non-executive director since 1996. Audit and Safety Review Committees. A Fellow of the Royal Society of Chemistry, Ashok Ganguly is Chairman of Technology Network (India) Private Limited, ICICI OneSource Ltd and ABP Ltd Group, director of ICICI Knowledge Park Ltd, Mahindra & Mahindra Ltd, Wipro Corporation, Tata AIG Life Insurance Co. Ltd, Reserve Bank of India, Hemogenomics Pvt Ltd and New Skies Satellites.

Captain Michael Jeffery (59)
Non-executive director since October, 2001. Chairman of the Safety Review Committee. Captain Jeffery was Director of Flight Operations from 1995 until his retirement from British Airways in June, 2001. He is a member of the West Michigan University College of Aviation Advisory Board.

Baroness O’Cathain OBE (66)
Non-executive director since 1993. Safety Review Committee. Detta O’Cathain is also a non-executive director of BNP Paribas UK Plc and South East Water plc.

Dr Martin Read (54)
Independent non-executive director since May, 2000. Chairman of the Remuneration Committee. Nominations Committee. Martin Read is Group Chief Executive of LogicaCMG plc and a non-executive director of the Boots Group PLC.

Alison Reed (47)
Independent non-executive director since December, 2003. Chairman of the Audit Committee from July 20, 2004 having served as a member since December 2003. Alison Reed is Finance Director of Marks & Spencer Group plc, and a Trustee of Whizz-Kidz.

Lord Renwick of Clifton (66)
Independent non-executive director since 1996. Remuneration and Safety Review Committees. Previously British Ambassador to the US and to South Africa. He is Vice Chairman Investment Banking of J P Morgan Europe, Chairman of Fluor Ltd, director of BHP Billiton, Harmony Gold, SABMiller Plc, Compagnie Financiere Richemont AG and a Trustee of The Economist.

Service Contracts of Executive Directors

Each of the three executive Directors has a rolling contract with a one-year notice period There are no express provisions for compensation payable upon early termination of any of the executive Directors’ service contracts other than payments due during the notice period. The service contracts include the following terms:

Executive Director	Date of contract	Unexpired term/notice period


Rod Eddington	July 7, 2000	terminable on 12 months notice or upon reaching retirement age, which is 60 in his case

Mike Street	July 1, 2001	terminable on 12 months notice or upon reaching retirement age, which is 65 in his case

John Rishton	September 1, 2001	terminable on 12 months notice or upon reaching retirement age, which is 63 in his case

Service Agreements of Non-Executive Directors

Except where appointed at a general meeting of shareholders of the Company, non-executive Directors stand for election by shareholders at the first Annual General Meeting of shareholders following appointment and stand for re-election every three years thereafter. Lord Marshall’s letter of engagement was amended in June, 2003 to remove a one year notice provision, and he subsequently indicated his intention to retire at the annual general meeting on July 20, 2004. None of the non-executive directors has any right to compensation on the early termination of their appointment. The letters of engagement for non-executive directors, other than Lord Marshall, were reviewed after the publication of the revised Combined Code and new letters of engagement were entered into in March, 2004. As at July 20, 2004, the dates of the Chairman’s and current non-executive Directors’ appointments are as follows:

Non-executive	Date of appointment	Date of election/ last re-election	Expiry date


Lord Marshall	December 13, 1983	July 16, 2002	July 20, 2004
Maarten van den Bergh	July 16, 2002	July 16, 2002	July 19, 2005
Martin Broughton	May 12, 2000	July 15, 2003	July 18, 2006
Dr Ashok Ganguly	April 12, 1996	July 16, 2002	July 19, 2005
Captain Michael Jeffery	October 1, 2001	July 16, 2002	July 19, 2005
Baroness O’Cathain	May 27, 1993	July 20, 2004	July 19, 2005
Dr Martin Read	May 12, 2000	July 15, 2003	July 18, 2006
Alison Reed	December 1, 2003	July 20, 2004	July 17, 2007
Lord Renwick	March 1, 1996	July 16, 2002	July 19, 2005

In addition to Rod Eddington, John Rishton and Mike Street above, the executive officers of the BA Group listed below each have service agreements.

Robert Boyle (39), Director of Commercial Planning. Joined the airline in 1993 in Corporate Finance, becoming General Manger, Network Development in 1998, taking on responsibility for Fleet Planning in 2002.

Paul Coby, (48), Chief Information Officer. Joined the airline in 1996 as Im Systems Supply Board Manager becoming Chief Information Officer in 2000.

Lloyd Cromwell Griffiths, (59), Director of Flight Operations. Joined the airline in 1973 as a pilot becoming Director of Flight Operations in 2001.

Martin George, (42), Commerical Director. Joined the airline in 1987 as a Brand Manager becoming Director of Marketing in 1997, taking on responsibility for Commercial Development in 2002.

Alan McDonald, (54), Director of Engineering. Joined the airline in 1966 as an Apprentice Engineer becoming Director of Engineering in 2001.

Roger Maynard, (61), 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, (51), Director for People. Joined the airline in 1976 as a graduate trainee becoming Director for People in 2002.

Robert Webb QC, (55), General Counsel. Joined the airline in 1998 and has responsibility for Legal, Government and Industry Affairs, Safety, Security, Risk Management, Community Relations and the Environmental departments of the airline.

Alan Buchanan, (46), Company Secretary. Joined the airline in 1990 as Principal Legal Adviser Finance becoming Company Secretary in April 2000.

The Company has arranged appropriate insurance cover in respect of legal action against its directors and officers. In May, 2004, the Company granted rolling indemnities to the directors and the secretary, uncapped in amount but subject to applicable law, in relation to certain losses and liabilities which they may incur in the course of acting as officers of companies within the group.

Compensation of Directors and Officers

The remuneration of the executive Directors for the year ended March 31, 2004 was:

Rod Eddington

John Rishton