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, 2005

 

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

1,082,902,918

          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  x          No  o

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

Item 17 o          Item 18 x



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

10

 

 

Risk Factors

10

 

Item 4.

Information on the Company

14

 

 

Introduction

14

 

 

Strategic Developments and Investments

14

 

 

Segmental Information

16

 

 

Route Network

17

 

 

Airline Fleet

18

 

 

Capital Expenditures

19

 

 

Operations

19

 

 

Marketing and Sales

20

 

 

Cargo

22

 

 

Ancillary Airline Activities

22

 

 

Seasonal Variations

22

 

 

Health Concerns: Occupational Health Service

22

 

 

Regulation

23

 

 

Competition

27

 

 

Organizational Structure

28

 

 

Property, Plant and Equipment

29

 

Item 5.

Operating and Financial Review and Prospects

30

 

 

Introduction

30

 

 

Results of Operations

30

 

 

Year by Year Analysis

30

 

 

Outlook

39

 

 

Other Matters

39

 

 

Critical Accounting Policies and New Accounting Standards

44

 

Item 6.

Directors, Senior Management and Employees

48

 

 

Compensation of Directors and Officers

51

 

 

Share Ownership

52

 

 

Options to Purchase Securities from Registrant or Subsidiaries

53

 

 

Employees

58

 

 

Pensions

58

 

Item 7.

Major Shareholders and Related Party Transactions

59

 

Item 8.

Financial Information

59

 

 

Consolidated Statements and Other Financial Information

59

 

 

Dividends

59

 

 

Legal Proceedings

60

 

 

Significant Changes

60

 

Item 9.

The Offer and Listing

60

 

Item 10.

Additional Information

61

 

 

Limitations on Voting and Shareholding

61

 

 

Memorandum and Articles of Association

61

 

 

Directors

62

 

 

Material Contracts

66

 

 

Exchange Controls

66

 

 

Tax

66

 

 

UK Income Tax

66

 

 

UK Tax on Capital Gains

67

 

 

UK Inheritance Tax

67

 

 

UK Stamp Duty and Stamp Duty Reserve Tax

67

 

 

US Federal Income Tax

67

 

 

Documents on Display

68

 

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

68

 

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

74

 

Item 16C.

Principal Accountant Fees and Services

74

 

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

75

 

Item 18.

Financial Statements

75

 

Item 19.

Exhibits

76


2


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 and British Airways CitiExpress Limited, and for historical comparatives, dba (formerly Deutsche BA Luftfahrtgesellschaft mbh) and 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 $1.8888 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, 2005. 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, 2005 was $1.793 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 Business and Financing Plans, expected future revenues, and expenditures and divestments. All forward-looking statements in this report are based upon information known to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. It is not reasonably 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”.

3


SPECIALIST TERMS

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

Available tonne kilometres (ATK)
The number of tonnes of capacity available for the carriage of revenue load (passenger and cargo) multiplied by the distance flown.

Revenue passenger kilometres (RPK)
The number of revenue passengers carried multiplied by the distance flown.

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

Revenue tonne kilometres (RTK)
The revenue load in tonnes multiplied by the distance flown.

Load factor
The percentage relationship of revenue load carried to capacity available.

Passenger load factor
RPK expressed as a percentage of ASK.

Overall load factor
RTK expressed as a percentage of ATK.

Break-even load factor
The load factor required to equate total traffic revenue with operating costs.

Frequent flyer RPKs as a percentage 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 points in the year.

Revenue per RPK
Passenger revenue from airline operations divided by airline RPK.

Total traffic revenue per RTK
Revenue from total traffic (scheduled and non-scheduled) divided by RTK.

Total traffic revenue per ATK
Revenue from total traffic (scheduled and non-scheduled) divided by ATK.

Punctuality
The industry’s standard, measured as the percentage of flights departing within 15 minutes of schedule.

Regularity
The percentage of flights completed to flights scheduled, excluding flights cancelled for commercial reasons.

Unduplicated route kilometres
All scheduled flight stages counted once, regardless of frequency or direction.

Interest cover
The number of times profit before taxation and net interest payable covers the net interest payable.

Dividend cover
The number of times profit for the year covers the dividends paid and proposed.

Operating margin
Operating profit/(loss) as a percentage of turnover.

Net debt
Loans, finance leases and hire purchase arrangements, plus Convertible Capital Bonds, net of short-term loans and deposits and cash less overdrafts.

Net debt/total capital ratio (including operating leases)
Net debt as a ratio of total capital, adjusted to include the discounted value of future operating lease commitments.

Total capital
Capital and reserves plus net debt.

Net debt/total capital ratio
Net debt as a ratio of total capital.

Manpower equivalent
Number of employees adjusted for part-time workers, overtime and contractors.

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

n/a
Not applicable.

4


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

 

 

 

 

 

 

 

2005

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

Restated

 

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except per Ordinary Share amounts)

 

 

 

 

 

 

 

$ (1)

 

£

 

£

 

£

 

£

 

£

 

Amounts in accordance with UK GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turnover

 

 

14,757

 

 

7,813

 

 

7,560

 

 

7,688

 

 

8,340

 

 

9,278

 

Cost of sales

 

 

(13,478

)

 

(7,136

)

 

(7,008

)

 

(7,263

)

 

(8,291

)

 

(8,757

)

 

 

                                   

Gross profit

 

 

1,279

 

 

677

 

 

552

 

 

425

 

 

49

 

 

521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative expenses

 

 

(137

)

 

(137

)

 

(147

)

 

(130

)

 

(159

)

 

(141

)

 

 

                                   

Operating profit/(loss)

 

 

1,020

 

 

540

 

 

405

 

 

295

 

 

(110

)

 

380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share of operating profit in associates

 

 

77

 

 

41

 

 

58

 

 

39

 

 

22

 

 

64

 

 

 

                                   

Total operating profit/(loss) including associates

 

 

1,097

 

 

581

 

 

463

 

 

334

 

 

(88

)

 

444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and charges

 

 

6

 

 

3

 

 

 

 

(11

)

 

21

 

 

1

 

(Loss)/profit on sales of fixed assets and investments

 

 

(49

)

 

(26

)

 

(46

)

 

60

 

 

145

 

 

(69

)

Net interest payable and other finance income and related fees

 

 

(270

)

 

(143

)

 

(187

)

 

(248

)

 

(278

)

 

(226

)

 

 

                                   

Profit/(loss) before tax

 

 

784

 

 

415

 

 

230

 

 

135

 

 

(200

)

 

150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax

 

 

(282

)

 

(149

)

 

(85

)

 

(50

)

 

71

 

 

(69

)

 

 

                                   

Profit/(loss) after tax

 

 

502

 

 

266

 

 

145

 

 

85

 

 

(129

)

 

81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity minority interests

 

 

(2

)

 

(1

)

 

(1

)

 

 

 

(1

)

 

(2

)

Non-equity minority interests

 

 

(26

)

 

(14

)

 

(14

)

 

(13

)

 

(12

)

 

(12

)

 

 

                                   

Profit/(loss) for the year

 

 

474

 

 

251

 

 

130

 

 

72

 

 

(142

)

 

67

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

(193

)

 

 

                                   

Retained profit/(loss) for the year

 

 

474

 

 

251

 

 

130

 

 

72

 

 

(142

)

 

(126

)

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per Ordinary Share (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44.2

c

 

23.4

p

 

12.1

p

 

6.7

p

 

(13.2

)p

 

6.2

p

Diluted

 

 

43.4

c

 

23.0

p

 

12.1

p

 

6.7

p

 

(13.2

)p

 

6.2

p

Basic weighted average number of shares

 

 

1,071

 

 

1,071

 

 

1,070

 

 

1,073

 

 

1,076

 

 

1,075

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

Diluted weighted average number of shares

 

 

1,126

 

 

1,126

 

 

1,070

 

 

1,073

 

 

1,078

 

 

1,085

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in accordance with US GAAP (3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) for the year

 

 

676

 

 

358

 

 

396

 

 

(115

)

 

(123

)

 

244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Ordinary Share (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) for the year

 

 

63.1

c

 

33.4

p

 

37.0

p

 

(10.7

)p

 

(11.4

)p

 

22.7

p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) for the year

 

 

61.4

c

 

32.5

p

 

36.1

p

 

(10.7

)p

 

(11.4

)p

 

22.5

p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per American Depositary Share (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) for the year

 

 

631

c

 

334

p

 

370

p

 

(107

)p

 

(114

)p

 

227

p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) for the year

 

 

614

c

 

325

p

 

361

p

 

(107

)p

 

(114

)p

 

225

p


Footnote on page 7

5


Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31

 

 

 

 

 

 

 

2005

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

Restated

 

Restated

 

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except per Ordinary Share amounts)

 

 

 

$ (1)

 

£

 

£

 

£

 

£

 

£

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in accordance with UK GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and landing rights

 

 

359

 

 

190

 

 

168

 

 

164

 

 

140

 

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fleet, property and equipment

 

 

15,397

 

 

8,152

 

 

8,637

 

 

9,487

 

 

10,474

 

 

10,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

283

 

 

150

 

 

531

 

 

493

 

 

464

 

 

401

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,039

 

 

8,492

 

 

9,336

 

 

10,144

 

 

11,078

 

 

11,123

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

5,372

 

 

2,844

 

 

2,765

 

 

2,725

 

 

2,559

 

 

2,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creditors: amounts falling due within one year

 

 

(5,629

)

 

(2,980

)

 

(2,996

)

 

(2,904

)

 

(3,201

)

 

(3,308

)

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current liabilities

 

 

(257

)

 

(136

)

 

(231

)

 

(179

)

 

(642

)

 

(758

)

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets less current liabilities

 

 

15,782

 

 

8,356

 

 

9,105

 

 

9,965

 

 

10,436

 

 

10,365

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creditors: amounts falling due after more than one year

 

 

(8,209

)

 

(4,346

)

 

(5,486

)

 

(6,553

)

 

(7,097

)

 

(6,901

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisions for deferred tax

 

 

(2,347

)

 

(1,243

)

 

(1,137

)

 

(1,062

)

 

(1,031

)

 

(1,094

)

Provisions for liabilities and charges

 

 

(156

)

 

(83

)

 

(85

)

 

(107

)

 

(126

)

 

(70

)

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,070

 

 

2,684

 

 

2,397

 

 

2,243

 

 

2,182

 

 

2,300

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Called up share capital

 

 

512

 

 

271

 

 

271

 

 

271

 

 

271

 

 

271

 

Reserves

 

 

4,144

 

 

2,194

 

 

1,916

 

 

1,756

 

 

1,720

 

 

1,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                   

Total equity shareholders’ funds

 

 

4,656

 

 

2,465

 

 

2,187

 

 

2,027

 

 

1,991

 

 

2,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity minority interest

 

 

23

 

 

12

 

 

10

 

 

10

 

 

9

 

 

18

 

Non equity minority interest

 

 

391

 

 

207

 

 

200

 

 

206

 

 

182

 

 

186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                   

 

 

 

414

 

 

219

 

 

210

 

 

216

 

 

191

 

 

204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                   

 

 

 

5,070

 

 

2,684

 

 

2,397

 

 

2,243

 

 

2,182

 

 

2,300

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in accordance with US GAAP (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and landing rights

 

 

223

 

 

118

 

 

93

 

 

91

 

 

434

 

 

395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fleet, property and equipment

 

 

15,367

 

 

8,136

 

 

8,626

 

 

9,264

 

 

10,073

 

 

10,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

277

 

 

147

 

 

570

 

 

530

 

 

505

 

 

488

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,867

 

 

8,401

 

 

9,289

 

 

9,885

 

 

11,012

 

 

11,092

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

7,463

 

 

3,951

 

 

3,681

 

 

3,370

 

 

2,983

 

 

2,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creditors: amounts falling due within one year

 

 

(6,190

)

 

(3,277

)

 

(3,248

)

 

(3,117

)

 

(3,378

)

 

(3,326

)

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current assets/(liabilities)

 

 

1,273

 

 

674

 

 

433

 

 

253

 

 

(395

)

 

(639

)

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets less current liabilities

 

 

17,140

 

 

9,075

 

 

9,722

 

 

10,138

 

 

10,617

 

 

10,453

 

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creditors: amounts falling due after more than one year

 

 

(10,504

)

 

(5,561

)

 

(6,413

)

 

(7,058

)

 

(7,103

)

 

(6,911

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for deferred tax

 

 

(2,395

)

 

(1,268

)

 

(1,240

)

 

(1,120

)

 

(1,117

)

 

(937

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisions for liabilities and charges

 

 

(156

)

 

(83

)

 

(85

)

 

(107

)

 

(126

)

 

(70

)

 

 

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,085

 

 

2,163

 

 

1,984

 

 

1,853

 

 

2,271

 

 

2,535

 

 

 

                                   

Capital and reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Called up share capital

 

 

512

 

 

271

 

 

271

 

 

271

 

 

271

 

 

271

 

Reserves

 

 

3,159

 

 

1,673

 

 

1,503

 

 

1,366

 

 

1,809

 

 

2,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                   

Total equity shareholders funds

 

 

3,671

 

 

1,944

 

 

1,774

 

 

1,637

 

 

2,080

 

 

2,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity minority interests

 

 

23

 

 

12

 

 

10

 

 

10

 

 

9

 

 

18

 

Non-equity minority interest

 

 

391

 

 

207

 

 

200

 

 

206

 

 

182

 

 

186

 

 

 

                                   

 

 

 

414

 

 

219

 

 

210

 

 

216

 

 

191

 

 

204

 

 

 

                                   

 

 

 

4,085

 

 

2,163

 

 

1,984

 

 

1,853

 

 

2,271

 

 

2,535

 

 

 

                                   


Footnote page 7

6


 

 

(1)

Translations of pounds Sterling into US Dollars have been made at the Noon Buying Rate on March 31, 2005 of £1.00 = US$1.8888.

 

 

(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)

For fiscal 2005, BA prepared 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 43 to the Financial Statements.

 

 

 

Effective from April 1, 2004, the Group applied the provisions of ‘UITF Abstract 38 – Accounting for ESOP Trusts’ and, as a result, the Group’s investment in own shares held for the purpose of employee share ownership plans has been reclassified from fixed asset investments and is now recorded as a reduction in shareholders’ equity. Comparative periods have been restated to reflect the adoption of UITF Abstract 31.

 

 

 

For Fiscal 2004 to Fiscal 2000, other finance income and related fees were shown with ‘other income’. For Fiscal 2005, such income is shown within net interest payable. As a result income reclassified to net interest payable was £13 million for Fiscal 2004 and £7 million for Fiscal 2003.

 

 

 

Effective April 1, 2005 BA will prepare its Financial Statements in accordance with International Financial Reporting Standards (IFRS).

 

 

(4)

Each American Depositary Share represents ten Ordinary Shares.

7


Group Operating Statistics (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

 

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

Restated

 

Restated

 

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airline Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traffic and capacity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue passenger km (RPK)(m)

 

 

107,892

 

 

103,092

 

 

100,112

 

 

106,270

 

 

123,197

 

Available seat km (ASK)(m)

 

 

144,189

 

 

141,273

 

 

139,172

 

 

151,046

 

 

172,524

 

Passenger load factor (%)

 

 

75

 

 

73

 

 

72

 

 

70

 

 

71

 

Cargo tonne km (CTK)(m)

 

 

4,954

 

 

4,461

 

 

4,210

 

 

4,033

 

 

4,735

 

Revenue tonne km (RTK)(m)

 

 

15,731

 

 

14,771

 

 

14,213

 

 

14,632

 

 

16,987

 

Available tonne km (ATK)(m)

 

 

22,565

 

 

21,859

 

 

21,328

 

 

22,848

 

 

25,196

 

Overall load factor (%)

 

 

70

 

 

68

 

 

67

 

 

64

 

 

67

 

Passengers carried (000)

 

 

35,717

 

 

36,103

 

 

38,019

 

 

40,004

 

 

44,462

 

Tonnes of cargo carried (000)

 

 

877

 

 

796

 

 

764

 

 

755

 

 

914

 

Frequent flyer RPKs as a percentage of total RPKs (%) (2)

 

 

3

 

 

4

 

 

4

 

 

4

 

 

3

 

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger yield (see definition under specialist terms) (p)

 

 

6

 

 

6

 

 

7

 

 

7

 

 

6

 

Cargo revenue per CTK (p)

 

 

10

 

 

10

 

 

12

 

 

12

 

 

12

 

Average fuel price (US cents/US gallon)

 

 

136

 

 

94

 

 

86

 

 

81

 

 

104

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unduplicated route km (000)

 

 

623

 

 

657

 

 

693

 

 

814

 

 

755

 

Punctuality (% within 15 minutes)

 

 

76

 

 

81

 

 

76

 

 

81

 

 

79

 

Regularity (%)

 

 

99

 

 

99

 

 

98

 

 

99

 

 

98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Group Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cover (times)(3)

 

 

3.2

 

 

2.1

 

 

1.5

 

 

0.4

 

 

1.5

 

Operating margin (%)(4)

 

 

6.9

 

 

5.4

 

 

3.8

 

 

(1.3

)

 

4.1

 

Net debt/total capital ratio (%)(5)

 

 

42.7

 

 

54.1

 

 

60.9

 

 

66.2

 

 

64.7

 

Scheduled (passenger, freight and mail) and non scheduled services revenue per RTK (p)

 

 

44

 

 

47

 

 

50

 

 

52

 

 

50

 

Scheduled (passenger, freight and mail) and non scheduled services revenue per ATK (p)

 

 

31

 

 

32

 

 

33

 

 

33

 

 

33

 

Net operating expenditure per RTK (p)(6)

 

 

41

 

 

44

 

 

48

 

 

52

 

 

47

 

Net operating expenditure per ATK (p)(6)

 

 

29

 

 

30

 

 

32

 

 

34

 

 

32

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average manpower equivalent (MPE)

 

 

47,472

 

 

49,072

 

 

53,440

 

 

60,468

 

 

62,844

 

RTKs per MPE (000)

 

 

331.4

 

 

301.0

 

 

266.0

 

 

242.0

 

 

270.3

 

ATKs per MPE (000)

 

 

475.3

 

 

445.4

 

 

399.1

 

 

377.9

 

 

400.9

 

Aircraft in service at year end

 

 

290

 

 

291

 

 

330

 

 

360

 

 

338

 

Aircraft utilization
   (average hours per aircraft per day)

 

 

9.83

 

 

9.21

 

 

8.91

 

 

8.32

 

 

8.79

 


 

 

(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). The franchise relationship with Regional Air was terminated in April, 2005. Qantas ceased to be an associated undertaking in September, 2004.

 

 

(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) and other finance income and charges 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 and the interest cover ratio for each of the five most recent financial years:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

Restated

 

Restated

 

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ millions (except ratios))

 

 

 

 

Profit before tax

 

 

415

 

 

230

 

 

135

 

 

(200

)

 

150

 

 

 

                             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest payable

 

 

(143

)

 

(187

)

 

(248

)

 

(278

)

 

(226

)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retranslation charges/(credits)

 

 

(33

)

 

(16

)

 

8

 

 

(46

)

 

(71

)

Other finance income and charges

 

 

(14

)

 

(13

)

 

(7

)

 

 

 

 

 

 

                             

 

 

 

(190

)

 

(216

)

 

(247

)

 

(324

)

 

(297

)

Interest cover

 

 

3.2

 

 

2.1

 

 

1.5

 

 

0.4

 

 

1.5

 

 

 

                             

8


 

 

(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 22 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

 

 

 

 

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

Restated

 

Restated

 

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ millions (except ratios))

 

 

 

 

 

 

Net debt

 

 

2,922

 

 

4,158

 

 

5,149

 

 

6,294

 

 

6,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital and reserves

 

 

2,465

 

 

2,187

 

 

2,027

 

 

1,991

 

 

2,096

 

Add minority interests

 

 

219

 

 

210

 

 

216

 

 

191

 

 

204

 

 

 

                             

Total shareholders’ funds

 

 

2,684

 

 

2,397

 

 

2,243

 

 

2,182

 

 

2,300

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net debt

 

 

2,922

 

 

4,158

 

 

5,149

 

 

6,294

 

 

6,223

 

Provision for deferred tax

 

 

1,243

 

 

1,137

 

 

1,062

 

 

1,031

 

 

1,094

 

 

 

                             

Total capital

 

 

6,849

 

 

7,692

 

 

8,454

 

 

9,507

 

 

9,617

 

 

 

                             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net debt/capital percentage

 

 

42.7

 

 

54.1

 

 

60.9

 

 

66.2

 

 

64.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(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

 

 

 

 

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ millions (except ratios))

 

 

 

 

 

 

Total operating expenditure

 

 

7,273

 

 

7,155

 

 

7,393

 

 

8,450

 

 

8,898

 

Less: other revenue

 

 

(831

)

 

(607

)

 

(614

)

 

(769

)

 

(846

)

 

 

                             

Net operating expenditure

 

 

6,442

 

 

6,548

 

 

6,779

 

 

7,681

 

 

8,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RTKs

 

 

15,731

 

 

14,771

 

 

14,213

 

 

14,632

 

 

16,987

 

 

 

                             

ATKs

 

 

22,565

 

 

21,859

 

 

21,328

 

 

22,848

 

 

25,196

 

 

 

                             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenditure per RTK

 

 

46

 

 

48

 

 

52

 

 

58

 

 

52

 

 

 

                             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenditure per ATK

 

 

32

 

 

33

 

 

35

 

 

37

 

 

35

 

 

 

                             

9


Exchange Rates

          The Noon Buying Rate expressed in US Dollars to pounds Sterling as of June 30, 2005 was $1.793. 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 Exposure” and “Item 11 — Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period End

 

Average(1)

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

 

$

 

$

 

Fiscal year

 

 

 

 

 

 

 

 

 

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

 

 

 

1.83

 

 

 

 

1.68

 

 

 

1.90

 

 

1.55

 

2005

 

 

 

1.88

 

 

 

 

1.84

 

 

 

1.95

 

 

1.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Month

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2005

 

 

 

 

 

 

 

 

 

 

 

 

1.91

 

 

1.86

 

February 2005

 

 

 

 

 

 

 

 

 

 

 

 

1.92

 

 

1.86

 

March 2005

 

 

 

 

 

 

 

 

 

 

 

 

1.93

 

 

1.87

 

April 2005

 

 

 

 

 

 

 

 

 

 

 

 

1.92

 

 

1.87

 

May 2005

 

 

 

 

 

 

 

 

 

 

 

 

1.90

 

 

1.82

 

June 2005

 

 

 

 

 

 

 

 

 

 

 

 

1.84

 

 

1.79

 


 

 

(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 which could affect the business operations and results of the Group. There may be others (see also 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 will continue to experience, significant structural change. Further, the Group’s future performance is likely to continue to be subject to a variety of factors over which the Group itself has little or no control including, by way of example only, governmental regulation whether domestically within the United Kingdom, within the European Union or worldwide; fluctuations in the price of jet fuel; acts of terrorism, changes in economic conditions, the (non) availability of financing and fluctuations in currency and interest rates. The Group’s results may also be affected by information technology risks as well as by the uncertainties inherent in labor relations and the uncertainty of pension costs. There may well be other risks which emerge from time to time including war, changes in liquidity and capital resources and restrictions in the availability and scope of insurance.

 

 

Factors Generally Affecting Commercial Strategy & Performance

Planned Move to Terminal 5

          In 2008, the Group expects to move into Terminal 5 at Heathrow. The construction of Terminal 5 is one of the largest construction projects in Europe. This project and the planned move bring with them significant risks and challenges, including completion risk, risks associated with moving and risks associated with starting operations in a new facility.

Commercial Strategy/Product Effectiveness

          The Group strives to operate to its strategic and business plans. By reason of the matters listed above and discussed in this section, such plans may not always prove able to be implemented along the lines and in the timescales envisaged.

10


Competition

          The markets in which the Group operates are highly competitive. The Group faces competition from other airlines on its routes, as well as from indirect flights, charter services and from other forms of transport. Some competitors have cost structures that are lower than the Group’s or have other competitive advantages. Fare discounting by competitors has historically had a negative effect on the Group’s results because the Group is generally required to respond to competitors’ fares to maintain passenger traffic.

Market/Economic Factors

          The Group is dependent on passengers and cargo shippers to be able and willing to pay for carriage by air. This ability and willingness is influenced by economic and security conditions.

Alliances, Franchise & Subsidiary effectiveness

          Controlled consolidation in the aviation industry has proven difficult to obtain. Accordingly, Alliances, Franchises and Subsidiaries are a part of the Group operation but necessarily control is or can be looser than in the case of owned operations.

 

 

Certain Business Disruption Risks

Loss of Systems – infrastructure/data

          The Group is dependent on IT systems for delivery of its functions. It believes its IT systems and the systems provided by third parties to be reliable and well protected but they require regular updating and maintenance and are under constant threat from hackers/viruses.

Security

          The Group believes its operations to be safe and secure but security matters have in the past and have the potential in the future to disrupt the business on temporary or longer term grounds.

Supplier failure

          The Group is dependent on third parties, e.g. fuel suppliers, caterers, IT, for important aspects of its operation. It is essential that critical supplies should be maintained; if this were not so, operations would be disrupted and the business and results would suffer.

Fleet grounding or restriction

          The Group operates a number of aircraft types. An accident or discovered defect could ground significant portions or all of the fleet.

Insurance Market failure

          After the events of September 11, 2001, there was a market failure of the airline insurance market in the UK. It is possible that a further failure could occur, either wholly or in part.

Constrained operating infrastructure

          Most UK airports, and Heathrow in particular, are constrained and operating beyond their build capacity. This can impair operations and adversely effect our business and results.

Medical – epidemics/pandemics/hygiene

          Epidemics and pandemics (e.g. SARS) as well as other health risks may occur and would be beyond the Group’s control.

Loss of key buildings/airport infrastructure

          Loss of access to or function of key infrastructure components such as terminal and hanger facilities would disrupt the business.

11


 

 

Factors that could increase operating and other Costs

Pensions shortfall

          There is a substantial deficit in the Group’s pension funding and a high degree of uncertainty regarding future funding needs. The introduction of a pension regulator and a Pension Protection Fund in the UK is expected to increase costs.

Operating Costs

          Operating costs increases are frequently outside of our control e.g. fuel costs and can have a significant impact on our results of operations.

Security costs

          These have increased significantly since the events of September 11, 2001 and are a substantial part of the Group’s costs. It is possible that these will continue to increase at a substantial rate.

Claims against the Group that are not covered by or exceed Insurance

          The Group believes its insurance cover would substantially mitigate the effect of claims likely to be brought against the Group in foreseeable circumstances but limits can always be broken or uncovered claims may emerge.

Financial commitments

          The Group carries substantial debt which needs to be repaid or refinanced. The Group’s ability to finance its operations and capital needs may be affected adversely by various factors including financial market conditions. Most of the Company’s debt is asset-related, reflecting the attractiveness of aircraft as security to lenders and other financiers. However, there can be no assurance that aircraft will continue to provide attractive security for lenders.

          Fleet Maintenance and Modernization

          It is essential to the Group’s strategy that it maintain a high-quality fleet and this requires funds sufficient to support the upgrade and replacement of aircraft. The Group’s ability to follow this strategy would be jeopardized if the trading climate were to deteriorate substantially.

Market power and Importance of suppliers

          In some areas it is difficult for the Group to spread its risk by sourcing from many alternative suppliers.

Political restrictions

          Route rights and landing rights are often determined by the country of destination. If permissions are withdrawn our operations would be impaired and our business and results could be adversely affected.

 

 

Risks to Reputation/Public Confidence

Corporate Governance/Corporate Responsibility

          The Group has detailed corporate governance and corporate responsibility programmes. Were they to fail, reputation and public confidence could be damaged.

Adverse publicity

          Whether justified or not, adverse publicity can damage public confidence which in the end can damage our business and results.

12


Inadequate crisis management

          If a crisis arises, the Group’s future business and results are likely to be substantially affected by the quality of its response to the crisis.

 

 

Legal & Regulatory Issues

Employment law

          Worldwide and within the UK, labor activities and the balance between workers’ rights and shareholders’ interests is in flux. Increased labor activity or adverse labor market regulation could damage the operations and results of the Group.

Industry Regulation

          Worldwide and particularly in the UK, airline industry is being increasingly regulated. Such regulation, including environmental regulation, does not generally enhance business or financial results and, accordingly, further increases in regulation could be damaging.

Competition law

          Continued impairment of consolidation opportunities may restrict the Group’s ability to compete effectively in the marketplace.

National/International law

          The Group operates under a large and complex body of national and international laws and regulations. Were these to cease to allow it to operate in any particular way or in any particular route, the Group’s business and results could be damaged.

Government Intervention and Support

          State aid for the aviation industry, whilst not technically lawful in Europe, can still be provided. Also, the differing nature of the insolvency laws of different countries also distorts aviation markets. Disparate levels of government assistance between the Group and other airlines could place the Group at a competitive disadvantage and adversely affect operations and results.

 

 

Workforce/Heatlth and Safety Considerations

Industrial relations

          The Group has a large unionized workforce. Collective bargaining takes place on a regular basis. A breakdown in the bargaining process could disrupt our operations and adversely affect our business and results.

Manpower levels/skills

          The Group operates a highly technical business; if sufficient technically qualified staff from pilots to engineers and many others cease to be available, operations and results could be adversely affected.

Health & Safety at Work

          The Group operates in a confined environment carrying out difficult and specialist tasks 24 hours a day 365 days a year. A major incident affecting the health and safety of staff would disrupt the operations of the Group.

13


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 149 destinations in 72 countries at March 31, 2005. In fiscal 2005, the Group carried more than 35 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. 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 sold in the United Kingdom and Ireland 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. This process is nearing completion and in fiscal 2005 the number of aircraft in service was reduced by one to 290.

          The Company’s overhaul of its wide-bodied aircraft is complete. Currently the Group has no further orders for wide-bodied aircraft. In shorthaul, six Airbus A321 aircraft were delivered during the year whilst three Boeing 737-400s were returned to lessors or stood down pending return to lessor and two Boeing 737-400s and one A320-200 were sub-leased. One de Havilland Canada DHC-8 turboprop was returned to its lessor.

14


          BA has confirmed future deliveries for three Airbus A319s, three A320s and one A321.

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, 2005 has more than halved since 1999. The Company now operates a fleet of 43 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, we believe more work can be done to make the business less complex for both our customers and our staff.

Business Plans

          Given the challenging trading environment that the airline industry continues to face, the focus on controlling costs has not ended with the completion of FSAS. In conjunction with its annual business plan process, the Company has announced 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. This program was completed on schedule. The second program aims to remove £300 million of employee costs across the business by March, 2007, deferred from March, 2006.

British Airways CitiExpress

          British Airways CitiExpress continued to simplify its operation during 2004/05, building on the work started in 2003/04. Since 2001 aircraft numbers have fallen by 35 and types from nine to four - - a further five aircraft (and another fleet type) will be taken out in 2005/06. The number of bases has also been reduced from 15 in 2001 to eight at the end of March, 2005. As a consequence of this simplification, operational performance is more robust, costs have fallen and financial results have improved. Further cost reductions are targeted in 2005/06.

Alliance benefits

          The oneworld alliance includes eight airline members: British Airways, Aer Lingus, American Airlines, Cathay Pacific, Finnair, Iberia, LanChile and Qantas. Co-operation across the alliance in a number of areas benefits the customer and increases the airlines’ effectiveness. oneworld offers a substantial package of customer benefits, including reciprocal reward and recognition programs, common lounge access, smoother transfers, increased customer support and greater value.

Qantas

          The relationship with Qantas, which is in its twelfth year, is British Airways’ longest standing and deepest alliance relationship. Under the Joint Services Agreement (JSA) there is full strategic, tactical and operational co-operation on all of British Airways’ and Qantas’ flights that serve markets between the United Kingdom/Continental Europe and Southeast Asia/Australia. This co-operation 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. In February, 2005, the Australian Competition and Consumer Commission extended permission for both carriers to co-operate in this way for a further five years. Application has also been made to the UK Office of Fair Trading and the EU competition authorities and their ruling is outstanding at this time.

          British Airways 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.

          On September 9, 2004 the Group completed the sale of its 18.25% holding in Qantas through a book build sale of the shares, thereby reducing debt and continuing to strengthen our balance sheet. The sale realized gross proceeds of £427 million. The loss on disposal of £11 million includes a write-off of goodwill of £59 million previously set off against reserves.

15


American Airlines

          American Airlines and BA continued to roll out codesharing on points behind and beyond the US and London gateways. BA now places its code on more that 120 American routes, whilst American Airlines applies its code to more than 80 BA routes.

Iberia

          In December, 2004, British Airways and Iberia signed a Joint Business Agreement (‘JBA’) to establish profit-sharing on two routes, Heathrow-Madrid and Heathrow-Barcelona. This was accompanied by joint selling and the co-ordination of schedules on these routes from Summer 2005.

          British Airways and Iberia codeshare on more than 65 domestic and international routings. As well as all UK-Spain routes, this includes Iberia codesharing on services operated by British Airways franchise carriers GB Airways and Comair, and British Airways codesharing on services operated by Iberia franchise Air Nostrum. The airlines carried over 700,000 codeshare passengers during fiscal 2004/05.

          As at March 31, 2005 British Airways held an 8.76% stake in Iberia. Iberia’s profit before tax for the 12 months to December 31, 2004 (included in the fiscal March 31, 2005 result) was €283.2 million, compared to a profit before tax last fiscal year of €201.7 million.

Aer Lingus

          In September, 2004, BA and Aer Lingus removed all but three of the fifteen codeshares that had been in place, in order to focus efforts on selling the routes of greatest value to both partners and to reduce costs.

Swiss International Air Lines

          A commercial agreement with Swiss International Air Lines was concluded in September, 2003. The proposal for Swiss to merge its frequent flyer program into the BA Executive Club and go on to join oneworld was rejected by Swiss in June, 2004 and BA agreed to release Swiss from its obligations under the commercial agreement. A new agreement was reached for Swiss to codeshare on BA’s Heathrow-Geneva services.

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 83% of Group revenue in the year ended March 31, 2005.

          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 revenue by business activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

 

 

 

 

2005

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

$

 

£

 

£

 

£

 

Traffic revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger revenue

 

 

12,277

 

 

6,500

 

 

6,490

 

 

6,590

 

Cargo

 

 

910

 

 

482

 

 

463

 

 

484

 

 

 

                       

 

 

 

13,187

 

 

6,982

 

 

6,953

 

 

7,074

 

Other revenue (including aircraft maintenance, package holidays and other airline services)

 

 

1,570

 

 

831

 

 

607

 

 

614

 

 

 

                       

 

 

 

14,757

 

 

7,813

 

 

7,560

 

 

7,688

 

 

 

                       

16


Geographical Analysis

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

 

 

 

 

2005

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

$

 

£

 

£

 

£

 

Turnover by area of original sale(1)

 

 

 

 

 

 

 

 

 

UK

 

 

7,408

 

 

3,922

 

 

3,731

 

 

3,634

 

Continental Europe

 

 

2,219

 

 

1,175

 

 

1,209

 

 

1,269

 

 

 

 

 

 

 

 

 

 

 

Europe

 

 

9,627

 

 

5,097

 

 

4,940

 

 

4,903

 

The Americas

 

 

2,612

 

 

1,383

 

 

1,347

 

 

1,482

 

Africa, Middle East and Indian sub-continent

 

 

1,419

 

 

751

 

 

717

 

 

733

 

Far East and Australasia

 

 

1,099

 

 

582

 

 

556

 

 

570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,757

 

 

7,813

 

 

7,560

 

 

7,688

 

 

 

 

 

 

 

 

 

 

 

Turnover by area of destination(2)

 

 

 

 

 

 

 

 

 

   UK

 

 

1,150

 

 

609

 

 

664

 

 

725

 

Continental Europe

 

 

3,515

 

 

1,861

 

 

1,975

 

 

2,113

 

 

 

 

 

 

 

 

 

 

 

Europe

 

 

4,665

 

 

2,470

 

 

2,639

 

 

2,838

 

The Americas

 

 

5,447

 

 

2,884

 

 

2,767

 

 

2,763

 

Africa, Middle East and Indian sub-continent

 

 

2,667

 

 

1,412

 

 

1,253

 

 

1,201

 

Far East and Australasia

 

 

1,978

 

 

1,047

 

 

901

 

 

886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,757

 

 

7,813

 

 

7,560

 

 

7,688

 

 

 

 

 

 

 

 

 

 

 

Operating profit/(loss) by area of destination(3)

 

 

 

 

 

 

 

 

 

   Europe

 

 

(49

)

 

(26

)

 

(60

)

 

(117

)

The Americas

 

 

655

 

 

347

 

 

294

 

 

223

 

Africa, Middle East and Indian sub-continent

 

 

423

 

 

224

 

 

210

 

 

168

 

Far East and Australasia

 

 

(9

)

 

(5

)

 

(39

)

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,020

 

 

540

 

 

405

 

 

295

 

 

 

 

 

 

 

 

 

 

 


 

 

(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, 2005 compared with year ended March 31, 2004 – Geographical Analysis” and “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.”

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, 2005, BA (including subsidiary carrier British Airways CitiExpress) served some 149 destinations in 72 countries. Including codesharing and franchise arrangements, flights with BA codes served some 346 destinations in 104 countries. Adding the services of BA’s alliance partners, the global network served some 558 destinations in 130 countries.

          During the year ended March, 2005, BA introduced services to Basle, Cagliari, Catania, Split, Thessaloniki and Vilnius. Services to Bilbao, Bogota, Caracas, Genoa, Jeddah, Knock, Riyadh, and the Seychelles were discontinued. Routes to Bennecula, Shetland and Stornoway were transferred to franchisee Loganair.

17


Airline Fleet

          Details of the Group’s fleet at March 31, 2005 are set out below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number in service with Group companies at
March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On
balance
sheet
aircraft

 

Off
balance
sheet
aircraft

 

Total

 

Future
deliveries

 

Options

 

2004-05
revenue
hours
flown

 

Average
hours
per
aircraft/
day

 

Average age
(years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airline operations (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boeing 747-400

 

 

 

57

 

 

 

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

 

 

269,468

 

 

12.95

 

 

10.8

 

Boeing 777

 

 

 

40

 

 

 

 

3

 

 

 

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

202,833

 

 

12.92

 

 

6.3

 

Boeing 767-300

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

74,600

 

 

9.73

 

 

12.1

 

Boeing 757-200

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

34,190

 

 

7.21

 

 

10.5

 

Airbus A319 (2)

 

 

 

21

 

 

 

 

12

 

 

 

 

33

 

 

 

 

3

 

 

 

 

47

 

 

 

101,234

 

 

8.4

 

 

4.4

 

Airbus A320 (3)

 

 

 

9

 

 

 

 

17

 

 

 

 

26

 

 

 

 

3

 

 

 

 

 

 

 

 

77,808

 

 

7.92

 

 

7.7

 

Airbus A321

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

 

 

 

1

 

 

 

 

 

 

 

 

6,505

 

 

7.67

 

 

0.5

 

Boeing 737-300

 

 

 

 

 

 

 

 

5

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

15,590

 

 

8.54

 

 

15.7

 

Boeing 737-400 (4)

 

 

 

18

 

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

59,550

 

 

8.26

 

 

12.6

 

Boeing 737-500

 

 

 

 

 

 

 

 

10

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

31,506

 

 

8.63

 

 

12.7

 

Turboprops (5)

 

 

 

 

 

 

 

 

9

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

25,338

 

 

5.2

 

 

8.4

 

Embraer RJ145

 

 

 

16

 

 

 

 

12

 

 

 

 

28

 

 

 

 

 

 

 

 

 

17

 

 

 

75,927

 

 

7.43

 

 

5.1

 

Avro RJ100

 

 

 

 

 

 

 

 

16

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

43,028

 

 

7.37

 

 

5.6

 

BAe 146 (6)

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

13,300

 

 

7.29

 

 

18.5

 

Hired aircraft

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,171

 

 

 

 

 

 

 

 

 

                                                                   

Group total

 

 

 

206

 

 

 

 

84

 

 

 

 

290

 

 

 

 

7

 

 

 

 

64

 

 

 

1,053,048

 

 

9.83

 

 

8.5

 

 

 

                                                                   


 

 

(1)

Includes those operated by British Airways Plc and British Airways CitiExpress Limited.

 

 

(2)

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

 

 

(3)

Excludes one Airbus A320 sub-leased to GB Airways.

 

 

(4)

Excludes two Boeing 737-400s sub-leased to Air One and one Boeing 737-400 stood down pending return to lessor.

 

 

(5)

Comprises nine de Havilland Canada DHC-8s. Excludes two British Aerospace ATPs stood down pending return to lessor, three British Aerospace ATPs sub-leased to Loganair and 12 Jetstream 41s sub-leased to Eastern Airways.

 

 

(6)

The British Aerospace 146 fleet will be retired from service during 2005/06.

          In the five-year period ended March 31, 2005, 55 new (British Airways Plc, British Airways CitiExpress) aircraft were purchased or acquired under finance leases representing a total capital investment of approximately $2,311 million. 26 new aircraft with an initial purchase price to the lessors of approximately $577 million were obtained under operating leases, and a further seven used aircraft, with an approximate market value of $254 million, were obtained under short-term operating leases. In the same period, 120 aircraft were disposed of from the BA fleet.

Future Fleet Commitments

          During fiscal 2005, 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 one Airbus A321. The company has agreed to sell on a further three Airbus A321 future deliveries to GB Airways. BA also has 47 option positions / purchase rights on the Airbus family aircraft.

Aircraft fleet

          The number of Group aircraft in service at March 31, 2005 was 290, a reduction of one on the prior year. Aircraft returned to lessors comprised two Boeing 737-400 and one de Havilland Canada DHC-8. In addition, two Boeing 737-400s were sub-leased to Air One, as was one Airbus A320-200 to GB Airways and one Boeing 737-400 aircraft was stood-down pending return to lessors. Deliveries comprised six Airbus A321 aircraft.

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Financing

          A total of six new aircraft were delivered during the year ended March 31, 2005. Two of these were financed on balance sheet through US Dollar denominated mortgage loans and four were purchased for cash.

          In addition the Company entered into one sale and leaseback transaction relating to owned aircraft. This was a Boeing 777-200 for a period of ten years and was carried out as part of the Company’s management of its residual exposure to this fleet type.

          As at March 31, 2005, the Company had cash and deposits, which in total amounted to £1,682 million. In addition, the Company had undrawn long-term committed aircraft and general financing facilities totalling approximately US$460 million and undrawn money market lines totalling £46 million.

          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 outstanding aircraft purchase commitments.

Capital Expenditures

          See “Item 5 – Operating and Financial Review and Prospects – Year by Year Analysis – Year ended March 31, 2005 compared with year ended March 31, 2004 – Capital expenditures” and “Item 5 – Operating Financial Review and Prospects – Year by Year Analysis – Year ended March 31, 2004 compared with year ended March 31, 2003 – Capital expenditure”.

Operations

Operational Centers

          Heathrow is BA’s principal base, and BA carries an estimated 39.7% 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 substantially all of its operations into Terminal 5. 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 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. 793/2004, which is implemented in accordance with UK regulations, the UK government must ensure the Airport

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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. 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 mostly 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 UK and 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.

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 award-winning 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, and World Traveller Plus cabin. By March, 2005 103 of the longhaul fleet were fully embodied with the new products, including all of the Heathrow Boeing 747and Boeing 777 fleets together with all ten longhaul aircraft operating out of Gatwick.

          Over the course of the year BA improved meal service in the Club World cabin and introduced a new Chiva Som spa-cuisine menu in First. Improvements in World Traveller targeted at families included a new family-friendly menu and entertainment pack.

Shorthaul Products

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

          BA’s premium shorthaul travellers have enjoyed improvements to their in-flight experience with the launch of a new onboard service and range of meals in Club Europe. The airline has also successfully increased the number of leisure travellers in the Club Europe cabin with the introduction of special upgrade fares on targeted routes.

          During Fiscal 2004, BA’s shorthaul customers saw a series of new services offered on the airline’s website, ba.com. These included improved booking, the ability to change tickets online and clearer, simpler fare rules being displayed. In addition to our online check-in service, BA introduced online boarding pass at Edinburgh in February, 2004, allowing customers to print their own boarding pass at home or in the office and go straight to the gate upon arrival at the airport. By March, 2005 there were 36 European and UK locations that offered online boarding pass.

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          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, 2005, 23% of all customers checking-in at self-service European and UK airports used such a kiosk, a notable growth on the previous year.

Executive Club

          The Executive Club is BA’s worldwide customer loyalty program for recognizing, retaining and communicating with our most valuable customers. 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.

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, 2005, 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. However the franchise with Regional Air of Kenya ended in April, 2005 following Regional Air’s suspension of operations.

          These six carriers carried approximately 4.23 million passengers during the fiscal year to 83 destinations (65 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.

Other Alliance relationships

          In addition to the above mentioned activities BA maintained alliance relationships with Cathay Pacific, America West, Lan Chile, JAL and SN Brussels Airlines. There were no events of note during the year with these relationships.

Computer Systems

          High performing IT and telecommunications systems are vital to the running of the Group’s business. Most areas of British Airways’ 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 other telecommunications suppliers

 

The campus network in London – provided by Affiniti Limited

 

Desktop, provision and support – provided by Specialist Computer Centres (SCC) in the UK and SITA for overseas.

          Over the last year a core element of the IT strategy has been to support simplification of the airline’s business processes through effective use of IT. We have achieved this through a number of initiatives including the customer enabled BA (ceBA) program, providing on-line selling and check in, the ability to upgrade and manage booking facilities. The Customer enabled program is about making BA so easy to do business with that our customers actively choose to serve themselves. We apply the same principles internally for our employees through our Employee Self Service programme.

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          For instance the ‘Manage My Booking’ feature gives our customers the ability to be more prepared for their journey before coming to the airport. They can complete their APIS (Advanced Passenger Information Service) data in advance, check-in online and print their boarding pass, exercise upgrade options and know their baggage allowance.

          Another important element is the use of e-ticket and the introduction of self-service kiosks at key airports around the world. The airline has now installed over 200 kiosks in airports such as Heathrow, New York JFK and Charles De Gaulle. e-ticket continues in its growth. As at March 31, 2005 76% of all worldwide passenger journeys ticketed by BA worldwide were issued on e-tickets.

          In February this year we were the second airline in the world to implement the Amadeus Altea Plan system which gives airlines control over their inventory and seat planning, providing the tools to maximise the yield on every seat, while recognising the value of each customer. This system is now fully integrated with our selling capability Altea Sell also provided by Amadeus.

          As a company listed on the New York Stock Exchange, BA has to comply with the US Sarbanes-Oxley Act of 2002. As a foreign issuer, the deadline for Section 404 compliance has been extended to March 31, 2007. We have completed a full gap analysis of all the requirements for Section 404 compliance and have a number of projects underway to support compliance.

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 2005, 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, 2004. In 2005 BA’s share of this funding requirement was £558,052. In February, 2004, BA’s share of the funding requirement was £968,000.

Seasonal Variations

          Traditionally, the Group earns most of its operating profit between April and October each year, as demand is higher during this period, whilst the majority of the Group’s costs are incurred more evenly throughout the year. Accordingly, as a result of seasonality of demand, operating results have and are expected to vary significantly from period to period within the financial year. Various other factors, including those set forth in this report, can also cause operating results to vary significantly from period to period and year to year. These variations in results and other factors may cause the price of the Company’s securities to fluctuate significantly.

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

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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. Experts in communicable diseases have warned of the risk of a pandemic flu outbreak and the airline has set up a contingency planning group to address this specific risk. Members of the group are working with government and non-government organizations, including the WHO, UK Government and IATA, to ensure a co-ordinated response.

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 could be used to 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”.

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          The Council of the EU decided in June 2003 to begin the process of transferring responsibility for third country relations in air transport to the European Commission. The Council then gave a mandate to the Commission to negotiate a liberal agreement with the US on behalf of all EU Member States. A general framework was developed covering all other third country relationships and the processes whereby Member States may continue to negotiate bilaterally whilst remaining within EU law as clarified by the 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 subjects 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.

          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 air 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 some bilateral air services agreements that the fares, rates and charges for scheduled services on the agreed routes must be filed with, and approved by, both governments concerned or their agencies. These requirements are increasingly being relaxed in accordance with UK Government policy. It is a condition of the air transport and route licenses granted to British airlines by the CAA that the tariffs to be charged for international carriage and the commissions to be paid by the airline to any agent shall be filed with and approved by the CAA. In practice, the CAA only regulates a limited number of fares and does not require commissions to be filed. Under some air services agreements, airlines are required to co-ordinate fares through IATA, (whose role in setting fares is described under “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.

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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 and non-binding Joint Aviation Requirements. 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 European Aviation Safety Agency was set up to advise the Commission and Member States on safety matters. The new safety framework is consistent with ICAO requirements. Member States are still responsible for supervision and compliance but they can no longer unilaterally vary standards in these areas except to respond to an immediate safety problem or to facilitate a short term operational need provided that safety is not compromised. Other areas of aviation safety, starting with operations and licensing, are expected to come under the new EU framework within the next few years.

          British airlines are still required, except in limited circumstances, to operate British registered aircraft. All British airlines are required to hold a 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 is given effect for EU registered airlines by an EU regulation. This governs the maximum compensation to be paid for loss, delay or damage to baggage and also governs liability to passengers in the event of an accident. Airlines are required to carry sufficient insurance to cover their liability.

          New EU denied boarding compensation rules came into force in February, 2005, extending compensation to cancelled flights and imposing passenger care requirements for long delays and cancelled flights. The new legislation has been challenged by the International Air Transport Association (IATA) in the European Court of Justice. An opinion is expected from the Advocate General in September, 2005.

25


          Domestic US disabled passenger legislation has been extended to foreign airlines. The EU also published legislative proposals for disabled passengers in February, 2005. There are conflicts between the EU and US approaches.

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 is currently consulting 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 March 2004, the BA Board adopted a new Code of Business Conduct and Ethics, applicable to all employees and the previous Code, adopted in 2000, was replaced by a new Statement of Business Principles. The new Code of Conduct and the Statement of Business Principles are two of the British Airways Standing Instructions, which set out policies with which all employees should comply. They were communicated throughout the Company in Summer 2004 and are 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.

          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 came into effect in July, 2004 and more substantive changes are still under consideration by the European Commission, following an unsuccessful

26


earlier attempt at change. 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 Commission is unsure that slot exchanges in the UK are consistent with existing EU rules, the UK Government has written to the Commission defending the UK system and pointing to a ruling from the UK High Court.

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. Commercial arrangements can govern, among other things, capacity offered by each airline over flight approvals, the apportionment of revenues between airlines and the co-ordination of schedules. In very few cases, some commercial arrangements are necessary under the relevant air services agreement.

US

          While the US domestic airline industry has been largely deregulated, routes between the UK and the US are still subject to regulation of market access, capacity and fares under an air service agreement known as Bermuda 2. However, both countries have adopted a relatively liberal approach to fare approval and other regulatory matters. In addition, 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.

27


          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, 2005.

 

 

 

 

 

Subsidiary undertakings

 

  Principal activities

Country of incorporation
and registration
and principal operations

 

 

 

 

 

Air Miles Travel Promotions Ltd*

 

Airline marketing

England

 

BA & AA Holdings Ltd*
(90 per cent of equity owned)

 

Holding Company

England

 

Britair Holdings Ltd*

 

Holding Company

England

 

British Airways 777 Leasing Ltd*

 

Aircraft financing

England

 

British Airways Capital Ltd*

 

Airline finance

Jersey

 

British Airways Holdings Ltd*

 

Airline finance

Jersey

 

British Airways Holidays Ltd*

 

Package holidays

England

 

British Airways Leasing Ltd*

 

Aircraft financing

England

 

British Airways Maintenance Cardiff Ltd*

 

Aircraft maintenance

England

 

British Airways Regional Ltd*

 

Air travel services

England

 

British Airways Travel Shops Ltd*

 

Travel agency

England

 

CityFlyer Express Ltd*

 

Aircraft financing

England

 

British Regional Air Lines Group Plc

 

Holding Company

England

 

Speedbird Insurance Company Ltd*

 

Insurance

Bermuda

 

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

 

 

 

 

 

 

Iberia, Lineas Aéreas de España, S.A. (‘Iberia’)

8.76

 

Airline operations

Spain

 

Comair Ltd

18.3

 

Airline operations

South Africa

 

 

 

 

 

 

 

           

 

 

 

 

 

 

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

 

Opodo Ltd*

5.9

 

Internet travel agency

England

 

WNS (Holdings) Ltd*

16.8

 

Flight Services Holding Company

Jersey

 

           


*  Owned directly by British Airways Plc

28


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

 

 

 

 

 

 

 

 

 

Cardiff Airport, Wales

 

 

 

 

 

 

 

Maintenance Area

 

offices, hangars and workshops

 

Lease

 

460,000

 

 

 

 

 

 

 

 

 

New York

 

 

 

 

 

 

 

Terminal Building,
John F. Kennedy
International Airport

 

passenger terminal

 

Sublease

 

535,000

 


 

 


(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.

          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 16 to the Financial Statements.

29


Item 5 — Operating and Financial Review and Prospects

Introduction

          The following discussion covers the three years ended March 31, 2005 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 43 to the Financial Statements.

          Group profits before tax for the fiscal year 2005 were £415 million, compared with a £230 million profit in the previous year. Operating profit in the year, at £540 million, was £135 million better than last year. The operating margin of 6.9% was 1.5 points better than last year. The improvement in operating profit primarily reflects improvements in turnover – up 3.3% - partially offset by increased operating costs, in particular fuel. Passenger yields (pence/RPK) for the year were down 4.4%; seat factor was up 1.8 points at 74.8% on capacity 2.1% higher in ASKs.

          Cargo volumes (CTKs) for the full year were up 11.1% compared with last year, with yields down 6.3% due to the negative impact of exchange rates. Overall load factor for the full year was up 2.1 points at 69.7%.

          Cash inflow before financing was £1,181 million for the twelve months. The closing cash balance of £1,682 million was up £12 million versus last year. Net debt fell by £1,236 million during the year to £2,922 million. This is the lowest level since March 31, 1993, and is down £3.7 billion from the December 2001 peak.

          The number of shares issued and fully paid as at June 30, 2005 was 1,130,882,404. The increase over March 31, 2005 reflects principally the conversion of capital bonds on maturity which resulted in the issue of 46 million shares.

Results of Operations

          The following table sets out the year-over-year percentage changes in Group operating revenue and selected operating statistics (volume, capacity and yield) for the three-year period ended March 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

       

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

(Change%)

 

Group operating revenue

 

 

3.3

 

 

(1.7

)

 

(7.8

)

Group operations:

 

 

 

 

 

 

 

 

 

 

Volume (RTKs)

 

 

6.5

 

 

3.9

 

 

(2.9

)

Capacity (ATKs)

 

 

3.2

 

 

2.5

 

 

(6.7

)

Yield (Revenue/RPK) (1)

 

 

(4.4

)

 

(4.3

)

 

(1.3

)



(1) Scheduled services (passenger and cargo) and non-scheduled passenger services revenue divided by RPKs

Year by Year Analysis

Year ended March 31, 2005 compared with year ended March 31, 2004

Revenue

          Group operating revenue improved in the year by 3.3% to £7,813 million. For the twelve month period, airline operations revenue improved by 0.4% to £6,982 million on a flying program 3.2% larger in ATKs.

          Passenger traffic (RPKs) increased by 4.7%, whilst capacity (ASKs) was 2.1% higher; as a result passenger load factor increased by 1.8 points compared with fiscal 2004 to 74.8%. Passenger yield (pence per RPK) deteriorated by 4.4% for the full year.

          Cargo volumes (CTKs) were up 11.1% compared with fiscal 2004 but yields fell by 6.3%. Cargo revenue was up 4.1% from £463 million to £482 million.

          Other revenue improved by 36.9% to £831 million, primarily due to the increase in the cargo fuel surcharge and the introduction of passenger fuel surcharges.

30


Expenditure

          Net operating expenditure (total operating expenditure less other revenue), decreased by 1.6% compared to fiscal 2004. Unit costs (net operating expenditure per ATK) were 4.7% lower than fiscal 2004.

          See footnote (6) 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, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

 

 

 

 

2005

 

2004

 

2003

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(% Increase / (decrease))

 

(£ million)

 

Employee costs

 

 

4

 

 

4

 

 

(13

)

 

2,273

 

 

2,180

 

 

2,107

 

 

Depreciation and amortization

 

 

1

 

 

(8

)

 

(5

)

 

687

 

 

679

 

 

734

 

 

Aircraft operating lease costs

 

 

(22

)

 

(29

)

 

(5

)

 

106

 

 

135

 

 

189

 

 

Fuel and oil costs

 

 

22

 

 

10

 

 

(18

)

 

1,128

 

 

922

 

 

842

 

 

Engineering and other aircraft costs

 

 

(2

)

 

(14

)

 

(12

)

 

502

 

 

511

 

 

592

 

 

Landing fees and en route charges

 

 

1

 

 

(5

)

 

(6

)

 

556

 

 

549

 

 

576

 

 

Handling charges, catering and other operating costs

 

 

0

 

 

(3

)

 

(13

)

 

930

 

 

934

 

 

961

 

 

Selling costs

 

 

(12

)

 

(22

)

 

(14

)

 

488

 

 

554

 

 

706

 

 

Accommodation, ground equipment costs and currency differences

 

 

(13

)

 

1

 

 

(17

)

 

603

 

 

691

 

 

686

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Group operating expenditure

 

 

2

 

 

(3

)

 

(13

)

 

7,273

 

 

7,155

 

 

7,393

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

          Employee costs increased by 4.3% compared with fiscal 2004 to £2,273 million as pension and wage increases and the cost of the Employee Reward Plan were only partially offset by manpower reductions and other efficiencies. The average number of employees in the Group, in manpower equivalents (MPE), fell by 3.3% to 47,472 and productivity (ATKs per MPE) improved by 6.7%.

          Depreciation costs increased by 1.2% compared with fiscal 2004 to £687 million reflecting a £16 million charge relating to the impairment of the BAe 146 aircraft at British Airways CitiExpress, following the decision to exit the fleet in 2005. This was partially offset by the favorable impact of changes in foreign currency exchange rates due to the weaker US Dollar.

          Aircraft operating lease costs reduced by 21.5% compared with fiscal 2004 to £106 million as a result of the return to lessors of two Boeing 737-400s and one de Havilland Canada DHC-8, and due to favorable exchange impacts. The previous year included an onerous lease charge of £11 million (relating to the withdrawal of the British Airways CitiExpress ATP fleet).

          Fuel and oil costs increased by 22.3% compared with fiscal 2004 to £1,128 million due to a 44.4% increase in fuel price (partially offset by hedging benefits) and the impact of the increased flying schedule. These were partially offset by the favorable exchange impact of the weaker US Dollar.

          Engineering and other aircraft costs reduced by 1.8% compared with fiscal 2004 to £502 million reflecting lower hull insurance costs and the favorable impact of changes in foreign currency exchange rates, partially offset by the cost of additional cargo freighter activity and additional engine sub-contract and lease costs.

          Landing fees and en route charges increased by 1.3% compared with fiscal 2004 to £556 million. This principally reflects increases in price and the impact of the larger flying program, partially offset by the favorable impact of exchange rates.

          Handling charges, catering and other operating costs decreased by 0.4% compared with fiscal 2004 to £930 million, primarily due to the impact of exchange, partially offset by additional freighter and trucking costs, and the full year effect of the British Airways Holidays package business costs.

          Selling and marketing costs fell by 11.9% compared with fiscal 2004 to £488 million. The impact of the restructuring of travel agent commissions and the increase in online sales were partially offset by volume related costs.

31


          Accommodation, ground equipment costs and currency differences decreased by 12.7% compared with fiscal 2004 to £603 million. This was due to reductions in information management spend, property costs, legal costs and favorable exchange impacts of £55 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.

          Operating results improved in each area. For longhaul, this reflected increased revenue partially offset by rising costs, in particular fuel. In Europe, losses continued to fall due to continued focus on cost reductions – the total loss of £26 million compared to £60 million in fiscal 2004 includes an impairment charge of £16 million due to the planned retirement of the BAe 146 fleet.

Share of operating profit in associates

          British Airways’ share of operating profits from associated undertakings reduced by £17 million to £41 million during fiscal 2005, principally due to the sale of the investment in Qantas in September, 2004.

Profit/loss on disposal of fixed assets and investments

          Losses on disposals of fixed assets and investments for fiscal 2005 were £26 million, compared with losses of £46 million in fiscal 2004, which included an £83 million loss on disposal of dba.

          The losses on disposal in fiscal 2005 primarily reflect the disposal of the investment in Qantas in September, 2004 (£11 million).

Net interest payable

          Net interest expense for fiscal 2005 was £157 million, £43 million lower than in fiscal 2004. This included a credit relating to the revaluation of Yen debts (used to fund aircraft acquisitions) of £31 million, compared to a credit the previous year of £16 million. The revaluation — a non cash item required by standard accounting practice — results from the weakening of the Yen against Sterling.

          Excluding the revaluation, the improvement in interest expense reflected lower gross debt and exchange benefits offset in part by higher interest rates.

Other finance income and related fees

          Other finance income and related fees were £14 million in fiscal 2005. This compares to a credit of £13 million in fiscal 2004.

Taxation

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

          There is no tax payable in the UK either on operating results, as adjusted for taxation, or on profits on disposals as these are covered by tax losses from current and prior periods. During the 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. The tax payable overseas relates principally to Australian tax payable on the disposal of the shareholding in Qantas.

32


Earnings per share

          For the twelve month period, profits attributable to shareholders were £251 million, equivalent to earnings of 23.4 pence per share, compared with earnings of 12.1 pence per share last year.

Aircraft fleet

          The number of Group aircraft in service at March 31, 2005 was 290, a reduction of one on the prior year. Aircraft returns to lessors comprised two Boeing 737-400 aircraft and one de Havilland Canada DHC-8. In addition, a Boeing 737-400 aircraft was stood-down pending return to the lessor. An Airbus A320 and two Boeing 737-400’s were sub-leased during the year. Deliveries comprised six Airbus A321 aircraft.

Capital expenditure

          During the three-year period ended March 31, 2005, capital expenditure and investments totaled approximately £937 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, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

(£ million)

 

Aircraft, spares, modifications and refurbishments (net of refund of progress payments)

 

 

257

 

 

154

 

 

225

 

Property and equipment

 

 

37

 

 

67

 

 

95

 

Landing rights

 

 

32

 

 

14

 

 

32

 

 

 

   

 

   

 

   

 

 

 

 

326

 

 

235

 

 

352

 

Investments

 

 

6

 

 

0

 

 

18

 

 

 

   

 

   

 

   

 

 

 

 

332

 

 

235

 

 

370

 

 

 

   

 

   

 

   

 

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

Working capital

          At March 31, 2005, net current liabilities were £136 million, down £95 million on last year. This change principally reflects lower creditors (£128 million) and an increase in debtors due to higher sales volumes, and a £12 million increase in cash, short-term loans and deposits, partially offset by the Convertible Capital Bonds that matured in June, 2005.

          Sales in advance of carriage increased from £859 million to £880 million.

          The Company believes its working capital is sufficient for its current requirements.

Cash flow

          Net cash inflow from operating activities totaled £1,192 million, an improvement of £99 million from last year primarily due to the improvement in operating profit partially offset by the impact of working capital movements.

          The net cash flow before management of liquid resources and financing was £1,181 million, an increase of £307 million from last year, primarily due to the sale proceeds of £427 million from Qantas.

33


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, 2005 (see also Note 26 to the Financial Statements):


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank and
other loans

 

Finance leases
and hire
purchase
arrangements

 

Total

 

 

 

 

 

 

 

 

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ million)

 

Balance at April 1

 

 

 

1,225

 

 

 

 

4,491

 

 

 

5,716

 

 

6,689

 

 

7,401

 

New loans raised

 

 

 

116

 

 

 

 

 

 

 

116

 

 

81

 

 

13

 

Non-cash refinancing

 

 

 

 

 

 

 

(9

)

 

 

(9

)

 

(32

)

 

 

Loans, finance leases and hire purchase arrangements undertaken to finance the acquisition of aircraft and other assets

 

 

 

 

 

 

 

12

 

 

 

12

 

 

97

 

 

221

 

Repayment of amounts borrowed

 

 

 

(168

)

 

 

 

(1,103

)

 

 

(1,271

)

 

(915

)

 

(797

)

Effect of exchange rate changes

 

 

 

(5

)

 

 

 

(67

)

 

 

(72

)

 

(204

)

 

(149

)

 

 

 

   

 

 

 

   

 

 

   

 

   

 

   

 

Balance at March 31

 

 

 

1,168

 

 

 

 

3,324

 

 

 

4,492

 

 

5,716

 

 

6,689

 

 

 

 

   

 

 

 

   

 

 

   

 

   

 

   

 

          Six Airbus A321 aircraft were delivered during the year. Two of the aircraft were financed through US Dollar mortgage loans; the remaining four aircraft were bought for cash. One Boeing 777-200 aircraft was sold and leased back for a period of ten years. This was the third of our Boeing 777-200 aircraft to be sold and leased back, helping to manage the Group’s residual value exposure to this aircraft fleet. Four Boeing 747-400 aircraft previously held on finance leases were purchased during the year.

          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 £21 million (2004: £169 million gain).

Net debt/total capital ratio

          Net debt at March 31, 2005 amounted to £2,922 million, a reduction of £1,236 million compared with fiscal 2004. This included convertible bonds of £112 million and is net of cash and short-term loans and deposits totaling £1,682 million.

          The net debt/total capital ratio stood at 42.7%, an 11.4 point reduction versus last year mainly due to the reduction in net debt. Including operating leases, net debt/total capital ratio was 48.2%, a 10.2 point reduction from last year.

Share capital

          The number of shares allotted, called up, and fully paid on March 31, 2005 was 1,082,903,000 (March 31, 2004: 1,082,845,000). On June 15, 2004, 39,000 ordinary shares were issued in exchange for 93,000 Convertible Capital Bonds 2005 on the basis of one ordinary share for every 2.34 Bonds held. During the year, 2,025,936 shares were issued on the exercise of options under Employee Share Option schemes.

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.

34


          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.

          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.

35


          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 shorthaul 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 shorthaul 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.

36


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 finance income and related fees

          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.

37


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 26 to the Financial Statements):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank and
other loans

 

Finance leases
and hire
purchase
arrangements

 

Total

 

 

 

 

 

 

 

 

 

 

 

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.

38


Outlook

          For the year to March, 2006, total revenue is expected to improve by 4.5% – 5.5%, including the impact of both cargo and passenger fuel surcharges. Capacity and volumes are expected to increase by about 3% with total yield flat. Fuel costs, net of hedging, are expected to be about £450 million more than last year. As announced in our latest Business Plan, our focus is on preparing for the move to Terminal 5 in 2008, investing in products for our customers and continuing to drive simplification to deliver a competitive cost base.

          See the Introductory Note regarding forward looking statements and the discussion of Risk Factors in Item 3.

Other matters

Business Plan

          Against a target of £450 million of savings announced in the 2003/05 Business Plan (including the £300 million of external spend savings) £457 million was realized. The £300 million employee cost savings announced in the 2004/06 Business Plan is expected to be delivered by March, 2007.

          The 2005/07 Business Plan was announced on February 22, 2005 with the key elements being to ensure we are prepared for the move to Terminal 5 in 2008 (‘Fit for 5’), targeted investment in our product and people and a continued focus on building a competitive cost base.

British Airways CitiExpress

          British Airways CitiExpress continued to simplify its operation during 2004/05, building on the work started in 2003/04. Since 2001 aircraft numbers have fallen by 35 and types from nine to four - - a further five aircraft (and another fleet type) will be taken out in 2005/06. The number of bases has also been reduced from 15 in 2001 to eight at the end of March 2005. As a consequence of this simplification, operational performance is more robust, costs have fallen and financial results have improved. Further cost reductions are targeted in 2005/06.

Alliance benefits

          The oneworld alliance includes eight airline members: British Airways, Aer Lingus, American Airlines, Cathay Pacific, Finnair, Iberia, LanChile and Qantas. Co-operation across the alliance in a number of areas benefits the customer and increases the airlines’ effectiveness. oneworld offers a substantial package of customer benefits, including reciprocal reward and recognition programs, common lounge access, smoother transfers, increased customer support and greater value.

Qantas

          The relationship with Qantas, now in its twelfth year, is British Airways’ longest standing and deepest alliance relationship. Under the Joint Services Agreement (JSA) there is full strategic, tactical and operational co-operation on all of British Airways’ and Qantas’ flights that serve markets between the United Kingdom/Continental Europe and Southeast Asia/Australia. This co-operation 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. In February 2005, the Australian Competition and Consumer Commission extended permission for both carriers to co-operate in this way for a further five years. Application has also been made to the UK Office of Fair Trading and the EU competition authorities and their ruling is outstanding at this time

          British Airways 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.

          On September 9, 2004 the Group completed the sale of its 18.25% holding in Qantas through a book build sale of the shares, thereby reducing debt and continuing to strengthen our balance sheet. The sale realized gross proceeds of £427 million. The loss on disposal of £11 million includes a write-off of goodwill of £59 million previously set off against reserves.

39


Iberia

          In December 2004, British Airways and Iberia signed a Joint Business Agreement (‘JBA’) to establish profit-sharing on two routes, Heathrow-Madrid and Heathrow-Barcelona. This was accompanied by joint selling and the co-ordination of schedules on these routes from Summer 2005.

          British Airways and Iberia codeshare on more than 65 domestic and international routings. As well as all UK-Spain routes, this includes Iberia codesharing on services operated by British Airways franchise carriers GB Airways and Comair, and British Airways codesharing on services operated by Iberia franchise Air Nostrum. The airlines carried over 700,000 codeshare passengers during fiscal 2004/05.

          As at March 31, 2005 British Airways held an 8.76% stake in Iberia. Iberia’s profit before tax for the 12 months to December 31, 2004 (included in the fiscal March 31, 2005 result) was €283.2 million, compared to a profit before tax last fiscal year of €201.7 million.

Franchising

          As at March 31, 2005 there were six franchisees operating to 83 destinations, of which 65 are additional to the British Airways network. The franchise with Regional Airways was subsequently terminated in April 2005, leaving five British Airways franchisees — Comair, GB Airways, British Mediterranean, Loganair and Sun-Air of Scandinavia.

Pension Deficit

          Under FRS 17, the pension deficit after deferred tax increased by £205 million to £1.4 billion (due mainly to lower long-term interest rates), despite the doubling of company contributions to £250 million. The deficit is not consolidated into the accounts as we continue to report under SSAP 24. Next year, under International Financial Reporting Standards (IAS 19), the pension deficit will be included in the balance sheet. This will have a significant adverse impact on reserves (in particular distributable reserves).

Liquidity and investments

          The Group maintained high liquidity throughout the year. Cash generated from operations together with continued low capital expenditure and the disposal of our share in Qantas for £427 million, allowed us to make scheduled repayments of £542 million and to repay £729 million of debt early whilst maintaining the closing cash balances at last year’s level. Early debt repayment in 2004/2005 has been focused on aircraft leases where we have repaid the debt on 24 aircraft early; this increased the number of unencumbered aircraft to 70 at the year-end. The Group continually reviews liquidity requirements and will continue to repay debt early to utilize surplus liquidity.

          At March 31, 2005 the Group had at its disposal short-term loans and deposits and cash at bank and in hand amounting to £1,682 million (2004: £1,670 million). In addition, the Group had undrawn long term committed aircraft and general financing facilities totaling approximately US$460 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 general funding facilities and net cash flow, are expected to be sufficient to cover the cost of all outstanding firm aircraft deliveries.

          Surplus funds are invested in high quality short-term liquid instruments, usually bank deposits and money market funds. Credit risk is managed by limiting the aggregate exposure to any individual counterparty, taking into account its credit rating. Such counterparty exposures are regularly reviewed and adjusted as necessary. Accordingly, the possibility of material loss arising in the event of non-performance by counterparties is considered to be unlikely.

40


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 towards management of corporate and asset financing, interest rate risk, fuel price risk, foreign exchange risk and cash and liquidity retention. The Treasury governance statement also lists the financial instruments that the Group’s treasury function is 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 that 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 to minimize group risk; 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 25 to the Financial Statements. Low capital expenditure has meant that the requirements for new financing have been limited. In April 2004, a Boeing 777 aircraft was sold and leased back. Other financing transactions have been met by the drawdown on existing committed facilities or from surplus liquidity.

          At March 31, 2005 approximately 80% of the Group’s borrowings (after swaps), net of cash, short-term loans and deposits, were at fixed rates of interest and 20% were at floating rates. This proportion of fixed rate borrowings has increased from 66% at March 31, 2004 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 25 to the Financial Statements.

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

41


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, 2005, the group had more US Dollar payments than US Dollar revenues, principally as a result of fuel purchased in US Dollars.

          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 or Sterling.

          The Group has substantial liabilities denominated in Yen, which consist mainly of purchase option payments falling due under various Japanese leveraged lease arrangements maturing between 2005 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 future Yen maturities.

          The Group’s forward transactions in foreign currency are detailed in Note 36 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.

          This strategy has moderated the impact of recent increases in the price of jet fuel and the company enters 2005/2006 with a substantial fuel hedging portfolio which was valued at $523 million at March 31, 2005.

Derivative financial instruments

          The company 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, 2005 are summarized in Note 36 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”.

42


Interest cover

          The Group’s interest cover for fiscal 2005 was 3.2 times. The increase in interest cover from fiscal 2004 (2.1 times) reflects the improvement in the profitability of the Group between fiscal 2005 and fiscal 2004 and a reduction in net interest payable. This reduction principally reflects the lower level of net debt of the Group.

          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

 

 

1,168

 

 

 

63

 

 

 

 

168

 

 

 

 

203

 

 

 

 

734

 

 

Capital lease Obligations

 

 

3,324

 

 

 

384

 

 

 

 

767

 

 

 

 

777

 

 

 

 

1,396

 

 

Operating lease Obligations

 

 

2,119

 

 

 

172

 

 

 

 

272

 

 

 

 

163

 

 

 

 

1,512

 

 

 

 

   

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

Total

 

 

6,611

 

 

 

619

 

 

 

 

1,207

 

 

 

 

1,143

 

 

 

 

3,642

 

 

 

 

   

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

See also Notes 16 and 25 to the Financial Statements.

          Capital expenditure commitments authorized and contracted for, but not provided for in the Group’s fiscal 2005 Financial Statements, amounted to £143 million for the Group (2004: £347 million), and £142 million for the Company (2004: £346 million), in each case as at March 31, 2005. The outstanding commitments include £132 million which relates to the acquisition of Airbus A320 family aircraft scheduled for delivery over the next three 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.

Off-Balance Sheet Arrangements

          As part of its Treasury and fuel risk management program, the Group selectively uses derivative financial and commodity instruments in order to reduce its exposure to fluctuations in market rates and prices. The Group uses derivatives only for the purposes of hedging identified exposures, where appropriate, and does not invest in derivatives for trading or speculative purposes. The instruments used include swaps, futures and forward contracts, options, collars in the currency, interest rate and fuel markets.

          The Group’s accounting policy for derivatives under UK GAAP is to defer and only recognize in the consolidated Statements of Income, gains and losses on hedges of revenues or operating payments as they are realized. Amounts payable or receivable in respect of interest rate swap agreements are recognized in the net interest payable charge over the period of the contracts on an accruals basis. Cross-currency swap agreements and forward foreign exchange contracts taken out to hedge borrowings are accounted for in establishing the carrying values of the relevant loans, leases or hire purchase arrangements in the balance sheet. Gains or losses on forward foreign exchange contracts that hedge capital expenditure commitments are recognized as part of the total Sterling carrying cost of the relevant tangible asset as the contracts mature or are closed out.

          Under US GAAP the notional gains or losses derivatives are included within net income as the contracts have not been designated hedges under SFAS 133.

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

43


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 43 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, 2005 was 117,982,563,998 and the total number of AirMiles outstanding was 7,224,643,645. BA has recorded a liability for the awards relating to these mileage credits of £112 million.

          The number of frequent flyer RPKs as a percentage of total RPKs for the years ended March 31, 2005, 2004 and 2003 was 3.2%, 4.0% and 4.4%.

          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.

44


          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 £8.2 billion in aircraft, property, equipment and other tangible assets as of March 31, 2005. 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, prior to April 1, 1998, goodwill arising on the acquisition of subsidiary undertakings, and investments in associated undertakings, was set off directly against retained earnings. From April 1,1998, goodwill has been capitalized and amortized over its useful economic life.

          Under US GAAP, in accordance with FAS 142 “Goodwill and Intangible Assets”, goodwill is capitalized and not amortized, but tested for impairment on an annual basis or on an interim basis when a triggering event occurs. As a result of the annual impairment test undertaken at March 31, 2003, the Group recognized at that date an impairment charge representing the outstanding balance of goodwill arising in respect of the acquisition of subsidiary undertakings.

          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 post-retirement benefits

          Accounting for pensions and other post-retirement 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 30 to the Financial Statements.

          Details of the US GAAP adjustment relating to pensions and other post-retirement benefits are included in Note 43 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

45


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 required to be adopted in year to March 31, 2005

          There were no new US accounting standards required to be adopted in the year.

Impact of new US accounting standards not yet adopted

          In November, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151 ‘Inventory Costs—an amendment of ARB No. 43, Chapter 4’ (“SFAS 151”). SFAS 151 clarifies the accounting treatment for certain types of overheads incurred in the production of inventory. Previously, these overheads were required to be expensed only when they met a criterion of being “so abnormal” as to justify this. SFAS 151 requires the allocation of fixed production overheads to inventory to be based on normal productive capacity, with unallocated overheads being expensed regardless of whether they meet the “so abnormal” criterion. SFAS 151 is effective for accounting periods beginning after June 15, 2005.The FASB does not anticipate significant changes in accounting treatments as a result of SFAS 151, which is intended to reduce differences with International Accounting Standards. Adoption of SFAS 151 is not anticipated to generate a material impact to the Group.

          In December, 2004, the FASB issued SFAS No. 152, ‘Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67’ (“SFAS 152”). The Statement references earlier guidance included in FASB Statement No. 66, ‘Accounting for Sales of Real Estate’ to AICPA Statement of Position (SOP) 04-2, ‘Accounting for Real Estate Time-Sharing Transactions’. SFAS 152 also amends Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, highlighting that guidance therein that relates to incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. SFAS 152 is effective for accounting periods beginning after June 15, 2005. Adoption of SFAS 152 is not anticipated to generate a material impact to the Group.

          In December, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 153 ‘Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29’ (“SFAS 153”). SFAS 153 amended one of the exceptions to the principle that exchanges be based on the fair values of the items exchanged. SFAS 153 eliminated the exception provided for the nonmonetary exchange of similar productive assets, and replaced this with an exception for the nonmonetary exchange of items that lack commercial substance. SFAS 153 is effective for accounting periods beginning after June 15, 2005, and is intended to reduce differences with International Accounting Standards. Adoption of SFAS 153 is not anticipated to generate a material impact to the Group.

          In December, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R) ‘Accounting for Stock-Based Compensation’ (“SFAS 123(R)”). SFAS 123(R) requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). SFAS 123(R) is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS 123(R) eliminates the alternative to use Opinion 25’s intrinsic value method of accounting, that was provided as an alternative option in Statement 123 as originally issued. The Group currently accounts for stock-based compensation using the intrinsic method and provides a pro forma disclosure in Note 43 of amounts that would arise under the fair value method. The effective date for implementation SFAS of 123(R) by public entities with a year end of March 31, is April 1, 2006. A program of work is underway in the Group to review the detailed provisions and implications of the Standard, and has yet to determine the impact of adopting its requirements on the financial statements.

          In May, 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154 ‘Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3’(“SFAS 154”). APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, and provides guidance where this is impractical. The Statement carries forward certain other guidance from Opinion 20, including the treatment of changes in estimate and the correction of errors. SFAS 154 is effective for accounting years beginning after December 15, 2005, and is intended to reduce differences with International Accounting Standards. SFAS 154 will be adopted on a prospective basis.

46


Impact of new UK accounting standards

          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, 2005 the Group held £26 million of own shares, treated as a deduction from equity as required under the UITF Abstract.

International Financial Reporting Standards

          British Airways will prepare its March 31, 2006, consolidated financial statements under International Financial Reporting Standards (IFRS).

          The adoption of IFRS will result in changes to the presentation of the financial statements (including disclosures analysis) and to the amount and timing of the recognition of profits and losses, and assets and liabilities. The main impacts on BA will be as follows:

IAS 16 – Property, Plant and Equipment

          Major engine overhaul will be treated as a separate component within fixed assets and depreciated over the period to the next overhaul as opposed to expensing when incurred.

IAS 18 – Revenue Recognition

          The area impacted by this standard will be the two loyalty programs the Group operates – the BA Executive Club (BA Miles) and Air Miles Travel Promotions Limited (Air Miles). A portion of the revenue on the sale of BA Miles to third parties and on the sale of AirMiles will be deferred. The amount deferred will be dependent on the fair value of the miles sold.

IAS 19 – Employee Benefits (defined benefit pension schemes)

          On transition to IFRS, the full value of any pension surplus or deficit will appear on the balance sheet with the corresponding charge to reserves, net of deferred tax.

IAS 32 – Financial Instruments – Disclosure and Presentation

          IAS 32 was adopted on April 1, 2005 in line with the exemption under IFRS 1 to prepare the comparative period under IFRS without IAS 32. This standard does not have a material impact on British Airways.

IAS 39 – Financial Instruments, Recognition and Measurement

          IAS 39 was adopted on April 1, 2005 in line with the exemption under IFRS 1 to prepare the comparative period under IFRS without IAS 39. This standard impacts the accounting for a wide range of financial instruments, including those used as part of the Group strategy, for example fuel hedging. A new fuel hedging system has been implemented to measure the effectiveness of the fuel hedges. Based on our experience to date, our fuel hedges are largely effective.

IAS 12 – Taxation

          Deferred tax will be provided on temporary differences rather than timing differences as under UK GAAP. As a result, additional tax will be provided.

47


Item 6 — Directors, Senior Management and Employees

          During fiscal 2005 the business of BA was directed by a Board of Directors which reduced in number from 12 to 11 members. All Directors are subject to retirement every three years and are eligible for re-election by the shareholders. Significant changes to the membership of the Board took place at the Annual General Meeting on July 19, 2005. The Directors of BA immediately prior to the meeting (and their respective ages) were:

CHAIRMAN

Martin Broughton (58)
Board Member since May 2000, Deputy Chairman from November, 2003 becoming non-executive Chairman in July, 2004. Safety Review Committee and Chairman of the Nominations Committee. Martin Broughton is Chairman of the British Horseracing Board.

CHIEF EXECUTIVE

Roderick Eddington (55)
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. Rod will be retiring from British Airways on September 30, 2005.

CHIEF EXECUTIVE DESIGNATE

William Walsh (43)
Executive Board Member since May 3, 2005. Formerly Chief Executive of Aer Lingus, he is a non-executive director of Fyffes Plc.

CHIEF FINANCIAL OFFICER

John Rishton (47)
Executive Board member since September, 2001. Having originally joined the airline in 1994, 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 (57)
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 The ACT Foundation Limited. He is a non-executive director of WSH Group Ltd and Kempton Park Racecourse Company Limited. Mike will be retiring from British Airways on September 30, 2005.

NON-EXECUTIVE DIRECTORS

Maarten van den Bergh (63)
Independent non-executive director since 2002 and senior independent non-executive director since July, 2004. Audit, Nominations and Remuneration Committees. He is Chairman of Lloyds TSB Group Plc and a non-executive director of BT Group plc, Royal Dutch Shell PLC and a member of the Supervisory Board of Akzo Nobel, 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.

Dr Ashok Ganguly (69)
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 (60)
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 was a member of the West Michigan University College of Aviation Advisory Board until June, 2005.

Denise Kingsmill (58)
Independent non-executive director since November, 2004. Audit and Safety Review Committees. Until December, 2003, she chaired the Department of Trade and Industry’s accounting for people task force and was deputy chairman of the Competiton Commission. She is also non-executive director with the Home Office and chairs the advisory forum for Laing O’Rourke plc.

48


Dr Martin Read (55)
Independent non-executive director since May, 2000. Chairman of the Remuneration Committee. Martin Read is Group Chief Executive of LogicaCMG plc and a non-executive director of the Boots Group PLC.

Alison Reed (48)
Independent non-executive director since December, 2003. Chairman of Audit Committee. Alison Reed left Marks & Spencer plc, where she was Group Finance Director, at the end of April, 2005 and became the Group Finance Director of Standard Life on June 13, 2005.

Lord Renwick of Clifton (67)
Independent non-executive director since 1996. Remuneration and Safety Review Committees. Previously British Ambassador to the United States and to South Africa. He is Vice Chairman Investment Banking of J P Morgan Europe, Chairman of Fluor Ltd, director of BHP Billiton, SABMiller Plc, Compagnie Financiere Richemont AG and a Trustee of The Economist.

Board Committees

          The Audit Committee meets at least quarterly under the chairmanship of Alison Reed and consists solely of independent non-executive directors. At the beginning of the year the members were Martin Broughton, Maarten van den Bergh, Ashok Ganguly, and Alison Reed, who succeeded Martin Broughton as chairman of the Committee on July 20, 2004, the date on which Martin Broughton left the Committee on becoming Chairman of the Company. Denise Kingsmill joined the Committee on November 1, 2004. The external and internal auditors, the General Counsel and the Company Secretary normally attend meetings of the Committee and have rights of access to it. Executives attend as required. In addition, the Committee has held closed meetings and has also met privately with each of the external and internal auditors. The Committee reviews the company’s financial statements to ensure that its accounting policies are the most appropriate to the company’s circumstances and that its financial reporting presents a balanced and understandable assessment of the company’s position and prospects. It also keeps under review the company’s system of internal control, including compliance with the company’s codes of conduct and the scope and results of the work of internal audit and of external audit, together with the independence and objectivity of the auditors. The Committee is responsible for overseeing the performance, as well as the objectivity and independence, of the auditor which it does by requiring reports from the auditor, a requirement to pre-approve fees for non-audit work and by ensuring that fees for non-audit work remain lower than those for audit work. The Committee is also responsible for oversight of the company’s policy on whistleblowers and the Risk Group (see Internal Control below).

          The Nominations Committee meets at least once a year, and additionally if required, to consider the balance of the Board’s membership, to identify any additional skills or experience which might enhance the Board’s performance, and to interview candidates and recommend appointments to or, where necessary, removals from, the Board. The Committee also reviews the performance of any director seeking re-election at the forthcoming annual general meeting. The Committee’s remit also includes review of corporate governance. On July 20, 2004 Lord Marshall retired as Chairman of the company and of the Nominations Committee. The process which resulted in the selection of the new chairman on November 7, 2003, was led by Maarten van den Bergh. From July 20, 2004, Martin Broughton has chaired the Committee and its other members are Maarten van den Bergh and Martin Read. No member of the Committee participates in any discussion of his or her own performance.

          The Remuneration Committee of the Board meets at least twice a year and additionally if required to determine the company’s policy on remuneration for the executive directors, senior executives below Board level, the Chairman and the Company Secretary, to review that remuneration and to consider and decide grants under the company’s long term incentive plans. The Committee consists solely of independent non-executive directors and is chaired by Dr Martin Read, its other members were Martin Broughton (until July 20, 2004), Lord Renwick (from July 20, 2004) and Maarten van den Bergh. No director is involved in deciding his or her own remuneration. The fees for the non-executive directors are fixed by the executive directors on the recommendation of the Chairman.

          The Safety Review Committee meets at least five times per year under the chairmanship, in the year under review, of Captain Michael Jeffery, a former Director of Flight Operations. Its other members were Martin Broughton, (until July, 2004) Baroness O’Cathain (until December, 2004), Dr. Ganguly, Lord Renwick and, from November, 2004, Denise Kingsmill. The Committee considers matters relating to the operational safety and security of the airline and subsidiary airlines as well as health and safety issues. The Committee is advised by an external expert, Sir Michael Alcock GCB KBE FREng.

49


Service Contracts of Executive Directors

          Each of the three executive directors who served during the year under review has a rolling contract with a one-year notice period. As a matter of policy, in the event of new external appointments, the length of service contracts would be determined by the Remuneration Committee in the light of the then prevailing market practice. However, the Remuneration Committee recognises that, in some cases, it may be necessary to offer a contract with a notice period in excess of one year in order to attract a new executive director. In these circumstances, the Remuneration Committee acknowledges that the notice period should reduce to one year after the initial period in accordance with paragraph B.1.6 of the Combined Code. There is no express provision for compensation payable upon early termination. The service contract for Willie Walsh provides for an initial notice period of two years reducing month-by-month to a period of one year. The Company’s Commercial Director, Martin George, was elected a director by shareholders at the Annual General Meeting on July 19, 2005. He also has a rolling contract with a one year notice period. The service contracts include the following terms:

 

 

 

 

 

Executive Director

 

Date of contract

 

Unexpired term/notice period

 

 

 

 

 

 

 

 

 

 

Rod Eddington

 

July 7, 2000

 

retiring on September 30, 2005

 

 

 

 

 

Mike Street

 

July 1, 2001

 

retiring on September 30, 2005

 

 

 

 

 

John Rishton

 

September 1, 2001

 

terminable on 12 months notice

 

 

 

 

 

Willie Walsh

 

March 8, 2005

 

terminable on 12 months notice after the first year

 

 

 

 

 

Martin George

 

February 1, 1997

 

terminable on 12 months notice

Service Agreements of Non-Executive Directors

          Except where appointed at a general meeting, directors stand for election by shareholders at the first annual general meeting following appointment and stand for re-election every three years thereafter under Article 87. There is no express provision for compensation payable upon early termination. None of the Chairman or the non-executive directors has any right to compensation on the early termination of their appointment. The letters of engagement for the Chairman and the non-executive directors, were reviewed after the publication of the revised Combined Code and new letters of engagement were entered into in March, 2004, copies of which have been filed as exhibits to the Company’s annual report on Form 20-F and are also available at www.bashareholders.com. As at the end of the Annual General Meeting held on July 19, 2005, 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

 

Expires at the
Annual General
Meeting in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Martin Broughton

 

May 12, 2000

 

July 15, 2003

 

 

 

2006

 

Maarten van den Bergh

 

July 16, 2002

 

July 19, 2005

 

 

 

2008

 

Denise Kingsmill

 

November 1, 2004

 

July 19, 2005

 

 

 

2008

 

Dr Martin Read

 

May 12, 2000

 

July 15, 2003

 

 

 

2006

 

Alison Reed

 

December 1, 2003

 

July 20, 2004

 

 

 

2007

 

Ken Smart

 

July 19, 2005

 

July 19, 2005

 

 

 

2008

 

Baroness Symons

 

July 19, 2005

 

July 19, 2005

 

 

 

2008

 

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

Robert Boyle (40), 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, (49), Chief Information Officer. Joined the airline in 1996 as Im Systems Supply Board Manager becoming Chief Information Officer in 2000.

Lloyd Cromwell Griffiths, (60), Director of Flight Operations. Joined the airline in 1973 as a pilot becoming Director of Flight Operations in 2001.

Alan McDonald, (55), Director of Engineering. Joined the airline in 1966 as an Apprentice Engineer becoming Director of Engineering in 2001.

50


Roger Maynard, (62), Director of Investments and Alliances. Joined the airline in 1987 as Vice-President Commercial Affairs North America, becoming Director of Corporate Strategy in May 1991.

Neil Robertson, (52), Director for People. Joined the airline in 1976 as a graduate trainee becoming Director for People in 2002.

Robert Webb QC, (56), 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, (47), 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, 2005 was:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rod Eddington

 

John Rishton

 

Mike Street

 

 

 

 

 

 

 

 

 

 

 

2005

 

2005

 

2005

 

 

 

 

 

 

 

 

 

 

 

(£’000)

 

Basic salary

 

 

 

592

 

 

 

 

340

 

 

 

 

345

 

 

Bonus

 

 

 

300

 

 

 

 

110

 

 

 

 

86

 

 

Taxable benefits*

 

 

 

25

 

 

 

 

16

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

917

 

 

 

 

466

 

 

 

 

453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

*

Taxable benefits include a company car or cash equivalent, fuel, private health insurance and personal travel.

          The remuneration of the three executive directors has been adjusted as reflected above from the amounts listed in the previously filed service contracts.

          The remuneration (fees and taxable benefits) paid to non-executive directors for the year ended March 31, 2005 were:

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

Fee

 

Taxable benefit*

 

 

 

 

 

 

 

 

 

(£’000)

 

 

 

 

 

 

 

 

 

 

 

Martin Broughton

 

 

208

 

 

 

21

 

 

Maarten van den Bergh

 

 

38

 

 

 

0

 

 

Dr. Ashok Ganguly

 

 

35

 

 

 

0

 

 

Captain Michael Jeffery

 

 

48

 

 

 

15

 

 

Denise Kingsmill (1)

 

 

15

 

 

 

1

 

 

Dr Martin Read

 

 

37

 

 

 

0

 

 

Alison Reed

 

 

37

 

 

 

0

 

 

Lord Renwick

 

 

33

 

 

 

1

 

 

 

 

   

 

 

 

 

 

 

Total

 

 

451

 

 

 

38

 

 

 

 

   

 

 

 

 

 

 



 

 

 

* Taxable benefits include a company car or cash equivalent, fuel, private health insurance and personal travel.

 

(1)

Appointed to the Board of Directors in November, 2004.

          The Chairman’s fee is determined by the Remuneration Committee. Fees for the non-executive directors are determined by the executive directors on the recommendation of the Chairman. At the beginning of the year in question, the fees were £27,500 per annum plus £600 for each Board Committee separately attended. The fees were subsequently reviewed in September, 2004, having last been reviewed in April, 2001. From October 1, 2004 the fees were £35,000 per annum, with the chairmen of the Audit and Remuneration Committees and the senior independent non-executive director each receiving £7,500 per annum in addition to these fees. No other fees are now paid for attendance at Board committees. The current Chairman of the Safety Review Committee receives £15,000 in addition to these fees and is provided with a company car and fuel. The Chairman and the non-executive directors are not eligible to participate in the long term incentive plans. Their fees are not pensionable.

51


They are also eligible for non-contractual travel concessions. Captain Jeffery, being a former executive of the company, is in receipt of a pension under the Airways Pension Scheme. As a former executive, Captain Jeffery retained conditional share options under the long term incentive plan, granted whilst he was serving as an executive of the company, however, these lapsed on April 1, 2005.

          For 2005, the aggregate compensation paid or accrued (excluding pension benefits) by BA to all members of the Board of Directors and its other executive officers named above during the year for services in all capacities was £2,524,084. Also during fiscal 2005, pension contributions of £366,951 were paid for the benefit of members of the Board of Directors and BA’s other executive officers. For the year ended March 31, 2005 Rod Eddington earned an annual pension of £24,074, John Rishton earned an annual pension of £19,789, and Mike Street earned an annual pension of £13,374.

          The Company has three main pension schemes. Two of these, Airways Pension Scheme (APS) and New Airways Pension Scheme (NAPS), are defined benefit schemes and are closed to new members. The new scheme, British Airways Retirement Plan (BARP) is a defined contribution scheme. Rod Eddington and John Rishton are members of both the New Airways Pension Scheme (NAPS) and an unfunded unapproved retirement scheme which, under the terms of their service contracts, will provide a total retirement benefit equivalent to 1/30th and 1/56th respectively of basic salary for each year of service. Mike Street is a member of NAPS which will provide 1/56th of pensionable pay for each year of service and Willie Walsh is a member of BARP.

Share Ownership

          The interests in shares held by the Directors as of March 31, 2005 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

British Airways Plc
Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,
2005

 

April 1,
2004

 

% of issued
share
capital

 

 

 

 

 

 

 

 

 

Martin Broughton

 

 

24,090

 

 

24,090

 

 

 

0.002

 

 

Rod Eddington

 

 

 

 

 

 

 

0.000

 

 

Mike Street

 

 

6,678

 

 

6,678

 

 

 

0.000

 

 

John Rishton

 

 

2,039

 

 

2,039

 

 

 

0.000

 

 

Maarten van den Bergh

 

 

2,000

 

 

2,000

 

 

 

0.000

 

 

Dr. Ashok Ganguly

 

 

104

 

 

104

 

 

 

0.000

 

 

Captain Michael Jeffery

 

 

2,624

 

 

2,624

 

 

 

0.000

 

 

Denise Kingsmill

 

 

 

 

 

 

 

0.000

 

 

Dr Martin Read

 

 

8,000

 

 

8,000

 

 

 

0.000

 

 

Alison Reed

 

 

10,000

 

 

 

 

 

0.000

 

 

Lord Renwick

 

 

32,014

 

 

32,014

 

 

 

0.002

 

 

 

 

   

 

   

 

 

 

 

 

 

Total

 

 

87,549

 

 

77,549

 

 

 

0.010

 

 

 

 

   

 

   

 

 

   

 

 

          No Director has any interest in the share capital of any of the Company’s subsidiaries.

          In addition to the Directors, as detailed below, the executive officers of BA held interests in 4,041,799 options as of June 30, 2005

52


Options to Purchase Securities from Registrant or Subsidiaries

          As of June 30, 2005 employees of the Company held options to purchase 54,163,811 Ordinary Shares at exercise prices ranging between 157p and 465p per Share.

          The following Directors held options to purchase ordinary shares of British Airways Plc granted under the British Airways Share Option Plan 1999, as at June 30, 2005. Options awarded under the 1999 plan are subject to a performance condition as detailed below. The interests in options held by the Directors as of June 30, 2005 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date of grant

 

Number of
options

 

Exercise
price

 

Exercisable for
seven years from

 

Expiry Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rod Eddington

 

 

May 26, 2000

 

 

138,888

 

360

p

 

 

May 26, 2003