UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

 

 

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, 2006

or

 

o

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

or

 

o

SHELL COMPANY 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          1,132,283,603

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes x     No o

          If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o     No x

          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 if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

 

 

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

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

Item 17 o     Item 18 x

          If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No x



Cross Reference to Form 20-F

 

British Airways Annual Report on Form 20-F for the year ended March 31, 2006 consists of the Directors’ Report and Business Review, including the Remuneration Report, together with certain other information required by Form 20-F which is set forth under the heading Form 20-F Supplemental Information. The following cross reference table indicates where information required by Form 20-F may be found in this document.

 

Form 20-F Heading

 

 

Location in this Document

Page

 

Part I

 

Item 1.

 

Identity of Directors, Senior Management and Advisers

 

Not applicable

 

Not applicable

 

 

 

Item 2.

 

Offer Statistics and Expected Timetable

 

Not applicable

 

Not applicable

 

 

Item 3.

 

Key Information

 

 

 

 

 

A.        Selected Financial Data

 

Item 3 — Key Information — Selected Financial Data

 

Page 4 of Form 20-F Supplemental Information

 

 

 

B.        Capitalisation and Indebtedness

 

Not applicable

 

Not applicable

 

 

 

C.        Reasons for the Offer and Use of Proceeds

 

Not applicable

 

Not applicable

 

 

 

D.        Risk Factors

 

Principal Risks and Uncertainties

 

Page 25 of Directors’ report and business review

 

 

Item 4.

 

Information on the Company

 

 

 

 

 

 

A.        History and Development of the Company

 

1, 2 & 3

 

 

 

 

Company Information

 

 

 

 

Page 6 of Directors’ report and business review

 

 

 

4

 

 

Not applicable

 

Not applicable

 

 

 

5 & 6

 

Company Information —Strategic developments and investments

 

Development and Performance of the Business — Financial Performance — Capital Expenditure

 

Page 7 of Directors’ report and business review

 

Page 20 of Directors’ report and business review

 

 

 

7

 

None

 

None

 

 

 

B.        Business Overview

 

 

 

 

 

1, 2, 3, 5, & 7

 

Company Information

 

Page 6 of Directors’ report and business review

 

 

 

 



 

 

 

 

 

 

 

Company Information — Objectives

 

Page 7 of Directors’ report and business review

 

 

 

 

Company Information — Strategic developments and investments

 

 

Page 7 of Directors’ report and business review

 

 

 

 

Development and Performance of the Business — Financial Performance — Segmental Information

 

Page 18 of Directors’ report and business review

 

 

 

 

Development and Performance of the Business — Financial Performance — Geographical Analysis

 

Page 18 of Directors’ report and business review

 

 

 

8

 

Company Information — Regulation

 

 

 

 

Company Information — Government/regulatory issues

 

Page 11 of Directors’ report and business review

 

 

Page 12 of Directors’ report and business review

 

 

 

4 & 6

 

None

 

 

 

 

 

C.        Organisational Structure

 

Organisational Structure

 

Page 16 of Directors’ report and business review

 

 

 

D.        Property, Plants and Equipment

 

Organisational Structure — Property, Plant and Equipment

 

 

Financial Statements

 

Page 17 of Directors’ report and business review

 

Note 12 to the Financial Statements

 

 

Item 4A

 

Unresolved Staff Comments

 

Item 4A — Unresolved Staff Comments

 

Page 8 of Form 20-F Supplemental Information

 

 

Item 5.

 

Operating and Financial Review and Prospects

 

 

 

 

 

 

A.  Operating Results

 

 

 

 

 

 

 

 

Development and Performance of the Business—Financial Performance

 

 

 

Financial Statements

 

 

Financial Statements

 

Page 18 of Directors’ report and business review

 

Financial Statements

 

 

Notes 35 and 36 to the Financial Statements

 

 

 

 

B.        Liquidity and Capital Resources

 

Receipts and Returns to Shareholders — Treasury policies and objectives

 

 

 

Financial Statements

 

Page 36 of Directors’ report and business review

 

 

Financial Statements

 

 

 

 



 

 

 

 

 

 

C.        Research and Development, Patents and Licenses, etc.

 

Not applicable

 

Not applicable

 

 

 

D.  Trend Information

 

Company Information — Strategic developments and investments

 

 

Outlook

 

 

Page 7 of Directors’ report and business review

 

Page 24 of Directors’ report and business review

 

 

 

E.        Off-Balance Sheet Arrangements

 

Receipts and Returns to Shareholders — Treasury policies and objectives — Off-balance sheet arrangements

 

Page 38 of Directors’ report and business review

 

 

 

F.  Tabular Disclosure of Contractual Obligations

 

Receipts and Returns to Shareholders —Treasury policies and objectives — Debt and other contractual obligations

 

 

Financial Statements

 

Page 39 of Directors’ report and business review

 

 

Notes 24 and 27 to the Financial Statements

 

 

Item 6.

 

Directors, Senior Management and Employees

 

 

 

 

 

 

 

A.        Directors and Senior Management

 

 

 

 

 

1, 2 & 3

 

Directors’ report and business review — Directors

 

Directors’ report and business review — Board Members as at May 18, 2006

 

 

Page 1 of Directors’ report and business review

 

Page 1 of Directors’ report and business review

 

 

 

 

 

4 & 5

 

None

 

None

 

 

 

B.  Compensation

 

Remuneration report

 

Page 42 of Directors’ report and business review

 

 

 

C.        Board Practises

 

Remuneration report — Committee and Advisors

 

 

Directors’ report and business review — Corporate Governance

 

Page 42 of Directors’ report and business review

 

Page 2 of Directors’ report and business review

 

 

 

D.  Employees

 

Employees

 

Page 9 of Form 20-F Supplemental Information

 

 

 

 



 

 

 

 

 

 

E.  Share Ownership

 

Remuneration report — Directors’ beneficial interests in shares

 

Remuneration report — Directors’ share options

 

 

 

Financial Statements

 

Page 48 of Directors’ report and business review

 

Page 49 of Directors’ report and business review

 

Note 29 to the Financial Statements

 

 

Item 7.

 

Major Shareholders and Related Party Transactions

 

 

 

 

 

A.        Major Shareholders

 

 

 

 

 

 

 

1, 2, 3 & 4

 

Item 7 — Major Shareholders and Related Party Transactions

 

Page 9 of Form 20-F Supplemental Information

 

 

 

B.        Related Party Transactions

 

Item 7 — Major Shareholders and Related Party Transactions

 

 

Remuneration report — Executive Directors — Service contracts

 

 

Financial Statements

 

Page 9 of Form 20-F Supplemental Information

 

Page 44 of the Directors’ report and business review

 

Note 33 to the Financial Statements

 

 

 

C.        Interests of Experts and Counsel

 

Not applicable

 

Not applicable

 

 

Item 8.

 

Financial Information

 

 

 

 

 

 

A.        Consolidated Statements and other Financial Information

 

Item 18 — Financial Statements

 

 

 

Financial Statements

 

Item 8 — Financial Information — Legal Proceedings

 

 

Item 8 — Financial Information —Dividends

 

Page 21 of Form 20-F Supplemental Information

 

Financial Statements

 

Page 11 of Form 20-F Supplemental Information

 

Page 10 of Form 20-F Supplemental Information

 

 

 

B.        Significant Changes

 

Item 8 — Financial Information — Significant Changes

 

Page 11 of Form 20-F Supplemental Information

 

 

Item 9.

 

The Offer and Listing

 

 

 

 

 

 

A.        Offer and Listing Details

1, 2, 3, 5, 6 & 7

 

4

 

Not applicable

 

 

Item 9 — The Offer and Listing

 

Not applicable

 

 

Page 11 of Form 20-F Supplemental Information

 

 

 

B.        Plan of Distribution

 

Not applicable

 

Not applicable

 

 

 

C.        Markets

 

Item 9 — The Offer and Listing

 

Page 11 of Form 20-F Supplemental Information

 

 

 

D.        Selling Shareholders

 

Not applicable

 

Not applicable

 

 

 

 



 

 

 

 

 

 

E.        Expenses of the Issuer

 

Not applicable

 

Not applicable

 

 

Item 10.

 

Additional Information

 

 

 

 

 

A        Share Capital

 

Not applicable

 

Not applicable

 

 

 

B.        Memorandum and Articles of
            Association

 

Item 10 — Additional Information

 

Page 12 of Form 20-F Supplemental Information

 

 

 

C.        Material Contracts

 

Remuneration report — Executive Directors — Service contracts

 

 

 

Page 44 of the Directors’ report and business review

 

 

 

 

D.        Exchange Controls

 

Item 10 — Additional Information — Exchange Controls

 

 

Page 16 of Form 20-F Supplemental Information

 

 

 

E.         Taxation

 

Item 10 — Additional Information — Tax

 

Page 16 of Form 20-F Supplemental Information

 

 

 

F.         Dividends and Paying Agents

 

Not applicable

 

Not applicable

 

 

 

G.         Statement by Experts

 

 

Not applicable

 

Not applicable

 

 

 

H.         Documents on Display

 

Item 10 — Additional Information — Documents on Display

 

Page 19 of Form 20-F Supplemental Information

 

 

 

I.           Subsidiary Information

 

Not applicable

 

Not applicable

 

 

 

Item 11

 

Quantitative and Qualitative Disclosures About Market Risks

 

 

Receipts and Returns to Shareholders —Treasury policies and objectives

 

 

Financial Statements

 

Page 36 of Directors’ report and business review

 

Note 27 to the Financial Statements

 

Part II

 

Item 12

 

Description of Securities Other than Equity Securities

 

Not applicable

 

Not applicable

 

 

Item 13

 

Defaults, Dividend Arrearages and Delinquencies

 

Item 13 — Defaults, Dividend Arrearages and Delinquencies

 

Page 19 of Form 20-F Supplemental

Information

 

 

Item 14

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

 

Item 14 — Material Modifications to the Rights of Security Holders and Use of Proceeds

 

Page 19 of Form 20-F Supplemental Information

 

 

Item 15

 

Controls and Procedures

 

Item 15 — Controls and Procedures

 

Page 20 of Form 20-F Supplemental Information

 

 

Item 16A

 

Audit Committee Financial Expert

 

Item 16A — Audit Committee Financial Expert

 

Page 20 of Form 20-F Supplemental Information

 

 

 

 



 

 

 

 

 

Item 16B

 

Code of Ethics

 

Item 16B — Code of Ethics

 

Page 20 of Form 20-F Supplemental Information

 

 

Item 16C

 

Principal Accountants Fees and Services

 

Item 16C — Principal Accountants Fees and Services

 

Page 20 of Form 20-F Supplemental Information

 

 

Item 16D

 

Exemptions from the Listing Standards for Audit Committees

 

Item 16D — Exemptions from the Listing Standards for Audit Committees

 

Page 21 of Form 20-F Supplemental Information

 

 

Item 16E

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

Item 16E — Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

Page 21 of Form 20-F Supplemental Information

 

PART III

 

Item 17

 

Financial Statements

 

Not applicable

 

Not applicable

 

 

Item 18

 

Financial Statements

 

Item 18 — Financial Statements

 

 

Financial Statements

 

Page 21 of Form 20-F Supplemental Information

 

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 


Directors’ report and business review

The directors present their Report, Business Review and Accounts for the year ended March 31, 2006.

Results for the year

Profit for the year attributable to members of British Airways Plc (‘the Company’) amounted to £451 million, against a profit on the same basis of £377 million in the previous year. No interim dividend was paid during the year. Consistent with the priorities agreed with major investors, in order to continue to strengthen the Company’s balance sheet, the Board has again decided not to recommend payment of a dividend.

Directors

The names and details of the current directors are set out below. During the financial year 2006 there were a number of changes to the membership of the Board. At the conclusion of the annual general meeting in July, 2005, Dr Ashok Ganguly, Captain Michael Jeffery and Lord Renwick of Clifton retired from the Board. Ken Smart CBE and The Right Honourable the Baroness Symons of Vernham Dean were appointed as non-executive directors and Martin George was appointed as an executive director at the annual meeting in July, 2005. Chumpol NaLamlieng was appointed to the Board in November, 2005 and Keith Williams was appointed as Chief Financial Officer and an executive director on January 1, 2006. Both will seek election by shareholders at the annual general meeting to be held on July 18, 2006. Martin Broughton and Martin Read will retire and seek reelection in accordance with the Company’s Articles of Association at the annual general meeting. Biographical notes about the directors seeking election and re-election are set out in the explanatory notes of the Notice of annual general meeting.

Directors’ membership of Board Committees appears below. Details of the directors’ remuneration and share interests are set out in the Remuneration report on pages 47 to 51.

During the financial year 2006 the business of the Company was directed by a Board of Directors which, as detailed below, comprised 11 members at both the start and end of the year. All Directors are subject to retirement every three years and are eligible for re-election by the shareholders. The directors of the Company (and their respective ages) are:

BOARD MEMBERS as at May 18, 2006

CHAIRMAN

Martin Broughton (59)
Board Member since May, 2000. Deputy Chairman from November, 2003 becoming non-executive Chairman in July, 2004. At the time of his appointment, Martin met the independence criteria set out in paragraph A.3.1 of The Combined Code on Corporate Governance (July, 2003). Safety Review Committee and Chairman of the Nominations Committee. Martin Broughton is Chairman of the British Horseracing Board.

CHIEF EXECUTIVE

Willie Walsh (44)
Executive Board Member since May, 2005, becoming Chief Executive on October 1, 2005. Formerly Chief Executive of Aer Lingus, he is a non-executive director of Fyffes Plc.

CHIEF FINANCIAL OFFICER

Keith Williams (50)
Executive Board Member since January, 2006. Having joined the airline in 1998 as Head of Taxation and additionally appointed Group Treasurer in 2000, Keith was appointed Chief Financial Officer on January 1, 2006. He is a chartered accountant.

COMMERCIAL DIRECTOR

Martin George (44)
Executive Board Member since July, 2005. Martin joined the airline in 1987, becoming Commercial Director in August, 2004. He is responsible for worldwide sales, marketing, revenue management, development of the airline’s website – ba.com, worldwide cargo, global PR, and in-flight service.

NON-EXECUTIVE DIRECTORS

Maarten van den Bergh (64)
Independent non-executive director since 2002, senior independent non-executive director since July, 2004. Audit, Nominations and Remuneration Committees. He was Chairman of Lloyds TSB Group Plc until May 11, 2006. He is Chairman of the Supervisory Board of Akzo Nobel NV, a non-executive director of BT Group plc, and Royal Dutch Shell PLC.

Denise Kingsmill (59)
Independent non-executive director since November, 2004. Audit and Safety Review Committees. Until December, 2003, she chaired the Department of Trade and Industry’s accounting for people task force and was deputy chairman of the Competition Commission. She is also non-executive director with the Home Office and is a senior advisor to the Royal Bank of Scotland.

Chumpol NaLamlieng (59)
Independent non-executive director since November, 2005. Audit and Safety Review Committees. He is a member of the Board of Directors and Chairman of the Management Advisory Committee of the Siam Cement Public Company Limited, non-executive Chairman of Singapore Telecommunications Ltd and Executive Committee Member of the World Business Council for Sustainable Development.

Dr Martin Read (56)
Independent non-executive director since May, 2000. Chairman of the Remuneration Committee. Martin Read is Group Chief Executive of LogicaCMG plc and a non-executive director of the Boots Group PLC.

Alison Reed (49)
Independent non-executive director since December, 2003. Remuneration Committee and Chairman of the Audit Committee. Alison Reed is Group Finance Director of Standard Life.

Ken Smart (60)
Independent non-executive director since July 2005. Audit Committee and Chairman of the Safety Review Committee. He is a member of the Board of Trustees of the UK Confidential Human Factors Incident Reporting Programme, European President of the International Society of Air Safety Investigators and a Visiting Professor at Cranfield University.

1


Baroness Symons (55)
Independent non-executive director since July, 2005. Audit and Safety Review Committees. The Right Honourable the Baroness Symons of Vernham Dean is a senior member of the House of Lords. Created a life peer in 1996, she served as a Minister in the Foreign and Commonwealth Office, the Ministry of Defence and the Department of Trade and Industry and was Minister of State for the Middle East and Deputy Leader of the House of Lords until she resigned from the Government in May, 2005. She was a non-executive director of The Peninsular and Oriental Steam Navigation Company from December 1, 2005 until its sale on March 8, 2006.

COMPANY SECRETARY

Alan Buchanan (47)
Joined the airline in 1990 as Principal Legal Adviser Finance, becoming Company Secretary in April, 2000. In addition, he became Head of Risk Management from October 1, 2005.

LEADERSHIP TEAM

Robert Boyle (40)
Director of Planning. Joined the airline in 1993 in Corporate Finance, becoming General Manager Network Development in 1998, taking on responsibility for Fleet Planning in 2002.

Paul Coby (49)
Chief Information Officer. Joined the airline in 1996 as Information Management Systems Supply Board Manager, becoming Chief Information Officer in 2000.

Lloyd Cromwell Griffiths (61)
Director of Flight Operations. Joined the airline in 1973 as a pilot, becoming Director of Flight Operations in 2001.

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

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

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

Geoff Want (53)
Director of Ground Operations. Joined the airline in 1976 as an Aircraft Performance Engineer, becoming Director of Ground Operations in September, 2005.

Robert Webb QC (56)
General Counsel. Joined the airline in 1998 and has responsibility for Legal, Government and Industry Affairs, Safety, Security, Community Relations and the Environmental departments of the airline.

CORPORATE GOVERNANCE

The Company is committed to high standards of corporate governance. The Board is accountable to the Company’s shareholders for good corporate governance. The Company has complied throughout the year with the code of best practice set out in Section 1 of the Combined Code (issued in July, 2003) appended to the Listing Rules of the Financial Services Authority (the ‘Combined Code’).

The role of the Board is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls, which enables risk to be assessed and managed. The Board sets the Company’s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives and reviews management performance. The Board sets the Company’s values and standards and ensures that its obligations to its shareholders and others are understood and met.

The Board of the Company routinely meets eight times a year and additionally when necessary to consider all matters relating to the overall control, business performance and strategy of the Company, and for these purposes the Board has drawn up a schedule of matters reserved for Board decision. Broadly, the Board has reserved to itself major strategic and financial decisions, including investment and divestment decisions, approval of significant alliance or codeshare partnerships and capital commitments of greater than £10 million. The Board has also drawn up a schedule of matters which must be reported to it. These schedules are reviewed at least annually. A statement on going concern is given on page 6.

The Board is led by the Chairman and the executive management of the Company is led by the Chief Executive. Their respective roles are more fully described in the corporate governance section of the Company’s website www.bashares.com. At the start of the financial year under review, the Board consisted of 11 members. The number rose to 12 during May, 2005 before falling to ten in October and returning to 11 in November, 2005. Of the 11 members serving at the year end, excluding the Chairman, three were executive directors and seven were non-executive directors. The seven non-executive directors are drawn from a diversity of business and other backgrounds, bringing a broad range of views and experiences to Board deliberations. Maarten van den Bergh is the Board’s senior independent director. The Board has included six or more fully independent non-executive directors throughout the year under review. Although they are eligible for non-contractual travel concessions in addition to their fees, this is not considered to affect their independence.

All directors receive a regular supply of information about the Company so that they are equipped to play as full a part as possible in Board meetings. Papers for Board and Committee Meetings are typically distributed in the week prior to the relevant meeting. All Board members have access to the Company Secretary for any further information they require. In addition, the Secretary ensures that the Board members receive appropriate training as necessary. The appointment and removal of the Secretary is a matter for the Board as a whole. Non-executive directors are encouraged to visit the Company’s operations and to speak to customers and employees. Independent professional advice would be available to directors in appropriate circumstances, at the Company’s expense. All directors are required to submit themselves for re-election every three years. New directors are appointed to the Board on the recommendation of the Nominations Committee whose terms of reference are described on page 3.

In the day-to-day running of the Company, the Chief Executive is supported by the Leadership Team, the members of which are described opposite.

2


The Company has arranged appropriate insurance cover in respect of legal action against its directors and officers. The Company has granted rolling indemnities to the directors and the Secretary, uncapped in amount but subject to applicable law, in relation to certain losses and liabilities which they may incur in the course of acting as officers of companies within the Group. These indemnities also set out the terms on which the Company may, in its discretion, advance defence costs. A specimen indemnity is available for view on the Company’s investor relations website, www.bashares.com by clicking on the heading Corporate Governance.

The Board has four standing Board Committees which meet regularly under terms of reference set by the Board. Copies of these are also available on www.bashares.com. Each of the Committees has authority to take external advice as required.

The Audit Committee meets at least quarterly under the chairmanship of Alison Reed and consists solely of independent non-executive directors. At the beginning of the year its other members were Maarten van den Bergh, Ashok Ganguly (until July, 2005) and Denise Kingsmill. Ken Smart and Baroness Symons joined the Committee in July, 2005 and Chumpol NaLamlieng joined the Committee in November, 2005. The Board is satisfied that Alison Reed has recent and relevant financial experience for the purposes of paragraph C.3.1 of the Combined Code. The external and internal auditors, the General Counsel and the Company Secretary normally attend meetings of the Committee and have rights of access to it. Executives attend as required. In addition, the Committee has held closed meetings and has also met privately with each of the external and internal auditors. The Committee reviews the Company’s financial statements to ensure that its accounting policies are the most appropriate to the Company’s circumstances and that its financial reporting presents a balanced and understandable assessment of the Company’s position and prospects. It also keeps under review the Company’s system of internal control, including compliance with the Company’s codes of conduct and the scope and results of the work of internal audit and of external audit, together with the independence and objectivity of the auditors. The Committee is responsible for overseeing the performance, as well as the objectivity and independence, of the external auditor which it does by requiring reports from the auditor, a requirement to 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 on page 5).

The Safety Review Committee meets at least four times per year under the chairmanship of Ken Smart who succeeded Captain Michael Jeffery as Chairman on July 19, 2005. Its other members are Martin Broughton (from May 12, 2005), Denise Kingsmill, Baroness Symons (from July 19, 2005) and Chumpol NaLamlieng (from March 20, 2006). The Committee considers matters relating to the operational safety and security of the airline and subsidiary airlines as well as health and safety issues. Throughout the year under review, the Committee was advised by an external expert, Sir Michael Alcock GCB KBE FREng.

The Safety Review Committee reviews reports from the various safety boards within the airline. For the purposes of the Air Operators Certificate and the Joint Airworthiness Requirements -Operations (JAR-Ops), the Chief Executive is the named Accountable Manager for the Company. As the Accountable Manager, he chairs meetings at bi-monthly intervals of the five Nominated Postholders (the executives responsible to the Civil Aviation Authority (CAA) for safety in the various operational departments of the Company) along with the General Counsel, the Head of Safety and Security and the Head of Safety. These meetings review operational compliance, quality and safety; monitor the effectiveness of the corporate safety management system and agree cross-departmental policy as appropriate. The Accountable Manager’s meetings allow him to review any issues with the Nominated Postholders and seek the necessary assurances that the Company is compliant with the relevant regulations.

The Nominations Committee meets at least once a year, and additionally if required, to consider the balance of the Board’s membership, to identify any additional skills or experience which might enhance the Board’s performance, and to interview candidates and recommend appointments to or, where necessary, removals from, the Board. The Committee also reviews the performance of any director seeking re-election at the forthcoming annual general meeting. The Committee’s remit also includes review of corporate governance. Martin Broughton chairs the Committee and its other members are Maarten van den Bergh and Martin Read.All non-executive Board members are invited to attend its meetings, however, no Board member participates in any discussion of his or her own performance. In relation to the appointment of new Board members, the process used for the nomination of new candidates commences with the identification of the skills and experience needed to maintain or enhance the diversity of skills and experience on the Board. Whilst in most cases this will result in the use of an independent search firm, this is not always the case. An independent search firm was used in relation to the appointment of Chumpol NaLamlieng, the only non-executive director appointed since the last annual general meeting.

The Remuneration Committee of the Board meets at least twice a year, and additionally if required, to establish the Company’s policy on remuneration for the executive directors, members of the Leadership Team listed on page 2, the Chairman and the Company Secretary, to determine that remuneration and to consider and decide grants under the Company’s long term incentive plans. The Report of the Remuneration Committee on pages 42 to 51 gives full details of the remuneration policy as well as the policies on notice periods and termination. The Committee consists solely of independent non-executive directors and is chaired by Dr Martin Read. Its other members are Maarten van den Bergh and Alison Reed. No director is involved in deciding his or her own remuneration. The fees for the non-executive directors are fixed by the executive directors on the recommendation of the Chairman.

During the financial year under review, a performance evaluation of the Board, relating to the prior year was undertaken through a questionnaire and one-to-one interviews by the Secretary. The results of this exercise were presented to, and considered by, the Board. Given the new executive team, the next full evaluation has been deferred to mid-2006. The Chairman and non-executive members typically meet without any executives present on at least two occasions during each financial year. At least once a year, the non-executive members of the Board meet under the chairmanship of the senior independent director during which, and taking account of the views of the executive directors, they review the performance of the Chairman.

3


Board attendance

The number of Board and Committee meetings attended by each director during the year is shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

                         

 

Director

 

Board Meetings
attended in
the period or
period of service

 

 

 

Audit
Committees
attended in
the period or
period of service

 

Nominations
Committees
attended in
the period or
period of service

 

Remuneration
Committees
attended in
the period or
period of service

Safety Review
Committees
attended in
the period or
period of service

 

                       

 

 

 

Scheduled
Meetings

 

Non-Scheduled
Meetings

 

 

 

 

 

 

 

 

 

 

9

 

2

 

6

 

5

 

11

5

 

                         

Martin Broughton

 

9/9

 

2/2

 

 

 

5/5

 

 

5/5

 

                         

Willie Walsh1

 

8/8

 

2/2

 

 

 

 

 

 

 

 

                         

Keith Williams7

 

2/2

 

2/2

 

 

 

 

 

 

 

 

                         

Martin George3

 

6/6

 

2/2

 

 

 

 

 

 

 

 

                         

Rod Eddington4

 

5/5

 

 

 

 

 

 

 

 

 

 

                         

Mike Street4

 

5/5

 

 

 

 

 

 

 

 

 

 

                         

John Rishton6

 

7/7

 

 

 

 

 

 

 

 

 

 

                         

Maarten van den Bergh

 

8/9

 

2/2

 

5/6

 

5/5

 

10/11

 

 

                         

Dr Ashok Ganguly2

 

2/3

 

 

 

0/1

 

 

 

 

1/2

 

                         

Captain Michael Jeffery2

 

3/3

 

 

 

 

 

 

 

 

2/2

 

                         

Denise Kingsmill

 

8/9

 

1/2

 

5/6

 

 

 

 

5/5

 

                         

Dr Martin Read

 

8/9

 

0/2

 

 

 

5/5

 

6/6

 

 

                         

Alison Reed

 

8/9

 

2/2

 

6/6

 

 

 

6/6

 

 

                         

Lord Renwick of Clifton2

 

5/5

 

2/2

 

 

 

 

 

 

3/3

 

                         

Ken Smart3

 

6/6

 

2/2

 

3/3

 

 

 

 

3/3

 

                         

Baroness Symons3

 

6/6

 

0/1

 

3/3

 

 

 

 

3/3

 

                         

Chumpol NaLamlieng5

 

5/5

 

0/1

 

2/2

 

 

 

 

1/1

 

                         

 

 

1

joined the Board in May, 2005

 

 

2

retired from the Board July 19, 2005

 

 

3

joined the Board in July, 2005

 

 

4

retired from the Board in September, 2005

 

 

5

joined the Board in November, 2005

 

 

6

resigned from the Board in December, 2005

 

 

7

joined the Board in January, 2006

The Company maintains regular contact with its larger institutional shareholders through its investor relations team and through meetings with the Chief Executive, the Chief Financial Officer and the Chairman as well as annual institutional investor events. The Board receives regular feedback on investors’ views. The presentations from these institutional investor events are also available to private shareholders through the Company’s investor relations website, www.bashares.com. The annual investor day in March, 2006 was attended by the Chairman and four other non-executive directors and major investors were given the opportunity to discuss corporate governance matters with those directors in one-to-one meetings. Private shareholders receive the British Airways Investor magazine twice annually and are encouraged to attend the annual general meeting and to express their views by completing and returning a freepost Issues of Concern card, the main themes of which are reported to the Board and responded to in the Chairman’s address at the annual general meeting.

In order to protect the operating rights of the Company, the number of ordinary shares held by non-UK nationals is monitored, as is the number of ordinary shares held by persons who are not nationals of states comprising the European Economic Area. At March 31, 2006, 39 per cent of the ordinary shares of the Company were held by non-UK nationals (2005: 38 per cent) and 23 per cent of the ordinary shares were held by persons who were not nationals of states comprising the European Economic Area (2005: 23 per cent). Although there are no large interests of single or associated non-UK nationals, the directors cannot rule out the possibility that they may be required to exercise their powers to restrict non-UK or non-EEA share ownership in order to protect the Company’s operating rights.

4


Internal control

The directors are responsible for the Company’s system of internal control, including internal financial control, which is designed to provide reasonable, but not absolute, assurance regarding: (a) the safeguarding of assets against unauthorised use or disposition, and (b) the maintenance of proper accounting records and the reliability of financial information used within the business or for publication.

There is an on-going process to identify, assess and manage risk. This process has been in place throughout the year to which these statements apply and up to the date of their approval.

The Company operates a risk management process that was introduced into the Company during 2002/03 which encompasses the business continuity activity. The process is aligned with the associated activities of Risk Finance, Insurance and Internal Control. The General Counsel chairs a high level Risk Group, whose function is to develop risk strategy and associated policies for the Group, which submits written progress reports to the Audit Committee regularly. Beneath this sits a committee of risk leaders, each of whom represents parts of the Group and is responsible for identifying risks, determining their level of impact and likelihood, and for developing mitigation strategies. The resultant departmental and corporate risk registers, which have been refined and developed during the year remain subject to regular review by the Risk Group. More details are on pages 27 and 28.

For the financial year 2006, the key procedures that the directors established to provide effective internal controls were as follows:

The Company has a Statement of Business Principles applicable to all employees. This has been in place since 2000 and is shortly to be replaced, following a review of the Company’s Standing Instructions, by a refined version which describes the ethical values and expected norms of business behaviour. The Company also has a Code of Business Conduct and Ethics which also applies to all employees. These are two of a number of Standing Instructions to employees of the Group designed to enhance internal control. Along with the Finance Standing Instructions, these are regularly updated and made available to staff through the Company’s intranet.

A clear organisational structure exists detailing lines of authority and control responsibilities. The professionalism and competence of staff is maintained both through rigorous recruitment policies and a performance appraisal system which establishes targets, reinforces accountability and control consciousness and identifies appropriate training requirements. Action plans are prepared and implemented to ensure that staff develop and maintain the required skills to fulfil their responsibilities, and that the Company can meet its future management requirements.

Information systems are developed to support the Company’s long-term objectives and are managed by a professionally staffed Information Management department. Appropriate policies and procedures are in place covering all significant areas of the business. During the year under review, the Company has worked to enhance controls in relation to IT risks.

The business agenda is determined by the business plan which represents the operational and financial evaluation of the corporate strategy, setting out the agreed targets for financial return and service standards, identifying and prioritising improvement opportunities to deliver those targets and the agreed capital and manpower requirements. The business planning process confirms that the targeted results can be achieved, satisfies departments that their plans are robust and establishes performance indicators against which departments can be evaluated. The business plan is approved by the Board on an annual basis. The latest business plan covering the period April 1, 2006 to March 31, 2008 was launched in March, 2006 and focuses on four themes: building a competitive cost base, delivering world-class customer service, preparing to be ready for the move to Terminal 5 and to be fit for growth.

A comprehensive management accounting system is in place providing financial and operational performance measurement indicators to management. Detailed management accounts are prepared monthly to cover each major area of the business. Variances from plan are analysed, explained and acted on in a timely manner. As well as regular Board discussions, monthly meetings are held by the Leadership Team to discuss performance with specific projects being discussed as and when required. The Capital Investment Committee and Manpower Control Group remain instrumental in maintaining tight control of capital expenditure and headcount respectively. All major corporate projects are audited regularly.

Business controls are reviewed on an on-going basis by the internal audit department which operates internationally and to a programme based on risk assessment. The department is managed by professionally qualified personnel with experience gained from both inside and outside the industry. The department includes dedicated resources for regular audits of major projects, arrangements with third parties (suppliers, agents, partners), IT controls as well as internal departments and processes. All areas of the Company are audited over the course of a standard four year cycle. The standards of internal controls in different parts of the business are measured and rated satisfactory or unsatisfactory. Major projects are measured against four criteria: well controlled, on time, within budget and benefits delivered. During the financial year essential work necessary to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 to which the Company is subject by virtue of its listing on the New York Stock Exchange has continued and the Board is confident of meeting the revised deadline imposed by the Securities and Exchange Commission. An analysis of all the requirements for Section 404 compliance has been completed and the required remediation projects are well advanced. This work has already resulted in significant strengthening of the Group’s internal control systems; the key controls necessary in each of the business’ core processes have been identified and tested. The Audit Committee considers significant control matters raised by management and both the internal and external auditors and reports its findings to the Board.

The directors have reviewed the effectiveness of the Company’s internal control system considering the processes set out above and make this statement pursuant to the revised guidance for directors issued in October, 2005.

Political donations

At the annual general meeting in 2002, shareholders passed a resolution to approve donations to EU political organisations and EU political expenditure (as such terms are defined in section 347A of the Companies Act, 1985 (as amended)) not exceeding £250,000 per annum for four years. The Board has repeatedly stressed that it does not make donations to political parties in the ordinary meaning of those words and that it has no intention of

5


doing so. Shareholders are being asked to pass a further resolution at the annual general meeting to be held on July 18, 2006 to extend this approval on a precautionary basis at the rate of £100,000 per annum for a further four years. The amount expended in the period from April 1, 2005 to March 31, 2006 was £ nil (2005: £10,000).

Going concern

After making enquiries, the directors consider that the Company has adequate resources to continue operating for the foreseeable future. For this reason, the going concern basis has been adopted in preparing the accounts.

COMPANY INFORMATION

The Company was incorporated in 1983 with Registered Number 1777777. It is domiciled in England and has its registered offices at Waterside, PO Box 365, Harmondsworth UB7 0GB, England, Telephone: +44 (0) 870 850 9 850. It is a public limited company organised and operating under the laws of England and Wales. Its agent in the US is Paul C. Jasinski, 75-80 Astoria Boulevard, Jackson Heights, NY 11370.

Overview of the business

Principal activities

The main activities of the Company and its subsidiaries are the operation of international and domestic scheduled and charter air services for the carriage of passengers, freight and mail and the provision of ancillary services.

The Company is one of the world’s leading scheduled international passenger airlines. The Group’s principal place of business is London, one of the world’s premier airport locations, which serves a large geographical area and a comparatively high proportion of point-to-point business. The Group also operates a worldwide air cargo business in conjunction with its scheduled passenger services. The Group currently operates one of the world’s most extensive international scheduled airline route networks, comprising 148 destinations in 75 countries at March 31, 2006. In the financial year 2006, the Group carried more than 35 million passengers on its services.

The Group’s airline network generates economic value by meeting the demand for business and leisure travel. The Group provides vital arteries for trade and investment, as well as leisure travel opportunities for individuals and families. In 2005/06, the Company earned over £8.5 billion in revenue, 9.6 per cent up on the previous year. 80 per cent of this revenue was generated from passenger traffic, 6 per cent from cargo and 14 per cent from other activities (including fuel surcharges). 795,000 tonnes of cargo was carried to destinations in Europe, the Americas and throughout the world. At the end of March, 2006, we had 284 aircraft in service, compared to 290 in March, 2005. The Company aims to manage its business responsibly. Our key responsibility to our shareholders is to ensure that we generate a sustainable return on the capital employed in our business and can invest for future growth. The Company has set a target of a ten per cent operating margin to ensure an adequate financial return and continues to make progress towards this goal. The Company also has responsibilities to other stakeholders – our employees, our customers, the communities affected by our operations as well as having regard to the impact our business has on the environment.

British Airways and Global Traffic Trends
Revenue Passenger Kilometres: % change on year earlier

(BAR CHART)

6


In terms of the industry in which the Company operates the International Air Transport Association (IATA) estimated that the airline industry during calendar year 2005 lost approximately £5.5 billion in aggregate.

Despite modest capacity growth, the Group’s passenger traffic volumes (RPK’s) rose by 3.7 per cent in 2005/06 as a whole, resulting in a 0.8 point rise in passenger seat factor to 75.6 per cent on capacity 2.6 per cent higher in ASKs. Cargo volumes for the full year were down 0.4 per cent compared with 2004/05. Passenger yields, excluding fuel surcharge, were up 1.3 per cent. Overall load factors were unchanged from the prior year. However, even after four years of growth, the Company’s traffic remains well below its level in 2000/01. Along with other airlines, the Company has had to battle against stiff cost headwinds. Fuel costs at £1.6 billion were 45 per cent more than in 2004/05. Employee costs rose by five per cent to £2.3 billion. The airline’s profitability improved again in 2005/06. The operating margin (operating profit as a percentage of revenue) rose to 8.3 per cent, up from 7.2 per cent in 2004/05.

Objectives

Building a sustainable business remains key for the Company. In 2005/06 the Company made further progress towards financial sustainability, by increasing its operating profit margin to 8.3 per cent. A ten per cent operating margin remains the financial target. However, the Company will only achieve and sustain this if it can work successfully in partnership with all its key stakeholders and effectively manage the risks associated with the business.

In conjunction with its employee engagement programme, the Company developed the ‘BA Way’ success formula supported by values and goals. The success formula recognised that the Company is a British network airline which provides “service that matters to people who value how they fly” based on five essential ingredients: (i) the best UK based network, (ii) understanding our customers better than competitors, (iii) a powerful brand that people know and trust, (iv) a competitive cost base and (v) working together as one team.

A key principle underpinning the ‘BA Way’ is the active engagement and support of all our stakeholders – investors, employees, customers and the communities in which we operate. The ‘BA Way’ which has been widely communicated across the Company is under review and will be refined to reflect the changed priorities in line with the business plan 2006/08.

Strategic developments and investments

Background

To mitigate the effects of the economic downturn prior to the events of September 11, 2001, the Group adopted a strategy of tight capacity management and cost control. After the events of September 11, 2001, as it became apparent that more drastic action was necessary, the Group undertook a comprehensive review of its cost structures, network operation, fleet complement and business strategies. In February, 2002, the results of this review were announced as part of a major package of measures designed to return the Group to profitability. This programme, known as Future Size and Shape (‘FSAS’), signalled a significant change in the size of the Company which took further steps to restructure its cost base over the two years to March 31, 2004. The FSAS programme set out to simplify the business, to drive cost reduction (particularly manpower), to restructure the European shorthaul business to provide a competitive response to the no frills carriers, to endorse and accelerate the Group’s existing fleet and network strategy unveiled in 1999 and to accelerate the strategy to ‘de-hub’ operations at Gatwick.

Recent business plans

Given the challenging trading environment that the airline industry continues to face, the focus on controlling costs has not ended with the completion of FSAS. In conjunction with its annual business plan process, the Company has announced further cost saving programmes. The first measure, £450 million by March, 2005, focused on reducing external spend and further simplification, in particular giving customers and staff more online access to systems and procedures. This programme was completed on schedule. The second programme from March, 2005 to March, 2007 placed continued emphasis on reducing the Company’s cost base and achieving a ten per cent operating margin. It established the ‘Fit for Five’ programme to ensure that staff were ready for the move to Terminal 5 and made a targeted investment in products and training for employees. Plans to remove £300 million of employee costs across the business by March, 2006 were deferred to March, 2007.

Business plan 2006/08

The business plan for the two-year period ending in March, 2008 identifies four priority areas. The first is building a competitive cost base with a target to make savings of £450 million over two years and achieve a ten per cent operating margin. Secondly, there will be a renewed emphasis on customer service through significant key areas including ba.com and the airline’s longhaul premium classes. Thirdly, the focus on being ‘Fit for Five’ continues as this business plan takes the airline right up to the opening day of Terminal 5. The final priority area is ‘Fit for Growth’ which highlights that the airline needs to consider future fleet investment but must address its cost base and, in particular, its NAPS pension fund deficit before it can take delivery of new longhaul aircraft.

Restructuring of the shorthaul business

Significant changes have been made to the shorthaul business. These included changes to the shorthaul pricing structure, offering passengers lower fares and greater flexibility, which were rolled out from May, 2002. This drive continues with the recent introduction of cheaper one-way fares and the ability to change bookings for a fee of £30 (€50) up to the last day prior to travel. As part of the drive to reduce global distribution costs, incentive payments to travel agents in the UK for shorthaul bookings have been reduced and the Company’s lowest fares are available on its website. The website, www.ba.com, was significantly changed and usage has increased considerably.

Fleet and network strategy

The fleet and network strategy aims to match capacity more closely to demand, simplify the fleet and reduce exposure to unprofitable markets whilst selectively growing capacity in profitable markets. Through increased aircraft utilisation and network restructuring fleet numbers have steadily decreased. This process is nearing completion and in the financial year 2006 the number of aircraft in service was reduced by six to 284.

In shorthaul, one Airbus A321 aircraft was delivered during the year. One Airbus A320 aircraft and one Boeing 737-400 aircraft returned to service from sublease. Six Avro RJ100s were

7


subleased to Swiss International Air Lines and one de Havilland Canada DHC-8 turboprop and one Boeing 737-500 aircraft were returned to lessors. One British Aerospace 146 was sold.

Future fleet commitments

During the financial year 2006, the Company made further changes through revised delivery dates to future fleet commitments, to facilitate its continuing strategy to match capacity more closely to profitable demand and in response to changes in market conditions and operational requirements.

The Company is to replace ten shorthaul Airbus A320 aircraft that are leaving the fleet with ten new aircraft from the Airbus A320 family. The new aircraft will be seven A320s and three A321s and they will be delivered between September, 2007 and October, 2008.

Firm orders were placed for six of the aircraft in 1998 and four aircraft options are being converted into firm orders.

The ten A320s leaving the fleet were inherited following the merger with British Caledonian and will be, on average, 19 years old when they leave the fleet by December, 2008.

The Company also has 32 option positions/purchase rights on the Airbus family aircraft.

Currently the Group has no further orders for wide-bodied aircraft. On March 9, 2006 the Company announced that it has reserved space in the Boeing production line at the end of this decade for ten Boeing 777 aircraft but has not made a firm commitment to purchase the aircraft. It is reallocating some of the money used to secure Boeing 777 aircraft options in the late 1990s to create the delivery positions. There is a high demand

AIRCRAFT FLEET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number in service with Group companies at March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On balance
sheet
aircraft

 

Operating Leases
Off balance sheet

 

Total
March
2006

 

Changes
since March
2005

 

Future
deliveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005/06
revenue
hours flown

 

Average
hours per
aircraft/day

 

Average
age
(years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extendible

 

Other

 

 

 

 

Options

 

 

 

                                           

Airline operations
(Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Note 7)

 

(Note 8)

 

 

 

 

 

 

 

 

 

 

                                                           

Boeing 747-400

 

 

57

 

 

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

275,548

 

 

13.25

 

 

11.8

 

                                                               

Boeing 777

 

 

40

 

 

 

 

 

3

 

 

43

 

 

 

 

 

 

 

 

 

 

 

211,494

 

 

13.47

 

 

7.3

 

                                                               

Boeing 767-300

 

 

21

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

71,664

 

 

9.39

 

 

13.1

 

                                                               

Boeing 757-200

 

 

13

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

33,363

 

 

7.03

 

 

11.5

 

                                                               

Airbus A319
(Note 2)

 

 

21

 

 

10

 

 

2

 

 

33

 

 

 

 

 

 

 

 

32

 

 

106,809

 

 

8.87

 

 

5.4

 

                                                               

Airbus A320
(Note 3)

 

 

9

 

 

2

 

 

16

 

 

27

 

 

1

 

 

7

 

 

 

 

 

79,340

 

 

8.24

 

 

8.7

 

                                                               

Airbus A321

 

 

7

 

 

 

 

 

 

 

 

7

 

 

1

 

 

3

 

 

 

 

 

20,238

 

 

8.33

 

 

1.4

 

                                                               

Boeing 737-300

 

 

 

 

 

 

 

 

5

 

 

5

 

 

 

 

 

 

 

 

 

 

 

16,929

 

 

9.28

 

 

16.7

 

Boeing 737-400
(Note 4)

 

 

19

 

 

 

 

 

 

 

 

19

 

 

1

 

 

 

 

 

 

 

 

60,433

 

 

9.00

 

 

13.6

 

Boeing 737-500

 

 

 

 

 

 

 

 

9

 

 

9

 

 

(1

)

 

 

 

 

 

 

 

28,157

 

 

8.39

 

 

13.5

 

                                                               

Turboprops
(Note 5)

 

 

 

 

 

 

 

 

8

 

 

8

 

 

(1

)

 

 

 

 

 

 

 

18,777

 

 

5.99

 

 

8.6

 

                                                               

Embraer RJ145

 

 

16

 

 

3

 

 

9

 

 

28

 

 

 

 

 

 

 

 

 

 

 

78,341

 

 

7.67

 

 

6.1

 

                                                               

Avro RJ100
(Note 6)

 

 

 

 

 

10

 

 

 

 

 

10

 

 

(6

)

 

 

 

 

 

 

 

34,669

 

 

6.38

 

 

10.5

 

                                                               

British Aerospace 146

 

 

4

 

 

 

 

 

 

 

 

4

 

 

(1

)

 

 

 

 

 

 

 

10,019

 

 

6.41

 

 

15.1

 

                                                               

Hired aircraft

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,087

 

 

 

 

 

 

 

                                                               

Group Total

 

 

207

 

 

25

 

 

52

 

 

284

 

 

(6

)

 

10

 

 

32

 

 

1,066,868

 

 

10.14

 

 

9.5

 

                                                               

Notes:

 

 

(1)

Includes those operated by British Airways Plc and BA Connect.

 

 

(2)

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

 

 

(3)

Includes one Airbus A320 aircraft returned to service from sub-lease to GB Airways.

 

 

(4)

Includes one Boeing 737-400 aircraft returned to service from sub-lease to Air One.

 

 

(5)

Comprises eight de Havilland Canada DHC-8s. Excludes five British Aerospace ATPs stood down pending return to lessor, and 12 Jetstream 41s subleased to Eastern Airways.

 

 

(6)

Excludes six Avro RJ100s sub-leased to Swiss International Air Lines.

 

 

(7)

Future deliveries have increased by four to ten to replace ten A320 aircraft due to leave the fleet from 2007.

 

 

(8)

Excludes secured delivery positions on ten Boeing 777 aircraft.

8


for new aircraft so the Company is safeguarding delivery positions in the Boeing production line in case it wishes to place future orders with the manufacturer. The Company is keen to see competition between Airbus and Boeing when it renews its longhaul fleet though there will be no longhaul aircraft joining the fleet until after its move to Terminal 5 in 2008.

Gatwick Operations

In December, 2000 our plan to ‘de-hub’ Gatwick was announced. As a result of the changes and simplification introduced, the capacity flown from Gatwick has more than halved since 1999. The Company now operates a fleet of 43 aircraft from Gatwick compared to 68 in 1999.

This year the airline announced plans to make its loss-making shorthaul operation at Gatwick profitable. A range of initiatives was introduced at Gatwick to grow revenue and reduce costs. These include a mixture of sales and marketing activities and a cost reduction programme.

BA Connect

The Company’s wholly owned subsidiary, British Airways CitiExpress, was renamed BA Connect on February 1, 2006. The name change reflects a significant shift in the airline’s business model, designed to improve profitability and compete more aggressively in the UK Regions.

BA Connect offers a single class cabin on all aircraft, high quality buy-on-board hot and cold catering, year round changeable one-way fares from as little as £25, and a new offering for business and frequent flyers called BA Connect Plus.

BA Connect’s operating fleet now numbers 50 (2005: 58).

Qantas

The relationship with Qantas is the Company’s longest standing and deepest alliance relationship. Under the Joint Services Agreement (JSA) there is full strategic, tactical and operational co-operation on all of British Airways’ and Qantas’ flights that serve markets between the United Kingdom/Continental Europe and Southeast Asia/Australia. This co-operation provides customers with improved flight departure times, routings and value for money, offering the very best of customer service to all passengers. In June, 2005, the Australian Competition and Consumer Commission extended permission for both carriers to co-operate in this way for a further five years, valid from February, 2005.

The Company and Qantas continue to co-ordinate sales and marketing activities worldwide and to share all costs and revenues on the JSA routes, giving both companies an incentive to improve the joint business.

American Airlines

The Company and American Airlines continue to codeshare on points behind and beyond the US and London gateways. The Company now places its code on more than 120 American routes, whilst American Airlines applies its code to more than 80 of the Company’s routes.

Iberia

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

The Company and Iberia codeshare on more than 65 domestic and international routings. As well as all UK-Spain routes, this includes Iberia codesharing on services operated by the Company’s franchise carriers GB Airways and Comair, and British Airways codesharing on services operated by Iberia’s franchise Air Nostrum. Together the airlines carried over 580,000 codeshare passengers during the calendar year 2005.

As at March 31, 2006 a 90 per cent owned subsidiary of the Company held a ten per cent stake in Iberia. (2005: ten per cent. Last year the Company reported only the net position, a nine per cent holding. This presentation has been changed since the introduction of IFRS.) Iberia’s profit before tax for the 12 months to December 31, 2005 (included in the financial year 2006 result) was €394 million compared to profit before tax in the previous financial year of €247 million (restated under IFRS).

Alliance benefits/relationships

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

During the year Royal Jordanian, JAL and Malev announced their intention to seek membership of oneworld.

In addition to the above mentioned activities, the Company maintained alliance relationships with Cathay Pacific, LanChile, Aer Lingus, Finnair, JAL and SN Brussels Airlines. There were no events of note during the year with these relationships.

The codeshare relationships with Swiss International and America West were terminated during the year. Both carriers announced that they were joining the Star Alliance.

Operations

Operational Centres

Heathrow is the Company’s principal base, and the Company carries an estimated 39.7 per cent of the airport’s passengers. In addition, the Company has a second base of operations at Gatwick. The construction of a fifth passenger terminal, ‘Terminal 5’, at Heathrow is progressing and the Company expects to consolidate the majority of its operations into Terminal 5. UK airport policy is discussed on page 14 Regulation — UK and International Airport Policy.

Offices, maintenance hangars and other support facilities used by the Company at Heathrow, Gatwick and other UK airports are either owned freehold or held under long-term leases from the respective airport owners, principally BAA plc or its subsidiaries. In addition, the Company occupies space and desks under lease or license in airports throughout the UK including (but not limited to) Manchester, Birmingham, Newcastle, Edinburgh and Glasgow.

The Company’s most important overseas base is at New York’s John F. Kennedy International Airport (‘JFK’), where it leases its

9


terminal building. At other overseas airports, the Company generally obtains premises as required on a short-term basis from the relevant authorities.

Details of the Company’s principal non-aircraft properties are given on page 17 in Property, Plant and Equipment.

Operational Services

In the UK, the Company provides most of the operational services it requires for the handling of passengers and cargo. At overseas airports, the Company subcontracts the provision of the majority of its ground handling requirements.

Runway, ramp and terminal facilities are provided by airport operators that charge airlines for the use of these facilities, principally through landing, parking and passenger charges. Navigation services are provided to aircraft by countries through whose airspace they fly or by international bodies such as Eurocontrol. Navigation charges are generally based on distance flown and weight of aircraft.

The Company’s ability to obtain slots at airports for the purpose of producing schedules attractive to passengers is very important. Allocation of slots at a significant number of airports where the Company operates, including Heathrow and Gatwick, is decided by the Airport Co-ordinator, who acts in accordance with guidelines laid down by IATA, sometimes supported by the local Scheduling Committee or Co-ordination Committee. These committees include representatives from the carriers flying to the relevant airport who may mediate disputes over slots. The Airport Co-ordinator makes the initial slot allocations within IATA guidelines, which give priority to the historic rights of existing users. Pursuant to Council Regulation (EC) No. 793/2004, which is implemented in accordance with UK regulations, the UK Government must ensure the Airport Co-ordinator advises the Company at the biannual IATA Schedule Co-ordination Conference of its slot allocations. These provide the basis for slot negotiations with the Airport Co-ordinator and other airlines. Most congested airports in the world apply IATA guidelines. Co-ordination of European airports is governed by the Council Regulation. Pursuant to the Council Regulation, the UK Government must ensure that the Airport Co-ordinator acts independently and in a non-discriminatory manner. Regulations governing the allocation of slots in the US are different, but the US has stated that it is committed by its international obligations to treat all carriers in a non-discriminatory manner.

Sales

The Company develops and maintains relationships with key customer groups and intermediaries using account management teams around the world. This includes large corporations, small and medium sized enterprises (SMEs), governments and individual customers. Product information, fares and schedules are distributed to these customer groups either through travel agents, both business and leisure, using global distribution systems (GDS) or direct through the contactBA call centres and increasingly through the website www.ba.com. The Company accepts payment through multiple mechanisms but credit card payments, either lodged or individual, are a significant proportion of the total. The growth of online penetration throughout the world provides a good opportunity for us to grow ba.com sales, improving knowledge of our customers by giving us a direct relationship with more of them, increasing ancillary sales and ensuring better compliance to airport processes.

Marketing and Distribution

Executive Club

The Executive Club is the Company’s worldwide customer loyalty programme designed to attract, grow and retain valuable flyers. The Executive Club provides members with recognition for their loyalty in the form of additional service benefits and mileage rewards.

Longhaul Products

To meet the needs of the longhaul customers, the Company has a range of four cabins: World Traveller, the main cabin, World Traveller Plus, which offers more space and legroom for economy customers, Club World, and First.

During the financial year 2006, the embodiment of the Club World flat bed product and World Traveller Plus cabin was completed, meaning these are now available on all longhaul services operated by British Airways. In Club World, softer seats were introduced and the Club World Sleeper Service was extended to include flights from Washington Dulles airport throughout the year.

To further improve our customers’ experience over the course of the last year, noise cancelling headsets were introduced in First and a refurbished check-in facility opened at Heathrow’s Terminal 4. A Molton Brown Spa was also opened at New York’s JFK airport for the use of our First and Club World customers.

To support the increase in services to India, the Company introduced a series of enhancements to the customer experience on the ground and in the air in these markets.

During the financial year 2006, British Airways announced its intention to launch an all new Club World product, an upgraded entertainment system in all longhaul cabins and upgrades to its First product.

Shorthaul Products

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

During the financial year 2006, shorthaul customers benefited from the continued development of ba.com. This included the extension of online check-in across the majority of shorthaul routes.

As discussed in more detail on page 9, in January, 2006, the Company announced a change to the name and business model for its British Airways CitiExpress subsidiary. The business was re-branded BA Connect and moved to a single cabin with lower prices and buy-on-board catering to improve its offering in UK regions with effect from March 26, 2006.

Franchising

As at March 31, 2006, the Company had five franchise partner airlines: Loganair, GB Airways, BMED, Sun Air of Scandinavia and Comair of South Africa.

These five carriers carried approximately 4.69 million passengers during the financial year to 85 destinations (66 destinations in addition to the mainline network) in the UK, continental Europe, the Middle East and Africa, using BA flight numbers. In addition to providing connecting passengers to the Company’s mainline

10


services, the franchisees pay a franchise fee and pay for any services provided to them by the Company.

Computer Systems

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

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

 

 

 

 

The wide-area data network – provided by SITA and other telecommunications suppliers

 

 

 

 

The campus network in London – provided by Kingston Communications (Hull) plc

 

 

 

 

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

A core element of the IT strategy has been to support simplification of the airline’s business processes through effective use of IT. The Company has achieved this by providing online selling and check-in, the ability to upgrade and manage booking facilities online. The aim is to make the Company so easy to do business with that customers choose to serve themselves. The Company also applies the same principles internally for its employees through its Employee Self Service (ESS) programme.

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

Another important element is the use of e-ticket and the introduction of self-service kiosks at key airports around the world. The airline has now installed around 235 kiosks in airports such as Heathrow, New York JFK and Charles De Gaulle. The use of e-tickets continues to grow. During the year ended March 31, 2006, 87 per cent of all passenger journeys ticketed by the Company worldwide were issued on e-tickets (2005: 77 per cent).

The delivery of the Sabre Airflite solution has provided improved capability to manage the airline’s flight schedules and has enabled the retirement of legacy technology. In addition, the delivery of Next Generation Revenue Management (NGRM) for BA World Cargo has provided increased capability to make the best use of cargo capacity.

Cargo

The Company’s cargo business is operated as a contribution centre. The majority of its cargo is carried in the holds of passenger aircraft, the balance on leased or part-chartered freighter aircraft where market conditions allow their deployment. This allows the Group to maximise the use of its scheduled route network to provide a worldwide cargo service. The Group utilises trucks to feed cargo to its major hubs in Europe and the United States.

Seasonal Variations

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

Regulation

The international airline industry is subject to a high degree of global, European and UK government regulation covering most aspects of airlines’ operations. This framework governs commercial activity (for example route flying rights, fare setting and access to airport slots) as well as operational standards (relating to areas such as safety, security, aircraft noise, immigration and passenger rights). British airlines are also affected by wider EU and UK policies, laws and regulation, particularly in relation to competition, airports and air traffic control.

The UK civil aviation industry is regulated by the Secretary of State for Transport and the CAA, an independent statutory body. Under the UK Civil Aviation Act 1982 and various statutory instruments, the CAA has a wide range of functions in relation to British airlines, including supervision of many aspects of their financial condition, management and operations. European airlines are also subject to a number of EU regulations, drawn up under the provisions of the European Treaty (chiefly Article 71). Responsibility for enforcement is shared between the European Commission and the relevant Member States.

The present basis for international regulation of airline operations derives from the Chicago Convention of 1944, to which nearly all countries are parties. The Convention also established the International Civil Aviation Organization (ICAO), a specialised agency of the United Nations, to foster the planning and development of international air transport. Under the auspices of ICAO, rules establishing minimum operational standards are 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.

11


Route flying rights

The Company’s traffic rights to carry scheduled passengers and cargo on particular international routes outside Europe generally derive from air services agreements between the UK Government and the governments of foreign states concerned. Under these agreements, each government grants to the other the right to designate an airline or airlines of its state to operate scheduled services between specified points in their respective countries, and sometimes to or from points in third countries, although this also requires the agreement of the third country’s government.

In order to comply with EU law, all new or revised bilateral agreements should now contain a Community designation clause in place of the nationality clause (which requires that designated airlines are substantially owned and effectively controlled by the government or its nationals). This will allow any EU airline, not just those with the nationality of the EU state, to apply for available traffic rights on a non-discriminatory basis. Currently, most UK agreements still reserve traffic rights to UK airlines, but this is changing as the agreements are renegotiated and updated.

Once an agreement has been reached, it is for the UK government to designate the airline or airlines which will operate the agreed services. As well as being designated, the Group must obtain the necessary operating permits from the foreign Governments concerned. These are unlikely to be withheld so long as the Group meets the required international safety standards. One ground on which a contracting government usually has the right to prevent the Group from operating the agreed services is if it is not satisfied that the Group is substantially owned and effectively controlled by the other government or its nationals (or by EU citizens if there is a Community clause). For this reason, the Company’s Memorandum and Articles of Association (the ‘Articles’) contain provisions that could be used to limit the rights of non-UK and non-European nationals who own shares in the Company.

In 2003 the EU Council granted two mandates to the European Commission, one to negotiate an Open Aviation Area with the US on behalf of all EU Member States, and the other to amend existing bilaterals between Member States and third countries to bring them into compliance with EU law. A general framework was developed covering all other third country relationships and the processes whereby Member States may continue to negotiate bilaterally whilst remaining within EU law as clarified by the judgement of the European Court of Justice of November, 2002. This judgement made it clear that Member States could no longer negotiate bilaterally with third countries on any subject which is covered by EU law. These subjects include ownership and control of airlines, pricing on intra-community routes and rules concerning computer reservation systems.

The European Commission began active negotiations with the US government in September, 2003 to agree the terms of a new multilateral agreement covering air services between the EU and the US. A text for the first stage of a new agreement was finalised in November, 2005 which removed all restrictions on transatlantic flights by EU and US airlines, and granted rights for EU airlines to carry passengers and freight from the US to third countries on services that originate in the EU, and reciprocally for US airlines to carry passengers and freight from EU countries to third countries (both within and beyond the EU) on services that originate in the US.

To address a perceived imbalance in the text, the EU has asked the US to remove restrictions on the foreign ownership and control of US airlines. In November, 2005 the US published a Notice of Proposed Rulemaking which purports to allow foreign investors to exercise greater control of US airlines than the current interpretation of legislation allows. When it is issued in its final form the European Commission will assess whether it is effective in removing ownership and control restrictions so as to balance the bilateral text and if so will recommend ratification by the EU Council.

In the EU, there is a single internal market for air transportation. The most significant elements of the single market legislation are a liberal pricing regime, free access to all routes within the EU for airlines and a carrier licensing procedure. Certain constraints continue to apply for infrastructure reasons. Under a separate agreement, EU single market policies have been extended to the European Economic Area (‘EEA’) comprising all the countries of the EU and the countries of the European Free Trade Area except Switzerland. Agreement has been reached between Switzerland and the EU, which has the effect of bringing Switzerland into the same arrangements.

Under the UK Civil Aviation Act 1982, the CAA must balance a number of objectives in making air transport or route licensing decisions where applications to operate a particular route are contested. These include encouraging British airlines to provide air services at the lowest fares consistent with safety; an economic return to efficient operators and the sound development of the UK air transport industry; furthering the reasonable interests of users; ensuring that British airlines compete as effectively as possible with other airlines on international routes; and securing the most effective use of UK airports.

The CAA will grant global route licenses for scheduled and charter air services. The absence of the necessary bilateral rights will not result in refusal to grant a licence application. If scarce bilateral capacity arises, this will be addressed through a process designed to deal with such a situation.

In its June, 2002 policy review, the CAA said that the interests of users will be best served if airlines are free to operate air services in competition with one another according to their commercial judgements, subject only to the application of normal competition policy.

Specific route licences are no longer required with respect to routes to, from and within the EU.

Charter operations are not generally covered by air services agreements. The CAA adopts a broadly liberal policy towards applications from British airlines for charter flying rights. It is then for the airline to seek the consent of the other government. Within the EEA no distinction is drawn between charter and scheduled operations.

Government/regulatory issues

Fare Setting

It is a provision of some bilateral air services agreements that the fares, rates and charges for scheduled services on the agreed routes must be filed with, and approved by, both governments concerned or their agencies. These requirements are increasingly being relaxed in accordance with UK Government policy. It is a condition of the air transport and route licenses granted to British airlines by the CAA that the tariffs to be charged for international carriage and the commissions to be paid by the airline to any agent shall be filed with and approved by the CAA.

12


In practice, the CAA only regulates a limited number of fares and does not require commissions to be filed. Under some air services agreements, airlines are required to co-ordinate fares through IATA, (whose role in setting fares is described under Competition below), though this is now rare. Pricing on intra-Community air routes is covered by EU Regulation.

Notwithstanding this regulatory position, it is a widespread 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, the Company is no exception. See Competition opposite. The Group responds competitively to market conditions and a large proportion of its revenue is derived from such sales.

Safety

Safety standards are generally agreed on a multilateral basis under the auspices of ICAO. The country of registration of an aircraft is generally responsible for ensuring that the aircraft and its crew meet these guidelines, leading to variations and differences on specific requirements between States. European countries first attempted to harmonise their safety requirements through the Joint Aviation Authorities (JAA) and non-binding Joint Aviation Requirements. Certification of compliance by the state of registry is normally recognised by all other members of ICAO.

In September, 2003, airworthiness and maintenance standards, based largely on ICAO and JAA standards, were adopted into EU law and a new independent European Aviation Safety Agency was set up to advise the Commission and Member States on safety matters. The new safety framework is consistent with ICAO requirements. Member States are still responsible for supervision and compliance but they can no longer unilaterally vary standards in these areas except to respond to an immediate safety problem or to facilitate a short term operational need provided that safety is not compromised. Other areas of aviation safety, starting with operations and licensing, are expected to come under the new EU framework within the next few years.

British airlines are still required, except in limited circumstances, to operate British registered aircraft. All British airlines are required to hold a UK Air Operator’s Certificate (AOC) issued by the UK CAA acting as a member of the JAA. The AOC confirms the competence of the holder to operate and maintain its aircraft safely. Each aircraft operated under an AOC may only be flown if it has a certificate of airworthiness confirming compliance with the EU regulations. All flight crew and certain maintenance staff must be licensed.

To continue to improve high safety standards is a primary objective of the Group. All departments, especially engineering, flight operations and ground operations, pay continual attention to operational safety and the health and safety of employees. Specific responsibility for advising on safety matters rests with a separate department under the Director of Safety and Security. A formal safety management system is in place, and a comprehensive monitoring system exists within the Company to ensure that incidents are reported and action is taken whenever appropriate.

Security

In the UK, the Secretary of State for Transport has the power to direct the aviation industry to take measures to prevent acts of criminal violence. The measures so directed often exceed both the international standards developed by ICAO and the regulations adopted in the EU following September 11, 2001 which set minimum required standards across the EU for the first time. Responsibility for implementing the measures and meeting their costs falls on both airlines and airport authorities. A number of foreign countries have also developed aviation security programmes which place an onus on the Company to meet specified security standards. The Company’s own security department continuously assesses the threat to its operations, develops policies for the protection of the Company’s operations and assets, and directs its staff or agents to implement appropriate countermeasures while monitoring their effectiveness. There are also circumstances in which governments may seek to prevent airlines from flying to or from various destinations or otherwise hinder their operation. Similarly changes in customs, immigration or other regulation may have the same effect.

Widespread passenger disclosure requirements are being introduced by various governments as a means of helping to control terrorism and illegal immigration. This creates conflicts with EU data protection laws designed to protect personal privacy. The Company has introduced passenger disclosure arrangements as required by the US and Canada. These have been approved by the European Commission and the Council, but the arrangements are still likely to be challenged in the European Court of Justice. EU airlines have asked their governments and the Commission to ensure that security arrangements avoid the industry being caught between conflicting legal requirements in different jurisdictions.

Passenger rights

The Montreal Convention applies to EU registered airlines by virtue of a EU regulation. This governs the maximum compensation to be paid for loss, delay or damage to baggage and also governs liability to passengers in the event of an accident. Airlines are required to carry sufficient insurance to cover their liability.

New EU denied boarding compensation rules came into force in February, 2005, extending compensation to cancelled flights and imposing passenger care requirements for long delays and cancelled flights. The European Court of Justice has declared the rules compatible with EU law.

Domestic US disabled passenger legislation has been extended to foreign airlines. The EU passed legislation setting out rules for treatment of disabled passengers which is expected to be published in the Official Journal in Spring 2006, and come into force 12 months later. There are conflicts between the EU and US rules.

Environmental regulation

The Company’s environmental management system commits the Group to working constructively with those concerned for the environment and to observing rules and regulations aimed at protection of the environment. The Group’s activities are covered by a comprehensive network of regulations at local, national and international levels, affecting emissions to the local and global atmosphere, disposal of solid waste and aqueous effluents, noise and other relevant parameters. The Group’s strategy takes compliance as the baseline of environmental performance and aims to exceed standards and regulations in a number of key areas.

13


The Group’s aircraft fleet meets existing internationally agreed noise standards and we are subject to departure noise and night flight restrictions at many airports worldwide. Major changes to current noise management systems are subject to the requirements of the ‘Balanced Approach’ established by ICAO, designed to ensure that noise restrictions are balanced and well targeted. At the Company’s main bases at Heathrow and Gatwick, the current night noise restrictions expire at the end of the Summer 2006 season, and a new regime – which is subject to consultation - is expected to operate from Winter 2006 to 2010. As with the current regime, this is likely to impose significant operating restrictions between the hours of 23:00 and 07:00. The Company is proactively involved in a number of areas aimed at mitigating the impact of aircraft noise, including voluntary measures to reduce noise on approach to airports.

The Group is playing an active role in promoting understanding of, and minimising the effects of, aircraft emissions to the atmosphere. This has included the sharing of ‘best practice’ to minimise fuel use and emissions, and championing emissions trading as the best possible way to mitigate emissions of greenhouse gases. The Company is a member of the UK emissions trading scheme and supports the inclusion of aviation in the EU scheme. The Company is also involved in discussions within ICAO to establish guidelines for international emissions trading within aviation.

Aircraft engines are also regulated for low altitude emissions, and areas around many airports have to meet stringent air quality limits. The Company is actively involved with defining aircraft emissions characteristics at ICAO, through the Government’s Project for the Sustainable Development of Heathrow and through its support for a number of additional research programmes. The Group has also been one of the driving forces behind the UK’s Sustainable Aviation initiative.

UK and International airport policy

Responsibility for airport policy in the UK lies with the UK Government and is defined in “The Future of Air Transport” White Paper published in December, 2003. This paper encouraged the sustainable development of commercial air transport and supported the expansion of several UK airports over a 30 year period. In South East England, new runway developments were supported at both Stansted and Heathrow, provided they met certain environmental requirements, chiefly relating to noise and air quality limits and the provision of new public transport links. These requirements are challenging and may necessitate action by airlines to reduce noise and/or emissions if Heathrow is to get a new runway by 2015, which is likely to be the earliest date possible (subject also to securing planning permission). The UK Government is also committed to consult in 2006 on fuller use of Heathrow’s existing runways which, if implemented, would over several years create the opportunity to reduce delays and/or increase capacity by some 10-15 per cent. The costs of airport expansion must be paid for by the users of each airport through user charges. It was agreed that Stansted should continue to cater for its local market and should not be developed as a second hub for London.

As discussed on page 10, obtaining slots is a necessary condition for providing service to many airports. The availability of slots generally is often beyond the control of a carrier and can be subject to capacity limits, government regulation and market conditions, including the actions of competitors. The Company believes that it has sufficient slots to operate its existing routes and generally has been able to obtain slots in connection with its previous route changes and expansions. However, the Company can provide no assurance that it will be able to obtain desired slots in the future.

Slots at UK airports are allocated under EU rules. Technical revisions came into effect in July, 2004 and more substantive changes are still under consideration by the European Commission. The Company is attempting to ensure that a market oriented approach is maintained under any new rules, so that essential flexibility and the possibility of exchanges between carriers remains. Although the Commission is unsure that slot exchanges in the UK are consistent with existing EU rules, the UK Government has written to the Commission defending the UK system and pointing to a ruling from the UK High Court that declares the current UK slot exchange practice compatible with EU law.

Competition

Most of the markets in which the Company operates are highly competitive. The Company faces competition from other airlines on the same city-pair routes, from indirect flights, from charter services and from other forms of transport. The intensity of the competition varies from route to route, depending on the number and nature of the competitors, particularly whether or not they are state-owned or state-supported, and on the regulatory environment and other factors. At one extreme, there are a few international routes on which competition is limited to the other state’s designated airline and fares are regulated. At the other extreme, there is a free market for internal flights within the whole of Europe allowing any European airline to operate on any route, setting whatever fares they wish, subject only to infrastructure constraints and competition law.

On many of the routes with multiple carriers, the Company’s pricing decisions are affected by competition from other airlines, some of which have cost structures that are lower than the Company’s or other competitive advantages and could therefore operate at lower fare levels.

It has been UK Government policy since at least 1984 to liberalise markets progressively and to encourage fair and equal competition wherever possible. The presence of state aid, in all its forms, and in several different markets, distorts competition and is generally incompatible with policies and regulations designed to open up markets.

The CAA from time to time issues statements of the policies it intends to carry out in pursuit of its statutory licensing role. The current statement came into force in June, 2002. This confirmed that the CAA would give greater weight to the interests of users in balancing the interests of the users on the one hand and the airlines on the other. Additionally, the CAA considered that competition, where possible, is the most effective way of ensuring that passengers’ interests are met. The new policy also removed the requirement for air carriers to be licensed on individual routes.

Tariff Co-ordination

The Company, along with many other airlines that participate in the multi-lateral interline system administered by the IATA, participates in IATA tariff conferences to agree multi-lateral interline passenger tariffs for scheduled journeys and tariffs for cargo interline services where it is lawful to do so.

14


The European Commission announced in November, 2005 that it intends to discontinue the exemption from the EU competition rules of IATA passenger tariff conferences for routes within the EU with effect from January 1, 2007, with a transitional period until December 31, 2006 to permit IATA and tariff conference member airlines to develop an alternative tariff-setting mechanism for multi-lateral interline fares which is consistent with EU Competition rules. The European Commission proposes to extend the exemption for passenger tariff co-ordination on routes between the EU and non-EU countries until June 30, 2008.

Certain air services agreements require airlines to co-ordinate or agree fares before approval by the governments concerned. Where such co-ordination is a legal requirement, the Company discusses fares bi-laterally with other airlines.

Commercial arrangements

The Company has commercial arrangements with other airlines covering scheduled passenger and cargo services on a small number of its international routes. Commercial arrangements can govern, among other things, capacity offered by each airline over flight approvals, the apportionment of revenues between airlines and the co-ordination of schedules. In very few cases, some commercial arrangements between the Company and other airlines are required under the relevant air services agreements.

US

While the US domestic airline industry has been largely deregulated, routes between the UK and the US are still subject to regulation of market access, capacity and fares under an air service agreement known as Bermuda 2. However, both countries have adopted a relatively liberal approach to fare approval and other regulatory matters. In addition, the Company faces further competition from airlines operating other routes between the US and continental Europe, including a number of carriers operating on these routes with antitrust immunity. The Company has responded with both price and service initiatives and has continued to carry more passengers between the UK and the US than any other carrier.

As discussed on page 12, the European Commission has been granted a mandate to negotiate with the US government a liberal set of air services arrangements to replace the bilateral agreements concluded by the EU Member States as discussed above (under “Route Flying Rights”). The outcome may provide a better environment for industry consolidation, especially in Europe.

15


ORGANISATIONAL STRUCTURE

The business and operations of the Group are conducted within the Company and its subsidiaries.

The following table sets forth the principal investments of the Group as at March 31, 2006.

Investments in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

Country of incorporation

 

 

 

 

 

 

and registration

 

 

 

 

Principal activities

 

and principal operations

             

Air Miles Travel Promotions Ltd *

 

 

 

Airline marketing

 

England

BA & AA Holdings Ltd *

 

 

 

Holding company

 

England

(90 per cent of equity owned)

 

 

 

 

 

 

Britair Holdings Ltd *

 

 

 

Holding company

 

England

British Airways 777 Leasing Ltd *

 

 

 

Aircraft financing

 

England

British Airways Capital Ltd *

 

 

 

Airline finance

 

Jersey

British Airways Holdings Ltd *

 

 

 

Airline finance

 

Jersey

British Airways Holidays Ltd *

 

 

 

Package holidays

 

England

British Airways Leasing Limited *

 

 

 

Aircraft financing

 

England

British Airways Maintenance Cardiff Ltd *

 

 

 

Aircraft maintenance

 

England

British Airways Regional Ltd *

 

 

 

Air travel services

 

England

British Airways Travel Shops Ltd *

 

 

 

Travel agency

 

England

CityFlyer Express Ltd *

 

Aircraft financing

 

England

British Regional Air Lines Group Plc

 

Holding company

 

England

Speedbird Insurance Company Ltd **

 

Insurance

 

Bermuda

BA Connect Ltd

 

Airline operations

 

England

The Plimsoll Line Ltd *

 

Holding company

 

England

(Holding company of British Regional Air Lines Group Plc)

 

 

 

 

         

 

 

 

 

 

 

 

Investments in associates

 

 

 

 

 

 

 

 

Percentage of

 

 

 

Country of incorporation

 

 

equity owned

 

Principal activities

 

and principal operations

             

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

 

10.0

 

Airline operations

 

Spain

Comair Ltd

 

18.3

 

Airline operations

 

South Africa

             

 

 

 

 

 

 

 

Other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

Country of incorporation

 

 

equity owned

 

Principal activities

 

and principal operations

             

Airline Group Ltd *

 

16.7

 

Air traffic control holding company

 

England

Opodo Ltd *

 

5.9

 

Internet travel agency

 

England

WNS (Holdings) Ltd *

 

16.8

 

Flight Services Holding company

 

Jersey

             

 

 

*

Owned directly by British Airways Plc

 

**

Previously British Airways CitiExpress Ltd

 

***

Held by a 90 per cent owned subsidiary company

16


Property, Plant and Equipment

The following table sets forth the principal property, plant and equipment of the Group. The table does not include the Group’s fleet of aircraft, which are described under Aircraft Fleet on page 8.

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximate

 

 

 

 

 

 

Gross Size

Principal Properties

 

Description

 

Nature of Title

 

(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 centre

 

Lease

 

250,000

Waterside, Harmondsworth

 

combined business centre

 

Freehold

 

570,000

Cranebank

 

technical training centre

 

Freehold

 

440,000

Speedmarque

 

workshops and offices

 

Lease

 

140,000

Link

 

warehouse and offices

 

Lease

 

170,000

             

Gatwick Airport, London

 

 

 

 

 

 

Maintenance Area East

 

offices, hangars and workshops

 

Lease

 2

495,000

Jubilee House

 

offices

 

Lease

 

130,000

Gatwick Cargo

 

warehouses

 

Lease

 

200,000

             

UK Regions

 

 

 

 

 

 

Newcastle Business Park

 

offices

 

Freehold

 

200,000

Pioneer House, Manchester

 

offices

 

Lease

 

64,000

Cardiff Airport, Wales

 

 

 

 

 

 

Maintenance Area

 

offices, hangars and workshops

 

Lease

 

460,000

             

New York

 

 

 

 

 

 

Terminal Building

 

passenger terminal

 

Sublease

 

535,000

John F. Kennedy

 

 

 

 

 

 

International Airport

 

 

 

 

 

 

             

 

 

1

Leasehold interest held from Heathrow Airport Limited for 150 years from April 1995 without restriction on disposal and with wide use provisions.

 

2

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

The Group also has other freehold and leasehold interests in real estate that are less significant to the Group as a whole in numerous countries throughout the world. See Note 12 to the Financial Statements.

17


DEVELOPMENT AND PERFORMANCE OF THE BUSINESS

Financial Performance

Introduction

The following discussion covers the two years ended March 31, 2006 and is based on the Group’s Financial Statements prepared in accordance with IFRSs (International Financial Reporting Standards).

Group profit before tax for the financial year 2006 was £620 million, compared with a £513 million profit in the previous year. Operating profit in the year, at £705 million, was £149 million better than last year. The operating margin of 8.3 per cent was 1.1 points better than last year. The improvement in operating profit primarily reflects improvements in revenue – up 9.6 per cent -partially offset by increased operating costs, in particular fuel.

Segmental Information

The Company’s principal activities are the operation of international and domestic scheduled air services for the carriage of passengers and cargo. The Company’s main business is the provision of network scheduled services, which accounted for approximately 93 per cent of Group revenue in the year ended March 31, 2006.

The following tables set out the Group’s results by business segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Network
airline
business

 

Regional
airline
business

 

Non-
airline
business

 

Total
Group
Operations

 

 

 

 

 

(£ million)

 

Year ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to

 

 

 

 

 

 

 

 

 

 

 

 

 

External Customers

 

 

7,922

 

 

357

 

 

236

 

 

8,515

 

Inter-Segment Revenue

 

 

83

 

 

6

 

 

4

 

 

93

 

                         

 

Total Turnover

 

 

8,005

 

 

363

 

 

240

 

 

8,608

 

                         

 

Operating Result

 

 

711

 

 

(20

)

 

14

 

 

705

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Network
airline
business

 

Regional
airline
business

 

Non-
airline
business

 

Total
Group
Operations

 

 

 

 

 

(£ million)

 

Year ended March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to

 

 

 

 

 

 

 

 

 

 

 

 

 

External Customers

 

 

7,151

 

 

394

 

 

227

 

 

7,772

 

Inter-Segment Revenue

 

 

77

 

 

7

 

 

6

 

 

90

 

                         

 

Total Turnover

 

 

7,228

 

 

401

 

 

233

 

 

7,862

 

                         

 

Operating Result

 

 

576

 

 

(27

)

 

7

 

 

556

 

Network airline business

Network airline operating profit for financial year 2006 was £711 million compared with £576 million in 2005. The improvement primarily reflects an increase in revenue partially offset by an increase in fuel costs.

Regional airline business

Regional airline operating loss for financial year 2006 was £20 million compared with £27 million in 2005. The improvement reflects lower operating costs, mainly depreciation, due to the reversal of the write down of BAe 146 aircraft made in the prior year, following the decision to maintain them in revenue-earning service. Offset against this is a reduction in revenue due to both lower volume and yield.

Non-airline business

Non-airline operating profit for financial year 2006 was £14 million compared with £7 million in 2005. The improvement is mainly due to an increase in revenue.

Geographical Analysis

The following table sets out the Group revenue by geographical area:

 

 

 

 

 

 

 

 

 

 

BA Group
By Area of original sale

 

 

 

 

 

(£ million)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Europe

 

 

5,406

 

 

5,079

 

United Kingdom

 

 

4,169

 

 

3,906

 

Continental Europe

 

 

1,237

 

 

1,173

 

The Americas

 

 

1,611

 

 

1,364

 

Africa, Middle East and Indian Sub-Continent

 

 

826

 

 

747

 

Far East and Australasia

 

 

672

 

 

582

 

Total BA Group Revenue

 

 

8,515

 

 

7,772

 

             

 

Route Network

The Company’s scheduled route network forms the basis of its business and is one of the world’s most extensive. As of March, 2006, the Company (including subsidiary carrier BA Connect) served some 148 destinations in 75 countries. Including codesharing and franchise arrangements, flights with the Company’s codes served some 340 destinations in 107 countries. Adding the services of the Company’s alliance partners, the global network served some 608 destinations in 135 countries.

During the year ended March, 2006 the Company introduced services to Bangalore, Grenoble, Hassi Messaoud, Izmir, Rekyjavik, Shanghai, Tirana and Varna. Services to Cologne and between Singapore and Melbourne were discontinued.

18


Year by Year Analysis

Year ended March 31, 2006 compared with year ended March 31, 2005

Revenue

Group operating revenue improved in the year by 9.6 per cent to £8,515 million. Airline operations revenue, excluding fuel surcharges, improved by 4.8 per cent to £7,318 million on a flying programme 2.4 per cent larger in ATKs.

Passenger traffic (RPKs) increased by 3.7 per cent, whilst capacity (ASKs) was 2.6 per cent higher; as a result passenger load factor increased by 0.8 points compared with financial year 2005 to 75.6 per cent. Passenger yield (pence per RPK) improved by 1.3 per cent for the full year.

Cargo revenue was up 3.3 per cent from £482 million to £498 million. Cargo volumes (CTKs) fell by 0.4 per cent compared with financial year 2005 with an improvement in yields by 3.8 per cent primarily due to the growth of premium products.

Overall load factor for the full year was flat at 69.7 per cent.

Other revenue improved by 51.5 per cent to £1,197 million, primarily due to the increase in passenger and cargo fuel surcharges.

Expenditure

Net operating expenditure (total operating expenditure less other revenue) increased by 2.9 per cent compared to financial year 2005. Unit costs (net operating expenditure per ATK) were 0.5 per cent higher than 2005.

See footnote (6) to the operating statistics on page 40 for the calculation of total operating expenditure per RTK and per ATK.

The table below summarises total Group operating expenditure and year on year changes in expenditure over the two financial years ended March 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ million)

 

2006

 

2005

 

Increase/
(decrease)

 

                     

Employee costs

 

 

2,346

 

 

2,235

 

 

 

5.0

%

 

Depreciation, amortisation and impairment

 

 

717

 

 

739

 

 

 

(3.0

)%

 

Aircraft operating lease costs

 

 

112

 

 

106

 

 

 

5.7

%

 

Fuel and oil costs

 

 

1,632

 

 

1,128

 

 

 

44.7

%

 

Engineering and other aircraft costs

 

 

473

 

 

432

 

 

 

9.5

%

 

Landing fees and en route charges

 

 

559

 

 

556

 

 

 

0.5

%

 

Handling charges, catering and other operating costs

 

 

955

 

 

918

 

 

 

4.0

%

 

Selling costs

 

 

449

 

 

490

 

 

 

(8.4

)%

 

Currency differences

 

 

(18

)

 

15

 

 

 

Nm

*

 

Accommodation, ground equipment and IT costs

 

 

585

 

 

597

 

 

 

(2.0

)%

 

                         

Total Group operating expenditure

 

 

7,810

 

 

7,216

 

 

 

8.2

%

 

                         

*      Nm not meaningful

Employee costs increased by 5.0 per cent compared with financial year 2005 to £2,346 million as pension and wage increases were only partially offset by manpower reductions and other efficiencies. The average number of employees in the Group, in manpower equivalents (MPE), fell by 1.0 per cent to 47,012 and productivity (ATKs per MPE) improved by 3.4 per cent.

Depreciation, amortisation and impairment costs reduced by 3.0 per cent compared with financial year 2005 to £717 million. The decrease resulted from the reversal of the write down of BAe 146 aircraft in the prior year.

Aircraft operating lease costs increased by 5.7 per cent compared with financial year 2005 to £112 million due to onerous lease provisions on RJ100 aircraft sub-leased to third parties and adverse US interest rates and exchange losses.

Fuel and oil costs increased by 44.7 per cent compared with financial year 2005 to £1,632 million due to a 38 per cent increase in fuel price (partially offset by hedging benefits), the impact of the increased flying schedule and adverse exchange impact of the stronger US Dollar.

Engineering and other aircraft costs increased by 9.5 per cent compared with financial year 2005 to £473 million primarily reflecting price increases, additional engine and component maintenance costs, and cargo freighter activity.

Landing fees and en route charges remained almost flat compared with financial year 2005 at £559 million. This primarily reflects the impact of the larger flying programme and adverse impact of exchange rates, offset by price reductions.

Handling charges, catering and other operating costs increased by 4.0 per cent compared with financial year 2005 to £955 million. The increase is due to the impact of the disruption caused by industrial action at the Company’s main caterer at Heathrow, a larger flying programme and the adverse impact of exchange.

Selling and marketing costs fell by 8.4 per cent compared with financial year 2005 to £449 million. This primarily reflects the impact of the restructuring of travel agent commissions and savings in marketing spend, partially offset by the adverse impact of exchange.

Accommodation, ground equipment and IT cost reduced by 2.0 per cent compared with financial year 2005 to £585 million. This reflects general overhead reductions partially offset by adverse exchange.

Financial Derivatives

Net unrealised gains on fuel derivatives were £19 million in financial year 2006, reflecting the ineffective portion of unrealised gains and losses on fuel derivative hedges following the adoption of IAS (International Accounting Standard) 39 effective from April 1, 2005.

Net finance costs

Net finance costs for financial year 2006 were £128 million, £40 million lower than in 2005. The reduction reflects lower levels of borrowings, partially offset by higher US interest rates.

Pension financing costs & retranslation expenses

Pension financing costs were £18 million in financial year 2006 compared to £29 million in 2005.

The retranslation of currency borrowings generated a charge of £13 million, compared with a credit the previous year of £56 million. The movement versus last year is primarily due to the transitional impact of IAS21 and IAS39.

19


Profit on sale of fixed assets and investments

Profits on sales of fixed assets and investments for financial year 2006 were £27 million, compared with profits of £71 million in 2005, which included an £86 million gain on the disposal of Qantas.

The profit on disposal in financial year 2006 primarily reflects the £26 million gain on the disposal of the Group’s investment in The London Eye Company Limited in February, 2006.

Share of post-tax profits in associates

The Group’s share of post-tax profits in associates increased by £4 million to £28 million during financial year 2006. This reflects a share in 2006 of Iberia’s profit on the sale of its investment in Amadeus, offset by the non-recurrence of profits from the Group’s investment in Qantas following the sale in 2005.

Taxation

The analysis of the tax charge is set out in Note 10a to the Financial Statements.

The Group has used up all of its UK trading losses brought forward and is now paying tax in the UK and has a UK liability which, for the year ended March 31, 2006, was £91 million (2005: £ nil). The Group did not pay significant overseas taxes during the financial year 2006.

Earnings per share

For the year ended March 31, 2006, profits attributable to shareholders were £451 million, equivalent to basic earnings of 40.4 pence per share, compared with basic earnings of 35.2 pence per share last year.

Capital Expenditure

The following table summarises Group capital expenditure in the two years ended March 31, 2006:

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006
£m

 

2005
£m

 

           

 

 

 

 

 

 

 

 

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

 

 

239

 

 

327

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

87

 

 

37

 

 

 

 

 

 

 

 

 

Landing rights and other intangible assets

 

 

8

 

 

32

 

 

 

 

 

 

 

 

 

Investments

 

 

7

 

 

6

 

               

 

 

 

 

 

 

 

 

 

 

 

341

 

 

402

 

               

See Notes 12, 15 and 17 to the Financial Statements.

Working capital

At March 31, 2006, net current assets were £234 million, up £751 million on last year. This change reflects an increase in current assets to £3,666 million, up £914 million, partially offset by an increase in current liabilities to £3,432 million, up £163 million.

The change in current assets primarily reflects an increase in cash and non-trade debtors. The increase in current liabilities primarily reflects an increase in non-trade creditors partially offset by the conversion of Capital Bonds for ordinary shares.

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

Cash flow

Net cash increase in financial year 2006 was £358 million, an improvement of £833 million over 2005 due to the improvement in cash flows from operating and financing activities, partially offset by an increased cash outflow on investing activities.

Net cash inflow from operating activities for financial year 2006 was £1,339 million, an improvement of £334 million over 2005 primarily due to an improvement in operating profit of £149 million and favourable working capital movements. This was partially offset by the tax payment of £57 million in 2006 (compared with a nil payment in 2005).

Cash outflow on investing activities for financial year 2006 was £510 million compared with £302 million for 2005. The increase primarily reflects the sale of the investment in Qantas in financial year 2005 for £427 million compared with the sale of the London Eye in 2006 for a net £78 million. Lower levels of investments in deposits and assets resulted in a reduction in cash outflow of £183 million.

Cash outflow from financing activities for 2006 was £472 million compared with £1,160 million for 2005, primarily reflecting a reduction in the level of capital repayments made on finance leases and hire purchase agreements of £688 million.

The total of cash, cash equivalents and other interest bearing deposits at March 31, 2006 of £2,440 million was up £758 million versus last year. Net debt fell by £1,281 million during the year to £1,641 million reflecting both the increase in cash and a reduction in borrowings. This is the lowest level since March 31, 1992, and is down £5.0 billion from the December, 2001 peak.

Leases and other financing arrangements

The following table sets out the movements in loans and capital obligations under finance leases and hire purchase arrangements for the two year period ended March 31, 2006 (see also Note 24 to the Financial Statements):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ million)

 

Bank and
other
Loans

 

Finance
Lease and
Purchase
Arrangements

 

Total
2006

 

Total
2005

 

                   

 

 

 

 

 

 

 

 

 

 

Balance at April 1

 

 

1,168

 

 

3,324

 

 

4,492

 

 

5,716

 

 

 

 

 

 

 

 

 

 

 

New loans raised

 

 

 

 

 

 

 

 

 

 

 

116

 

 

 

 

 

 

 

 

 

 

 

Other non cash movements

 

 

 

 

 

11

 

 

11

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Repayment of amounts borrowed

 

 

(64

)

 

(415

)

 

(479

)

 

(1,271

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes

 

 

12

 

 

45

 

 

57

 

 

(72

)

                           

Balance at March 31

 

 

1,116

 

 

2,965

 

 

4,081

 

 

4,492

 

                           

20


Only one aircraft, an Airbus A321 aircraft was delivered during the year and it was paid for in cash.

The Company arranged two long-term secured finance facilities during the year. The first was a syndicated committed Japanese Yen 75 billion credit facility which puts in place committed funding to re-finance a series of maturing Yen obligations in connection with 24 Japanese Leveraged Leases (‘JLLs’) which mature between March, 2009 and January, 2011. This facility significantly improves the correlation between projected future Yen operating income and Yen debt repayments. A second US$420 million standby facility provides the Company with additional medium term liquidity. The facility is available for drawing between 2005 and 2010 and would, if drawn, be repayable between the date of drawing and 2015. Any drawing between now and 2010 will be secured against aircraft to be specified by the Company at the time of drawing, with each aircraft type and vintage within the Company’s fleet having a predetermined fixed amount capable of being drawn against it at the time of such drawing.

For the purposes of the financial statements, foreign currency debt is translated into Sterling at year-end exchange rates. Following the adoption of IAS 39 on April 1, 2005, the majority of debt repayments in US Dollar and Yen are used as a hedge of the Group’s exposure to fluctuations of the sterling value of future US Dollar and Yen revenues. As a result, gains and losses on translation of debt used as a hedge are taken to the fair value reserve and are released to the income statement on repayment of the debt. Gains and losses on translation of debt not used as a hedge are taken to the income statement. Net translation losses of £44 million on US Dollar and Yen denominated debt were taken to the fair value reserve during the year.

Net debt/total capital ratio

Net debt at March 31, 2006 amounted to £1,641 million, a reduction of £1,281 million compared with March 31, 2005. This is net of cash, cash equivalents and other interest bearing deposits totalling £2,440 million.

The net debt/total capital ratio at March 31, 2006 was 44.2 per cent, a 23.5 point reduction versus last year mainly due to the reduction in net debt, the conversion of the Convertible Capital Bonds 2005 to equity on maturity and the recognition of the fair value of derivative financial instruments under IAS 39 from April, 2005. Including operating leases, net debt/total capital ratio was 53.0 per cent, a 19.3 point reduction from last year.

CRITICAL ACCOUNTING POLICIES

Introduction

The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated Financial Statements, which have been prepared in accordance with IFRSs. The preparation of these Financial Statements requires the development of estimates and judgements that affect the reported amount of assets and liabilities, revenues and costs and related disclosure of contingent assets and liabilities at the date of the Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties and potentially result in materially different results under different assumptions and conditions. It is believed that the Company’s critical accounting policies are limited to those described below. The Company’s management has discussed the development of the estimates and disclosures related to each of these matters with the Audit Committee.

Note 2 to the Financial Statements provides additional discussion of the application of these estimates and other accounting policies.

Passenger revenue

Passenger revenue is initially recorded as a liability for sales in advance of carriage, with revenue from ticket sales recognised at the time that the Company provides the transportation. In respect of unused ticket revenue recognised, the Group makes estimates based on historical trends regarding liability for tickets sold but not yet processed, the timing and amount of tickets used for travel on other airlines and the amount of tickets sold that will not be used. These are used to determine the timing and amount of unused ticket revenue recognised. Changes to these estimation methods could have a material effect on the presentation of the Group’s financial results.

Periodic evaluations are performed of the estimated liability for tickets sold but not yet processed. Any adjustments, which can be significant, are included in results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to differences between the statistical estimation of certain revenue transactions and the related sales price as well as refunds, exchanges, interline transactions and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price. These amounts have been generally consistent from year to year.

Frequent flyer programmes

The Group operates a frequent flyer programme known as the Executive Club, which allows members travelling on the Company’s (and certain partner airlines’) flights to accumulate BA Miles that entitle them to various awards, including free travel. In addition, BA Miles are sold to participating partners to use in promotional activity.

Air Miles Travel Promotions Limited, a wholly-owned subsidiary, operates a scheme which allows companies to purchase AirMiles from the Group for use in promotional incentives.

The estimated direct incremental cost of providing free redemption services, including free travel, in exchange for redemption of miles earned by members is accrued as participants earn miles from the purchase of airline tickets. The accrued cost is based on various estimates with respect to the incremental fuel, food and other costs incurred in providing such schemes. Additional assumptions are made, based on general customer behaviour, regarding the likelihood of a customer redeeming the miles on the Company, redeeming the miles for non-travel benefits, or redeeming the miles on partner carriers. Changes in cost estimates or accrual methods, among other factors, could have a significant effect on the Group’s presentation of its financial results.

The fair value of miles sold to participating partners under both the AirMiles scheme and the BA Miles scheme is deferred and recognised on redemption of the miles by the participants to whom the miles are issued. The incremental cost of providing

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free redemption services is recognised when the miles are redeemed.

The total number of BA Miles outstanding at March 31, 2006 was 127,638,125,986 and the total number of AirMiles outstanding was 7,666,093,423. The Company has recorded a liability for the awards relating to the flown mileage credits of £15 million and has deferred revenue of £359 million relating to the sale of miles that are unflown. The estimate of unflown miles is reviewed and if necessary adjusted each year. In financial year 2006 this review resulted in the release of £31 million to other revenue.

The number of frequent flyer RPKs as a percentage of total RPKs for the years ended March 31, 2006 and 2005 was 2.8 per cent and 3.2 per cent respectively.

The Company believes that the displacement of revenue passengers by those travelling on frequent flyer awards is minimal based on the low percentage of frequent flyer RPKs to total RPKs and the Company’s ability to manage frequent flyer capacity.

Property, Plant and Equipment

The Group has a net book value of approximately £7.9 billion in aircraft, property, equipment and other tangible assets as at March 31, 2006. Depreciation is calculated to write off the cost, less the estimated residual value, on a straight-line basis. Changes to the Group’s policies relating to the revaluation of assets, estimation of useful lives, residual values or other policies could have a material effect on the presentation of the Group’s financial position and results of operations. Further information relating to the Group’s accounting for property, plant and equipment is provided in Note 2 to the Financial Statements.1

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

Goodwill and other intangible fixed assets

Under IFRS goodwill is capitalised and tested for impairment annually and when events or changes in circumstances indicate the carrying value may not be recoverable.

Intangible assets with finite lives continue to be capitalised and amortised over their useful economic lives. The Group’s landing rights have definite useful lives over which the cost is amortised. The carrying value of finite-lived intangible assets is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

Changes to the Group’s valuation methods used for the purposes of impairment review or estimation of useful economic lives for finite-lived intangible assets could have a material effect on the presentation of the Group’s financial position and results of operations.

Employee benefits

Accounting for pensions and other post-retirement benefits involves judgement about uncertain events including, but not limited to, discount rates, life expectancy, future pay inflation, expected rate of return on plan assets and expected health care cost trend rates. Determination of the projected benefit obligations for the Group’s defined benefit pension schemes and post-retirement plans are important to the recorded amount of benefit expense in the income statement and valuation of the balance sheet.

Under IFRS, actuarial valuations on pension schemes are required to be carried out at least annually. These determine the expense recorded in the income statement, the liability recognised in the balance sheet and unrecognised in the pension ‘corridor’. Details of the assumptions used are included in Note 31 to the Financial Statements.

Financial instruments and derivative instruments

The Group has elected under IFRS 1 to apply IAS 32 – ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 – ‘Financial Instruments: Recognition and Measurement’ effective from April 1, 2005.

Under IAS 39 financial instruments are recorded initially at fair value. Subsequent measurement of those instruments at the balance sheet date reflects the designation of each financial instrument. The measurement of fair value is based on market observable data, where such information is available, or alternative valuation methods that can involve the use of judgements and estimates.

Gains and losses on derivative financial instruments designated as cash flow hedges and assessed as effective for the period, are taken to equity in accordance with the requirements of IAS 39. Gains and losses taken to equity are reflected in the income statement when either the hedged cash flow impacts income or its occurrence ceases to be probable. As a result of the requirement to measure the effectiveness of the hedging instruments, changes in market conditions or the Group’s hedging strategy can result in the recognition in the income statement of unrealised gains or losses on derivative financial instruments designated as hedging instruments. During financial year 2006 derivatives were generally found to be effective. The only ineffectiveness related to fuel hedges where the unrealised profit being recognised in the income statement for ineffective hedges was £19 million compared with a recognised realised hedging profit for 2006 of £303 million.

1 In relation to US GAAP, there has been one change of accounting policy which is explained in the following terms in Note 36 to the financial statements in the Annual Report on Form 20F which reads as follows: “Under IFRS the Group has applied the component based approach of IAS 16 “Property, Plant and Equipment” for tangible assets. This resulted in a change in accounting policy for the costs of major engine overhaul as compared to the accounting previously applied under UK GAAP. Previously, under UK GAAP, the Group had expensed these costs as incurred, but under IAS 16 these costs are capitalised at the time of expenditure and amortised over the period between major overhauls. As of April 1, 2005, the Group changed its US GAAP accounting policy for major engine overhaul from ‘expense as incurred’ to ‘capitalise and amortise’. This change represents a change in accounting principle as defined by APB No. 20 “Accounting Changes”, and a cumulative effect adjustment is recorded in the 2005/06 Income Statement. The Group changed its accounting policy under US GAAP because it believes the new policy results in a better matching of revenues and expenses.”

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KEY PERFORMANCE INDICATORS

The Company’s Key Performance Indicators (KPIs) are derived from the success measures in the ‘BA Way’ and the performance criteria in the Remuneration Plans. These are detailed below.

1. Profitability/Operating Margin

Operating margin is defined as Operating Profit/(Loss) divided by Revenue expressed as a percentage and is the key measure of financial performance in the Company. The central corporate financial target approved by the Board under the FSAS review and subsequent business plans is an average operating margin of ten per cent per annum across the business cycle.

The Group achieved an operating margin of 8.3 per cent in financial year 2006, up from 7.2 per cent in 2005. This is still short of the rate of ten per cent that the Group has set itself as a target to deliver an adequate return to shareholders over the long term.

2. Customer Advocacy

Customer Recommendation has been introduced alongside operating margin to provide an improved focus on this key area using an objective and measurable customer service metric. The Company measures Customer Recommendation of British Airways through our Global Performance Monitor (GPM) survey, an on-board customer survey augmented by a follow-up telephone survey that picks up the arrival elements of the customer’s journey. The survey is carried out on approximately 50,000 customers each month. The data is subject to auditing and checks by GfK NOP, the independent Market Research company who run the survey on our behalf, to ensure its accuracy and independence. The Customer Recommendation measure is based on the percentage of customers who, when surveyed, would highly recommend British Airways to friends, family or colleagues. The Company believes this measure provides an important linkage between customer experience and future profitability. The target in 2005/06 was that 65 per cent of customers are extremely likely or very likely to recommend the Company.

Customer Recommendation is driven by two factors: whether a customer is satisfied with their experience with the airline and whether they think it is good value for money. This year’s results were 61 per cent Highly Recommend. This figure was heavily impacted by the disruption to our customer experience in August, 2005 resulting from the industrial action at Heathrow. The key elements of the journey that need focus on to improve customer recommendation are the operational basics (especially punctuality and baggage delivery), providing a speedy departure experience through the terminal and providing a quality onboard experience, including from Cabin Crew, catering, cabin environment and in-flight entertainment.

(BAR CHART)

3. Safety and Security

The Company places the utmost importance on ensuring the safety and security of its customers and employees in the air and on the ground. The Company works continuously to ensure that its customers are safe and secure and its record has been consistent with that objective.

The target for safety and security is that 95 per cent of customers feel safe with the Company. Clearly the Company aims to be 100 per cent safe – no other target is acceptable. However, in setting targets for measuring the perception among people who fly, the Company has acknowledged that some passengers do not enjoy air travel, even if they are experienced or frequent flyers.

External events beyond the control of the airline, such as terrorism and war, impact customers’ perceptions of safety, as do events that we control, such as a strike or well-publicised disruption.

The current results for this measure are that 90 per cent of flyers surveyed in the UK claim to feel safe with the Company. The Company believes that result was adversely affected by the impact of the disruptions last August.

The measurement of customers’ perception of safety for the Company and other carriers comes from the UK Brand Tracker survey. This is an online survey conducted with approximately 400 flyers in the UK each month. During 2005/6, the independent Market Research company, IPSOS, conducted this survey for us.

A number of high profile incidents across the world have been reported in the year and these can influence individual customer perception.

The events in London last July show that terrorists continue to evolve in both how and where they attack. The Company continues to work with UK and overseas governments to ensure that our counter measures are appropriate to the prevailing threat. A team of dedicated security experts frequently visit all airports that the Company operates from in order to evaluate security standards and, where required, implement supplementary measures. If security standards could not be brought up to a sufficiently high standard the Company would cease operations to that destination.

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Safety is an integral part of the business with all departments being actively involved in searching for improvements. The Company works closely with its oneworld and franchise partners to develop prevention strategies that enhance its safety and drive industry best practice. Despite the industry being extremely competitive the Company prides itself on having an open relationship with respect to sharing safety data. This approach allows it to force the pace of change in certain sectors to the benefit of all.

During last year the Company has further evolved its safety and quality management systems as the organisation has changed to meet the changing economic demands of the airline industry. Its safety and security review committees have been streamlined to provide greater clarity for reviewing every aspect of the operation. A number of its key customers have also been taken through this process to explain how the Company manages all aspects of safety and security, with very encouraging feedback.

In the coming financial year, the Company will begin the process of obtaining IATA Operational Safety Audit (IOSA) accreditation, which is a key element of IATA’s six point safety plan for the airline industry. The Company is a founding member of the IATA development committee which has produced this new standard which aims to raise airline safety standards across all operators.

 

 

4.

Respected Company

The target for ‘Respected Company’ is that 80 per cent of community, social and environmental stakeholders respect the Company. The Company aims to be respected by these groups for the way in which it deals with them and with the issues affecting them. Research is conducted by an independent Market Research agency, Opinion Leader Research, with 100 community stakeholders from the following groups:

 

 

 

 

Politics/Government,

 

 

 

 

Policy and Non-profit organisations,

 

 

 

 

the Media,

 

 

 

 

Environment and sustainability groups,

 

 

 

 

Local authorities and community groups around Heathrow,

 

 

 

 

Groups representing minority interests,

 

 

 

 

London and South East economic development organisations.

The research in August, 2004, concluded that 74 per cent of our community stakeholders respect the Company. The follow on study in August, 2005 concluded that 83 per cent of our community stakeholders respect the Company.

 

 

5.

Employee Motivation

The fifth and final ‘BA Way’ goal for the year 2005/06 related to employee motivation. The target here is that 75 per cent of employees feel motivated to deliver the Company’s business goals. An employee research programme, called the Employee Feedback Programme (EFP), conducted by the independent research agency, MORI, began in November, 2004. It was clear from the first survey and from subsequent work that scores for employee motivation vary markedly across the business. During the year, the Company launched a major awareness campaign designed to inform employees about the consequences of the pensions deficit and its implications for the members of NAPS. The decision was made to defer testing and the next full census survey of all employees will be conducted in Autumn 2006.

Again this online survey will be conducted and hosted by MORI, with full respondent anonymity guaranteed.

The review of the ‘BA Way’ which was already underway at the time of this Report is likely to result in changes to this measure based on the new work carried out in conjunction with MORI.

 

 

6.

Key Performance Indicators in Incentive Plans

The incentive plans designed by the Remuneration Committee use the following additional measures to assess and incentivise management’s performance.

Total Shareholder Return (TSR) measures the financial benefits of holding a company’s shares and is determined by share price performance along with any dividends which are paid. For the purposes of the Long Term Incentive Plan (LTIP), the Company’s TSR was compared to the TSR of the FTSE 100 group of companies. In relation to the conditional award made under the scheme on June 9, 2003 which measured TSR over the three financial years commencing April 1, 2003, the Company was the 13th highest performing company out of the 93 FTSE 100 companies remaining for the performance period April 1, 2003 to March 31, 2006. This placed the Company on the 86th percentile.

The LTIP was replaced by the Performance Share Plan (PSP) in 2005. For the purposes of this scheme, the Company’s TSR is measured against a comparator group of airline companies over a single three-year performance period which begins on April 1, prior to the award date. Full details of the scheme are given in the Remuneration Report.

For the year 2005/06 only, the annual bonus plan for senior executives also included performance against the Terminal 5 Transition Programme, known internally as ‘Fit for 5’, as a performance condition. After assessing performance on the hard measures and taking into account the progress made during the year, the Remuneration Committee judged the performance to be ten out of a possible 25.

The Company believes that its Key Performance Indicators must remain relevant to the needs of the business and they will therefore be subject to refinement from time to time in accordance with the needs of the business. As mentioned above, the ‘BA Way’ is being reviewed and the Key Performance Indicators may be changed accordingly.

OUTLOOK

The airline market in the United Kingdom remains fiercely competitive. No frills carriers continue to consolidate their presence in European markets, and now account for more than a third of all shorthaul flights from London’s airports. As a result, the Company has seen its share of passengers in the United Kingdom shorthaul market fall from more than 30 per cent in 1998 to below 20 per cent in calendar year 2005. Even among business travellers, corporate cost consciousness has allowed no frills airlines to carry an increasing share of the market, and the proportion of business travellers flying in the premium cabins of the network carriers, such as British Airways’ Club Europe, has continued to decline. Longhaul services also face vigorous competition. As the market recovers, competitor airlines are beginning to order new aircraft and start new intercontinental services. In particular, Middle East carriers are undertaking rapid expansion of their hubs. Ailing American carriers have been able to offload costs under the protection of the United States Chapter 11 bankruptcy laws.

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Despite the challenging market conditions, the Company’s total revenue is expected to increase in 2006/07. But there are also major cost headwinds – particularly in terms of fuel costs. The Company’s business plan for the two years ending March, 2008 identifies four priority areas. First, the Company needs to continue to reduce its cost base to ensure it is competitive in the global airline market. Second, the Company is making targeted investment in products and in training for employees. This includes investment in the air and on the ground, where the Company is applying new technology (such as online check-in) to ease the travel experience and speed passengers through the airport. It also includes a renewed focus on training and employee engagement. Third, is ‘Fit for 5’ – being ready to move to Terminal 5. Fourth, the Company needs to prepare for future growth, as long as it remains on track to meet its target return of ten per cent operating margin.

The Company’s growth plans, however, hinge on infrastructure development at our Heathrow base. The Company is working to support the plans for future development laid out in the 2003 White Paper, “The Future of Air Transport”. This recommended the building of a third runway at Heathrow, and consideration of better use of the existing runways at Heathrow by ‘mixed mode operations’. Mixed mode – enabling airlines to use each runway for both take off and landing – would add to runway capacity over the longer term and in the short term it could also reduce congestion and delays. The Government is working with key stakeholders to establish the environmental implications of this expansion, through its Project for the Sustainable Development of Heathrow. The Company is actively contributing to this work, particularly through the monitoring and modeling of the impact of aircraft on local air quality.

PRINCIPAL RISKS AND UNCERTAINTIES

This section describes some of the risks which could affect the business operations and results of the Group. There may be others (see also the cautionary statement regarding forward-looking statements contained in the inside front cover).

The commercial airline industry is highly competitive and the market for air travel has experienced, and will continue to experience, significant structural change. Further, the Group’s future performance is likely to continue to be subject to a variety of factors over which the Group itself has little or no control including, by way of example only, governmental regulation whether domestically within the United Kingdom, within the European Union or worldwide, fluctuations in the price of jet fuel, acts of terrorism, changes in economic conditions, the availability or otherwise of financing and fluctuations in currency and interest rates. The Group’s results may also be affected by information technology risks as well as by the uncertainties inherent in labour relations and the uncertainty of pension costs. There may well be other risks which emerge from time to time including war, changes in liquidity and capital resources and restrictions in the availability and scope of insurance.

Factors Generally Affecting Commercial Strategy & Performance

Planned move to Terminal 5

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

Commercial strategy/product effectiveness

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

Competition

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

Market/economic factors

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

Alliances, Franchise & Subsidiary effectiveness

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

Certain business disruption risks

Loss of systems – infrastructure/data

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

Security

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

Supplier failure

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

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Fleet grounding or restriction

The Group operates a number of aircraft types. An accident or discovered defect even where this applied to another airline, could ground significant portions or all of the fleet.

Insurance Market failure

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

Constrained operating infrastructure

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

Health concerns, epidemics and pandemics

Epidemics (e.g. SARS) and pandemics as well as other health risks may occur and would be beyond the Group’s control. Health concerns are one of the factors that can adversely affect demand for air travel. For example, in the Spring of 2003, an outbreak of SARS caused concerns among many travellers about the spread of the disease and related health issues. This resulted in a decline in demand for certain of the Group’s routes, most notably in routes involving the Far East. Future health concerns that affect the demand for air travel generally, or the demand for air travel involving a geographic area, could have an adverse affect on the Group’s operations and financial results.

Loss of key buildings/airport infrastructure

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

Factors that could increase operating and other costs

Pensions shortfall

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

Operating costs

Operating cost increases are frequently outside the Company’s control, and can have a significant impact on the results of operations.

Security costs

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

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

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

Financial commitments

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

Fleet maintenance and modernisation

It is essential to the Group’s strategy that it maintains a 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 jeopardised if the trading climate were to deteriorate substantially.

Market power and importance of suppliers

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

Political restrictions

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

Risks to reputation/public confidence

Corporate Governance/Corporate Responsibility

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

Adverse publicity

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

Inadequate crisis management

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

Legal & Regulatory risks

In certain areas, the Group relies on tailored compliance programmes for appropriate groups of employees to ensure that it meets its regulatory obligations.

Failure to comply with applicable new or changed laws, regulations or governance standards or new or changed regulatory interpretation thereof may harm the business or the Company’s reputation. Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure causes and may continue to cause uncertainty for companies affected by them unless they are or become sufficiently certain. Continuing uncertainty regarding compliance matters and higher costs of compliance could result from ongoing revisions to such laws, regulations and governance standards.

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In particular, the essential work necessary to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 to which the Company is subject by virtue of its listing on the New York Stock Exchange is continuing and, as disclosed on page 5, an analysis of all the requirements for Section 404 compliance has been completed and required remediation projects are underway. Failure to achieve compliance in a timely fashion, or to maintain compliance once achieved, with Section 404 could harm the business or the Company’s reputation.

Employment law

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

Industry regulation

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

Competition law

Competition law which constrains consolidation opportunities may restrict the Group’s ability to compete effectively in the marketplace.

National/International law

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

In certain cases, the regulatory requirements of the US (and other governments) conflict with EU rules applicable to the Group.

Government intervention and support

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

Workforce/Health and Safety considerations

Industrial relations

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

Manpower levels/skills

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

Health & Safety at work

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

Internal control

The directors are responsible for the Company’s system of internal control, including internal financial control, which is designed to provide reasonable, but not absolute, assurance regarding: (a) the safeguarding of assets against unauthorised use or disposition, and (b) the maintenance of proper accounting records and the reliability of financial information used within the business or for publication.

Risk approach

The Company has put in place a structure and process to facilitate the identification, assessment, and management of risks.

Each of the Leadership Team directors (detailed on page 2) has appointed one of his direct reports as the directorate’s Risk Leader. The role of the Risk Leader is to identify and manage risks for the directorate, co-ordinating risk management activity within it and ensuring that risk is on the agenda at his/her director’s team meetings.

The ten Risk Leaders meet quarterly under the chairmanship of the Head of Risk Management. This meeting provides an opportunity to discuss risks which are cross departmental in their impact and which, therefore, must be managed by a number of people throughout the organisation under the auspices of the risk owner who is overall accountable for ensuring the risk is managed effectively. The Risk Leaders will also make recommendations regarding the management of risks or changes in process or structure to the Risk Group, to which it reports.

The Risk Group, chaired by the General Counsel, currently consists of seven of the Leadership Team directors and the heads of internal control and risk management. It provides policy and guidance to the Risk Leaders, reviews the Company’s key risks and will make decisions about risks identified by the Risk Leaders where there are options as to how the risk may be managed. It also ensures that the business plan is aligned with the Corporate Risk Register. This group will be expanded in future so that it includes all of the Leadership Team directors and will conduct its business as part of Leadership Team Strategy Days. The frequency of meetings will remain as quarterly.

A Risk Finance Group, which in future will be chaired by the Head of Risk Management, supports both the Risk Leaders and the Risk Group by advising on matters relating to the Group’s wholly owned insurance company, the Company’s risk appetite and risk transfer.

The Risk Group reports bi-annually to the Audit Committee. Each report outlines the principal activities of the Risk Group during the period including developments it has been responsible for as well as reporting on the Company’s key risks to aid the Audit Committee and the Board in their efforts to assess and manage risk in accordance with the revised guidance for Directors on the Combined Code (October, 2005).

The roles of Risk Leaders, the Risk Financing Group and the Risk Group are defined by Terms of Reference in each case.

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The management of each major area of corporate risk is subject to audit by an appropriate body. For example safety risks are audited by the Board’s Safety Review Committee and security risks by the Corporate Security Board. Changes to the risk register are made in accordance with the audit body’s decisions. Each key risk is subject to review in this way at least once per annum.

The risk management process, including the corporate risk register, is managed by a small team, reporting to the Head of Risk Management. This team also provides training and guidance where required on risk management generally and the Company’s process and structure specifically and provides secretarial services to the Risk Leaders and Risk Group and facilitates the auditing of risks at the relevant audit body risk review meetings.

The Risk Register

Usually, Risk Leaders are sufficiently close to the business activity in the Company in general and their Directorate in particular that they are able to capture any new or emerging risks or changes in the nature of any existing risks. Nevertheless, any employee can alert any participant in the risk management process if they become aware of a risk that they believe has not been previously identified. Where a new risk emerges, the Risk Leader will raise the matter with his or her Director and, if appropriate, an owner is allocated. The Risk Leader then enters the risk detail on the departmental register and the central team updates the Corporate Risk Register and allocates an appropriate audit body.

The risk register can be presented in a variety of ways to enable its use as a business tool, for example, by total score, where the impact and likelihood are multiplied to reach a total score. Alternatively Risk Registers can be produced with risks sorted by audit body, directorate, or by grouping risks into six categories –Commercial Strategy & Performance, Business Disruption, Costs, Reputation & Public Confidence, Legal & Regulatory Issues and People Issues.

A register of key risks is also regularly reviewed by the Risk Group and by the Audit Committee. By reviewing such risks the Risk Group and the Audit Committee can assess whether such risks are being satisfactorily monitored and mitigated should their likelihood suddenly increase.

The Risk Register and other associated documents are classified ‘Confidential’ and as such, access to them is restricted to individuals on a ‘need to know’ basis. Access is controlled by the central risk management team in accordance with the Company’s systems access control policies.

RESOURCES AND RELATIONSHIPS

The ‘BA Way’ also underpins the Company’s corporate responsibility reporting. A fuller version of the following information is available on the website www.ba.com/responsibility

The BA Way in the marketplace

Customers

The airline puts its customers at the heart of everything it does.

Safety and security

The Company believes that excellent ground security is at the heart of achieving comprehensive security in the air and works very closely with all relevant airport authorities, government regulators and security and law enforcement agencies around the world. Our experienced team of dedicated security experts frequently audits every airport to which the airline flies. If any concerns emerge during the audit, we implement additional security measures to ensure that security levels in place are commensurate with our own high standards.

The Company promotes an open safety culture among all staff, who are encouraged to report incidents or concerns at every opportunity. It is only through the reporting of safety incidents that trends can be identified and new procedures put in place to enhance further the airline’s safety record.

The safety of our customers, staff and aircraft is absolutely paramount and will never be compromised. Even the most minor incident is reported to and assessed by senior managers.

Monitoring customer satisfaction

The Company monitors customer feedback on key stages of their flights each month, using a sample of passengers seated in particular positions throughout the aircraft. The findings are presented monthly to the Leadership Team. This mechanism ensures that where shortfalls are identified action is taken to address the issue.

A chart showing customer satisfaction is on page 23.

Customer advocacy

As detailed in the key performance indicators on page 23. Customer Recommendation is a key measure of customer satisfaction for the airline. For the year under review, a number of areas scored particularly highly in customer satisfaction ratings, however, there are some areas where customers say the airline must improve. The key issue for customers is making sure flights depart on time, especially at Heathrow.

 

 

 

 

customers rate cabin crew highly, with 83 per cent of passengers saying they were extremely or very satisfied with the service they received from cabin crew (against a target of 83 per cent);

 

 

 

 

overall satisfaction with booking on ba.com was 83 per cent, with leisure travellers and customers aged 55 and over rating ba.com particularly highly;

 

 

 

 

overall customer satisfaction with flight departure was 43 per cent in February, 2006.

www.ba.com

The Company’s website is central to its plans to make travelling with the airline easier for customers.

ba.com receives more than 20,000 visits every hour – roughly three times as many people as fly with the airline. Online bookings now account for 25 per cent of the Company’s total bookings worldwide. The website is designed to provide customers with an extensive range of services including up-to-

28


the-minute information on flight arrivals and departures, the ability to check-in, allocate seats and print their boarding cards, order special meals, book hotels and car hire, manage their Executive Club accounts, search for information on the destination they are visiting and find advice on wellbeing before, during and after their flight. Customers can also make enquiries and complaints via ba.com and, if necessary, trace any late-arriving baggage. Refinements to ba.com during the last 12 months include:

 

 

 

 

enabling customers travelling to America to enter the Advance Passenger Information data required by the US authorities before arriving at the airport;

 

 

 

 

extending the availability of online boarding passes to 180 routes;

 

 

 

 

allowing customers to pay for tickets with credit cards billed in a country other than the original departure point, and to book up to six sectors – for example, for round-the-world trips - in one transaction.

‘It’s About Time’

To deliver improved customer service the airline acknowledges that it must also deliver better punctuality. ‘It’s about time’ is the name given to the airline’s drive on punctuality, introduced at the end of 2005. Significant focus is being placed on getting each day off to a good start. The ‘First Wave’ plan stresses how vital it is that the first services of the day leave on time to prevent knock-on delays disrupting the later schedule.

In-Flight product development

The Company offers one of the airline industry’s most extensive ranges of in-flight cabins across its longhaul and shorthaul networks. It is one of only two international airlines to offer four cabins on longhaul flights and remains firmly committed to providing an economy and business class cabin on its mainline shorthaul operation. It means the airline can offer a quality service and value-for-money fares for all customers.

In-flight entertainment

The airline announced plans in 2005 to carry out a major upgrade of the airline’s in-flight entertainment systems in all longhaul cabins. The introduction of ‘audio-visual on-demand’ means that customers can select a programme, film or music channel and stop or pause as they wish during the flight, depending on whether they want to rest, eat or work. The initiative, to be implemented from Summer 2006, will give customers more choice and greater flexibility by giving them control over what they watch and when.

A new training programme for our cabin crew, the ‘Premium Academy’, was introduced in November, 2005 focusing on quality of service style and consistency of delivery.

Customer relations

The airline has focused heavily during the last three years on improving service and interaction with customers who experience service failures. Customers’ overall satisfaction levels with the way in which complaints were handled rose from 50 per cent to 65 per cent. Satisfaction with staff professionalism has almost doubled in the last two years to 60 per cent. Customer satisfaction for the timeliness of responses to complaints also increased significantly from 30 per cent to 55 per cent. In part, this reflected a rise in the proportion of responses sent by email this year – from 15 per cent to 25 per cent.

SMS alerts

Unfortunately, from time to time flights are disrupted. Following a successful trial, we introduced this year an SMS messaging system to alert customers if their flight is delayed or cancelled. Customers who register their mobile phone number on ba.com will receive a message to alert them to any changes to their flight.

Executive Club

The Company’s customer loyalty and reward programme, the Executive Club, has been running for 20 years. It is designed to recognise the airline’s most regular and valuable customers and rewards them by giving them frequent-flyer points (BA Miles), priority check in, access for Gold and Silver members to 250 airport lounges worldwide, flight upgrades and special offers. Results from a trial of 1,000 Executive Club members showed that satisfaction rose by 14 per cent among those members who received this more personalised service.

Baggage

Sometimes luggage goes missing or does not travel on the same flight as its owner. Understanding the inconvenience that this causes customers, the airline has implemented a number of initiatives that help customers track and recover their bag more easily. In North America, for example, a dedicated baggage helpline has been set up so customers can access specific assistance rather than rely on airport general customer service teams who may not be able to give baggage inquiries consistent priority.

Lounges

In July, 2005, a new Molton Brown spa was opened in the Terraces Lounge at New York’s JFK airport. A major refurbishment of lounges in India took place in 2005, and an overhaul of lounges in Heathrow’s Terminals 1 and 4 was completed in March, 2006.

Health

The information and advice on air travel and health provided for customers on the Company’s website has been simplified to make it clearer and more easily understood, with links to recommended external websites providing more detail. Health information provided to passengers through onboard announcements, video and in-flight magazines has also been reviewed.

The Company maintains a health service whose responsibilities include the analysis of health-related issues for passengers and staff and the provision of advice to the Group on appropriate measures to take in response to such issues. British Airways Health Services remains constantly vigilant to the threat of emerging diseases. Experts in communicable diseases have warned of the risk of a pandemic flu outbreak and the airline has set up a contingency planning group to address this specific risk. Members of the group are working with government and non-government organisations, including the World Health Organisation (WHO), UK Government and IATA, to ensure a coordinated response.

Heathrow capacity

To ensure Heathrow airport offers customers a global network of direct routes comparable with hubs in Continental Europe, the Company strongly supports the sustainable development of the airport’s capacity.

29


In 2005/06 the Government and BAA have continued with preliminary studies related to the proposals of the 2003 Air Transport White Paper to build a third runway at Heathrow (subject to meeting environmental conditions) and to consult on full use of Heathrow’s existing runways. The Government is committed to producing a report on progress on implementation of the White Paper by the end of 2006.

The Company is actively contributing to these projects for the sustainable development of Heathrow by:

 

 

 

 

responding in detail to BAA’s consultation on a draft interim master plan for Heathrow, and supporting proposals that protect local property values in areas potentially affected by Heathrow’s third runway;

 

 

 

 

participating in ‘Future Heathrow’, a broadly-based campaign embracing all the main Heathrow trades unions, and local and national business organisations seeking Heathrow’s sustainable modernisation and expansion;

 

 

 

 

discussing with local authority representatives and regional organisations (including the South East England Development Agency and the London Development Agency) the strategies for local and regional plans that would best secure the potential benefits of Heathrow’s expansion for these areas. There is a major opportunity for Heathrow’s growth to underpin areas of West London that the London Plan is seeking to regenerate with the creation of many thousands more jobs;

 

 

 

 

promoting the case to reduce flight delays when Heathrow’s runway capacity is increased, as this would cut emissions and noise from aircraft that would otherwise be held on the ground before take-off and in a stack before landing.

The Company will continue fully to support the implementation of the Government’s policies for the sustainable development of Heathrow, for the unique benefits it can offer customers as the UK’s global hub.

Suppliers

Ethical procurement

In February, 2006 we tested an ethical procurement survey on our 50 main suppliers, covering health, safety, environment, diversity and labour standards as well as business continuity planning. We are now working to interpret the findings and to develop a strategy for improving standards where necessary.

Payment performance

We implemented a number of initiatives this year in order to improve our level of supplier payment performance to our target of 90 per cent (67 per cent on time payment in 2004/05). As a result our on time payment has increased to 78 per cent worldwide in March, 2006 (with 80 per cent on time payment in the UK). Initiatives are in hand to improve performance further in 2006/07.

Supplier performance

August, 2005 saw disruption to our worldwide flight operation following industrial action by the workforce at the airline’s primary Heathrow caterer, Gate Gourmet. The Gate Gourmet dispute resulted in some of our aircraft not being fully catered for a considerable period. Contingency plans had been put in place to minimise customer inconvenience during any such disruption and these worked well for an initial period. The consequences for the airline were, however, exacerbated by unlawful industrial action taken by some of the airline’s ground staff. The Company has now developed a supplier risk log, which proactively highlights key risk criteria against critical suppliers. The risks are monitored on a monthly basis allowing us time to mitigate the level of risk to our operations and forms part of the corporate risk governance process.

Terminal 5

Terminal 5 provides suppliers with opportunities to innovate processes and develop strategies to deliver good customer service. Terminal 5 is subject to specific environmental planning conditions, supplemented by joint BA and BAA initiatives to which each supplier must commit. These initiatives include reducing emissions by the procurement of new vehicles and equipment and reducing supplier journeys into the Terminal 5 site.

Payment policy

British Airways is a signatory to the Confederation of British Industry (CBI) code of practice on supplier payment and is committed to the payment of its suppliers to agreed terms. Further information in respect of this code can be obtained from the CBI at Centre Point, 103 New Oxford Street, London WC1A 1DU. The number of days’ purchases in creditors as at March 31, 2006 in respect of the Company is calculated in accordance with the provisions of the Companies Act 1985 and was 39 days (2005: 55 days).

The BA Way in the workplace

As discussed in the fifth of our key performance indicators (described on page 24), our employees are critical to the success of the Company. This section outlines some of the developments in relation to our staff.

Terminal 5 is bringing the ‘BA Way’ to life. The Company’s planning has one objective: to deliver the best airport customer service in the world. Customers want speed through the airport and punctual departure with their bags. The operation is designed to deliver these goals, using simple, safe and standard processes assisted by technology. The Company’s people want fulfilling and secure jobs, a good working environment, fair reward and personal development. The Company wants them to come to work, do the job well and be flexible. The move in March 2008 will be the largest in the Company’s history and is a once-in-a-lifetime opportunity to transform the travel experience for customers and working conditions for employees.

The Transition Programme is presently structured into workstreams covering safety and security, baggage and equipment, passenger preparation, employees, planning and control. Included in the workstreams is a focus on the cultural change required to make Heathrow a safer place to work and the requirement to ensure all passenger gate requests for seat, meal or other changes are dealt with prior to the passengers’ arrival at the airport in order to remove the adverse effect on punctuality. Another workstream is planning methods which will reduce waste including duplication of effort, queuing and unnecessary movement around the airport by both people and vehicles.

30


Diversity

The objective of the Company’s diversity programme is to ensure greater awareness of diversity issues (disability, age, race, religion, gender and sexual orientation) amongst all employees.

In 2005/06, some of our key activities included:

 

 

 

 

a new diversity training programme for managers has been designed and delivered;

 

 

 

 

an audit of work to enable compliance with the Employment Equality (Age) Regulations 2006 has been completed and an action plan developed. The Company participated in the Government’s consultation process and is embarking on a cultural change programme for employees;

 

 

 

 

the Company has been involved in a reclassification of the workforce to 2001 census standards. All employees have been asked to complete online information about their ethnic minority status and disability using the new diversity monitoring categories;

 

 

 

 

new diversity targets have been agreed in principle by our Corporate Responsibility Board and implementation will proceed in 2006;

 

 

 

 

the Company has signed up to a joint partnership with our four main trade unions as part of a national initiative led by Amicus and the Department of Trade and Industry aimed at eradicating workplace harassment and bullying. We are reviewing communication and training on all aspects of this issue.

The Company welcomes applications from people with disabilities and has a helpline number on ba.com to arrange any reasonable adjustments which may be needed, for example information in alternative format or extra time for tests. This also enables us to make adjustments to the workplace in advance of the employee taking up a position.

The Company works with our Disabled Employees Group and Occupational Health Department on disability issues, and makes reasonable adjustments for employees who may become disabled. If reasonable adjustments cannot be made for any reason, an alternative suitable role and re-training will be considered through our Careerlink redeployment service. Training for employees is increasingly provided online and accessibility to e-learning is constantly reviewed.

All front line employees are now being trained in disability awareness to increase their knowledge about disabled customers and employees.

Pension Fund

The Company’s New Airways Pension Scheme (NAPS) fund represents most serving UK staff, with just under 34,000 active members and 35,000 deferred members and pensions. The 2003 actuarial valuation showed a deficit of £928 million and, despite additional Company contributions since January, 2004, the deficit and cost of funding future service within the scheme are both expected to rise at the next actuarial review (March, 2006) due to lower long-term interest rates and increased life expectancy. For this reason the Company has proposed changes to future benefits within NAPS.

In October, 2005 the Company started a three-month face-to-face communications programme with staff, to ensure that all were aware of the background to the pensions issue. In March, 2006 the Company proposed that, subject to members agreeing to increase the retirement age, to lower the accrual rate, to cap pensionable pay awards in line with inflation and to lower the capping on pension growth in retirement, it would inject an additional £500 million into the NAPS pension fund. Discussions with the trustees, trade unions and workforce on this proposal are still proceeding.

Management reductions

In November, 2005 the Company announced a programme to reduce the number of senior managers in the business by 50 per cent and the number of middle managers by 30 per cent by March, 2008. The objective of this programme is to remove duplication and complexity, provide greater accountability and to reduce costs. The initial phase of this programme saw a 23 per cent reduction in senior managers by March 31, 2006.

Internal employment

As and when the Company has been downsizing its workforce, displaced employees below senior manager level have the option of moving to the Careerlink register through which the internal job market is managed so as to ensure that individuals who are displaced are considered first for any vacancies. Careerlink provides a pool of experienced employees who are available for redeployment but are also eligible for redundancy. During the financial year 2006, the number of people registered with Careerlink reduced to 62. A total of 119 people have found alternative roles within the business or decided to leave the Company.

Industrial relations

In Summer 2005 the Company received the backlash of the Gate Gourmet catering dispute when some of our ground support staff took part in unlawful industrial action affecting the operation at Heathrow for two days. An enquiry known as ‘Focus on Fact’ was launched to investigate the events leading up to the disruption. Two employees were dismissed and a third was suspended as a result. The cost of the disruption to the business was approximately £40 million.

Last year a programme for Company managers and Trade Union (TU) representatives called the Industrial Relations Change Programme (IRCP) was launched to reduce communication barriers and improve understanding. Over 1,800 managers and 220 TU representatives attended the workshops. Joint work will continue in 2006/07 to improve relationships.

Tribunal claims and outcomes

During 2005/06 the Group received new Employment Tribunal claims in respect of 39 matters and one breach of employment contract claim in the County Court. Of the 40 cases, the Company is the Respondent in 32 whilst the remaining eight cases were brought against BA Connect (2 claims), BA Maintenance Cardiff (5 claims), BA Clubs (1 claim) and BA Holidays (1 claim).

Eleven of the 40 cases are ongoing. Of the 29 other matters, the Company has won in Employment Tribunal in two cases and 13 cases have either been withdrawn by the complainant or struck out by the Employment Tribunal. Another 11 cases have been settled either with no payment or with a payment of no more than £5,000, whilst three cases were settled for a sum over £5,000.

31


Two of the ongoing claims are multi-claimant cases brought against the Company. The first of these (with 15 claimants) is a claim under the Sex Discrimination Act. This relates to the terms of employment applicable to employees whose roles have become redundant and whom the Company has redeployed to new positions.

The second multi-claimant matter is a claim relating to holiday pay entitlements under the Civil Aviation (Working Time) Regulations 2004. The claim is brought by the Transport & General Workers Union (TGWU) on behalf of all its members who are employed by the Company as ground staff. The exact number of claimants is yet to be confirmed by the TGWU but the Company estimates that this will be in the region of 10,076. The Company faced a similar claim in 2004 in respect of which it is waiting for the Court of Appeal to issue its judgement.

Absenteeism

A new absenteeism policy was introduced in October, 2004 when our absenteeism ran considerably above the industry average. The policy was reviewed during 2005/06 assisting us to approach our target of 10 days average absence per employee. The average stood at 10.5 days in January, 2006.

Training

The British Airways Training Department delivers in excess of 200,000 training days per annum worldwide. The majority of our expenditure is on mandatory and job essential training to ensure that we continue to meet our objective of being the safe and secure airline of choice. More than a third of all training is now available online, reflecting the need for cost-effectiveness. Terminal 5 will be a focus for the training team during the next two years. By February, 2008 over 5,000 Heathrow-based staff will have received training in preparation for the opening of the new terminal.

Recruitment

The Company aims to ensure that it attracts sufficient numbers of people, at the required standard to meet its external recruitment needs. Recruitment is closely monitored to ensure that it is only authorised if the Company is confident that the business need is critical, and there are no suitable internal candidates available. Despite this, the Company has recruited 2,300 people since April, 2005 from 41,000 applications. On average there are over 5,000 visits every day to our job website: www.britishairwaysjobs.com

Employee Involvement

An important part of our strategy is to continue our focus on Employee Involvement. The Employee Involvement initiative has created a foundation for developing new ways of communicating, managing and involving our people. During the past year, several hundred managers have been trained in communication and involvement skills in order to engage and mobilise our employees. A number of departmental sessions have been held to communicate business issues and invite ideas and debate. Leadership Team members have increased their visibility, meeting hundreds of people across the business.

Employee Reward Plan 2005/06

In 2004, the Board approved an Employee Reward Plan (ERP) for non-management grades, linked to the operating margin the airline achieves. The initial Board approval was to operate the ERP for two years. Financial year 2005/06 is the ERP’s second year. Managers and APPG grade are not included in the ERP. They have their own existing performance related bonus scheme linked to the operating margin and individual performance targets and ratings. This will incorporate an equivalent ERP element. The new arrangements mean that everyone can benefit from the Company’s future success as it seeks to work together to improve the business performance, measured by the operating margin achieved.

Health and safety

The Company is committed to creating a safety culture that uses behavioural risk management. It is engaged in a number of initiatives to reduce the risk of employees being injured at work. In preparation for the move to Terminal 5 the Company has contracted Marsh to assist in further improving the safety culture of the Heathrow ramp staff through the introduction of a Behavioural Risk Improvement programme – RAMPsafe. The overall aim of the programme is to reduce lost time, injuries, aircraft damage and vehicle damage and to enhance risk awareness on the ramp areas. It will also aim to improve communication of the safety message within all areas of the Company. Specific manual handling training is being provided to ramp staff. On completion of the training the Company expects to see a 25 per cent reduction in the risk of injury to ramp workers. Completion of training for the initial targeted population will occur in 2007/08. To complement the training initiatives the Company is also leading the industry in reducing the maximum permitted weight of a single piece of checked-in baggage.

Employee safety key performance indicators

Number of employee safety incidents by severity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minor

 

 

Serious

 

 

Major

 

 

Fatal

 

                         

 

2002/03

 

 

6,271

 

 

454

 

 

40

 

 

0

 

2003/04

 

 

5,677

 

 

405

 

 

22

 

 

0

 

2004/05

 

 

5,248

 

 

594

 

 

24

 

 

0

 

2005/06

 

 

5,461

 

 

741

*

 

15

 

 

0

 

                         

 

* We are continuing to see a steady reduction in the number of major injuries. The rise in the number of serious injuries is attributed to changes in the way that injuries of this type are recorded. A “serious injury” is one that has the ability to cause an absence. With our focus on reducing absenteeism the accuracy of recording of injury severity has become even more important because absence associated with a work related injury is typically discounted from an employee’s absence record. Incidents are investigated and analysed for trends. There is no evidence to suggest that the increase in serious incidents reflects a reduction in the personal safety of our employees.

Number of 2005/06 fatalities, health and safety offences and enforcement notices issued:

 

 

 

 

 

Issue

 

 

Number

 

         

Fatalities involving BA employees or contractors at work

 

 

0

 

         

Health and Safety offences

 

 

0

 

         

Enforcement notices

 

 

0

 

         

Working days lost due to work related injuries for 2005 average 4,214 per month per 100,000 employees (see graph overleaf). The 2004 average was 4,300 days per month. The Health and Safety Executive has set a target for reducing the number of major injuries by ten per cent by 2010. The number of major injuries at the Company has now reduced from 40 since 2002/03 to 15 and we continue with our drive to reduce this number to zero.

32


Working Days lost from Work Related Injury
per 100,000 Employees

(BAR CHART)

Our target is for the number of working days lost due to all causes of injuries to be reduced by 30 per cent by 2010 and the total number of major injuries to be reduced by ten per cent by 2010. (These are targets set by the Health and Safety Executive with the baseline set at 2001.)

The BA Way in the Community

The Company continues to be a member of both the London Benchmarking Group (LBG) and Business in the Community’s Percent Club. The LBG’s benchmarking model is used to assess the Company’s total contributions to the community. Business in the Community reported our total contributions for the financial year 2006 as £5.4 million (2005: £6 million). The Company’s direct charitable donations (cash donations to charity) for the financial year 2006 were £898,081 (2005: £830,000).

British Airways Giving Scheme saw 5,157 of current and retired United Kingdom employees donate £614,909 directly from their payroll to their chosen charities. The top charities were Cancer Research UK, High Flight, Sreepur Village Project, RSPCA and NSPCC.

In 2006, the Company supported 130 projects worldwide within five themed priorities: education and youth development, supporting employees, sustainable tourism, environment and heritage.

For more information see: www.ba.com/communityrelations

The BA Way in the Environment

The Company is committed to respecting the environment and improving its environmental performance. The Company focuses particularly on issues related to the direct impact of aviation on the environment – climate change, noise and air quality. In addition it seeks to ensure it minimises waste and makes efficient use of natural resources throughout its operations.

In 2005, the Company joined a cross-sectoral initiative to develop a strategy for the long-term development of UK aviation. The Sustainable Aviation Initiative includes commitments on key environmental challenges including limitation of climate change, noise and local emissions.

The Company is reducing the climate change impact of its aircraft fleet through investment in modern aircraft and operational measures to minimise fuel consumption. The Company’s aircraft fuel efficiency has improved by 27 per cent from a 1990 baseline and remains on target to meet its fuel efficiency target of 30 per cent improvement by 2010.

Aircraft fuel efficiency (index of fuel use per
Revenue Tonne Kilometre, 1990 =100)

(BAR CHART)

The Company has participated in the voluntary UK Emissions Trading Scheme since 2002. Emissions of carbon dioxide from UK properties and domestic flights have reduced by 18 per cent compared to the 1998-2000 baseline. The Company believes it is the only major airline involved in emissions trading, and has sought to share its experience with the European Commission and ICAO as both organisations seek to promote the involvement of aviation in emissions trading.

33


Aircraft carbon dioxide emissions
(million tonnes)

(BAR CHART)

In September, 2005 the Company added to its programme of initiatives on climate change by launching a voluntary carbon offset scheme available through ba.com. This offers customers the opportunity to invest in projects sponsored by Climate Care which reduce carbon emissions equivalent to those generated by their flight with the Company.

The Company continues to take steps to reduce the impact on local communities including reducing aircraft noise. More than 85 per cent of the aircraft fleet now meet the criteria for the new Chapter 4 international noise standard. The Company is also constantly reviewing its operating practices and this year has changed Boeing 777 landing settings at Heathrow and Gatwick to reduce noise. This change will be progressively rolled out to other airports.

Local air quality around airports is an increasingly important issue, particularly at Heathrow where future legal limits mean it could be a barrier to future expansion. The Company is working with the UK Department for Transport to help improve the measurement of the impact of aircraft on local air quality, including active involvement in the technical work as part of the Project for the Sustainable Development of Heathrow.

Road traffic is the major cause of air quality problems around Heathrow Airport, so the Company continues to look for opportunities to promote alternative modes of transport for its employees. In June, 2005, the Company published its second company travel plan ‘Towards T5’.

The Company launched a waste initiative in January, 2005 and set targets for waste minimisation and increased recycling. The focus on waste management has continued with additional initiatives and projects. In calendar year 2005, segregated recycling at Heathrow and Gatwick increased by nearly ten per cent and the proportion of waste at Heathrow and Gatwick disposed to landfill was three per cent less than the previous year.

Getting ‘Fit for Five’ is a key part of the Company’s current business plan. This includes ensuring its facilities and operating practices for Terminal 5 at Heathrow Airport helps the Company to achieve improved environmental performance. In particular the Company seeks to make progress in reducing noise and emissions, exploiting innovative design for energy, water and waste management, and maximising the use of sustainable resources.

Key environmental targets

The Company focuses particularly on the specific environmental impacts of aviation on the global atmosphere, and on local communities, through noise and NOx emissions which contribute to local air quality problems.

The Company continues to focus on best practice techniques to mitigate the noise and emissions impacts from its aircraft. Absolute levels of noise and emissions have, however, increased slightly as a result of the increased flying programme and improved aircraft utilisation supported by generally improved market conditions.

The Company remains on course to meet its target for a 30 per cent improvement in aircraft fuel efficiency in 2010 compared to a 1990 baseline. The Company’s fuel efficiency has improved by 27 per cent since 1990, equivalent to a saving of 55 million tonnes of carbon dioxide. In calendar year 2005, carbon dioxide emissions from its global flight operations increased slightly, reflecting increased aircraft utilisation.

Noise from its global flight operations has reduced by 30 per cent over the past five years as a result of investment in modern, quiet aircraft technology. In calendar year 2005, its noise indicator increased slightly, reflecting increased aircraft utilisation.

Total noise energy from British Airways aircraft
(million “Quota Count” equivalents)

(BAR CHART)

The Company is revising its approach to the measurement of NOx in the light of the work carried out for the government-sponsored Project for Sustainable Development of Heathrow (PSDH). However, the Company has invested in an aircraft fleet which meets high environmental standards. More than three-quarters of its aircraft fleet (76 per cent) meets the highest global emissions standard (ICAO CAEP/4).

For more information see: www.ba.com/responsibility

RECEIPTS AND RETURNS TO SHAREHOLDERS

Dividend

The Board has again decided not to recommend the payment of a dividend. The Company last paid a dividend in July, 2001. The Board has indicated its intention is to resume the payment of dividends at an appropriate time.

34


Share Issues/Buybacks/Treasury Shares

The authorised Share Capital is unchanged, with a small change in the issued capital.

No authority has been sought from shareholders to conduct share buybacks.

The Articles of Association permit the holding of shares in Treasury but the Company is not able to operate such a scheme without first seeking the authority from shareholders to conduct share buybacks.

Capital Bond Conversion

The £320 million 9 ¾ per cent Convertible Capital Bonds 2005 issued in 1989 matured on June 15, 2005. On that date 47,979,486 ordinary shares were issued in exchange for 112,317,274 Convertible Capital Bonds on the basis of one ordinary share for every 2.34 Bonds held.

Shares and Shareholders

The number of shares issued and fully paid as at May 18, 2006 was 1,132,799,225. The increase over March 31, 2006 reflects the issue of new shares to satisfy a portion of the share options exercised under the British Airways Share Option Plan 1999.

Capital Structure

The number of shares allotted, called up, and fully paid on March 31, 2006 was 1,130,882,000 (March 31, 2005: 1,082,903,000). During the year, 10,602,000 shares were issued on the exercise of options under Employee Share Option schemes (2005: 2,026,000).

See Note 28 to the Financial Statements.

Exercise of share options

The following table represents shares exercised during the year under the British Airways Share Option Plan 1999.

 

 

 

 

 

 

 

 

 

 

Group and Company

 

 

 

   

 

 

 

 

 

 

 

 

Number of shares ‘000s

 

2006

 

2005

 

           

 

 

 

 

 

 

 

 

Share options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at April 1

 

 

47,114

 

 

42,274

 

 

 

 

 

 

 

 

 

Granted in the year

 

 

8,242

 

 

8,942

 

 

 

 

 

 

 

 

 

Exercised during the year *

 

 

(10,602

)

 

(2,026

)

 

 

 

 

 

 

 

 

Expired/cancelled

 

 

(2,707

)

 

(2,076

)

               

At March 31

 

 

42,047

 

 

47,114

 

               

Date exercisable

 

 

2006 – 2015

 

 

2005 – 2014

 

 

 

 

 

 

 

 

 

Price per share

 

 

157p – 394

p

 

157p - 465

p

 

 

 

 

 

 

 

 

Price range of options exercised during the year

 

 

157p – 321

p

 

157p - 262

p

               

* Part of the exercise of shares during the year was met through shares previously held by British Airways Employees Benefits Trustees (Jersey) Limited.

As at May 18, 2006 there were 232,863 shareholders (May, 2005: 236,786). An analysis is given below.

 

 

 

 

 

 

 

Size of
shareholding

 

Percentage of
shareholders

 

Percentage of
shares

             

1-1,000

 

 

87.20

 

 

5.21

1,001 - 5,000

 

 

11.43

 

 

4.40

5,001 - 10,000

 

 

0.81

 

 

1.09

10,001 - 50,000

 

 

0.31

 

 

1.22

50,001 - 100,000

 

 

0.06

 

 

0.80

100,001 - 250,000

 

 

0.06

 

 

1.96

250,001 - 500,000

 

 

0.04

 

 

2.87

500,001 - 750,000

 

 

0.02

 

 

2.42

750,001 - 1,000,000

 

 

0.01

 

 

2.04

Over 1,000,000

 

 

0.06

 

 

77.99

             

 

 

 

100.00

 

 

100.00

             

 

 

 

 

 

 

 

Classification of
shareholding

 

Percentage of
shareholders

 

Percentage of
shares

         

Individuals

 

 

98.30

 

 

11.30

Bank or Nominee

 

 

1.37

 

 

85.70

Insurance companies

 

 

0.02

 

 

0.01

Pension trusts

 

 

0.01

 

 

0.69

Investment trusts

 

 

0.02

 

 

0.09

Other corporate bodies

 

 

0.28

 

 

2.21

 

             

 

 

 

100.00

 

 

100.00

             

As at May 18, 2006 Barclays PLC have a non-beneficial interest in 9.98 per cent of the shares of the Company.

35


Treasury policies and objectives

The Board of Directors sets the Treasury policies and objectives of the Group, and lays down the parameters within which the various aspects of Treasury risk management are operated. The Board has approved a Treasury governance statement that outlines the Group’s policies towards management of corporate and asset financing, interest rate risk, fuel price risk, foreign exchange risk and cash and liquidity retention. The Treasury governance statement also lists the financial instruments that the Group’s Treasury function is authorised to use in managing financial risks. The governance statement is under on-going review to ensure best practice in the light of prevailing conditions.

Responsibility for ensuring that Treasury practices are consistent and compatible with the agreed governance statement is vested in the Finance Committee that is chaired by the Chief Financial Officer.

A monthly Treasury Committee, chaired by the Group Treasurer and Head of Investor Relations, approves risk management strategies and reviews major foreign exchange, fuel and interest rate exposures and actions taken during the month to manage those exposures.

Group Treasury implements the agreed policies on a day-to-day basis to meet the Treasury objectives in a risk averse though cost effective manner. These objectives include ensuring that the Group has sufficient liquidity to meet its day-to-day needs and to fund its capital investment programme and other investments; deploying any surplus liquidity in a prudent and profitable manner; managing currency, fuel, interest rate and credit exposures to minimise Group risk; and managing the Group’s relationship with a large number of banks and other financial institutions worldwide.

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

Foreign currency risk

The Group generates a surplus in most of the currencies in which it does business. The US Dollar can be an exception to this as capital expenditure, together with ongoing operating lease and fuel payments denominated in US Dollars, can create a deficit. In the year to March 31, 2006, the Group had more US Dollar payments than US Dollar revenues, principally as a result of its fuel requirements being purchased in US Dollars.

The Group can experience adverse or beneficial effects arising from exchange rate movements. For example, the Group is likely to experience an adverse effect from a strengthening in Sterling or the US Dollar and a beneficial effect from a strengthening of other foreign currencies. The Group seeks to reduce its foreign exchange exposure arising from transactions in various currencies through a policy of matching, as far as possible, receipts and payments in each individual currency. Surpluses of convertible currencies are sold, either spot or forward, for US Dollars or Sterling.

The Group has substantial liabilities denominated in Yen, which consist mainly of purchase option payments falling due under various Japanese leveraged lease arrangements maturing between 2006 and 2011. These purchase option payments total £714 million (Yen 146 billion) but of this £367 million (Yen 75 billion) has been refinanced and will be repaid over five years commencing on the original purchase option date. The Group utilises its Yen purchase option and debt repayments as a hedge of future Yen traffic revenues.

Forward foreign exchange contracts are used to cover near-term future revenues and operating payments in a variety of currencies. The Group had outstanding forward transactions to hedge foreign currencies as follows:

 

 

 

 

 

 

 

 

(£ million)

 

All Expected to
Mature before
March 31, 2007

 

2006
Notional
Gain/(Loss)

 

2005
Notional
Gain/(Loss)

 

               

To hedge future currency revenues against Sterling - Pound Sterling equivalents

 

152

 

(1

)

1

 

 

 

 

 

 

 

 

 

To hedge future operating payments against US Dollars - US Dollars

 

428

 

5

 

 

 

 

 

 

 

 

 

 

 

To hedge future currency revenues against US Dollars - US Dollars

 

136

 

(3

)

(2

)

 

 

 

 

 

 

 

 

To hedge debt against Japanese Yen - Pound Sterling equivalents

 

10

 

 

 

 

 

               

The unrealised gain/(loss) on forward currency transactions has been calculated as the change in the marked to market value between inception and the reporting date.

36


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. Low capital expenditure has meant that the requirements for new financing have been limited.

At March 31, 2006 53 per cent of the Group’s gross borrowings (after swaps) were at fixed rates of interest and 47 per cent were at floating rates. This proportion of fixed rate borrowings has increased from 51 per cent at March 31, 2005.

The Group’s borrowings are predominantly denominated in Sterling, US Dollars and Yen. Sterling represents the Group’s natural “home” currency, whilst a substantial proportion of the Group’s fixed assets are priced and transacted in US Dollars.

The currency and interest rate mix of the Group’s gross borrowings is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected final maturity date before March 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ millions, except percentages)

 

2007

 

2008

 

2009

 

2010

 


2011

 

After
March 31,
2011

 

Total

 

Fair
Value

 

2005

 

Fair
Value

                                                           

Fixed rate principal (Pounds Sterling)

 

53

 

 

46

 

 

92

 

 

13

 

 

22

 

 

914

 

 

1,140

 

 

1,193

 

 

1,298

 

 

1,382

                                                           

Weighted average fixed rate

 

8.4

%

 

6.4

%

 

8.9

%

 

6.9

%

 

6.4

%

 

6.6

%

 

6.9

%

 

 

 

 

6.1

%

 

 

                                                           

Floating rate principal (Pounds Sterling)

 

32

 

 

34

 

 

126

 

 

458

 

 

29

 

 

719

 

 

1,398

 

 

1,398

 

 

1,704

 

 

1,704

                                                           

Weighted average floating rate

 

5.0

%

 

5.4

%

 

5.0

%

 

5.0

%

 

5.2

%

 

4.7

%

 

4.9

%

 

 

 

 

5.2

%

 

 

                                                           

Fixed rate principal (US Dollars)

 

 

 

 

138

 

 

 

 

 

 

 

 

 

 

 

159

 

 

297

 

 

289

 

 

275

 

 

269

                                                           

Weighted average fixed rate

 

 

 

 

3.5

%

 

 

 

 

 

 

 

 

 

 

5.4

%

 

4.5

%

 

 

 

 

4.5

%

 

 

                                                           

Floating rate principal (US Dollars)

 

 

 

 

(138

)

 

 

 

 

15

 

 

100

 

 

555

 

 

532

 

 

532

 

 

571

 

 

571

                                                           

Weighted average floating rate

 

 

 

 

4.6

%

 

 

 

 

5.0

%

 

5.0

%

 

5.4

%

 

5.5

%

 

 

 

 

3.7

%

 

 

                                                           

Fixed rate principal (Japanese Yen)

 

65

 

 

107

 

 

62

 

 

280

 

 

178

 

 

22

 

 

714

 

 

714

 

 

756

 

 

756

                                                           

Weighted average fixed rate

 

1.4

%

 

1.2

%

 

1.3

%

 

1.3

%

 

1.3

%

 

1.3

%

 

1.3

%

 

 

 

 

1.3

%

 

 

                                                           

Floating rates of interest are based on LIBOR (London Interbank Offered Rate) and fixed rates of interest are based on the contract rates. Fair values of bank and other loans, finance leases and the non-Yen denominated portions of hire purchase arrangements carrying fixed rates of interest have been calculated by discounting the repayments which the Group is committed to make at the relevant interest rates applicable at March 31, 2006. Fair values of the Euro-Sterling notes and Euro-Sterling Bond 2016 are based on the quoted market values at March 31, 2006. The fair values of floating rate borrowings are deemed to be equal to their carrying values.

The Yen denominated portions of hire purchase arrangements carrying fixed rates of interest relate to the tax equity portions of Japanese leveraged leases which are personal to the Group, cannot be assigned and could not be refinanced or replaced in the same cross border market on a marked-to-market basis and, accordingly, a fair value cannot be determined. The carrying value has therefore been included as the fair value above.

As part of its Treasury risk management activities, the Company has entered into a number of swap agreements in order to hedge its direct exposure to interest rates. The majority of these swaps are embedded in lease and loan agreements. A smaller number of interest rate swaps are not associated with specific loans and leases and are disclosed below.

 

 

 

Single currency interest rate swap

 

 

     

 

 

 

Notional principal balance

 

$240 million

 

 

 

Termination dates

 

2008

 

 

 

- weighted average fixed rate payable

 

2.95% - 3.57%

 

 

 

- weighted average variable rate receivable

 

4.45% - 4.67%

     

Unrealised profit

 

£4 million

     

The unrealised profit on the interest rate swaps was calculated using discounted cash flow analysis, to determine the amount the Group would receive or pay to terminate the agreements.

37


Fuel price risk

The Group’s fuel risk management strategy aims to provide the airline with protection against sudden and significant increases in oil prices while ensuring that the airline is not competitively disadvantaged in a serious way in the event of a substantial fall in the price of fuel. In meeting these objectives, the fuel risk management programme allows for the judicious use of a number of derivatives available on the Over The Counter (OTC) markets with approved counterparties and within approved limits. Derivatives traded on regulated exchanges in London (the International Petroleum Exchange) and New York (the New York Mercantile Exchange) are also used.

Set out below are the outstanding fuel contracts at March 31, 2006, which all mature on or before March 31, 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

2005

                         

 

 

 

Expected to mature before March 31

 

 

 

             

 

 

2007

 

2008

 

Total

 

Total

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

volume (barrels millions)

 

 

4.8

 

 

2.0

 

 

6.8

 

 

7.1

 

 

 

 

 

 

 

 

 

 

 

 

 

- open acquisition value ($ millions)

 

 

382.7

 

 

97.3

 

 

480.0

 

 

282.0

 

 

 

 

 

 

 

 

 

 

 

 

 

- Unrealised gain ($ millions)

 

 

94.1

 

 

43.8

 

 

137.9

 

 

364.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Collars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

volume (barrels millions)

 

 

17.4

 

 

5.6

 

 

23.0

 

 

21.4

 

 

 

 

 

 

 

 

 

 

 

 

 

- open acquisition value ($ millions)

 

 

1,220.1

 

 

402.6

 

 

1,622.7

 

 

987.0

 

 

 

 

 

 

 

 

 

 

 

 

 

- Unrealised gain ($ millions)

 

 

182.0

 

 

32.2

 

 

214.2

 

 

159.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

volume (barrels millions)

 

 

22.2

 

 

7.6

 

 

29.8

 

 

37.3

                         

- open acquisition value ($ millions)

 

 

1,602.8

 

 

499.9

 

 

2,102.7

 

 

2,602.5

                         

- Unrealised gain ($ millions)

 

 

276.1

 

 

76.0

 

 

352.1

 

 

523.0

                         

- Unrealised gain (Sterling equivalent millions)

 

 

159.0

 

 

43.7

 

 

202.7

 

 

278.0

                         

See Critical Accounting Policy on page 22.

Derivative financial instruments

The Company uses derivative financial instruments (derivatives) selectively for Treasury and fuel risk management purposes. The Group’s policy is not to trade in derivatives but to use these instruments to hedge anticipated exposures.

Forward foreign exchange contracts and collars are used to cover near term future net revenues in a variety of currencies. Forward foreign exchange contracts outstanding at March 31, 2006 are summarised in Note 27 to the Financial Statements.

The Group considers the purchase of interest rate, foreign exchange and fuel options as bona fide Treasury exposure management activities. It would not generally contemplate the opening of new exposures by selling options, except where the 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.

Interest cover

The Group’s interest cover for the year ended March 31, 2006 was 5.8 times. The increase in interest cover from last year (3.8 times) reflects the improvement in the operating profitability of the Group and a reduction in net interest payable. This reduction principally reflects the lower level of net debt of the Group.

Off-balance sheet arrangements

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

Under IAS 39 financial instruments are recorded initially at fair value. Subsequent measurement of those instruments at the balance sheet date reflects the designation of the financial instrument. The measurement of fair value is based on market observable data, where such information is available, or alternative valuation methods that can involve the use of judgements and estimates.

Gains and losses on derivative financial instruments designated as cash flow hedges and assessed as effective for the period, are taken to equity in accordance with the requirements of IAS 39. Gains and losses taken to equity are reflected in the income statement when either the hedged cash flow impacts income or its occurrence ceases to be probable. As a result of the requirement to measure the effectiveness of the hedging instruments, changes in market conditions or the Group’s hedging strategy can result in the recognition in the income statement of unrealised gains or losses on derivative financial instruments designated as hedging instruments. During financial year 2006 derivatives were generally found to be effective. The only ineffectiveness related to fuel hedges where the unrealised profit being recognised in the income statement for ineffective hedges was £19 million compared with a recognised realised hedging profit for 2006 of £303 million.

38


Debt and other contractual obligations

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(£ millions)

 

Less than
1 year

 

1 - 5 years

 

More than
5 years

 

Total

 

2005

                     

Long-term debt obligations

 

 

86

 

 

354

 

 

676

 

 

1,116

 

 

1,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital lease obligations

 

 

393

 

 

1,421

 

 

1,151

 

 

2,965

 

 

3,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease obligations

 

 

177

 

 

414

 

 

1,535

 

 

2,126

 

 

2,119

                               

Total

 

 

656

 

 

2,189

 

 

3,362

 

 

6,207

 

 

6,611

                               

See also Notes 24 and 27 to the Financial Statements.

Capital commitments

Capital expenditure commitments authorised and contracted for, but not provided for in the 2006 Financial Statements, amounted to £249 million for the Group (2005: £143 million), and £249 million for the Company (2005: £142 million), in each case as at March 31. The outstanding commitments include £222 million which relates to the acquisition of Airbus A320/A321 aircraft scheduled for delivery over the next two years. It is intended that these aircraft will be financed partially by cash holdings and internal cash flow and partially through external financing, including committed facilities arranged prior to delivery.

Liquidity

The Group maintained high liquidity throughout the year. Cash generated from operations together with continued low capital expenditure and the disposal of the London Eye for a net £78 million, allowed the Company to make scheduled repayments of £462 million and to repay £17 million of debt early whilst increasing year end cash balances. The Group continually reviews liquidity requirements.

At March 31, 2006 the Group had at its disposal short-term loans and deposits and cash at bank and in hand amounting to £2,440 million (2005: £1,682 million). In addition, the Group had undrawn long term committed aircraft financing facilities totalling approximately US$216 million, further general facilities of $420 million and Yen 75 billion and undrawn uncommitted overdraft lines totalling £60 million.

The Group’s holdings of cash and short-term loans and deposits, together with committed general funding facilities and net cash flow, are expected to be sufficient to cover the cost of all outstanding firm aircraft deliveries.

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

39


OPERATING AND FINANCIAL STATISTICS (NOTE 1)

For the five years ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Group operations

 

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

                           

Traffic and capacity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue passenger km (RPK)

 

 

m

 

 

111,859

 

 

107,892

 

 

103,092

 

 

100,112

 

 

106,270

Available seat km (ASK)

 

 

m

 

 

147,934

 

 

144,189

 

 

141,273

 

 

139,172

 

 

151,046

Passenger load factor

 

 

%

 

 

75.6

 

 

74.8

 

 

73.0

 

 

71.9

 

 

70.4

Cargo tonne km (CTK)

 

 

m

 

 

4,933

 

 

4,954

 

 

4,461

 

 

4,210

 

 

4,033

Total revenue tonne km (RTK)

 

 

m

 

 

16,105

 

 

15,731

 

 

14,771

 

 

14,213

 

 

14,632

Total available tonne km (ATK)

 

 

m

 

 

23,106

 

 

22,565

 

 

21,859

 

 

21,328

 

 

22,848

Overall load factor

 

 

%

 

 

69.7

 

 

69.7

 

 

67.6

 

 

66.6

 

 

64.0

Passengers carried

 

 

‘000

 

 

35,634

 

 

35,717

 

 

36,103

 

 

38,019

 

 

40,004

Tonnes of cargo carried

 

 

‘000

 

 

795

 

 

877

 

 

796

 

 

764

 

 

755

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

 

 

%

 

 

2.8

 

 

3.2

 

 

4.0

 

 

4.4

 

 

3.7

Revenue aircraft km

 

 

m

 

 

659

 

 

661

 

 

644

 

 

635

 

 

685

Revenue flights

 

 

‘000

 

 

368

 

 

378

 

 

391

 

 

413

 

 

492

Break-even overall load factor

 

 

%

 

 

63.0

 

 

64.3

 

 

63.6

 

 

63.9

 

 

65.0

                                     

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger revenue per RPK

 

 

p

 

 

6.10

 

 

6.02

 

 

6.30

 

 

6.58

 

 

6.67

Passenger revenue per ASK

 

 

p

 

 

4.61

 

 

4.51

 

 

4.59

 

 

4.74

 

 

4.69

Cargo revenue per CTK

 

 

p

 

 

10.10

 

 

9.73

 

 

10.38

 

 

11.50

 

 

11.98

Average fuel price (US cents/US gallon)

 

 

 

 

 

188.22

 

 

136.44

 

 

94.49

 

 

86.01

 

 

81.29

                                     

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average manpower equivalent (MPE)

 

 

 

 

 

47,012

 

 

47,472

 

 

49,072

 

 

53,440

 

 

60,468

RTKs per MPE

 

 

 

 

 

342.6

 

 

331.4

 

 

301.0

 

 

266.0

 

 

242.0

ATKs per MPE

 

 

 

 

 

491.5

 

 

475.3

 

 

445.4

 

 

399.1

 

 

377.9

Aircraft in service at year end

 

 

 

 

 

284

 

 

290

 

 

291

 

 

330

 

 

360

Aircraft utilisation (average hours per aircraft per day)

 

 

 

 

 

10.14

 

 

9.83

 

 

9.21

 

 

8.91

 

 

8.32

Unduplicated route km

 

 

‘000

 

 

627

 

 

623

 

 

657

 

 

693

 

 

814

Punctuality – within 15 minutes

 

 

%

 

 

75

 

 

76

 

 

81

 

 

76

 

 

81

Regularity

 

 

%

 

 

98.8

 

 

98.8

 

 

98.8

 

 

98.2

 

 

98.6

                                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

2005

 

2004*

 

2003*

 

2002*

                           

Financial*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cover (note 3)

 

 

times

 

 

5.8

 

 

4.1

 

 

 

 

 

 

 

 

 

Dividend cover

 

 

times

 

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

Operating margin (note 4)

 

 

%

 

 

8.3

 

 

7.2

 

 

 

 

 

 

 

 

 

Earnings before interest, tax, depreciation, amortisation and rentals (EBITDAR)

 

 

m

 

 

1,701

 

 

1,581

 

 

 

 

 

 

 

 

 

Net debt/total capital ratio (note 5)

 

 

%

 

 

44.2

 

 

67.7

 

 

 

 

 

 

 

 

 

Net debt/total capital ratio including operating leases

 

 

%

 

 

53.0

 

 

72.3

 

 

 

 

 

 

 

 

 

Total traffic revenue per RTK

 

 

p

 

 

45.44

 

 

44.38

 

 

 

 

 

 

 

 

 

Total traffic revenue per ATK

 

 

p

 

 

31.67

 

 

30.94

 

 

 

 

 

 

 

 

 

Net operating expenditure per RTK (note 6)

 

 

p

 

 

41.06

 

 

40.85

 

 

 

 

 

 

 

 

 

Net operating expenditure per ATK (note 6)

 

 

p

 

 

28.62

 

 

28.48

 

 

 

 

 

 

 

 

 

                                     

*     Financial ratios are only available under comparative IFRSs from the Group’s transition date of April 1, 2004.

n/a = not applicable

40


Notes:

1 Operating statistics do not include those of associates undertakings (Iberia and Comair) and franchisees (BMED, GB Airways, Loganair and Sun Air (Scandinavia) ). The franchise relationship with Regional Air was terminated in April, 2005.

2 The carriage of passengers on Frequent Flyer Programme is evaluated on a ticket by ticket basis.

3 Interest cover is defined as the number of times profit/(loss) before tax excluding net interest payable covers the net interest payable. Interest cover is not a financial measure under IFRS or US GAAP. However, management believes this measure is useful to investors when analysing the Group’s ability to meet its interest commitments from current earnings.

The following table shows a reconciliation of net interest payable for each of the two most recent financial years:

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

   

 

 

2006

 

2005

 

           

(£ million (except ratios))

 

 

 

 

 

 

 

               

 

 

 

 

 

 

 

 

Profit before tax

 

 

620

 

 

513

 

 

 

 

 

 

 

 

 

Net interest payable (a)

 

 

(128

)

 

(168

)

               

Profit adjusted for Interest Payable (b)

 

 

748

 

 

681

 

 

 

           

Interest Cover (b)/(a)

 

 

5.8

 

 

4.1

 

 

 

           
               

4 Operating margin is defined as operating profit/(loss) as a percentage of revenue. Revenue comprises: passenger revenue (scheduled services and non scheduled services), cargo services and other revenue. See Note 3 to the Financial Statements for segment information on revenue.

5 Net debt as a percentage of total capital. Net debt is defined as the total of loans, finance leases and hire purchase liabilities, plus Convertible Capital Bonds, net of short-term loans and deposits and cash less overdrafts. See Note 21 to the Financial Statements for details of the calculation of net debt.

Total capital is defined as the total of capital, reserves, minority interests, and net debt. Total capital and the net debt/total capital ratio are not financial measures under IFRS or US GAAP. Similarly, net debt adjusted to include obligations under operating leases is not a financial measure under IFRS or US GAAP. However, management believe these measures are useful to investors when analysing the extent in which the Group is funded by debt rather than by shareholders’ funds.

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

 

 

 

 

 

 

 

 

 

At March 31

 

 

 

 

 

2006

 

2005

         

(£ million (except ratios))

 

 

 

 

 

 

             

 

 

 

 

 

 

 

Capital and reserves

 

 

1,861

 

 

1,185

 

 

 

 

 

 

 

Add minority interests

 

 

213

 

 

212

             

Total shareholders’ funds

 

 

2,074

 

 

1,397

             

Net debt (a)

 

 

1,641

 

 

2,922

             

Total capital (b)

 

 

3,715

 

 

4,319

             

Net debt/total capital percentage (a)/(b)

 

 

44.2

 

 

67.7

             

6 Net operating expenditure is total operating expenditure less other revenue. Net operating expenditure, net operating expenditure per RTK and net operating expenditure per ATK are not financial measures under IFRS or US GAAP. However, management believe these measures are useful to investors as they provide further analysis of the performance of the Group’s main business activity i.e. airline operations. The Board of Directors reviews these measure internally on a monthly basis as an indication of management’s performance in reducing costs.

The following table shows a reconciliation of net operating expenditure to total operating expenditure, total operating expenditure per RTK and total operating expenditure per ATK for each of the two most recent financial years:

 

 

 

 

 

 

 

 

 

 

Year ended March 31

 

 

 

   

 

 

2006

 

2005

 

           

(£ million (except ratios))

 

 

 

 

 

 

 

               

 

 

 

 

 

 

 

 

Total operating expenditure

 

 

7,810

 

 

7,216

 

 

 

 

 

 

 

 

 

Less: other revenue

 

 

(1,197

)

 

(790

)

               

Net operating expenditure

 

 

6,613

 

 

6,426

 

 

 

 

 

 

 

 

 

RTKs

 

 

16,105

 

 

15,731

 

               

ATKs

 

 

23,106

 

 

22,565

 

               

Net operating expenditure per RTK (p)

 

 

41.06

 

 

40.85

 

               

Net operating expenditure per ATK (p)

 

 

28.62

 

 

28.48

 

               

Directors’ statement as to disclosure of information to auditor

The directors who are members of the Board at the time of approving the Directors’ Report and Business Review are listed on pages 1 and 2. Having made enquiries of fellow directors and of the Company’s auditor, each of these directors confirms that:

 

 

 

 

to the best of each directors’ knowledge and belief there is no information relevant to the preparation of their report to which the Company’s auditor is unaware; and

 

 

 

 

each director has taken all the steps a director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the Company’s auditor is aware of that information.

Approved by the Board and signed on its behalf by

 

 

Alan Buchanan
Company Secretary

May 18, 2006

41


Remuneration report

Information not subject to audit

COMMITTEE AND ADVISERS

The Company’s Remuneration Committee determines on behalf of the Board, within the agreed terms of reference, the overall remuneration packages for the executive directors, the members of the Leadership Team (listed on page 2), the Chairman and the Company Secretary. Its members are all independent non-executive directors of the Company, none of whom has any personal financial interest, other than as a shareholder, in the matters to be decided. Throughout the financial year 2006, the Company’s Remuneration Committee was chaired by Dr Martin Read and its other members were Maarten van den Bergh, Lord Renwick (until July 19, 2005) and, from July 19, 2005, Alison Reed. The Company Secretary acts as secretary to the Committee.

The Company currently participates in three main salary survey sources – run by Hay, Monks, and Towers Perrin. Data is extracted from each of these in determining the Company’s approach to base pay market rates, and identifying competitive market practice in respect of the other remuneration elements. The Remuneration Committee is cognisant of the risk of an upward ratchet of remuneration that can result from the use of pay surveys.

New Bridge Street Consultants LLP are advisers to the Remuneration Committee and gave advice to the Committee that materially assisted it. Their terms of reference are available for inspection on the Company’s investor relations website. Towers Perrin, which is the Company’s main adviser in relation to executive remuneration, also gave advice to the Committee that materially assisted it. The Chairman, Rod Eddington and Willie Walsh, (each in their capacity as Chief Executive), the Company Secretary, Neil Robertson, Director for People and Christopher Hunt, Reward Manager, all assisted the Committee in its deliberations but none of them participated in any decisions relating to their own remuneration. None of those who materially assisted the Committee in its deliberations was appointed by the Remuneration Committee other than New Bridge Street Consultants. New Bridge Street Consultants, Towers Perrin, Hay and Monks provided no other services to the Company other than advice on remuneration matters during the financial year. Where appropriate, the Committee does consult with investors about its proposals.

During the year under review, the Committee met on 11 occasions and, prior to the 2005 annual general meeting, consulted with investors. Individual attendance details can be found within the Directors’ Report and Business Review on page 4. The terms of reference of the Committee are available on the Company’s website.

EXECUTIVE DIRECTORS

Policy

The Company’s remuneration policy was first approved by shareholders at the annual general meeting in 2001 and remains unchanged both in relation to the year under review and the financial year 2007 as well as for the foreseeable future.

The Company’s remuneration policy is to provide compensation packages at market rates which reward successful performance and attract, retain and motivate managers. The remuneration packages offered by the Company are comparable with other UK based international businesses of similar size and nature to the Company.

In fixing packages, the Committee has regard to the compensation commitments which would result in the event of early termination. During the year under review, the Committee secured mitigation terms in the contracts of many of the most senior group of executives.

Remuneration package

The remuneration package for executive directors, consists of a basic salary, benefits in kind (including private health care, a car and fuel and non-contractual travel concessions), pension, an annual bonus scheme (including a deferred element payable in shares) and participation in the Performance Share Plan. The proportion of performance related variable remuneration, through the bonus scheme and awards under the Performance Share Plan, is approximately 50-55 per cent of total target remuneration (excluding pension arrangements).

The policy in relation to base salaries aims to target base salaries at the market median. The strategy for incentive pay is intended to increase the expected value to make the package more market-competitive for executive directors, but to retain as its aim the achievement of a market median value, subject to the achievement of stretching targets. Recognising the volatility associated with the airline industry, variable pay focuses on the achievement of short-term targets providing a clear link between performance and reward. Between them, the elements of the remuneration package provide a good balance between the achievement of short and longer-term goals linked to the creation of shareholder value.

Basic salary

The basic salary reflects the level of responsibility of the executive director, his or her market value and individual performance. The Committee’s objective is to offer basic salaries around the market median level. In reviewing basic salary, independent external advice is taken on salaries for comparable jobs in companies similar to the Company from the three survey sources referred to previously. The Committee has regard to pay and employment conditions elsewhere in the Group when determining annual salary increases. The base salaries for the executive directors are currently:

 

 

Willie Walsh

£600,000

Keith Williams

£375,000

Martin George

£375,000

Annual bonus

For the financial year 2006, details of bonuses earned are given in the table on page 47.

The amount of annual bonus available for distribution to senior executives was determined by performance against three performance measures subject to a maximum limit of 100 per cent of salary. No bonus would have been payable unless the minimum operating margin target threshold of eight per cent had been achieved. This threshold having been achieved, 50 per cent

42


of bonus potential was determined by the achievement of a range of operating margin targets as this is the Company’s key internal financial measure. The second measure, for up to 25 per cent of bonus potential, required the achievement of a customer recommendation target as this is a key measure of customer satisfaction and provides a strong link to future profitability. This element of the bonus was not triggered. The third measure for the remaining 25 per cent of bonus potential assessed performance against the Terminal 5 Transition Programme, known internally as ‘Fit for 5’. This element was only partially triggered. The Remuneration Committee was satisfied that the performance of, and outlook for, the business was satisfactory. While the total amount available for distribution is derived through the method described, the distribution to individuals is adjusted to reflect personal performance.

To ensure continued alignment between executives and the shareholders, 50 per cent of the bonuses earned will be invested in shares under the Deferred Share Plan (described below) and deferred for three years, subject to continued employment.

For the financial year 2007, the amount of annual bonus available for distribution to senior executives will be determined by performance against four performance measures and will, again, be subject to a maximum limit of 100 per cent of salary. No bonus will be payable unless the minimum operating margin target threshold is achieved. If this threshold is achieved, 50 per cent of bonus potential will be determined by the achievement of a range of operating margin targets. The second measure for one-sixth of the bonus potential will require the achievement of a customer recommendation target. The third measure, for a futher one-sixth of the bonus potential, will require the achievement of a punctuality target (relating to mainline network punctuality performance) and the fourth measure, again for a sixth of the bonus potential, will assess employee involvement in the mainline business. In addition to the above targets, the Remuneration Committee must be satisfied that the performance of, and outlook for, the business is satisfactory. As was the case in 2005/06, 50 per cent of any bonus earned will be invested in shares under the Deferred Share Plan (described below) and deferred for three years, subject to continued employment.

Long term incentive arrangements

A shareholding guideline has been adopted, linked to the two new share based incentive schemes introduced in 2005, the Deferred Share Plan and the Performance Share Plan. Executives will be expected to retain no fewer than 50 per cent of the shares (net of tax) which vest from these two schemes until they have built up a shareholding equivalent to 100 per cent of basic salary. This policy aims to further align the interests of executives and shareholders.

Current Incentive Plans

British Airways Deferred Share Plan 2005

The British Airways Deferred Share Plan (Plan) was adopted by the Board on September 16, 2005 and is the mechanism for delivering the deferred element of the annual bonus. The first awards under the plan will be made at the end of July, 2006 when the annual bonuses disclosed on page 47 are due to be paid. An award of deferred shares to the value of one half of the bonus earned will be made to executives. Other than on retirement the shares will be subject to forfeiture if the executive leaves during the three-year deferral period. On vesting, executives will receive the benefit of any dividends paid over the deferred period.

British Airways Performance Share Plan 2005

The British Airways Performance Share Plan (PSP) is the new long-term incentive plan awarded to key senior executives of the Company, those most directly involved in shaping and delivering the medium to long-term business goals of the Company. It was approved by shareholders at the annual general meeting in 2005. The PSP consists of an award of the Company’s shares which vest subject to the achievement of pre-defined Company performance conditions (see below). If the conditions are met, the shares vest in full or in part at the third anniversary of award. No payment is required from individuals when the shares are awarded or when they vest. The Remuneration Committee supervises the operation of the PSP. Awards worth up to 150 per cent of an executive’s base salary can be granted although currently it is only intended that the Chief Executive will receive this level of award. Other directors will receive awards at the 100 per cent of base salary level.

There are two performance conditions and these operate independently of each other. This means that meeting either of the conditions would trigger a payment without the need to meet the other performance condition. 50 per cent of each award will be subject to a Total Shareholder Return (TSR) performance condition, measured against a group of 20 other airline companies, and the other 50 per cent will be subject to an average operating margin performance condition. The use of two separate but complementary performance conditions creates an alignment to both the airline industry (via the TSR measure) and also the Company’s internal financial performance measure (via the operating margin measure). Both of these performance conditions will be measured over a single three-year performance period which begins on April 1 prior to the award date. The awards will not vest until the third anniversary of the date of Grant as mentioned above. The Remuneration Committee selected these performance conditions because they are challenging and aligned to shareholders’ interests.

TSR measures the financial benefits of holding a company’s shares and is determined by share price performance along with any dividends which are paid. None of the shares that are subject to the TSR performance condition, will vest unless the Company’s TSR performance is at the median (50th percentile) of the airline comparator group. If median performance is achieved, 25 per cent of the shares (i.e. 12.5 per cent of the total award) vest. There is then a sliding scale at the top of which all of the shares vest in full (i.e. the full 50 per cent of shares which are subject to the TSR performance condition) if the Company’s TSR performance is at or above the upper quintile (top 20 per cent) of the comparator group. The comparator group of airlines used in the 2005/6 award is included in the table below:

 

 

AIR CANADA

IBERIA

AIR FRANCE

LUFTHANSA

AIR NEW ZEALAND

NORTHWEST AIRLINES

ALITALIA

QANTAS AIRWAYS

ALL NIPPON AIRLINES

RYANAIR

AMERICAN AIRLINES

SAS

CATHAY PACIFIC AIRWAYS

SINGAPORE AIRLINES

CONTINENTAL AIRLINES

SOUTH WEST

DELTA AIRLINES

UNITED AIRLINES

EASYJET

US AIRWAYS

43


During the year under review, United Airlines delisted and therefore could not be included in the comparator group for the 2006/07 award. US Airways was removed from the comparator group for 2005/06 following its delisting prior to its merger with America West but the merged entity has been included in the comparator group for 2006/07. The Committee has discretion to consider, amongst other matters, the impact of government action on the performance of carriers included in the comparator group.

For the 50 per cent of the shares that are subject to the operating margin performance condition in the initial three-year performance period 2005/06 to 2007/08, no shares will vest unless average annual operating margin over the three-year performance period is more than seven per cent. If the average of seven per cent is achieved, 25 per cent of the shares (i.e. 12.5 per cent of the total award) vest. There is then a sliding scale at the top of which all of the shares vest (i.e. the full 50 per cent of shares which are subject to the operating margin performance condition) if average annual operating margin is ten per cent per annum or above. The equivalent range of operating margin targets applicable for the second three-year performance period 2006/07 to 2008/09 is eight to ten per cent.

The two performance conditions will be considered separately when determining vesting. If TSR performance is below median and average annual operating margin is below the minimum percentage for the relevant performance period, then the award will lapse in full.

Prior Incentive Plans

British Airways Share Option Plan 1999

The Plan was closed after the final grant in 2005/2006. The Plan enabled the Remuneration Committee to grant options to acquire ordinary shares in the Company or the Company’s American Depositary Shares at an option price not less than the market value of the shares on the date of grant. No payment was due upon the initial grant of options. An individual’s participation was limited so that the aggregate value of the shares over which options were granted in any one year would not exceed basic salary. Exercise of options is subject to a performance condition, the aim of which was to link the exercise of options to sustained improvements in the underlying financial performance of the Company. The performance condition used for options granted in 2005 requires the Remuneration Committee to be satisfied that there has been an increase in the earnings per share (EPS) of the Company which is at least four per cent per annum more than the increase in the retail price index during the three consecutive financial years 2004/05, 2005/06 and 2007/08. EPS is calculated as set out in the Statement of Investment Practice No. 1 of the Institute of Investment Management and Research as this is a recognised method in the market. The Remuneration Committee selected the performance condition because it is challenging and aligned to shareholders’ interests. Performance against the condition is assessed by calculating EPS growth of the Company to see if it exceeds the minimum performance required. In relation to awards made in 2003, the performance condition used required the Remuneration Committee to be satisfied that there had been an increase in the EPS of the Company which was at least four per cent per annum more than the increase in the retail price index during the three consecutive financial years 2003/04, 2004/05 and 2005/06. The Remuneration Committee’s base EPS threshold of 17.3p per share was the applicable reference point. Gains made on the exercise of these share options during the year under review are reported on pages 49 and 50.

British Airways All Employee Share Ownership Plans

In July, 2000, the Company obtained shareholders’ approval to implement any aspect of the new all employee share plans now known as share incentive plans. The approval permits the Company to operate a partnership share plan which would allow employees in the UK to buy shares from their pre-tax salary and would allow the Company to give matching or free shares to those participants in the share plan. Financial limitations would apply to any new plan. The Company has no current intention of launching such a plan.

For further information regarding the Company’s employee share schemes, see Note 29 to the Financial Statements.

Long Term Incentive Plan 1996

The Long Term Incentive Plan operated from 1996 to 2004. It provided for conditional awards of shares worth up to 75 per cent of salary each year, subject to a TSR condition measured against the companies comprising the FTSE 100. The final tranche of the awards made in 2001 lapsed, however, 90.67 per cent of the awards made in 2003 have vested as shown on page 51. The Company introduced the Performance Share Plan detailed on page 43 in place of the 1996 Plan.

Service contracts

Each of the three executive directors who served during the year under review has a rolling contract with a one year notice period. As a matter of policy, in the event of new external appointments, the length of service contracts would be determined by the Remuneration Committee in the light of the then prevailing market practice. However, the Remuneration Committee recognises that, in some cases, it may be necessary to offer a contract with a notice period in excess of one year in order to attract a new executive director. In these circumstances, the Remuneration Committee acknowledges that the notice period should reduce to one year after the initial period in accordance with paragraph B.1.6 of the Combined Code. Willie Walsh joined the Company on May 3, 2005 and his contract provides that neither he nor the Company shall serve notice of termination to expire earlier than the second anniversary of the date of commencement of his employment.

Of the directors proposed for re-election and election at the forthcoming annual general meeting, Keith Williams has a service contract which is detailed below. The service contracts for the serving directors include the following terms:

 

 

 

     

Executive Director

Date of contract

Unexpired term/ notice period

     

Willie Walsh

March 8, 2005

terminable on 12 months notice provided that neither the Company nor the executive may give notice of termination to expire earlier than May 3, 2007

     

Keith Williams

January 1, 2006

terminable on 12 months notice

     

Martin George

February 1, 1997

terminable on 12 months notice

     

44


There are no express provisions for compensation payable upon early termination of the Chief Executive’s contract other than normal payments due during the notice period. In the event of early termination, the Company’s policy is to act fairly in all circumstances and the duty to mitigate would be taken into account. The Remuneration Committee has noted the ABI/NAPF joint statement; “Best Practice on Executive Contracts and Severance”. None of the contracts provides for compensation to be paid in the event of a change of control of the Company. In relation to Keith Williams and Martin George, their contracts now expressly include mitigation provisions in the event of early termination. Copies of all three service contracts can be viewed on the Company’s website.

The service contracts for the executive directors who left the business during the year (and therefore have no unexpired term) were as follows:

 

 

 

     

Executive Director

Date of contract

Notice period

     

Rod Eddington

July 7, 2000

terminable on 12 months notice

     

John Rishton

September 1, 2001

terminable on 12 months notice

     

Mike Street

July 1, 2001

terminable on 12 months notice

     

External non-executive directorships

The Board encourages executive directors to broaden their experience outside the Company by taking up non-executive appointments from which they may retain any fee. The Company’s consent is required as a matter of contract before an executive can accept such an appointment and permission will only be given in appropriate circumstances. During the year in question, for the proportion of the year they served on the Board, Willie Walsh earned fees of €36,083, Martin George earned fees of £14,708, Rod Eddington earned fees of US$67,500 and A$10,000, John Rishton earned fees of £22,916 and Mike Street earned fees of £8,727.

Pension schemes

The Company has three main pension schemes. Two of these, Airways Pension Scheme (APS) and New Airways Pension Scheme (NAPS), are defined benefit schemes and are closed to new members. The third scheme, the British Airways Retirement Plan (BARP), has been available to new joiners since April 1, 2003 and is a defined contribution scheme. Mike Street was a member of NAPS, Rod Eddington and John Rishton were members of both NAPS and an unfunded unapproved retirement scheme. Willie Walsh is a member of BARP. Martin George is a member of NAPS. Keith Williams is a member of both NAPS and an unfunded unapproved retirement scheme. Provision for payment of a surviving dependant’s pension on death and lump sum payments for death in service is also made.

In light of the December, 2003 consultation paper “Simplifying the taxation of pensions: the Government’s Proposals”, the Committee has carried out a review of the pension arrangements for senior executives. The Committee has decided that the Company should not seek to compensate executives for the effect of changes in taxation. Accordingly, no changes have been made to the pension arrangements of any of the senior executives and no new unfunded unapproved retirement arrangements have been entered into.

NON-EXECUTIVE DIRECTORS

Policy

In relation to the Chairman, the Company’s policy is that the Chairman should be remunerated in line with the market rate reflecting his time commitment to the Group. In relation to non-executive directors, the Company’s policy is that their remuneration should be sufficient to attract and retain world-class non-executive directors. The Chairman and the non-executive directors do not receive performance related pay.

Chairman’s and non-executive directors’ fees

The Chairman’s fee is determined by the Remuneration Committee. It was set at £300,000 in September, 2004 and has not been reviewed since then. Fees for the non-executive directors are determined by the executive directors on the recommendation of the Chairman. For the year in question, the fees (which were also set in September, 2004) were £35,000 per annum, with the chairmen of the Audit, Remuneration and Safety Review Committees and the senior independent non-executive director each receiving £7,500 per annum in addition to these fees. No other fees are paid for attendance at Board committees. The Chairman and the non-executive directors are not eligible to participate in the long-term incentive plans neither are their fees pensionable. They are, however, eligible for non-contractual travel concessions.

45


Service Agreements

The dates of the Chairman’s and current non-executive directors’ appointments are as follows:

 

 

 

 

Non-executive

Date of appointment

Date of election/
last re-election

Expiry date

       

Martin Broughton

May 12, 2000

July 15, 2003

2006

       

Maarten van den Bergh

July 16, 2002

July 19, 2005

2008

       

Denise Kingsmill

November 1, 2004

July 19, 2005

2008

       

Chumpol NaLamlieng

November 1, 2005

July 18, 2006

2006

       

Dr Martin Read

May 12, 2000

July 15, 2003

2006

       

Alison Reed

December 1, 2003

July 20, 2004

2007

       

Ken Smart

July 19, 2005

July 19, 2005

2008

       

Baroness Symons

July 19, 2005

July 19, 2005

2008

       

Except where appointed at a general meeting, directors stand for election by shareholders at the first annual general meeting following appointment and stand for re-election every three years thereafter under Article 95. There is no express provision for compensation payable upon early termination. None of the Chairman or the non-executive directors has any right to compensation on the early termination of their appointment. Copies of the letters of engagement for the Chairman and the non-executive directors are available for inspection on the Company’s website.

PERFORMANCE GRAPH

The graph shows the total shareholder return (with dividends reinvested where applicable) for each of the last five financial years of a holding of the Company’s shares against a hypothetical holding of shares in the FTSE 100.

The FTSE 100 was selected because it is a broad equity index of which the Company is a constituent.

Five-year Historical TSR Performance
Growth in the Value of a Hypothetical £100 Holding over Five-years

FTSE 100 Comparison Based on 30 Trading Day Average Values

(LINE GRAPH)

46


Information subject to audit

Directors’ remuneration

The remuneration of the directors was:

 

 

 

 

 

 

 

 

Basic salary

Taxable

Performance

Total 2006

Total 2005

 

and fees

benefits 1

related bonuses 6

 

 

 

 

 

 

 

 

 

 

 

 

Cash

Value of

 

 

 

 

 

 

deferred shares

 

 

 

 

 

 

 

 

 

 

£’000

£’000

£’000

£’000

£’000

£’000

             

Executive Directors

 

 

 

 

 

 

 

Rod Eddington 4

338

45

0

0

383

917

             

Willie Walsh 2

548

69

135

135

887

0

             

Martin George 2

276

1

74

74

425

0

             

Mike Street 4

193

11

0

0

204

453

             

Keith Williams 2

94

3

82

82

261

0

             

John Rishton 5

288

12

0

0

300

466

             

 

Non-executive Directors

 

 

 

 

 

 

 

Martin Broughton 7

300

31

 

 

331

229

             

Maarten van den Bergh

43

 

 

 

43

38

             

Dr Ashok Ganguly 3

11

 

 

 

11

35

             

Captain Michael Jeffery 3

15

8

 

 

23

63

             

Denise Kingsmill

35

1

 

 

36

16

             

Dr Martin Read

43

 

 

 

43

37

             

Alison Reed

43

 

 

 

43

37

             

Chumpol NaLamlieng 2

15

1

 

 

16

 

             

Lord Renwick 3

11

 

 

 

11

34

             

Ken Smart 2

30

 

 

 

30

 

             

Baroness Symons 2

25

1

 

 

26

 

             

Aggregate emoluments

2,308

183

291

291

3,073

2,325

             

 

 

1

Taxable benefits include a company car, fuel, private health insurance, personal travel and, in the case of Rod Eddington and Willie Walsh, relocation expenses.

 

2

Figures shown from date of appointment.

 

3

Retired from the Board on July 19, 2005.

 

4

Retired from the Board on September 30, 2005.

 

5

Resigned from the Board on December 31, 2005. John Rishton retains non-contractual travel benefits for a period equal to his length of service on the Board.

 

6

In relation to the year under review, the bonus entitlement was capped at 100 per cent of salary, payable only if stretching targets were achieved and half of which will be paid in deferred shares under the Deferred Share Plan. 50 per cent of the bonus for the executive directors and senior management was dependent on the delivery of an acceptable operating margin which is the Company’s key internal financial measure. For the year 2005/2006, the operating margin target range, determined by the Remuneration Committee, was set at 7.5 per cent to ten per cent on a UK GAAP basis (equivalent to eight per cent to 10.66 per cent on an IFRS basis). The bonus available for distribution was determined by reference to the achievement of this target range. For the year under review the operating margin achieved was 8.3 per cent on an IFRS basis. The Remuneration Committee therefore determined that a bonus should be triggered for the three executive directors.

 

7

Martin Broughton became Chairman of the Company in July, 2004

For 2006, the aggregate compensation paid or accrued (excluding pension benefits) by the Company to all members of the Board of Directors and its other executive officers named on page 2 during the year for services in all capacities was £5,785,856 (2005: £2,524,084). Also during financial year 2006, pension contributions of £430,638 (2005: £366,951) were paid for the benefit of members of the Board of Directors and the Company’s other executive officers.

47


The pension entitlements of the executive directors were:

 

 

 

 

 

 

 

 

Increase, before

Transfer value*

 

Accumulated

Increase in

inflation, in

of increase before

 

accrued benefits

accrued benefits

accrued benefits

inflation, less

 

March 31, 2006

during the year

during the year

director’s contributions

 

£

£

£

£

         

Rod Eddington

108,333

11,450

10,151

138,873

Mike Street

248,074

8,188

4,971

105,959

John Rishton

88,330

11,790

10,245

85,235

Keith Williams

42,140

12,087

11,276

110,496

Martin George

120,836

28,306

25,808

176,245

         

The transfer value* of each director’s accrued benefits at the end of the financial year is as follows:

 

 

 

 

 

 

 

 

Director’s contributions

Movement, less director’s

 

March 31, 2006

March 31, 2005

during the year

contributions

 

£

£

£

£

         

Rod Eddington

1,650,151

1,353,657

15,750

280,744

Mike Street

5,636,481

3,839,314

9,026

1,788,141

John Rishton

859,551

688,725

14,582

156,244

Keith Williams

447,506

296,264

12,336

138,906

Martin George

944,260

671,556

30,498

242,206

         

Rod Eddington, John Rishton, and Keith Williams are members of both the New Airways Pension Scheme (NAPS) and an unfunded unapproved retirement scheme which, under the terms of their service contracts, will provide a total retirement benefit equivalent to 1/30th (in the case of Rod Eddington) and 1/56th (in respect of John Rishton and Keith Williams) of basic salary for each year of service. Mike Street and Martin George are members of NAPS which provides 1/56th of pensionable pay for each year of service.

* Transfer value represents a liability of the Company, not a sum paid or due to the individual. It is calculated in accordance with “Retirement Benefit Schemes – Transfer Value (GN11)”.

Willie Walsh is a member of BARP, a defined contribution scheme and the Company paid contributions in relation to him during the year of £74,280.

Directors’ beneficial interests in shares

 

 

 

 

 

British Airways Plc

 

Ordinary Shares

       

 

March 31, 2006

**

April 1, 2005 *

       

Current Board Members

 

 

 

Martin Broughton

49,090

 

24,090  

Willie Walsh

0

 

0  

Keith Williams

0

 

0  

Martin George

6,619

 

6,619  

Maarten van den Bergh

2,000

 

2,000  

Denise Kingsmill

2,000

 

0  

Chumpol NaLamlieng

0

 

0  

Dr Martin Read

8,000

 

8,000  

Alison Reed

10,000

 

10,000  

Ken Smart

0

 

0  

Baroness Symons

0

 

0  

       

Total

77,709

 

50,709  

       

Board Members who retired during the year

 

 

 

Rod Eddington

0

 

0  

Mike Street

6,678

 

6,678  

John Rishton

2,039

 

2,039  

Dr Ashok Ganguly

104

 

104  

Capt Michael Jeffery

2,624

 

2,624  

Lord Renwick

32,014

 

32,014  

       

Total

43,459

 

43,459  

       

* or date of appointment                  ** or as at date of retirement/resignation

No director has any beneficial interest in any subsidiary undertaking of the Company. There have been no changes to the shareholdings set out above between the financial year end and the date of the report.

In addition to the Directors, the executive officers of the Company, as detailed on page 2 held interests in 5,739,232 options as of March 31, 2006 (2005: 4,041,799)

48


Directors’ share options

The following directors held options to purchase ordinary shares of the Company granted under the British Airways Executive Share Option Scheme 1987 and the British Airways Share Option Plan 1999. In line with market practice at the time, the 1987 scheme is not subject to any performance condition. The 1999 plan is subject to a performance condition as detailed on page 44.

No consideration was received from the executive directors for the granting of these options:

British Airways Executive Share Option Plan 1987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

Options

Options

Market 

 

Options

 

 

Options

 

 

Options as

 

Exercised

lapsed

price at 

Gain made

granted

 

 

as at

 

Date of

at April 1

Exercise

during

during

date of 

on exercise

during the

Exercisable

 

March 31

 

Grant

2005 *

Price

the year

the year

exercise 

£

year

from

Expiry date

2006

                       

Martin

 

 

 

 

 

 

 

 

 

 

 

George

June 30, 1995

9,876

405p

 

9,876

  

 

 

June 30, 1998

June 30, 2005

Nil

                       

British Airways Share Option Plan 1999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

Options

Options

Market

 

Options

 

 

Options

 

 

Options as

 

Exercised

lapsed

price at

Gain made

granted

 

 

as at

 

Date of

at April 1

Exercise

during

during

date of

on exercise

during the

Exercisable

 

March 31

 

Grant

2005 *

Price

the year

the year

exercise

£

year

from

Expiry date

2006

                       

Martin

 

 

 

 

 

 

 

 

 

 

 

George

Aug 26, 1999

36,598

394p

 

 

 

 

 

Aug 26, 2002

Aug 26, 2009

36,598

 

June 28, 2000

43,421

380p

 

 

 

 

 

June 28, 2003

June 28, 2010

43,421

 

June 26, 2001

77,024

321p

 

 

 

 

 

June 26, 2004

June 26, 2011

77,024

 

July 1, 2002

136,602

181p

136,602

 

292.75p

152,652

 

July 1, 2005

July 1, 2012

Nil

 

June 25, 2003

162,420

157p

 

 

 

 

 

June 25, 2006

June 25, 2013

162,420

 

June 25, 2004

100,248

262p

 

 

 

 

 

June 25, 2007

June 25, 2014

100,248

 

June 23, 2005

 

276p

 

 

 

 

100,905

June 23, 2008

June 23, 2015

100,905

                       

Total

 

556,313

 

136,602

 

 

152,652

100,905

 

 

520,616

                       

Keith

 

 

 

 

 

 

 

 

 

 

 

Williams

Aug 26, 1999

30,456

394p

 

 

 

 

 

Aug 26, 2002

Aug 26, 2009

30,456

 

June 28, 2000

26,315

380p

 

 

 

 

 

June 28, 2003

June 28, 2010

26,315

 

June 26, 2001

38,940

321p

 

 

 

 

 

June 26, 2004

June 26, 2011

38,940

 

July 1, 2002

91,160

181p

 

 

 

 

 

July 1, 2005

July 1, 2012

91,160

 

June 25, 2003

114,649

157p

 

 

 

 

 

June 25, 2006

June 25, 2013

114,649

 

June 25, 2004

72,480

262p

 

 

 

 

 

June 25, 2007

June 25, 2014

72,480

 

June 23, 2005

 

276p

 

 

 

 

69,927

June 23, 2008

June 23, 2015

69,927

                       

Total

 

374,000

 

 

 

 

 

69,927

 

 

443,927

                       

Rod **

 

 

 

 

 

 

 

 

 

 

 

Eddington

May 26, 2000

138,888

360p

 

138,888

 

 

 

May 26, 2003

Mar 30, 2006

Nil

 

June 26, 2001

163,551

321p

163,551

 

354.75p

55,198

 

June 26, 2004

Mar 30, 2006

Nil

 

July 1, 2002

290,055

181p

290,055

 

306p

362,568

 

July 1, 2005

Mar 30, 2006

Nil

 

June 25, 2003

350,318

157p

350,318

 

306p

521,973

 

Sep 30, 2005

Mar 30, 2006

Nil

 

June 25, 2004

216,221

262p

216,221

 

306p

95,137

 

Sep 30, 2005

Mar 30, 2006

Nil

                       

Total

 

1,159,033

 

1,020,145

138,888

 

1,034,876

 

 

 

Nil

                       

Mike **

 

 

 

 

 

 

 

 

 

 

 

Street

Aug 26, 1999

71,903

394p

 

71,903

 

 

 

Aug 26, 2002

Mar 30, 2006

Nil

 

June 28, 2000

75,605

380p

 

75,605

 

 

 

June 28, 2003

Mar 30, 2006

Nil

 

June 26, 2001

95,015

321p

95,015

 

339p

17,102

 

June 26, 2004

Mar 30, 2006

Nil

 

July 1, 2002

168,508

181p

168,508

 

261.50p

135,648

 

July 1, 2005

Mar 30, 2006

Nil

 

June 25, 2003

203,821

157p

203,821

 

304.50p

300,635

 

Sep 30, 2005

Mar 30, 2006

Nil

 

June 25, 2004

125,801

262p

125,801

 

304.50p

53,465

 

Sep 30, 2005

Mar 30, 2006

Nil

                       

Total

 

740,653

 

593,145

147,508

 

506,850

 

 

 

Nil

                       

* or date of appointment

** for the directors who retired during the year the exercisable date relates to the date they retired and the expiry date is six months later

49


British Airways Share Option Plan 1999 continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

Options

Options

Market

 

Options

 

 

Options

 

 

Options as

 

Exercised

lapsed

price at

Gain made

granted

 

 

as at

 

Date of

at April 1

Exercise

during

during

date of

on exercise

   during the

Exercisable

 

March 31

 

Grant

2005 *

Price

the year

the year

exercise

£

year

from

Expiry date

2006

                       

John

 

 

 

 

 

 

 

 

 

 

 

Rishton

Aug 26, 1999

21,852

394p

 

 

 

 

 

Aug 26, 2002

June 30, 2006

21,852

 

June 28, 2000

31,578

380p

 

 

 

 

 

June 28, 2003

June 30, 2006

31,578

 

June 26, 2001

70,093

321p

 

 

 

 

 

June 26, 2004

June 30, 2006

70,093

 

July 1, 2002

124,309

181p

124,309

 

292p

137,982

 

July 1, 2005

July 1, 2012

Nil

 

June 25, 2003

191,082

157p

 

191,082

 

 

 

June 25, 2006

Dec 31, 2005

Nil

 

June 25, 2004

117,938

262p

 

117,938

 

 

 

June 25, 2007

Dec 31, 2005

Nil

 

June 23, 2005

 

276p

 

126,811

 

 

126,811

June 23, 2008

Dec 31, 2005

Nil

                       

Total

 

556,852

 

124,309

435,831

 

137,982

126,811

 

 

123,523

                       

* or date of appointment

The performance condition applicable to share options granted in June, 2004 and June, 2005 listed above and on page 49 requires the Remuneration Committee to be satisfied that there has been an increase in the EPS of the Company which is at least four per cent per annum more than the increase in the retail price index during three consecutive financial years. EPS is calculated as set out in the Statement of Investment Practice No. 1 of the Institute of Investment Management and Research (IIMR) as this is a recognised method in the market.

In relation to John Rishton, due to the circumstances prevailing at the time of his departure, the Company agreed with him that he should not be able to exercise any of his vested share options prior to May 19, 2006. Any options not vested on his date of departure lapsed on that date.

For options granted in June, 2004, there is a single opportunity to re-test performance over four years from the same fixed base. There is no retesting of the options granted in 2005.

Under the performance condition of the plan, the options granted in 2003 were tested at the end of 2005/06. In 2003/04, the Company’s EPS under the IIMR definition was below the threshold of 17.3p set by the Remuneration Committee which was therefore the applicable base. EPS for 2005/06 using the IIMR definition were 34.9p. The Remuneration Committee therefore determined that the performance condition had been satisfied in relation to the grants made in 2003. These options will become exercisable on the third anniversary of the original grant, June 25, 2006.

Directors’ Conditional Awards

The following directors held conditional awards over ordinary shares of the Company granted under the British Airways Long Term Incentive Plan (LTIP) and the PSP.

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

Number of

 

 

 

 

awards as at

Awards vesting

Awards lapsing

Awards made

awards as at

 

 

Plan

Date of award

April 1, 2005 *

during the year

during the year

during the year

March 31, 2006

**

               

 

Willie Walsh

PSP

August 30, 2005

 

 

 

319,148

319,148

 

               

 

Total

 

 

 

 

 

319,148

319,148

 

               

 

Martin George

LTIP

June 5, 2000

11,559

 

11,559

 

Nil

 

 

LTIP

June 8, 2001

33,132

 

16,318

 

16,814

 

 

LTIP

June 12, 2002

87,471

 

87,471

 

Nil

 

 

LTIP

June 9, 2003

136,607

 

 

 

136,607

 

 

LTIP

June 16, 2004

77,250

 

 

 

77,250

 

 

PSP

August 30, 2005

 

 

 

98,758

98,758

 

               

 

Total

 

 

346,019

 

115,348

98,758

329,429

 

               

 

Keith Williams