2007/08
Annual Report and Accounts
Americas
Antigua
Atlanta
Baltimore
Barbados
Bermuda
Boston
Buenos Aires
Calgary
Chicago
Dallas
Denver
Grand Cayman
Grenada
Houston
Kingston
Los Angeles
Mexico
Miami
Montreal
Nassau
New York (JFK)
New York (Newark)
Orlando
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Port of Spain
Providenciales
Rio De Janeiro
San Francisco
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Seattle
St Lucia
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Tobago
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Washington
Middle East
& South Asia
Abu Dhabi
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Bangalore
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Doha
Dubai
Islamabad
Kuwait
Madras
Mumbai
Muscat
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Asia/Pacific
Bangkok
Beijing
Hong Kong
Shanghai
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Sydney
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Africa
Abuja
Accra
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Cape Town
Dar Es Salaam
Entebbe
Johannesburg
Lagos
Luanda
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Tunis
UK
& Ireland
Aberdeen
Dublin
Edinburgh
Glasgow
Jersey
Manchester
Newcastle
Newquay
Europe
Alicante
Amsterdam
Antalya
Athens
Barcelona
Bari
Basle
Belgrade
Berlin
Bologna
Bordeaux
Brussels
Bucharest
Budapest
Cagliari
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Copenhagen
Dresden
Dubrovnik
Dusseldorf
Faro
Frankfurt
Geneva
Gibraltar
Grenoble
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Madrid
Malaga
Malta
Marseilles
Milan (Linate)
Milan (Malpensa)
Moscow
Munich
Naples
Nice
Oslo
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Paris
Pisa
Poznan
Prague
Pristina
Rome
Salzburg
Sarajevo
Sofia
St Petersburg
Stockholm
Stuttgart
Thessaloniki
Tirana
Toulouse
Turin
Varna
Venice
Verona
Vienna
Warsaw
Zurich
1998
British Airways orders 59 aircraft in the
Airbus A320 family and 16 Boeing 777s.
1999
British Airways opens its new
World Cargo Centre.
2000
British Airways completes a 9 per cent
acquisition of Iberia.
Where we fly to
as at May 15, 2008
Overview of the year
Business review
Corporate responsibility
Financial statements
Shareholder information
02 Who we are
03 Financial highlights
04 Chairman’s statement
08 Chief Executive’s statement
12 Chief Financial Officer’s report
19 Our business plan – BP10
20 The markets we operate in
27 The way we run our business
30 Our key performance indicators
34 What the future holds
36 Principal risks and uncertainties
40 The workplace
46 The marketplace – suppliers
47 The marketplace – customers
48 Environment
50 Community investment
Corporate governance
52 Board of directors
53 Leadership team
54 Directors’ report
59 Corporate governance statement
62 Report of the Audit Committee
64 Report of the Safety Review Committee
65 Report of the Remuneration Committee
74 Report of the Nominations Committee
75 Independent auditor’s report
78 Group consolidated income statement
79 Balance sheets
80 Cash flow statements
81 Statements of changes in equity
82 Notes to the accounts
128 Operating and financial statistics
130 Principal investments
131 Shareholder information
132 Glossary
www.ba.com/annualreport
Heathrow Terminal 5 is given the go-ahead
by the UK Government.
British Airways becomes the world’s first
airline to take part in a scheme to reduce
greenhouse gas emissions.
Concorde makes its last commercial flight.
2001 2002 2003
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
02 / British Airways 2007/08 Annual Report and Accounts
British Airways is the UK’s largest
international scheduled airline, flying
to over 300 destinations at convenient
times, to the best located airports.
Who we are
We are one of the world's leading scheduled international
passenger airlines. Our principal place of business is Heathrow,
one of the world's premier airport locations, which serves a
large geographical area with a comparatively high proportion
of point-to-point business. We also operate a worldwide air
cargo business, largely in conjunction with our scheduled
passenger services. Operating one of the most extensive
international scheduled airline route networks, with our
codeshare and franchise partners, we fly to more than
300 destinations worldwide. In 2007/08, we carried more
than 33 million passengers.
Our airline network generates economic value by meeting the
demand for business travel, by providing vital arteries for trade
and investment, as well as providing leisure travel opportunities
for individuals and families. In 2007/08, we earned over
£8.7 billion in revenue, 3.1 per cent up on the previous year.
Passenger traffic accounted for 86.2 per cent of this revenue,
while 7.0 per cent came from cargo and 6.8 per cent from
other activities. We carried 805,000 tonnes of cargo to
destinations in Europe, the Americas and throughout the
world. At the end of March 2008, we had 245 aircraft in
service, compared to 242 in March 2007.
Our fleet: 245 aircraft
57
Boeing 747s
13
Boeing 757s
25
Airbus A320s
42
Boeing 777s
33
Boeing 737s
33
Airbus A319s
21
Boeing 767s
11
Airbus A321s
10
Avro RJ100s
2004
British Airways becomes the first airline in
the UK to enable passengers departing from
Heathrow to print their own boarding passes
online for selected flights.
2005
A new voluntary scheme is launched to
enable customers to offset the carbon
dioxide emissions from their flights by making
a contribution to an environmental trust.
2006
British Airways unveils its next generation
business class cabin, offering greater comfort,
more space and storage.
British Airways 2007/08 Annual Report and Accounts / 03
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Financial highlights
British Airways places an order for 12 Airbus
A380 aircraft and 24 Boeing 787 aircraft.
British Airways’ first flight from Terminal 5
departs to Paris on March 27, 2008.
2007 2008
£8,753m
Revenue
Group revenue for 2007/08 was
£8,753 million, compared with
£8,492 million in the previous year.
£883m
Profit before tax
Group profit before tax for 2007/08
was £883 million, compared with
£611 million in the previous year.
£875m
Operating profit
Group operating profit for 2007/08
was £875 million, compared with
£602 million in the previous year.
10%
Operating margin
The operating margin in 2007/08
was 10.0 per cent compared with
7.1 per cent in the previous year.
59.0 pence
Basic earnings per share
Group earnings per share for 2007/08
were 59.0 pence, compared with
25.5 pence in the previous year.
£2,055m
Fuel costs
Fuel costs rose by 6.4 per cent in
2007/08 to £2,055 million, compared
with £1,931 million in the previous year.
Group revenue by area of original sale Gearing %
2007/08 (£m)
United Kingdom 4,357
Continental Europe 1,219
The Americas 1,697
Africa, Middle East and
Indian sub-continent 821
Far East and Australia 659
07/0806/0705/0604/05
67.7
44.2
29.1
28.8
2006/07 (£m)
United Kingdom 4,160
Continental Europe 1,156
The Americas 1,731
Africa, Middle East and
Indian sub-continent 803
Far East and Australia 642
There is no doubt that the past
year has been a turbulent one
for our Company. There have
been highlights and lowlights –
some of our own making,
others outside our control.
04 / British Airways 2007/08 Annual Report and Accounts
Chairman’s statement
The embarrassing events surrounding the opening of Terminal 5
have been well documented, as has our deep regret at the
frustration and inconvenience the disruption caused.
I want to reassure you that our recovery plan is in
place
and we are determined to rebuild our reputation
worldwide and restore the trust of our customers in
British Airways. In the meantime our staff are rising to
the challenge of delivering the service our customers
deserve, despite the difficulties of working across
three terminals at Heathrow.
While the change to a phased move to Terminal 5 has had a
broader impact on Heathrow, it is vital that our operation is
embedded fully before the next stage of development at the
airport. Although this has put back the move of other airlines
into Terminal 4, BAA agrees that it is in the interests of our
industry and UK plc that we move forward together.
These events have taken the gloss off a very good set of
results which we achieved despite record fuel costs and the
impact of economic slowdown, caused mainly by the credit
crunch in the US.
Financial performance
Our operating profit of £875 million gives us a record operating
margin of 10 per cent. Our pre-tax profit of £883 million is also
a record.
Achieving 10 per cent operating margin was a major
milestone for our Company. It has been our goal
since 2002 and one of the necessary triggers for the
restoration of the dividend. The other was addressing
the pensions deficit which was one of the biggest of
the FTSE 100 companies.
The Board has always maintained that we needed to tackle
our pension deficit, strengthen our balance sheet and achieve
a 10 per cent operating margin before we would restore a
dividend. Based on successful resolution of these matters,
the Board has decided on a dividend policy for the current year
to start at a modest level that reflects our lowered financial
expectations for the coming year and that will allow it to grow
over time and be consistent with other cyclical companies and
our major airline competitors.
Our revenue performance was good, up 3.1 per cent in 2007/08.
Operating costs were down 0.7 per cent despite the impact
of rising fuel costs. Fuel continues to be a major cost and at
current prices we expect our fuel bill next year to be some
£3 billion, up £1 billion on this year. Our cargo performance
improved and cargo revenue was up 3.0 per cent.
Runway capacity
We await the recommendation from the government on plans
to allow full utilisation of Heathrow’s two existing runways and
the construction of a short, third runway – subject to meeting
stringent environmental safeguards.
British Airways 2007/08 Annual Report and Accounts / 05
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Operating margin
10%
Operating profit
£875m
Revenue up
3.1%
Pre-tax profit
£883m
This follows a public consultation during which protestors
made sure it was high on the media agenda. Interestingly, in the
area around Heathrow, where you might expect opposition to
expansion to be strongest, a Populus opinion poll of residents
in the 12 boroughs closest to the airport showed 50 per cent
backing for a third runway, with opposition running at 30 per cent.
The majority in favour of mixed mode was larger still.
Business leaders were vocal in their backing for sustainable
growth and made it clear that London and the UK needs a
world-class airport that has the capacity to provide the range
of air links you need for success in a global economy. We hope
the government holds firm in its clear intent to go ahead with
the third runway because it is important not just for British
Airways but for London and the UK economy.
Climate change
In this context we realise that climate change is perhaps the
biggest long-term challenge we face. It is important for the public
to understand that the atmosphere has no preferences whether
emissions come from aviation or agriculture, from China or the
UK. But it does matter that cuts in those emissions are achieved
in the most economically sensible manner. This message is
often lost in the emotional headlines around the issue.
Aviation worldwide accounts for approximately 2 per cent of
global CO
2
emissions, and allowing for growth, it is forecast by
the UN to produce about 3 per cent by 2050. In comparison,
road transport generates about six times as much CO
2
and
power generation and deforestation around ten times as much.
We believe carbon trading is the most effective way of
controlling emissions in an economically sensible manner.
So when the UK Government endorsed the introduction
of aviation into the EU Emissions Trading Scheme it should
have been a decision to welcome. But we were disappointed
that the implementation date was delayed until 2012 and
not confined to intra-EU airlines.
To impose it on foreign airlines flying into and out of the EU
will provoke significant international opposition and lead to
further delays in implementation. A better approach would
be to restrict the scheme to intra-EU travel and negotiate
the global development of an emissions trading scheme.
HM Treasury announced its intention to replace Air Passenger
Duty with a new ‘per plane’ tax with effect from November 2009.
The Treasury’s consultation on this proposal has now closed.
We have serious concerns that this new tax will distort competition
and discriminate against UK network and longhaul carriers,
while at the same time incentivising travel over rival European
hub airports with no benefit to the environment.
Any new tax should be balanced and non-discriminatory and
should retain the current transfer exemption for connecting
passengers. In any event, once UK aviation joins the EU
Emissions Trading Scheme in 2012, any existing taxes should
be phased out.
EU – US
Looking at transatlantic regulatory issues, the limited progress
made in stage one of the EU-US aviation agreement has
allowed us to launch a new subsidiary airline called OpenSkies
offering direct services from continental Europe to the US for
the first time. The first service will be from Paris to New York on
a Boeing 757 that offers flat beds and a unique style of service.
One reason we chose the name OpenSkies for our fledgling
new business is to signal our commitment to stage two of the
talks between the EU and US towards a genuine Open Aviation
Area – with equal traffic rights and removal of ownership
restrictions. Then the industry can finally reap the benefits of
the kind of sensible cross-national consolidation that has taken
place in electronics, motor manufacturing, pharmaceuticals,
banking and almost every other business sector.
We will not hesitate to remind the government of its right to
terminate the current deal if sufficient progress towards this
bigger goal has not been made by 2010.
The new air treaty has also enabled us to move our flights
to Dallas and Houston from Gatwick to Heathrow and we are
increasing frequencies on flights to New York JFK, Washington,
Seattle and Orlando.
Separate to the air treaty we have announced our intention to
launch services from London City airport to New York using
Airbus A318 aircraft in an all-business, 32-seat configuration.
06 / British Airways 2007/08 Annual Report and Accounts
Chairman’s statement continued
New aircraft
We announced our long awaited order for longhaul replacement
and growth aircraft during the year. Both the Airbus A380 and
the Boeing 787 have huge potential for us and, of course, for
our customers.
The ‘whispering giant’, as the Airbus A380 has been
called, and the Boeing 787 Dreamliner, will set new
benchmarks in the sky for comfort and technology,
and in terms of emissions, NO
X
and noise.
Boeing subsequently announced a delay to the original delivery
schedule, and while this is a setback we are working closely
with them to mitigate this.
Strategic partnerships
In an exciting development for the oneworld alliance, we are
exploring opportunities for closer cooperation with American
Airlines and Continental Airlines.
In the UK, our franchise model has outlived its purpose and
we took the opportunity to end our franchise with GB Airways
when they made it clear they wanted to sell their business.
We subsequently launched our own services on some of the
key routes previously operated by our franchisee and we are
pleased that they have proved to be very popular. We are the
only airline offering the benefits of a full service carrier from
Gatwick to destinations such as Antalya, Faro and Malaga.
We have also announced we are ending our franchise agreement
with Loganair, and earlier in the year we ended our relationship
with BMED. Our overseas franchises, however, are not affected
as they provide useful feeder traffic and extend our brand into
areas we cannot serve ourselves.
Our relationship with Iberia continues to strengthen
and during the year we increased our shareholding
from 9.95 to 13.15 per cent. This purchase reflects the
strategic importance we attach to our relationship
with Iberia and our continued confidence in its
management. We will continue to consider further
opportunities to increase our stake.
Sponsorship
Sponsorship allows us to give our support to worthy causes
and sporting events. We are delighted and proud to support
London’s bid for the 2012 Olympic and Paralympic Games.
We will play an integral role in welcoming the world to London
in 2012.
London 2012 is about inspiring young people, transforming
and inspiring a nation, creating a lasting legacy for Britain and
encouraging people to actively participate in the Games.
We will support this vision with a number of initiatives over
the next four years that will invest in communities where the
Games will be staged, support diversity and celebrate Britain
at its best.
The British Airways Olympic Youth Bursary Scheme has been
created with the specific aim of encouraging young people to
get involved in sport and assist the next generation of Olympic
hopefuls and aspiring athletes.
Looking forward
The history of aviation economics indicates that it is important
to be in a healthy financial condition at the start of a cyclical
downturn. With oil at $120 a barrel, that’s exactly where we
are now. In the coming year we will need a sensible financial
outcome, albeit down on the year just ended, but it will be
especially important to win back our customers’ trust.
Martin Broughton, Chairman
British Airways 2007/08 Annual Report and Accounts / 07
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
We are the only airline offering the
benefits of a full service carrier
from Gatwick to destinations such
as Antalya, Faro and Malaga.
Last year turned out to be a
mixed one for British Airways.
We celebrated some real
triumphs – including achieving
a 10 per cent operating
margin for the first time ever,
announcing exciting new
services and placing important
aircraft orders. But the opening
of Terminal 5 went badly wrong.
Despite this, I think we can feel
confident about our future.
08 / British Airways 2007/08 Annual Report and Accounts
Chief Executive’s statement
Financial success
For the first time ever we achieved
an operating margin of 10 per cent
in 2007/08.
Continuing tight control of our costs
played a crucial role in hitting this
important target and it puts us in a
far stronger position than many of our
competitors to cope with increasingly
tough economic conditions in the
year ahead.
Our profit before tax for the year
was £883 million, up £272 million,
on revenue of £8,753 million, an
increase of 3.1 per cent.
British Airways 2007/08 Annual Report and Accounts / 09
After the early problems with Terminal 5 and a lot
of hard work by people right across British Airways,
we believe this fantastic new facility will increasingly
help us to transform the travelling experience of our
customers. That’s what they deserve, and that’s what
we are determined to give them.
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Key achievements in 2007/08
Environmental commitment
Our industry’s most pressing corporate
responsibility is to reduce the carbon
emissions from its operations.
The recent agreement between the
International Air Transport Association
and the airlines to a joint commitment
on this is an important step forward
for our industry.
We continue to be leaders in this field.
We are the only airline to have taken
part in an emissions trading scheme.
Since 1990 we have cut our emissions
by 28 per cent and in 2007/08 set
ourselves the new target of cutting our
CO
2
by a further 25 per cent by 2025.
Customer service developments
We have completed the fit out of our
new award-winning Club World cabin on
our Boeing 747 fleet and have started
putting it on our Boeing 777 fleet.
It has already won design awards and
set new benchmarks for comfort in
the air.
On the ground we continue to
improve our online booking engine
ba.com and customers can now buy
online, check-in online and email
messages on ba.com in 11 languages.
We have placed an $8 billion order
for new aircraft and our design teams
have begun work on defining the
interiors of these aircraft.
© Airbus
The next few years will be immensely challenging for the
airline industry. Like our competitors we will have to respond
to sharply rising infrastructure and fuel costs, changes in
regulation, fierce competition, possible restructuring of our
industry and significant environmental challenges. We must
contend with these while striving to meet the relentlessly
high expectations of our customers.
Thanks to a great deal of hard work in recent years
the fundamentals of our business are vastly improved.
So we will meet these challenges from a position
of financial strength that few other carriers enjoy.
Once Terminal 5 is fully running, as it can and should,
we will have the tools to transform the travelling
experience of our customers.
Terminal 5 – a new start
I want to put on record again my deep regret for the
inconvenience and frustrations we caused to customers
in the days after Terminal 5 opened.
Our people have worked tirelessly to put things right and,
thanks to this ongoing effort, customers will begin to see
this tremendous new facility in its true light.
The first phase of the move of additional flights into Terminal 5
will take place on June 5. The services to be switched include
flights to and from New York JFK. The other seven destinations
are Abuja, Bangalore, Beijing, Cairo, Cape Town, Lagos and
Phoenix. All these flights currently operate from Terminal 4
and combined they amount to about a quarter of the airline’s
Terminal 4 schedule.
We will switch further flights from Terminal 4 when we have full
confidence that good standards of service will be maintained,
with the terminal handling larger volumes of customers and bags.
BA038 incident
Another incident which attracted intense media focus was the
BA038 which landed short of the runway on its approach to
Heathrow in January.
There were 136 customers on board, 13 members of cabin
crew and three pilots. Thanks to the heroism and skill of the
flight crew, the Boeing 777 aircraft landed safely and the
excellent work of the cabin crew ensured that all our customers
were evacuated on the Captain’s command with only a few
injuries sustained.
An incident of this kind is something we hope will never happen
but this is why we place so much emphasis on safety. We focus
a great deal of importance on the quality and standard of our
training. Our flight and cabin crew have shown the value of
their training and skills and were able to deal with the incident
professionally, effectively and safely.
All the crew did a magnificent job supported by our frontline
staff from engineering to call centre staff and volunteers to
care for the passengers and keep our operations going.
I am very proud of them, and from the emails and letters that
I received after this incident, I know many people around the
world share this view. The Air Accident Investigation Board
(AAIB) continues to investigate what caused the incident.
Customer development
I fully understand why many will be tempted to view our
performance this year through the prism of Terminal 5. But
we have made great strides forward enhancing our service
for customers on the ground and in the air.
We completed the installation of our new Club World cabin
on our entire 57 Boeing 747 fleet, offering better sleep to our
premium customers, and an improved Club kitchen. We have
also striven to set new benchmarks for comfort in the air, and
the awards it has attracted tell us that we are achieving that.
We have started the fit out of the new Club World on our
42 Boeing 777 fleet.
On the ground we continue to develop our online booking
service ba.com.
I referred earlier to our order of new aircraft. While the delivery
of the Boeing 787 and Airbus A380 may be some years away,
our design team has already begun the process of developing
our unique next generation interior. In terms of CO
2
emissions
per seat, the Airbus A380 will be 17 per cent cleaner than
the Boeing 747-400 and the Boeing 787 will be 30 per cent
cleaner than the Boeing 767.
10 / British Airways 2007/08 Annual Report and Accounts
Chief Executive’s statement continued
New services
We are also investing in new services to prepare for new
opportunities in our markets. We have ordered two Airbus A318s
to operate our new business-only service from London City
airport to New York – a service we think will prove popular and
convenient for people working in these two financial centres.
In longhaul we are expanding services to our two most
important markets, the US and India. This summer we
will fly 41 times a day to 18 US destinations. We will
also launch a new daily service to Hyderabad in India.
The alliances we have with other airlines remain very important
to us and mean we can be much more responsive to our
customers’ needs. Our ties with Iberia, where we now have
a 13.15 per cent stake, continue to get stronger and you can
expect us to enter new code-sharing agreements with the
Spanish carrier beyond those we already have.
As the Chairman notes, we have also announced plans to start
flying from continental Europe to the US.
Controlling costs
Of course our ability to invest in growth depends directly on
us controlling our cost base. In the last seven years this has
been an absolute priority. To that end we tackled our pension
deficit and worked hard to reduce our debt levels from the
peak of over £6 billion to £1.3 billion.
As a result of this concerted action, we have delivered
a 10 per cent operating margin for the first time ever.
However, we expect to see our margins decrease in 2008/09,
due mostly to sharp increases in fuel costs – which we now
expect to rise by around a half to £3 billion (at current prices)
this year – higher employee costs, economic slowdown and
increased competition.
The expected reduction in margin in the current year only
serves to underline how important our cost control efforts
have been and must continue to be.
Another area of significant cost is airport charges which have
been set by the CAA for the five years between April 2008
and March 2013. We continue to believe they were set at an
overly generous level at Heathrow that is far in excess of what is
needed to upgrade facilities through investment in infrastructure
and improved service quality levels.
We suffer from very poor regulation and the CAA’s objective
should be to ensure that BAA provides the infrastructure
and services that customers want, but in a cost effective
and efficient way that does not overcompensate the airport
operator financially.
The focus of the Competition Commission’s current review
into the UK airports’ market should be to ensure that the right
conditions are put in place that best meet customers’ needs.
Environmental leadership
We have put corporate responsibility at the centre of our
business priorities and our ambition is to be a leader in this field.
During the year we announced that Silla Maizey – formerly
Head of Procurement – had been appointed as our first ever
Head of Corporate Responsibility, reporting directly to me.
We are determined to grow. But we are equally determined to
grow responsibly, and I hope Silla’s appointment will be seen
as a statement of our serious intent.
Undoubtedly, climate change is our most significant challenge in
this respect. Our industry gets pilloried by some environmentalists
for its contribution to global warming. We don’t agree with their
analysis, but I want to be very clear that we do intend to be in
the vanguard in tackling this issue.
The corporate responsibility report can be found on pages
38 to 50.
Confidence
At the end of a testing year for British Airways, I’d like to thank
everyone in the Company for their tremendous support and
dedication – not least as we worked to overcome difficulties
at Terminal 5 and restore the confidence of our customers.
It’s this spirit that, above all, gives me such a strong sense of
confidence in the future of this airline.
Willie Walsh, Chief Executive
British Airways 2007/08 Annual Report and Accounts / 11
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
12 Airbus A380 on order, with
options on a further seven.
© Airbus
Our profits reached record
levels in 2007/08, as we
achieved our target of a
10 per cent operating margin
for the first time.
12 / British Airways 2007/08 Annual Report and Accounts
Chief Financial Officer’s report
This Chief Financial Officer’s report forms part of, and should be read
in conjunction with, the Directors’ report set out on pages 54 to 58.
Financial performance
Our operating profit in the year, at £875 million, was up
£273 million, against a background of ever-increasing fuel
prices. Pre-tax profits were £883 million, up £272 million on
the previous year. Our financial strength has been significantly
improved over the last few years and these results put us in a
good position to deal with the extremely difficult climate which
is now gripping the industry – caused by economic slowdown
and record fuel prices.
Revenue
Revenue for the year was £8,753 million, up 3.1 per cent,
despite the negative impact of exchange rate movements.
Excluding the impact of exchange, primarily down to the
weaker US dollar, revenue was up 4.6 per cent.
Our passenger revenue, at £7,541 million, was up 3.8 per cent,
on capacity up 0.8 per cent. Seat factor, being the measure of
how full our flights are, was down 0.5 points to 75.6 per cent.
Despite the negative impact of exchange rates, yields (measured
as revenue per passenger kilometre flown) were up 3.6 per cent,
mainly due to more premium passengers travelling with us.
Demand for our premium cabins remained strong. The new
Club World product is now available on our entire 747 fleet,
and this added almost 10 per cent additional premium capacity
during the second half of the year. Shorthaul premium traffic
weakened, partly due to concerns within the financial markets.
Non-premium traffic on the North Atlantic was soft during
the year and this, in part, contributed to a reduction in non-
premium revenue.
Our cargo revenue for the year was £616 million, up 3.0 per cent.
Excluding the impact of exchange, it was up 4.8 per cent. Cargo
capacity, measured in available tonne kilometres (ATK), decreased
by 0.2 per cent. Our cargo volumes, however, recovered strongly
in the year and were up by 4.2 per cent. Premium product
volumes continued to grow and were up by 12.6 per cent. Our
cargo yield (revenue per cargo tonne kilometre) decreased
by 1.2 per cent. Increased cargo fuel surcharges and a better
premium mix in the second half of the year helped offset
ongoing price pressures evident in a number of markets.
The strong euro continues to impact demand from Europe, and
price pressures due to overcapacity continued to be a feature
in South Asia. Flown volumes from the Americas and the UK
improved, and Asia Pacific continues to perform strongly.
Overall load factor for the year was 71.2 per cent, up 0.8 points
on last year.
Total revenue £ million
Operating expenditure
Our cost performance in the year was strong. Our expenditure
on operations decreased by 0.7 per cent compared to last
year, with unit costs (total expenditure on operations per ATK)
reducing by 0.5 per cent. This was a major achievement,
considering that we were facing rapidly rising fuel costs
throughout the year and we had also concentrated significant
additional resources on the operation for the move to Terminal 5.
Excluding fuel costs, our expenditure on operations reduced
by 3.0 per cent.
The table overleaf summarises total Group expenditure on
operations and year on year changes in expenditure over the
two financial years ended March 31, 2008 and March 31, 2007.
Our employee costs reduced by 4.9 per cent to £2,166 million.
Within this, pension costs were down some £92 million
primarily due to the agreed changes to the future service
benefits as part of a 10-year programme to fund the deficit in
the New Airways Pension Scheme (NAPS). The changes were
implemented in February 2007. Lower redundancy costs and
manpower efficiencies more than offset inflation-linked wage
increases. Our employee costs included £35 million in respect
of our Employee Reward Plan (ERP) and management bonuses.
The average number of employees in the Group, measured in
manpower equivalents (MPE), fell by 2.5 per cent to 42,403
and productivity (measured in ATKs per MPE) improved by
2.4 per cent.
2007/08
2006/07
2005/06
2004/05
2003/04
8,753
8,492
8,213
7,772
7,560
British Airways 2007/08 Annual Report and Accounts / 13
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Our depreciation, amortisation and impairment costs reduced
by 3.1 per cent compared to last year. This is partly due to
changes in dilapidations charges and changes to the useful
economic lives of a number of assets.
The number of aircraft we have on operating leases reduced
during the year and this, along with lease renegotiations and
the weaker US dollar, resulted in our aircraft operating lease
costs reducing by £13 million compared with last year.
Record fuel prices drove our fuel and oil costs up by
£124 million compared with last year. This increase
was after the benefits of hedging of $392 million,
and the favourable exchange impact of the weaker
US dollar.
Our engineering and other aircraft costs, at £451 million,
increased by 8.9 per cent compared with last year. This was
partly due to contractual price increases on our flying hour
engine maintenance contracts and partly due to prior year
inventory provision releases on the back of a sustained
improvement in the control environment. We also had an
increased number of wet leases (aircraft with crew) this year,
and additional shorthaul freighter costs. These increases were
partly offset by reduced fleet insurance rates due to the soft
aviation market.
Landing fees and en route charges cost us £528 million, up
2.1 per cent. This was partly due to rate increases and adverse
exchange movements, primarily the stronger euro.
14 / British Airways 2007/08 Annual Report and Accounts
Chief Financial Officer’s report continued
Better/
(£ million) 2007/08 2006/07 (worse)
Employee costs 2,166 2,277 4.9%
Depreciation, amortisation and impairment 692 714 3.1%
Aircraft operating lease costs 68 81 16.0%
Fuel and oil costs 2,055 1,931 (6.4)%
Engineering and other aircraft costs 451 414 (8.9)%
Landing fees and en route charges 528 517 (2.1)%
Handling charges, catering and other operating costs 977 930 (5.1)%
Selling costs 359 436 17.7%
Currency differences 6 18 66.7%
Accommodation, ground equipment and IT costs 576 618 6.8%
Total Group expenditure on operations* 7,878 7,936 0.7%
*Before non-recurring items.
Handling charges, catering and other operating costs increased
by 5.1 per cent compared with last year. The increase was
primarily down to the costs of repatriating mishandled baggage
and compensation, following the baggage issues we had in the
summer and more recently following the opening of Terminal 5.
We also incurred additional costs as a result of our ongoing
investment in First and Club World.
Our selling and marketing costs fell by 17.7 per cent, year on
year. This primarily reflects increased booking through ba.com,
lower advertising costs and agency commissions.
Our £576 million spend on accommodation, ground
equipment and IT was 6.8 per cent lower than last year. This
reflects savings in IT development and operating costs as well
as lower property costs – mainly due to rent and rates savings,
less onerous lease costs and reduced dilapidation provisions.
Our spend on legal fees reduced, but this was partially offset
by higher consultancy costs associated with Terminal 5.
Financial derivatives
Net unrealised gains on fuel derivatives were £12 million
(2006/07: £12 million loss), reflecting the ineffective portion
of unrealised gains and losses on fuel derivative hedges
required to be recognised through the income statement
under International Accounting Standard (IAS) 39.
Operating expenditure
down 0.7%
Unit costs
down 0.5%
Net finance costs
Our finance costs for 2007/08 were £175 million, compared
with £168 million in 2006/07.
Despite increases in the UK and US floating rates, our interest
payable on bank and other loans reduced, mainly as a result
of lower debt levels. Our interest costs also benefited from
increased capitalised interest, thanks mostly to Terminal 5
and aircraft orders.
Our finance income for the year was £111 million, down
£18 million on last year. The reduction was due to lower
average cash balances, only partially offset by higher interest
rates. The lower cash balance was due to one-off payments
into NAPS and the fine paid to the US Department of Justice
(DOJ) for anti-competitive activity.
Pension financing income and retranslation expenses
Pension financing income was £34 million in 2007/08
compared to a charge of £19 million in 2006/07. This was
primarily the result of a higher return on assets in the pension
scheme following the one-off cash contributions into NAPS.
The retranslation of currency borrowings generated a charge
of £11 million, compared with a credit of £13 million the
previous year. The movement versus last year was due mainly
to a strengthening of the Japanese yen this year, partly offset
by lower yen debt levels.
Profit on sale of fixed assets and investments
Profit on the sale of fixed assets and investments for the year
was £14 million (2006/07: £47 million which included a profit of
£48 million on the sale of our holding in World Network Services).
British Airways 2007/08 Annual Report and Accounts / 15
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Our engineering and other aircraft
costs, at £451 million, increased
by 8.9 per cent compared with
last year.
Share of post-tax profits in associates
During the year, we increased our holding in Iberia from
9.95 per cent to 13.15 per cent. The increase in our share of
post-tax profits in associates – up from £5 million in 2006/07
to £26 million in 2007/08 – in part reflects this increased
shareholding.
Taxation
The analysis and explanation of tax is set out in note 11 to
the financial statements.
Our total tax charge arising on profits from continuing
operations was £187 million (2006/07: £173 million) giving us
an effective tax rate for the year in relation to our profits from
continuing operations of 21 per cent (2006/07: 28 per cent).
The tax charge benefited from a one-off deferred tax credit of
£76 million arising from the reduction in the UK corporation
tax rate from 30 per cent to 28 per cent, which is effective
from April 1, 2008, and there were charges relating to prior
years totalling £4 million (2006/07: £14 million credit).
Excluding these one-off items the effective tax rate for the
Group would have been 29 per cent (2006/07: 31 per cent).
We paid corporation taxes totalling £66 million during the
year, compared with £128 million last year, and we had a
corporation tax provision of £4 million at March 31, 2008
(March 31, 2007: £54 million). Our deferred tax balance
at March 31, 2008 was £1,154 million (March 31, 2007:
£930 million).
Earnings per share
The total earnings attributable to shareholders for
the year was £680 million, equivalent to 59.0 pence
per share. This represents a 131 per cent increase
on last year’s earnings per share of 25.5 pence. The
increase was driven by both the higher profit before
tax, and by a one-off credit to the tax charge, arising
from the reduced corporation tax rate effective from
April 1, 2008.
Dividend
The directors propose a dividend of 5 pence per share
(totalling £58 million) for the year ended March 31,
2008. The dividend will be submitted for approval
at the annual general meeting to be held on July 15,
2008. The financial statements do not reflect the
dividend payable which will be accounted for as a
reduction in shareholders’ equity in the year ending
March 31, 2009.
Capital expenditure
(£ million) 2007/08 2006/07
Aircraft, spares, modifications and
refurbishments (net of refund of
progress payments) 428 258
Property and equipment 209 81
Landing rights and other intangible assets 40 41
Investments 57 0
734 380
Our capital spend in the year was £734 million, up
£354 million on last year. This was primarily down to higher
spend on fleet assets, mainly due to the delivery of seven new
Airbus shorthaul aircraft, higher investment in property and
equipment for Terminal 5, and additional investment in Iberia.
Capital commitments
Capital commitments authorised and contracted for but not
provided in the accounts amount to £5,189 million for the
Group (2006/07: £554 million) and £5,185 million for the
Company (2006/07: £553 million).
The outstanding commitments include £5,162 million for the
acquisition of four Boeing 777 aircraft scheduled for delivery in
2009, 19 Airbus A320 family (from 2008 to 2010), 12 Airbus
A380 (from 2012 to 2014) and 24 Boeing 787 (from 2012
to 2015).
16 / British Airways 2007/08 Annual Report and Accounts
Chief Financial Officer’s report continued
Working capital
At March 31, 2008 our total current assets and receivables
were £3,148 million, compared to £3,431 million at March 31,
2007. The reduction primarily reflects lower current interest-
bearing deposits, due mainly to the payments to NAPS and
the DOJ, partially offset by increases in short-term derivative
financial instruments.
Our total current liabilities at March 31, 2008 were
£3,244 million, down £381 million versus March 31, 2007.
This mostly reflects a reduction in short-term provisions, due
mainly to the $300 million (£149 million) payment to the DOJ,
and a reclassification of some elements of the remainder of
the provision for anti-competitive activity from short-term
to long-term provisions.
We believe the working capital is sufficient for our current
requirements.
Cash flow
Our cash and cash equivalents position at March 31, 2008
was £1,864 million. This was a reduction of £491 million
compared with the position at March 31, 2007. The reduction
was driven by a number of one-off items during the year.
Firstly, we paid £560 million into NAPS in April 2007 as part of
the changes agreed to address the deficit in NAPS. Secondly,
as discussed, we were fined $300 million ($100 million for
longhaul passenger fuel surcharges and $200 million for cargo)
by the DOJ for anti-competitive activity. This was paid during
the first half of the year. Finally, we paid an additional £50 million
into NAPS in March 2008. Again, this was in line with the
changes agreed last year, under which we agreed to pay up to
an additional £50 million a year for three years if our year end
cash balance exceeds £1.8 billion.
Net cash inflow from operating activities was £303 million,
a reduction of £453 million over 2006/07. This was primarily
due to the one-off payments highlighted above and changes to
working capital, partially offset by improvements in operating
cash flow.
The £78 million increased cash outflow on investing
activities was primarily due to our increased spend
on property, plant and equipment (new aircraft and
Terminal 5), and increasing our shareholding in Iberia.
Liquidity
At March 31, 2008 we had short-term loans and deposits
and cash at bank and in hand amounting to £1,864 million
(March 31, 2007: £2,355 million). In addition, we had undrawn
long-term committed aircraft financing facilities totalling
approximately $2,880 million, further committed general
facilities of $115 million and ¥75 billion, undrawn uncommitted
overdraft lines totalling £20 million and €20 million, and
undrawn uncommitted money-market lines of £45 million.
Net debt/total capital ratio
Net debt at March 31, 2008 amounted to £1,310 million, an
increase of £319 million compared with March 31, 2007. This
is net of cash and cash equivalents and other interest-bearing
deposits totalling £1,864 million.
Despite our increase in net debt, the net debt/total capital ratio
at March 31, 2008 was 28.8 per cent, a 0.3 point reduction
on last year. This was mainly due to growth in retained profits.
Including operating leases, our net debt/total capital ratio was
38.4 per cent, a 1.2 point reduction from last year.
Financial risk management
We are exposed to a variety of financial risks, including market
risk, credit risk and liquidity risk. Our overall risk management
programme focuses on the unpredictability of financial markets
and seeks to minimise potential adverse effects on our financial
performance. This is covered in more detail in note 30 to the
financial statements.
Keith Williams, Chief Financial Officer
British Airways 2007/08 Annual Report and Accounts / 17
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Our strategy set out our
priorities for the three years
to March 2010. Within its
timeframe, the plan would see
us established in Terminal 5
and, subject to our financial
performance, allow us to order
new aircraft for our fleet.
18 / British Airways 2007/08 Annual Report and Accounts
Business review
This business review forms part of, and should be read in conjunction with,
the Directors’ report set out on pages 54 to 58.
Bring Terminal 5 alive
Terminal 5 represents our single biggest change and
challenge within BP10. In year one of the plan our ‘Fit for 5’
programme was set to be completed, securing the necessary
agreement changes and the implementation of greatly
improved working practices across the terminals at Heathrow.
A successful delivery of Terminal 5 continues to be the key
to improving our operational performance and enhancing the
customer experience at our Heathrow base.
BA Basics and Brilliance
To justify the premium we charge our customers we need
to deliver the ‘BA Basics’ consistently and offer ‘Brilliance’
in areas where it really counts. BP10 introduced an immediate
focus on punctuality and baggage performance, with further
plans to improve ‘BA Basics’ in a number of other areas for
the long term. To set ourselves apart from our competitors,
we particularly focused on offering ‘Brilliance’ to our customers
in several key areas including our network and schedule from
London, ba.com, customer service, our premium customer
experience and Terminal 5.
Competitive cost base
Controlling our costs remains a priority throughout BP10,
with savings expected across a number of areas of the
business. But BP10 particularly recognised the need to resolve
our pensions problem and reduce our significant deficit
position. Achieving a competitive cost base is critical if
we are to achieve our investment and growth plans.
Invest in growth
Subject to satisfactory resolution of the pensions deficit,
BP10 included plans to launch a competition for new longhaul
aircraft in the first year of the plan. We wanted to secure the
first of these aircraft in 2009 to meet specific growth plans,
while the second batch would be used to begin replacing our
fleet from 2011. We recognised the strategic importance
of our Gatwick and London City airport operations in BP10.
The retention of BA Connect’s London City operations, as
part of the sale of our regional business to Flybe, was key
to our network development plans from this airport.
BP10 enablers
Continued involvement and engagement of our people is
critical to the implementation of BP10. Local face-to-face
communication was recognised to be the most effective
type of engagement, and it formed a key part of our broader
communications strategy. IT remained the second key enabler
for change across the business. Our investment plans in this
area included Terminal 5, continued improvements in the
usability and functionality of ba.com, using Employee Self
Service to simplify and automate corporate processes and
supporting a wide range of departmental change programmes.
During the course of the year we drew up a new three-year business plan that builds on the priorities and themes of BP10. The new
plan, BP11, will take us through to the end of 2010/11. We describe the new plan in more detail on pages 34 and 35 of this report.
British Airways 2007/08 Annual Report and Accounts / 19
Our business plan – BP10
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Regulation
The international airline industry is subject to a high degree
of global, European and UK Government regulation covering
both commercial activity and operational standards.
UK airlines are regulated by the Secretary of State for Transport
and the Civil Aviation Authority (CAA), an independent statutory
body. Under the UK Civil Aviation Act 1982, the CAA is
responsible for supervising many aspects of an airline’s financial
condition, management and operations. European airlines are
also subject to 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 Member States.
International regulation of airline operations derives from the
Chicago Convention of 1944, which established the International
Civil Aviation Organization (ICAO). This is a specialist agency
of the United Nations, which fosters 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 are generally derived from the International Air
Services Transit Agreement of 1944. Rights to carry traffic
between countries and the regulation of fares are normally
agreed on a bilateral basis between governments.
Route flying rights
Our rights to carry scheduled passengers and cargo on
international routes outside Europe generally derive from air
services agreements between the UK Government and the
governments of the 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
.
Once an agreement has been reached, the UK Government
designates the airlines that will operate the agreed services.
We must also obtain the necessary operating permits from
the foreign governments concerned. These are unlikely to
be withheld so long as our operations meet the required
international safety standards. A government may have the
right to prevent an airline from operating the agreed services
if it is not satisfied that it is substantially owned and effectively
controlled by the other government or its nationals (commonly
referred to as the ‘nationality clause’). For this reason, our
Memorandum and Articles of Association contain provisions
that could be used to limit the rights of non-UK and non-
European nationals who own shares in British Airways Plc.
In order to comply with EU law, all new or revised bilateral
agreements signed by EU countries must contain a Community
designation clause in place of the nationality clause. This
clause allows any EU airline to apply for available traffic rights
between that EU Member State and the third country on
a non-discriminatory basis. Currently, most UK agreements
still reserve traffic rights to UK airlines, but this is changing
gradually as the agreements are renegotiated.
In 2003, EU Member States granted the European Commission
a mandate to negotiate changes to existing bilateral agreements
between Member States and third countries, to comply with
EU law. A general framework was also agreed covering the
processes whereby Member States may continue to negotiate
bilaterally with third countries.
Within the EU there is a single internal market for air transportation.
The most significant elements of this are a liberal pricing
regime, free access to all routes within the EU for airlines and
a carrier licensing procedure. EU single market policies extend
to the European Economic Area (EEA) comprising the EU,
European Free Trade Area countries and Switzerland.
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 on
international routes; and making the most effective use of UK
airports. The CAA grants global route licences for scheduled
and charter air services. The absence of the necessary bilateral
rights will not result in refusal to grant a licence application.
20 / British Airways 2007/08 Annual Report and Accounts
Business review continued
The markets we operate in
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.
EU – US Open Skies
A new multilateral agreement covering air services between
the EU and the US was signed on March 22, 2007. This first
stage agreement, which came into effect on March 30, 2008,
removes all restrictions on transatlantic flights by EU and US
airlines. It also grants rights for EU airlines to carry passengers
and freight from the US to third countries on services that
originate in the EU, and, in turn, for US airlines to carry passengers
and freight from EU to third countries (both within and beyond
the EU) on services that originate in the US. Talks on a second
stage agreement, which will aim to achieve further liberalisation,
commenced in May 2008.
Airport slots
Our ability to obtain slots at airports is critical to producing
schedules that are attractive to our customers. Allocation
of slots at a significant number of airports where we operate,
including Heathrow and Gatwick, is decided by the Airport
Coordinator, who acts in accordance with guidelines laid down
by the International Air Transport Association (IATA). These
guidelines give priority to the historic rights of existing users.
Airport Coordinators advise their slot allocations at the
biannual IATA Schedule Coordination Conference. These
allocations provide the basis for slot negotiations with the
Airport Coordinators and other airlines.
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.
We believe that we have sufficient slots to operate our existing
routes and generally we have been able to obtain slots to cover
previous route changes and expansions.
Fare setting
The CAA no longer regulates fares of UK carriers. But some
foreign governments still require all airlines to file and seek
approval of their fares. It is a widespread practice among
airlines to sell a substantial proportion of seats and cargo space
in many parts of the world at tariffs lower than the approved
levels or on other unapproved special terms. We respond
competitively to such market conditions and accordingly a
large proportion of our revenue is derived from such sales.
We continue to offer our customers interline passenger
and cargo services with other IATA airlines but we no longer
participate in IATA tariff conferences. Multilateral interline
passenger tariffs for scheduled journeys and tariffs for cargo
interline services are now determined through the IATA e-tariff
and Flex Fare mechanism.
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
(EASA) was set up to advise the European 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 meet a
short-term operational need without compromising safety.
In December 2006, EU-OPS 1 was published as Regulation
1899/2006. EU-OPS 1 basically transfers the operational
requirements and procedures from non-binding JAA requirements
into European law. It is anticipated that these will form the basis
British Airways 2007/08 Annual Report and Accounts / 21
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
A new multilateral agreement
covering air services between
the EU and the US signed
March 22, 2007, has enabled us
to launch our new OpenSkies
subsidiary.
of EASA regulations when competence for operations and
licensing is given to EASA. EU-OPS 1 comes into effect on
July 16, 2008.
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) currently
issued by the CAA, acting as a member of the JAA. The AOC
will continue to be issued by the CAA on behalf of the European
Commission or EASA. 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.
Maintaining our high safety standards is a key priority.
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 Head of Safety and Security. We have
a formal safety management system in place, and
we operate a comprehensive monitoring system
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. These measures often exceed both the
international standards developed by ICAO and EU regulations.
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 require us to meet specific security standards.
Our security department continuously assesses the threats
to our business, develops policies for the protection of our
operations and assets, directs our staff or agents to implement
appropriate countermeasures and monitors 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. Changes in customs,
immigration or other regulation may have the same effect.
Widespread passenger disclosure requirements and
enhanced security measures exist and continue to
be introduced by the EU and various governments
to help control terrorism and illegal immigration.
We engage actively with the European Commission,
the UK and other governments and airports to try
to minimise inconvenience to our customers while
maintaining the necessary level of security.
22 / British Airways 2007/08 Annual Report and Accounts
Business review continued
The markets we operate in
Our security department
continuously assesses the
threats to our business, develops
policies for the protection of our
operations and assets, directs
our staff or agents to implement
appropriate countermeasures
and monitors their effectiveness.
Environmental regulation
Our activities are covered by a comprehensive network of
regulations at local, national and international levels. These
cover emissions to the local and global atmosphere, disposal
of solid waste and aqueous effluents, noise and other relevant
factors. In managing our environmental performance we aim to
comply with these regulations as a minimum, but to exceed them
in a number of key areas. For further detail see the environment
section on corporate responsibility on pages 48 and 49.
Competition
Most of the markets in which we operate are highly competitive.
We face competition from other airlines on the same city-pair
routes, from indirect flights, from charter services and from
other modes 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, our pricing
decisions are affected by competition from other airlines,
some of which have cost structures that are lower than ours
or other competitive advantages allowing them to operate at
lower fare levels.
It is UK Government policy 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.
Commercial arrangements
We maintain commercial arrangements with other airlines
covering scheduled passenger and cargo services on a small
number of our international routes. Commercial arrangements
can govern, among other things, capacity offered by each airline,
how revenue is shared between airlines and how schedules are
coordinated. In very few cases, some commercial arrangements
between ourselves and other airlines are required under the
relevant air services agreements. For further details on some
of our key commercial arrangements see the key alliances
section on pages 28 and 29.
British Airways 2007/08 Annual Report and Accounts / 23
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
We maintain commercial
arrangements with other airlines
covering scheduled passenger and
cargo services on a small number
of our international routes.
The economic landscape
There has historically been a strong correlation between our
revenue performance and the health of the major economies
of the UK and US. This relationship has continued throughout
2007/08 as both these markets began to show signs of weakness.
The long awaited softening in the UK economy, which the Bank
of England had been trying to engineer through higher interest
rates, failed to materialise in 2007. Indeed, real GDP growth
accelerated to 3.1 per cent from 2.9 per cent in 2006.
But during the latter part of 2007, there was growing evidence
that the UK economy was approaching a turning point. The
financial market crisis had intensified, while high interest rates,
high household debts, and reduced credit availability were
finally starting to affect housing demand and prices. Against
this background, there were also signs that the long expected
slowdown in consumer spending had finally begun.
Economic slowdown really began to bite in the early part of
2008. The credit crunch has started to affect the real economy,
with households and businesses finding access to credit
materially reduced. Growth in the housing market has stalled,
and house prices have started to edge down. Rising fuel and
food prices have further squeezed real disposable incomes,
although retail sales have remained remarkably resilient. The
downside risks have increased, and growth is expected to slow.
The US economy experienced a clear softening in 2007, largely
as a consequence of problems in the residential housing sector,
which culminated in the sub-prime crisis. Conditions have
continued to deteriorate and at a faster pace, with consumers
hit by higher unemployment, rising energy prices, continued
problems in the housing market, and falling wealth. There are
also signs of weakness in the business sector.
The Federal Reserve has so far responded with aggressive
cuts in interest rates contributing to a further weakening of
the US dollar, particularly against the euro and yen. In addition,
the US Government has responded with significant tax cuts.
The competitor landscape
The airline industry remains highly competitive, with more
competition than ever before in a number of our market
segments.
Domestic and shorthaul
We face competition on the ground and in the air. There is a
clear relationship between shorter rail journey times and the
ability of train operators to capture a bigger share of the total
air/rail travel market. For example, between 2004 and 2007,
rail journey times between London and Manchester decreased
by 17 per cent and the train’s share of the total market grew
by 20 per cent.
The development of Eurostar services has had a significant
impact on air travel. With Eurostar now based at St. Pancras
International and journey times cut by up to 25 minutes,
customers will experience greater benefits from travelling
into city centre terminals by train.
Furthermore, increased awareness of the environment is
affecting demand in this market.
In the air, competition in shorthaul is mostly coming from the
budget airlines, who will soon account for more than half of the
London market. These carriers are now planning to increase
their fleets significantly, but only a small proportion of this
growth seems destined for the London markets, with focus
shifting towards intra-European services.
Traditionally, full service airlines have had two cabins, with a
premium and an economy cabin. In recent years, there has
been a move away from this configuration, with some airlines
removing premium cabins and others shifting to a hybrid three
class offer.
Private jets
Demand for private charter airlines meeting the needs of
business travellers is increasing. These services are premium/
luxury standard and entirely flexible, offering a fast and
efficient service from smaller airports.
24 / British Airways 2007/08 Annual Report and Accounts
Business review continued
The markets we operate in
Longhaul
The quality and number of competitors has grown in the last
five years. Competition will continue to increase.
While our traditional markets such as the UK
and the US will continue to be strong, new ones,
particularly India and China, look likely to grow.
The rise of the Gulf, as a destination and as the
home of key competitors, is expected to intensify.
We are also starting to see the first successful steps
towards airline consolidation in Europe with the
mergers of Air France/KLM and Lufthansa/Swiss.
Mainstream competitors have begun to invest in their
products, focusing on inflight entertainment and new seat
technology. New aircraft, in particular the Airbus A380,
will offer opportunities for further product upgrades.
Full service carriers continue to invest in special facilities
for premium passengers, in some cases creating dedicated
premium terminals.
Premium-only carriers
The operation of premium-only services became a high profile
activity in 2005 with the almost simultaneous launch of the
US carriers Eos and MAXjet with a focus predominantly on
the London-US market, especially London-New York.
Despite their appeal to consumers, these carriers have not
proven commercially sustainable and have both collapsed
in recent months.
Low cost longhaul carriers
Dedicated low cost airlines still remain a rarity in the longhaul
segment, and most are linked to charter or tour companies.
Indeed, it could be argued that existing charter airlines have
already been serving the low cost longhaul segment for
some years.
The consumer landscape
Consumer expectations and spending power continue
to rise. Consumers are leading increasingly complex and
busy lives. As pressure on their time grows, leisure time will
become increasingly precious to them. An ageing population
also means that there will be a greater number of older people
with the wealth and health to travel more. There will also be
growth in the affluent, younger segment.
An increasing proportion of our customers are
e-literate. The development of broadband and mobile
technologies will make it easier for them to access
information quickly and change the way they buy
goods and services. Social networks will become
increasingly important with consumers relying more
on peer advice than traditional advertising when
making purchase decisions. Environmental concerns
are moving higher up the agenda, with consumers
expecting brands to be environmentally responsible.
Consumer travel and purchase behaviour
People are taking more holidays. Short breaks – many arranged
independently – are growing particularly strongly. Although
the package holiday is not dead, there has been a significant
increase in the number of consumers creating trips and
holidays for themselves.
The value of trips booked online shows the strongest growth.
The internet has undoubtedly been the single biggest influence
on changing the way we research and buy products, goods
and services.
British Airways 2007/08 Annual Report and Accounts / 25
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
People are searching for products
and services that make their lives
less complex and challenging.
They are also looking to punctuate
their busy lifestyles by taking time
out to escape their hectic routines
or to reward themselves for dealing
with the pressures of the day.
Changing consumer trends
Consumers are living increasingly fast, full and flexible lives.
The boundaries between work and leisure are blurring and,
for many people, time and personal energy have become the
most valuable resources in daily life. Many of our products and
services are designed to help customers make the best use of
their time – whether on the ground or in the air. For example,
we have smooth and fast check-in processes for all, and
fastrack departures and lounges for premium customers.
Consumers are looking for ways to control their energy
levels and to save time by doing tasks more quickly or by
outsourcing them. That’s why, in our lounges at Heathrow and
New York JFK we now offer a concierge service for customers
to help them while they are on the move.
People are searching for products and services that make their
lives less complex and challenging. They are also looking to
punctuate their busy lifestyles by taking time out to escape
their hectic routines or to reward themselves for dealing with
the pressures of the day.
Award-winning ba.com allows customers to research, book
and manage their travel whenever they need – while at home
or when travelling. We are constantly developing and adapting
our site to respond to the changing needs of our customers.
Health and wellbeing
There is a growing interest in health and wellbeing, a trend
strongly associated with increasing affluence and with an
ageing population. Good health underpins personal freedom,
and is naturally a big priority as people get older.
Alongside health, people are concerned about individual safety
and international security. For travellers these fears include
the threat of global conflicts, terrorism, the impact of climate
change, environmental disasters like the tsunami or the New
Orleans floods and health threats such as bird flu and SARS.
Many people are now focusing on developing their emotional-
wellbeing, contentment and quality of life. Consumers increasingly
expect more basic needs to be fulfilled and thus have higher
expectations of their overall wellbeing than previous generations.
Our ‘Well Being in the Air’ programme provides customers
with information to help them reach their destination feeling
healthy, refreshed and relaxed. We also offer a series of
podcasts from our resident sleep expert ‘Dr Sleep’ to help
people manage the effects of jetlag. Our wellbeing information
is available on both ba.com and onboard through our inflight
entertainment programme, Highlife.
Professional consumers
Consumers are becoming more demanding and sophisticated in
their shopping patterns. As markets become more competitive
and spending power increases, the balance of power is shifting
from supply to demand, giving consumers the upper hand.
We offer a range of products and services to meet the differing
demands of our customers. This ranges from different cabins,
to choices on how customers book and manage their travel,
to the service offered on board.
Despite the increasing affluence of consumers, value remains
a critically important factor in their choices. Equally they are
prepared to ’trade up’ and pay a premium price for better
quality products. Many brands are responding to this by
offering more luxurious and more expensive versions of
everyday commodities. For customers who want to treat
themselves, we have recently introduced attractive and popular
Club Europe upgrade prices for a range of leisure destinations
and will continue to look at options to extend this further.
Communication channels
The overload of available information is forcing consumers to
think about the communications and the information sources
they use. Increasingly they are choosing for themselves what
media and communications tools suit them. Digital technology
has made it easier for them to be creative in developing their
own content, and in sharing their ideas with others, for instance
by turning to peer networks for word-of-mouth recommendations.
We are experimenting with our own ‘Google gadget’ so that
customers can have the latest flight and operational news and
offers built into their Google homepage. We continue to look at
other ways that we can harness the knowledge and experience
of our customers and staff for social networking and blogging.
26 / British Airways 2007/08 Annual Report and Accounts
Business review continued
The markets we operate in
Commercial
Our Commercial team is responsible for managing revenue and
pricing, sales, marketing and distribution, as well as planning
our fleet and network.
Revenue Management monitors and controls the sale of seats
to improve our overall profitability. It also sets the pricing
structure to ensure that, in all the countries across our network,
we offer the right mix of prices and a flexible range of products.
Our sales force develops and maintains relationships with key
customer groups and intermediaries using account management
teams around the world. Product information, fares and
schedules are distributed either through travel agents using
global distribution systems, direct through the contactBA
call centres and, increasingly, through our website, ba.com.
Our Marketing and Distribution team develops, designs,
delivers and promotes our products and services. This team
sets our distribution and booking channel strategy, including
managing ba.com and relationships with the major global
distribution systems. It also includes the management of
our subsidiaries, British Airways Holidays and Air Miles.
Fleet Planning develops our fleet strategy. It determines when
we need to acquire or dispose of aircraft to ensure we have the
right fleet to meet our network requirements. Network Planning
develops our schedule to maximise network profitability, plans
the requisite infrastructure and manages our slot portfolio
across the network.
Engineering
Our in-house engineering function manages and maintains our
fleet of aircraft and provides limited services to other operators.
Our main base is located on the east side of Heathrow airport,
where aircraft management, technical and support staff are
located. The main base has extensive facilities to service and
repair our Heathrow-based fleet. We have a second, smaller
maintenance base at Gatwick to support the fleet based there.
Heavy overhaul facilities for Boeing 747, 767, and 777 aircraft
are located at Cardiff, Wales, and at Glasgow, Scotland, for
Boeing 737 and Airbus A320 family aircraft. In addition, we
have component overhaul facilities in Wales and London.
We retain a significant in-house engineering capability to support
our fleet, but we also outsource maintenance where it is higher
quality or more competitive to do so.
Flight Operations
Our Flight Operations team is responsible for the safe
operation of our fleet and is responsible for the recruitment,
training and support functions for our pilot community.
Approximately 2,900 of our pilots are based at Heathrow,
with a further 350 based at Gatwick.
To ensure we operate our aircraft as safely and
efficiently as possible, a team of technical experts
works closely with the aircraft manufacturers and
our own engineers to create and maintain the policies
and standards to which we operate our aircraft. Flight
planning specialists create the routing, performance
and briefing material for our 400 departures per day.
Within Flight Training we run 14 full-flight and four fixed-base
simulators. We provide all of our own training requirements,
but also generate revenue by selling simulator facilities to other
airlines, corporate customers and the general public. A team of
fleet-specific training managers is responsible for the management
of all recurrent and conversion training.
Operations
Our Operations team is responsible for the planning and control
of the worldwide operation, with ultimate accountability for
network punctuality and baggage performance. It is responsible
for the planning of ground resources and of both flight and cabin
crew. The team is also responsible for operational scheduling
of aircraft, ensuring they are available to fly the schedule and,
with Engineering, for maintenance. Control of this operation is
particularly important when the schedule is disrupted, for example
,
due to weather conditions. At such times it is our Operations
team that decides how to reschedule aircraft, crew and resources.
Operations also incorporates British Airways World Cargo
(BAWC), responsible for our cargo network. The majority of
cargo is carried in the holds of passenger aircraft, with the
British Airways 2007/08 Annual Report and Accounts / 27
The way we run our business
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
balance in third-party freighter aircraft. In the UK, BAWC
has handling facilities at Heathrow, Gatwick and Stansted
airports. With the exception of the US, all overseas handling
is subcontracted.
Customer Service
The Customer Services directorate was created in November
2007 as part of our commitment to upgrade the customer
experience. The new directorate brings together all staff
involved in the customer journey, including contact centres,
customer relations and passenger services on the ground and
in flight.
At our main hub, Heathrow, our passenger services team
is responsible for check-in, boarding and special services
including assistance for children travelling alone and passengers
with disabilities. The worldwide airport solutions team ensures
the same level of service is provided by our third-party agents
at airports around the network.
Throughout 2007/08, customer service staff prepared for our
move to Terminal 5. These preparations included, amongst
other things, improvements at our contact centres to support
increased online check-in and training on new processes and
systems in the terminal.
Information Management
IT is increasingly important to us. It is helping us to reduce
costs, simplify our processes and automate complex manual
tasks. Our website, ba.com, provides customers with the ability
to book and check-in for flights online and, thanks to recent
developments, now also provides revenue from ancillary sales.
There has been significant investment in IT at Terminal 5. This
includes both infrastructure to run the terminal and systems
to ensure passengers are ‘ready to fly’ before they reach the
airport. Self-service check-in will eventually reduce queues and
significantly improve the airport experience for our customers.
IT has transformed the way all our staff interact, thanks to our
Employee Self Service (ESS) programme. Almost all our staff
now use ESS every month and the system will eventually
become the place where everyone can find the information
and systems they need to do their job.
IT also plays an important role in helping us manage our
environmental impact. The power used by our data centres
has remained the same despite a big increase in the number of
processors we use. Our new notebook laptops are 70 per cent
more power efficient and personal computers are automatically
powered off overnight. Whenever we dispose of PCs and
laptops we follow ‘Waste – Electrical & Electronic Equipment’
(WEEE) principles and we donate reconditioned PCs to
charities we support in the UK and overseas.
Key alliances
Qantas
Under the Joint Services Agreement (JSA) there is full strategic,
tactical and operational cooperation between ourselves
and Qantas on all flights that serve markets between the
UK/continental Europe and Southeast Asia/Australia. This
cooperation provides our customers with improved flight
departure times, routings and value for money, and means we
can offer the very best of customer service to all passengers.
In June 2005, the Australian Competition and Consumer
Commission extended permission for us to cooperate in
this way for a further five years, valid from February 2005.
We continue to work with Qantas to coordinate sales and
marketing activities worldwide. We share all costs and revenues
on the JSA routes, providing both companies with an incentive
to improve the joint business.
American Airlines
We currently codeshare with American Airlines on points
behind and beyond our respective US and London gateways.
We now place our code on more than 120 American Airlines
routes, whilst American Airlines applies its code to more than
80 of our routes. However, we continue to compete with
American Airlines on North Atlantic routes.
We have recently announced we are exploring opportunities
for cooperation with American Airlines and Continental Airlines.
28 / British Airways 2007/08 Annual Report and Accounts
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The way we run our business
Iberia
Under the Joint Business Agreement (JBA), on the Heathrow-
Madrid and Heathrow-Barcelona routes, our cooperation with
Iberia provides customers with improved schedules and value
for money. Together with Iberia, we codeshare on more than
30 domestic and international routings.
During 2007/08, we joined a Texas Pacific Group-led consortium
which considered making an offer for the equity of Iberia.
However, the consortium eventually decided not to make a
formal offer. During the year, we increased our shareholding
in Iberia from 9.95 per cent to 13.15 per cent.
Alliance and codeshare relationships
At March 31, 2008 the oneworld alliance included 10 airline
members: British Airways, American Airlines, Cathay Pacific,
Finnair, Iberia, Japan Airlines, LAN, Malev, Qantas and Royal
Jordanian. Aer Lingus left the alliance on April 1, 2007, although
we have maintained our bilateral codeshare relationship with
the airline.
The oneworld alliance offers a substantial package of
customer benefits, including reciprocal reward and recognition
programmes, common lounge access, smoother transfers,
increased customer support and greater value.
In addition to the above activities, during 2007/08 we
maintained codeshare relationships with oneworld members,
Cathay Pacific, LAN, Malev, Japan Airlines and Finnair.
In terms of relationships outside the oneworld alliance, we
have maintained codeshare relationships with bmi, Brussels
Airlines and Flybe. The relationships with Flybe and bmi were
formed during the year, following the sale of BA Connect and
termination of the BMED franchise respectively. Additionally,
Caribbean Airlines and TAAG place their code on our services
to Port of Spain and Luanda.
Franchising
As at March 31, 2008, we operated with three franchise
partner airlines: Loganair in the UK, Sun Air in Scandinavia and
Comair in South Africa. These three carriers carried 2.3 million
passengers during the year to 38 destinations (including
24 destinations not served by our own network) in the
UK, continental Europe, and Africa. In addition to providing
connecting passengers to our own mainline services, the
franchisees pay a fee to us and also pay for any services
we provide to them.
BMED and GB Airways also operated under franchises for part
of the year, prior to the termination of our agreements with
them. The latter arrangement was terminated on March 28,
2008 following easyJet’s acquisition of 100 per cent of the
share capital of GB Airways.
In October 2007, Loganair announced that it will cease to be
a British Airways franchise operator from October 2008. We
expect to maintain a codeshare relationship with Loganair
when the franchise ends.
British Airways 2007/08 Annual Report and Accounts / 29
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
At our main hub, Heathrow,
our passenger services team is
responsible for check-in, boarding
and special services including
assistance for children travelling
alone and passengers with
disabilities.
We have established a balanced
set of performance indicators
for our business, both financial
and non-financial, to improve
our performance over time. As
part of the business planning
process, and in line with our
agreed strategic objectives, the
Board sets annual targets for
each of these key performance
indicators (KPIs).
Our key performance indicators
30 / British Airways 2007/08 Annual Report and Accounts
British Airways 2007/08 Annual Report and Accounts / 31
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Financial
Customers
Operations
Employees
Customer recommendation is a key measure of our success.
Our Global Performance Monitor (GPM) survey, an onboard
customer survey covering all the key stages of the flight
experience, together with a follow-up online survey on the
arrivals process, provides monthly insights into customers’
views. The survey is carried out by GfK NOP, the independent
market research company, and involves more than 55,000
customers each month.
The customer recommendation measure is based on the
percentage of customers who, when surveyed, would highly
recommend British Airways to friends, family or colleagues.
Apart from being extremely important in its own right,
we believe that this measure indicates how the customer
experience will affect future profitability. Our target for
2007/08 was for 63 per cent of customers to be ‘extremely
likely’ or ‘very likely’ to recommend British Airways.
Progressive, high performing organisations are increasingly
recognising that involved employees are more committed to
organisational goals and values, and more willing to embrace
change and improve customer service. Last year we started
using an Employee Involvement index, as measured by an all-
employee Speak Up! survey. This is run twice a year, with a full
version in September and a shorter tracker version in March.
The Speak Up! surveys are conducted and hosted by the
independent research organisation, Ipsos MORI, and are
completely confidential. As a business we aim to match
the involvement scores of other leading service sector
organisations, and a target of 73 per cent for Employee
Involvement was set for 2007/08.
We must run a robust operation if we are to meet our
customers’ expectations and create a cost-effective business.
Having Heathrow at the heart of our operations, with all its
infrastructure constraints, puts a significant strain on delivering
operational excellence, day in, day out.
Within our business plan we have focused our efforts on five
key areas of operational delivery – the ‘BA Basics’. Among
these, departure punctuality is our primary operational
performance measure. Punctuality ensures other operational
processes run smoothly and remains a key factor in whether
customers would recommend British Airways to other travellers.
We call our chosen measure of punctuality ‘Ready to Go’. This
measures how many of our flights are prepared for departure
at three minutes before the scheduled departure time. So
many issues can have an impact on punctuality, but using this
measure ensures we focus on the aspects of the departure
process within our control. The target range for ‘Ready to Go’
punctuality for 2007/08 was set at 44-48 per cent.
We must achieve a consistent, strong financial performance
if we are to continue investing in the future success of the
business and reward our shareholders through the payment
of a dividend. Operating margin – which we define as operating
profit divided by revenue expressed as a percentage – is the
main way we measure our financial performance.
In 2002 we set ourselves a target of achieving a 10 per cent
operating margin through the economic cycle. In 2007/08
we set ourselves the goal of hitting a 10 per cent margin for
the year for the first time.
The following KPIs were set for 2007/08, with our performance against them detailed on pages 32 and 33.
32 / British Airways 2007/08 Annual Report and Accounts
Business review continued
Our key performance indicators
Financial
Customers
Operations
Employees
Linking with our strategy Achievements in 2007/08
Despite weakening economic conditions and
increasing fuel prices in the second half of the
year, we focused on establishing a competitive
cost base as part of the BP10 business plan to
ensure we achieved record profits for the year.
Delivery of the ‘BA Basics’ as part of the
business plan is at the heart of our strategy
for improving our operational performance.
Punctuality, baggage performance, aircraft
cleanliness, smooth connections and the
reliability and product offering of our inflight
entertainment systems are the key areas
of focus.
BP10 redefined our customer promise
under the banner of ‘BA Basics and Brilliance’.
This focused everyone in the business on
delivering the ‘BA Basics’ to customers day in,
day out, and developing products and services
that offer ‘Brilliance’ where it really counts.
An involved and motivated workforce is a
key enabler to achieving the objectives in
our business plan. Investing in and developing
our people, through training and by ensuring
all employees are equipped to do their jobs,
is a fundamental building block in support
of our plans.
We delivered record profits and an operating
margin of 10 per cent in 2007/08.
‘Ready to Go’ performance averaged at
34 per cent during 2007/08, with a peak
of 65 per cent in January 2008. This was
a disappointing performance, which fell
short of our target for the year.
We achieved a customer recommendation
score of 59 per cent during the year. This
represented a fall of 2 points on the previous
year, largely because of a disappointing
performance on the ‘BA Basics’, particularly
at Heathrow.
The results of the MORI Speak Up! survey
in September 2007 showed our Employee
Involvement Index at 65 per cent.
British Airways 2007/08 Annual Report and Accounts / 33
2008/09 will be a year of transition as our operations transfer between terminals
at Heathrow. However, we are determined to deliver an improved customer
experience and Terminal 5 will be a significant step in this direction, providing a
fantastic opportunity for our customers and our employees.
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Understanding our KPIs going forwardPerformance over time KPI measure
2007/08
2006/07
2005/06
2004/05
2003/04
10.0%
7.1%
8.5%
6.9%
5.4%
2007/08
2006/07
59%
61%
34%
36%
2007/08
2006/07
2007/08
2006/07
65%
70%
Operating margin will continue to be our key financial
performance indicator. A more challenging economic
outlook, the continuing rise in the price of fuel, and
transitional costs relating to our move to Terminal 5
will all contribute to a reduction in our operating margin
in 2008/09.
Departure punctuality is key to our operational success,
and focusing on the aspects within our control is critical.
‘Ready to Go’ performance does precisely that. A key
driver of improved network punctuality over the next
year is the performance at Heathrow. The move to
Terminal 5, with its associated infrastructure and
process changes, will begin to play a huge role in
delivering improvements in this area.
Customer advocacy – the likelihood of customers to
recommend travel on British Airways – will continue
to be our key customer metric in 2008/09. The move
to Terminal 5, coupled with the continued investment
in our inflight products and customer service on the
ground, give us the opportunity to deliver improvement
in this indicator over the next year.
We are currently reviewing the appropriate measure
going forward for determining the level of employee
involvement.
Operating margin
Punctuality –
‘Ready to Go’
Customer
recommendation
Not applicable
Our new business plan – BP11 – sets the direction we will
take for the next three years.
It sets out four key priorities which build on last year’s plan:
an upgraded customer experience; planning for growth; the
continuing need to control our costs; and taking a lead in
corporate responsibility.
Delivering an upgraded experience to all of our customers – not
just through Terminal 5 but through all aspects of our customer
service – is absolutely fundamental to our long-term success.
BP11 also recognises the need to grow our business, and
in 2008/09 we will take delivery of our first new longhaul
aircraft since 2001.
To afford this investment in new aircraft and services, we
need to control our costs. Faced with rising fuel costs and
an economic slowdown in some of our key markets, this
will be more important than ever before.
Finally, BP11 includes a new theme of corporate responsibility.
We are determined to demonstrate we can grow in a responsible
way and we will be doing and investing even more to manage
our environmental impact.
An upgraded customer experience
Improving the service we give to our customers is central to
our success as a business. Last year we introduced the idea
of doing the basics better, and adding brilliance where it really
matters to our customers. Terminal 5 is central to this, but our
investment will not be limited to Terminal 5.
We are improving the service we offer our premium customers.
The new Club World product that began its roll out in 2007
saw the start of this. Initial feedback from customers has been
very positive. We will continue to invest at this level during the
life of BP11 to complete the roll out of the Club World product
across the remainder of the longhaul fleet. In 2009 we will
introduce a new First cabin. In addition, we will be investing in
our terminal at New York JFK and in a number of our lounges
worldwide, complementing our new Galleries lounge in
Terminal 5.
Another priority is to improve the way we look after customers
when things go wrong. We know from experience that brilliant
service recovery can turn frustration into loyalty and genuine
gratitude.
Within our airline operations, delivering the basics means a
focus on operational excellence in all the activities on the
ground. In particular we are focused on regularity – which
means operating the programme as planned – punctuality and
baggage performance, all to the highest possible standards of
ground safety.
In this business plan, Terminal 5 is critical to achieving
operational excellence. We will continue to work hard to get
this new facility working to its real capabilities. Ahead of its
opening we had spent more than three years and £300 million
developing new systems for the terminal.
To overcome the early problems we encountered
with some of these systems, we have continued
this intense work. And we believe Terminal 5 will
progressively transform the experience for our
customers, taking away the stress of travelling
through the airport.
But Terminal 5 is not the only part of our operation where
we will be striving for operational excellence. At various
times during the first year of BP11 we will also be operating
in Terminal 1, Terminal 4 and Terminal 3 at Heathrow, and,
with all of the planned moves, we will make sure we deliver
the highest possible standards of service there too. At Gatwick,
punctuality and baggage performance remain two areas where
we can stay ahead of our competitors. We will therefore be
focusing on maintaining our excellent recent record of operational
performance at Gatwick as we launch new routes from the
airport this year.
Operating as one team across the world, we are committed
to delivering on the promise of much better service to all
our customers.
34 / British Airways 2007/08 Annual Report and Accounts
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What the future holds
British Airways 2007/08 Annual Report and Accounts / 35
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
A plan for growth
Successful businesses are growing businesses. We have clear
plans to modernise our aircraft fleet and offer new services.
Last year we announced a new order for longhaul aircraft
worth more than £4 billion. These will both replace existing
fleet and expand our overall longhaul capacity. These aircraft
are quieter, greener and more efficient and will establish a new
gold standard for environmental performance. In 2008/09 we
expect to launch a competition for additional longhaul aircraft,
due for delivery in the second half of the decade.
To get the most of our investment in a modern fleet, we need
Heathrow’s capacity to grow. That is why we have strongly
backed the government’s plans for expanding the airport at
Heathrow with a proposed third runway.
Over the course of BP11, we will launch services to 13 new
destinations from Gatwick. We have purchased two new
Airbus A318s to offer business class-only flights between
London City airport and New York. Finally, through our new
subsidiary OpenSkies, due to launch in June of this year, we
will fly directly between continental Europe and the US.
Competitive cost base
In the last five years we have worked hard to improve our
financial position so that we can invest in new products
and services, and grow our business for the future.
We have to keep investing to stay ahead of the competition.
But we will also need to stay in healthy financial shape to
protect ourselves from the impact of a global economic
slowdown and higher oil prices.
The price of fuel has almost trebled in five years. In 2007/08
our fuel bill was in excess of £2 billion for the first time. This
financial year it will rise significantly again, and will represent
around a third of our total costs.
Over the last few years, significant cost savings have been
made across the business to offset the higher cost of fuel.
Given the financial headwinds expected next year, we will
continue to focus on maintaining a competitive cost base.
Corporate responsibility
BP11 establishes corporate responsibility as a new priority
for our business. We will be doing even more to address our
environmental impact. This will include cutting our carbon
emissions further; reducing and recycling waste; minimising
our contribution to air and noise pollution; and continuing to
invest in our community relations programme.
Our partnership in the London 2012 Olympic and Paralympic
Games will be the focus for some of our community activities,
including community work in East London and the launch of
a travel bursary scheme for young athletes.
We are putting corporate responsibility centre stage because we
believe it matters and will help us stand out from our competitors.
We intend to lead our industry in corporate responsibility.
We are improving the service
we offer our premium customers.
The new Club World product that
began its roll out in 2007 saw the
start of this, and First will be
relaunched next year.
The operational complexities inherent in our business, together
with the highly regulated and commercially competitive
environment of the airline industry, leave us exposed to a
number of risks. Many of these risks – for example, changes in
governmental regulation, acts of terrorism and the availability
of finance – can be mitigated to a certain degree but remain
outside of our control.
The directors of the Group believe that the risks and uncertainties
described below are the ones that could have the most
significant impact on the long term value of British Airways.
The list (presented in alphabetical order) is not intended to
be exhaustive.
Brand reputation
Our brand is of significant commercial value. Erosion of the
brand, through either a single event, or series of events, could
adversely impact our leadership position with customers and
ultimately affect our future revenue and profitability.
Capital investment
A wrong decision in respect of our planned fleet growth, in
terms of timing, aircraft numbers or fleet type, could have
a material adverse impact on our future performance.
Competition
The markets in which we operate are highly competitive. We
face competition from other airlines on our routes, as well as
from indirect flights, charter services and from other modes
of transport. Some competitors have cost structures that are
lower than ours or have other competitive advantages. Fare
discounting by competitors has historically had a negative
effect on our results because we are generally required to
respond to competitors’ fares to maintain passenger traffic.
Consolidation/Deregulation
Mergers and acquisitions amongst competitors have the potential
to adversely affect our market position and revenue. Certain
markets in which we operate remain regulated by governments,
in some instances controlling capacity and/or restricting
market entry. Relaxation of such restrictions, whilst creating
growth opportunities for us, may negatively impact margins.
Environment
Failure to adopt an integrated environmental strategy could
lead to a deterioration in our reputation and consequential loss
of revenue. An increased focus on corporate responsibility and
a published emissions reduction target will help deliver the
refocused strategy.
Financial commitments
We carry substantial debt which will need to be repaid or
refinanced. Our ability to finance ongoing operations, committed
aircraft orders and future fleet growth plans may be affected by
various factors including financial market conditions. Although
most of our debt is currently asset-related, there can be no
assurance that aircraft will continue to provide attractive
security for lenders in the future.
Fuel price
We use approximately six million tonnes of jet fuel a year.
Volatility in the price of oil and petroleum products can have
a material impact on our operating results. This price risk is
partially hedged through the purchase of oil and petroleum
derivatives in forward markets, which can generate a profit
or a loss.
Global economic slowdown/Credit crunch
Our revenue is highly sensitive to economic conditions in the
markets in which we operate. The financial services sector is
one of our key customer segments and recent difficulties in
the banking industry represent a significant risk to our revenue.
Government intervention
The airline industry is becoming increasingly regulated. The
scope of such regulation ranges from infrastructure issues
relating to slot capacity and route flying rights, through to new
environmental and security requirements. Our ability to both
comply with, and influence any changes in, these regulations is
key to maintaining our operational and financial performance.
36 / British Airways 2007/08 Annual Report and Accounts
Business review continued
Principal risks and uncertainties
British Airways 2007/08 Annual Report and Accounts / 37
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Heathrow and Gatwick airports and economic regulation
Our main operating bases, Heathrow and Gatwick, are subject
to economic regulation by the UK CAA. The CAA sets the
maximum level of airport charges, the airport's capital
investment programme and service quality standards for five-
yearly periods. A new five-yearly settlement came into force
on April 1, 2008. Significant benefits of the settlement include:
•
Major new capital investment that would be of benefit to our
business for example Terminal 5’s Satellite C, an automated
transfer baggage link to Terminal 3 where our other Heathrow
services and oneworld partners are due to operate, and
allowance for ‘mixed mode’ use of Heathrow’s existing two
runways and investment in a third;
•
A major cut in the cost of capital allowance for the airports
– which reduces our airport charges; and
•
Raising and extending service quality standards, which
benefits our operations and customer service.
But the settlement also includes a large rise in allowed
airport operating costs – which adds to our airport charges.
It is unclear if this settlement will stay in place as some other
airlines are considering instigating a judicial review in 2008
which may lead to changes. We will seek to protect our
interests should such a review take place.
In parallel, the UK Competition Commission is holding an
inquiry into the UK airports market – notably BAA’s airports
in SE England and Scotland.
This inquiry is expected to issue its formal report in 2008 and
must do so no later than March 2009. The report may lead to
wide-ranging structural changes to the regulatory arrangements
and to the ownership of airports. It may also involve a period
of uncertainty during implementation if the Commission’s
recommendation is contested by the parties.
We will continue to put the case for a strengthened regulatory
structure (with licence requirements on the regulated airports).
We will also campaign for the right regulatory or ownership
structure to make sure neither prevents urgent attention being
given to expanding Heathrow and transforming it into a modern
and globally-competitive hub.
Heathrow operational constraints
Heathrow has no spare runway capacity and operates on the
same two runways it had when it opened 60 years ago. As a
result, we are vulnerable to short-term operational disruption
and there is little we can do to mitigate against this. In February
2008 public consultation ended on the UK Government's
conclusion that its environmental conditions on Heathrow
expansion could now be satisfied and allow full utilisation of
Heathrow's two runways and the construction of a short third
runway to go ahead. This would create extra capacity and
reduce delays, enabling Heathrow to compete more effectively
against European hubs like Paris, Amsterdam and Frankfurt.
Industrial relations
We have a large unionised workforce. Collective bargaining takes
place on a regular basis and a breakdown in the bargaining
process could disrupt operations and adversely affect business
performance. Our continued effort to reduce employment
costs, through increased productivity and competitive wage
awards, increases the risk in this area.
Pandemics
Epidemics, pandemics and other health risks that may occur,
can adversely affect demand for air travel. For example, in
the Spring of 2003, the SARS epidemic caused concerns
among many travellers and resulted in a decline in demand for
certain of our routes, most notably those to/from the Far East.
Infectious disease experts consider that there is currently a
serious risk of a global influenza pandemic.
Safety/Security incident
The safety and security of our customers and employees are
fundamental values of ours. Failure to prevent a major safety
or security incident could adversely impact our operations
and financial performance. One of our Boeing 777 aircraft was
involved in a landing accident in January 2008. Investigations
by the UK AAIB are ongoing but at this stage the cause
does not appear to be related to either the operation or
maintenance of the aircraft.
In February 2008, public
consultation ended on the UK
Government’s conclusion that
its environmental conditions on
Heathrow expansion could now be
satisfied and allow full utilisation
of Heathrow’s two runways and
the construction of a short third
runway to go ahead.
Our corporate responsibility
vision is to become the world’s
most responsible airline, and
we have developed guiding
principles that describe what we
are doing to achieve this goal.
38 / British Airways 2007/08 Annual Report and Accounts
Corporate responsibility
This report covers the activities of British Airways’ passenger and cargo
businesses and it forms part of, and should be read in conjunction with,
the Directors’ report set out on pages 54 to 58.
British Airways 2007/08 Annual Report and Accounts / 39
The highlights of our corporate responsibility
activities in 2007/08 are summarised under four
headings – workplace, marketplace, environment
and community investment.
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Governance
In November 2007, we created
a new corporate responsibility
department, bringing together our
former Community Relations and
Environment teams. The activities
of the team are overseen by our
Corporate Responsibility Board
(CRB), which is chaired by our Chief
Executive, Willie Walsh and attended
by Baroness Kingsmill, a non-executive
director. In addition, the CRB includes
representatives of health and safety,
as well as people with responsibility
for emerging issues such as climate
change, whistleblowing, responsible
procurement and fuel management.
The CRB, which meets quarterly,
is supported by the Corporate
Responsibility Team and Corporate
Responsibility Champions drawn
from across the business. Their
work is further supported by a
variety of steering groups including
health and safety, diversity, disability,
procurement, fuel, environmental
management and information
technology.
Strategy
Our approach to corporate
responsibility has three main
components – the vision, goals
and programme plan.
Our activities are centred in four
key areas:
•
Workplace – ensuring that we provide
sustainable employment for current
employees and become the employer
of choice for future employees;
•
Marketplace – working with
suppliers and customers to build
a more sustainable business;
•
Environment – making sure
we minimise our impact on
the environment, including our
contribution to climate change,
air quality, noise and waste; and
•
Community investment activities –
supporting diverse projects that
help to make communities in the
UK and overseas more sustainable.
We have identified performance goals
to measure our progress in each of
these four areas.
Finally, we have developed a
programme plan containing over
80 programme level activities and
several hundred individual projects
aimed at delivering our corporate
responsibility strategy.
Communications
In January 2008, we upgraded our
corporate responsibility website
‘Respecting our World’. The site
features the four key corporate
responsibility areas of workplace,
marketplace, environment and
community investment. It also
provides information on responsible
growth for aviation, future Heathrow
development plans and information
on responsible travel.
Also, in January 2008 we upgraded
significantly our carbon offset
scheme for passengers, introducing
a highly-visible, ‘one click’ option
into the booking process on ba.com.
Further information on our approach to corporate responsibility is available on ba.com.
People and organisational effectiveness
A new change programme
We have recently embarked on a culture change programme
that will transform British Airways into an organisation where
innovation, growth and clear customer focus are the defining
qualities.
The programme has five main themes:
•
Colleagues – engaging our people to make British Airways
a high performance workplace;
•
Customers – focusing all our people to deliver consistent
customer service;
•
Partnerships – developing and maintaining world-class
partnerships with all key stakeholders, both internal and
external;
•
Performance – creating a performance-based culture; and
•
Operational efficiency – driving continuous improvement,
short and long-term.
This work, led by the Leadership team, involves and engages
employees right across our business.
Training
We delivered 235,000 days of training during the year, including
30,000 training days to staff at Heathrow to support our move
to Terminal 5.
We have invested significantly in the development of our
customer service training portfolio and have developed a
programme for those working in our Club and First cabins.
Developed as part of a brands refreshment exercise, the
programme aims to make sure cabin crew deliver the highest
standards of service to our customers.
Over the past year, some 3,100 people have joined our
Company. This has required a high level of induction training.
We have refreshed our new entrant training programmes to
make sure they reflect the priorities in our business plan.
External accreditation of our training programmes
Following the government review of vocational education,
led by Lord Leitch, we have explored how we can invest more
effectively in the development of our employees to build both
their skills and educational standards. We have become the
first national airline recognised as a training centre by the City
& Guilds and, from February 2008, all new entrant cabin crew
will achieve an NVQ Level 2 qualification on completion of
their training. It is envisaged that further internal training
programmes will become accredited and that employees
undertaking courses will achieve nationally recognised
qualifications.
Colleague involvement
Employee involvement continued to be a key focus during the
year. Employees are asked to give their views and opinions on
a wide range of topics every year via the Speak Up! opinion
survey, administered by Ipsos MORI. The results from the
survey are communicated widely and all departments are
required to produce action plans to address areas of concern.
Results from the last survey showed significant improvements
over the 12-month period in the perception of the effectiveness
of line managers. However, despite these positive trends, the
overall response rate to the survey – at just 35 per cent –
was low. Employees expressed concerns about our ability to
provide excellent customer service, reflecting some of the
difficulties over the summer caused by increased security
arrangements at UK airports.
40 / British Airways 2007/08 Annual Report and Accounts
Corporate responsibility
The workplace
One of our main aims this year is to increase the number of
people responding to the survey. We also want to speed up
our action planning and, in support of the corporate change
programme, identify issues that would improve our perception
of British Airways as a ‘great place to work’.
Leadership development
Leadership was a significant priority during the year. We have
developed a number of programmes to improve the capability
and performance of our leaders. These included a one-day
programme for all managers, called ‘Leading the Business’,
which focused on the challenges of managing change, engaging
employees and delivering results to support our business
strategy. As a result of this programme, a leadership website
has been developed which provides information and training
materials to help managers with all aspects of their roles.
Other development programmes included a three-day
‘Leadership Matters’ programme aimed at developing
world-class leaders throughout the airline including our
pilot and cabin crew communities.
There will be increased focus on talent and leadership
development over the coming year as we build the capability
we need for growth.
British Airways values
We have defined our corporate values as part of the business
planning process. All training programmes now contain a module
which helps customer service colleagues understand how they
can demonstrate commitment to our values in the work they
do. Our recruitment processes have been redesigned to make
sure we select people who can clearly demonstrate these
essential values.
Employee relations
During the year, we consolidated our UK operations in six
regional airports, and transferred ground roles to third-party
ground handlers. This affected some 1,000 employees.
Those affected were helped to find alternative employment
both inside and outside the airline.
As part of our transition to Terminal 5, a work practice and
technology change agreement was reached in early 2007 for
our customer service and ramp employees. Following this, the
Terminal 5 change programme entered its implementation phase.
Since May 2007, we have held 113 full day, change implementation
forums with employees represented by trades unions. As a
result, a further 55 key implementation agreements were
completed delivering extensive change to working practices,
industrial agreements, operational processes and support
systems in readiness for the consolidation of our operations
in Terminal 5. As Terminal 5 comes into full operation, we are
committed to working closely with the trades unions in this
next phase.
A new system of performance pay has been implemented in
our Heathrow terminals, linking pay to performance across
many job functions.
Following the threatened cabin crew strike of early 2007,
we committed ourselves to a fresh start. Since then we have
continued to implement the settlement that was reached
and to develop a better relationship with our cabin crew
trades union.
Within Flight Operations, we have agreed radical changes with
the trades union in a far-reaching agreement on work coverage.
This has involved changes to rostering rules, work bidding
practices, overtime payments and reserve establishment.
British Airways 2007/08 Annual Report and Accounts / 41
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Employee involvement continued
to be a key focus during the year.
Employees are asked to give their
views and opinions on a wide
range of topics every year via
the Speak Up! opinion survey,
administered by Ipsos MORI.
In early 2008 the pilots’ union, BALPA, balloted its members
for strike action over our plans to set up a new subsidiary,
OpenSkies, flying between continental Europe and the US.
We notified BALPA that we thought strike action would be
unlawful, and BALPA did not call a strike. Instead it issued
legal proceedings against British Airways in the High Court to
clarify the position. A trial will start on May 19, 2008.
Our Industrial Relations Change Programme is continuing. This
brings together trades union representatives and managers
in specific training and action planning events, to help us find
ways to solve problems together and involve colleagues across
the business.
Reward
We operate two funded principal defined benefit pension
schemes in the UK, the Airways Pension Scheme (APS) and
the New Airways Pension Scheme (NAPS). Both are closed
to new members. From April 1, 2003 we commenced a new
defined contribution scheme, the British Airways Retirement
Plan (BARP).
Total members
In April 2007 we introduced changes to future service benefits
as part of a 10-year programme to fund the deficit in NAPS.
The changes provided people with choices about their level
of future pension savings and benefits.
APS 32,678
NAPS 69,333
BARP 5,038
March 31, 2008
Active members 38,288
Pensioners in payment 33,821
Dependent pensioners 9,777
Deferred pensioners 25,163
March 31, 2008
In February 2008, we also introduced a SmartPension
arrangement, which allows our UK-based employees to
make their pension contributions in a more tax-efficient way.
The changes were introduced with trades union support and
around 90 per cent of those eligible are now benefiting from
this arrangement.
We operate an Employee Reward Plan (ERP) allowing our
non-management workforce to share in the success of the
business. The plan, introduced in 2005, awards amounts to
employees based on our performance against a balance of
financial and non-financial measures. These measures cover
operational, customer and financial performance and the plan
helps to reinforce the importance of all the various factors
that affect our overall performance.
Management bonus schemes use the same financial and
non-financial performance metrics as the ERP, but also include
employee involvement as a further measure. Our managers
are also rewarded for their individual contribution towards
achieving the Company’s goals and targets.
We also operate a recognition scheme, known as Bravo. The
scheme enables people across our business to be recognised
for their efforts and achievements. The Bravo scheme was
reviewed and revised during the year, resulting in a significant
increase in the number of awards being made.
In November 2007, we concluded consultations and announced
a revised staff travel package, which will be launched in April
2009. The changes will make this employee benefit simpler,
fairer and more flexible, and is designed to give greater choice.
Headcount
As at March 31, 2008, we employed 42,377 manpower
equivalents (MPE). There has been an increased level of attrition
during the year, particularly within the Contact Centres and
Gatwick cabin crew. Average attrition is still low at 8 per cent.
Our employment costs have reduced year on year, due to
the pension changes, reduced severance costs and higher
productivity achieved through changes in working practices.
42 / British Airways 2007/08 Annual Report and Accounts
Corporate responsibility continued
The workplace
Diversity and inclusion
Our Diversity team launched a new Diversity and Inclusion
Strategy during the year. This has two simple aims. Firstly,
to ensure that everyone understands why and how diversity
is important to us and, secondly, to ensure that diversity is
integrated into every part of the business.
We are committed to creating an inclusive working culture in
which all our employees feel valued, respected and motivated.
We try to promote types of behaviour, values and working
practices which recognise and support individuals. We want
to reflect the wide cultural diversity of our customers so
that we can deliver the best products and services to them.
In the first phase of the strategy we used a survey, interviews
and focus groups to find out and discuss what harassment
and bullying meant, and how awareness about this could be
raised. A booklet and film were produced and these have
been distributed across the business. Further work on how
bullying cases are resolved and on the role mediation might
play in tackling harassment are also being explored. This
work will continue to be a priority for the coming year and
will be measured through the Speak Up! employee survey.
We are working with key members of our major trades unions
on a joint Dignity at Work project. As a result, we have delivered
joint training for senior trades union representatives across the
business and run sessions on harassment and bullying with
trades union representatives in the ramp areas at Heathrow.
We focused on religion and belief throughout the year and
successfully defended an employment tribunal in November
2007 in this regard. We have become a steering group member
of a new organisation called ‘Employers Forum on Belief’ and
we have established a new interfaith network group which
meets to discuss all aspects of religion in the workplace such
as prayer rooms, catering and uniforms.
We also sponsored Gay Pride in London in July 2007. As
well as having positive commercial impact, there was also an
opportunity for our people to show their solidarity by marching
together. We were proud that many of them chose to wear
their uniforms for the parade.
As a responsible Company we take disability very seriously.
We welcome applications from people with disabilities as
we aim to employ the most talented people, and we support
individuals with disabilities in reaching their full potential by
making reasonable adjustments in the workplace.
We consult with our disabled employee group to identify
disability issues and they help us to ensure that we are making
all our products, services and training fully inclusive and
accessible. All front line employees are trained in disability
awareness to increase their knowledge about disabled
customers and employees.
We are also constantly looking at how we can improve our
journey experience for disabled travellers. We have put into place
a disability strategy for the next four years, called ‘Building
Ability towards 2012’, which covers many areas and will ensure
that we can meet the needs of all our paralympic athletes.
Gender profiles
Absence
We have continued to manage absence carefully and the
latter part of 2007/08 has seen the previous decline in
attendance start to improve, despite some trades union
unrest and a challenging operating environment. Overall this
recovery has resulted in the annual headline absence figure
holding at 11.7 average days per person per annum.
Recent focus on the poorest attendees in each month is
bringing results. Proposals for a revised world-class approach,
supported by accountable managers in the new People and
Organisational Effectiveness department, are targeted to achieve
a minimum 15 per cent improvement during the coming year.
Total employees
Women
Men
Senior managers
Women
Men
Managers
Women
Men
43%
57%
27%
73%
37%
63%
British Airways 2007/08 Annual Report and Accounts / 43
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Baggage and loading staff have
completed their manual handling
training with cabin crew, flight
crew, engineering and cargo
scheduled to start training later in
the year. Each training programme
will focus on risks associated with
the specific roles and we will do a
root cause analysis with
employees who report an injury.
Due to improvements in the way we manage ill health
retirements we are continuing to achieve a 40 per cent
reduction in ill health pensions, halting inappropriate awards
and saving more than £10 million per annum.
Absence – average days per person per annum
Health and safety
In 2007/08, there were a total of 23 major injuries recorded
across our business. The majority of these injuries related to
employees slipping or tripping.
But within this total, there was an increase in reported injuries
involving engineers suffering fall injuries while working on aircraft
both in the hangars and on the line. As a consequence of these
incidents, we launched a review of the access equipment used
by our engineers. Following trials and a significant investment, we
started taking delivery of new equipment in March 2008 and
will continue this replacement programme up to September 2008.
A combined communication and supervision process is being
introduced to ensure that the correct equipment is used for
the many tasks that are carried out and we expect to see a
reduction in fall-related injuries as a result.
January 2008
2003 baseline
16.7
11.7
Manual handling injuries continue to be the most common
injury. In conjunction with our employer’s liability insurers,
we are introducing a series of focused training programmes
across our business. Baggage and loading staff have completed
their training with cabin crew, flight crew, engineering and
cargo scheduled to start training later in the year. Each training
programme will focus on risks associated with the specific
roles and we will do a root cause analysis with employees
who report an injury.
Employees injured whilst at work are able to benefit from a
company-sponsored rehabilitation programme. This benefit
has been extended to employees who are injured away from
work to help them return to work as soon as possible.
During the year, British Airways Maintenance Cardiff received
a Prohibition Notice from the Health and Safety Executive for
a piece of access equipment that was deemed unsuitable. The
piece of equipment was immediately removed from service
and the Notice closed.
Moving a huge number of vehicles and pieces of equipment
into Terminal 5 – safely and efficiently – required a considerable
amount of planning. This involved closing a runway and moving
convoys of equipment from both Terminals 1 and 4 to Terminal 5
throughout the night. The migration was completed successfully
and safely.
Our behavioural safety programme, Rampsafe, continues to
deliver safety improvements with a reduction in damage to
aircraft and equipment.
44 / British Airways 2007/08 Annual Report and Accounts
Corporate responsibility continued
The workplace
Working days lost from work-related injury and ill health per 100,000 employees
Number of lost days
0
2,000
4,000
6,000
8,000
Mar
2007
Apr
2007
May
2007
Jun
2007
Jul
2007
Aug
2007
Sep
2007
Oct
2007
Nov
2007
Dec
2007
Jan
2008
Feb
2008
Employment tribunals
During 2007/08, the Group was served with 69 new
proceedings in the Employment Tribunals.
British Airways Plc was the Respondent in all but six of the
69 proceedings. The other six are one each in BA Avionic
Engineering and BA CityFlyer, and two each in BA Interiors
and BA Regional.
Of the 69 proceedings, the following points are noted:
1. Eight claims were multi-applicant proceedings, i.e. there is
more than one claimant. Of these eight, five were groups
of fewer than 100 claimants. Of the remaining, two related
to how holiday pay should be calculated under the Civil
Aviation (Working Time) Regulations, and were brought
by pilot and cabin crew trades unions on behalf of all their
(respectively) over 3,000 and 10,759 members who are
British Airways employees and the third was a claim for
a payment under the Employee Reward Plan by 114
employees of BA Regional Limited.
2. 17 of the claims were for unfair dismissal, or unfair dismissal
plus other claims of which none were discrimination claims.
Of these, seven remain ongoing, two were settled and the
other eight were withdrawn, won by British Airways or
struck out by the Tribunal.
3. 30 of the claims were for discrimination, or discrimination
plus other claims. Of these, 17 remain ongoing, three were
settled and the other 10 were withdrawn, won by British
Airways or struck out by the Tribunal.
4. For the first time, therefore, the number of claims including
a discrimination element outweighs the number of claims
for unfair dismissal.
British Airways 2007/08 Annual Report and Accounts / 45
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Supplier market
Overall supplier costs, excluding fuel, were held flat over the
year, despite significant inflationary pressures on suppliers’
own costs.
We had a busy year with our suppliers, with a number of major
sourcing projects either started or completed during the
period. We placed new aircraft orders with Airbus and Boeing,
for 12 Airbus A380 and 24 Boeing 787 aircraft. We have also
begun to review our in-flight catering needs at Heathrow, with
a new supply contract required by March 2010. Additionally,
the launch of our OpenSkies subsidiary in mainland Europe,
and direct flights from London City to the US, will mean new
work with suppliers.
Supplier risk
Our procurement team records and measures risk
across our most important suppliers. We have currently
identified 25 suppliers who, if they ceased trading or
experienced severe operational difficulties, would
have a serious impact on our ability to operate. For
these suppliers, risk is measured across five dimensions,
updated each month and we take mitigating action
when any supplier is deemed to be at risk.
In addition to managing risks relating to key suppliers, we also
routinely monitor the financial health of a number of other
critical suppliers using monthly Dun & Bradstreet company reports.
This information provides an early warning of increased risk.
We use Business Continuity Plans to cover the risks of supply
failures from our key suppliers and make sure that we can
demonstrate these plans are tested regularly. Equally, we make
sure contingency plans are in place to respond to any supply
interruption, from securing alternative suppliers, switching to the
use of our own resources, or scaling down the services required.
Payment performance
We have again made good progress on paying suppliers
promptly. On average, 88 per cent of payments were on time
in the UK for the year ended March 31, 2008. This compares
with 84 per cent in the preceding year.
Next year our aim is to maintain this momentum and
eventually to achieve a target of 90 per cent on time payment
worldwide. Increased use of e-invoicing and purchasing cards
will help us in this effort.
We are a signatory to the Confederation of British Industry
(CBI) code of practice on supplier payment and are committed
to the payment to our suppliers on agreed terms. The number
of days’ purchases in creditors at March 31, 2008 is calculated
in accordance with the provisions of the Companies Act 1985
and was 33 days (2007: 34 days).
Corporate responsibility in the supplier base
We are committed to being fully responsible in our purchasing
decisions, and during 2008/09 we will develop our purchasing
process to make sure this happens. We will continue to survey
potential suppliers to assess their corporate responsibility
credentials, and ensure that our staff are familiarised with key
issues. In addition, we will look at using independently-held,
self-certification data to better inform supplier selection decisions.
Procurement delivery
We are committed to driving spend through preferred suppliers.
In December 2007, 97 per cent of our external spend was
with 2,050 suppliers and they have been awarded formal
preferred supplier status. We have also focused on ensuring
our spend is committed through our approved order-based
process, and in December 2007, 99 per cent of spend was
through this process.
46 / British Airways 2007/08 Annual Report and Accounts
Corporate responsibility continued
The marketplace – suppliers
The wellbeing of our customers is extremely important to
us. Every year, we research and listen to the views of over
600,000 customers. This year, we have also sought the advice
of young travellers through our newly launched Kids Council,
the first group of its kind of any airline. As a result we offer
and continue to develop a range of high-quality products
and services to meet the needs of all our customers.
Terminal 5
Preparing for our move to Terminal 5 has been a major focus
this year. Despite the initial difficulties on opening, this state-
of-the-art building will progressively offer a smoother check-in,
fewer queues and less waiting around. The building boasts a
huge range of options for eating, drinking and relaxing as well
as the world’s largest lounge complex for premium passengers.
Club World
Club World has been redesigned from end-to-end. In 2007/08,
we finished fitting the new Club World cabin to all our Boeing
747 aircraft and have been preparing to introduce it on our
Boeing 777s. The new cabin combines comfort, control and
privacy. It features Club Kitchen – where customers can find
a wide range of hot and cold food – and a new seat, which is
25 per cent wider. A softer mattress, memory-foam headrest
and cosy quilt mean that customers can comfortably stretch
out on a fully flat bed and sleep in privacy behind a touch
button screen.
Audio visual on demand
Our new in-flight entertainment system is now available on all
our Boeing 747s and Boeing 767s, offering increased choice
and control to our customers with more than 200 movies,
TV shows, audio options and interactive games. We have seen
marked improvements in satisfaction among passengers who
have used the new system.
ba.com
A quarter of all bookings are now made through ba.com and
we continue to improve our booking process. People travelling
together can now easily share flight itinerary and price information
prior to purchase. Customers also now have the option to offset
the carbon emissions of their journey when they book their
ticket on ba.com, with all proceeds going towards UN certified
emission reduction projects.
Our award-winning online check-in system continues to
improve. It now allows passengers to check-in on other
carriers for connecting codeshare journeys and select
how many checked bags they will be taking to the airport,
highlighting important allowance information. The system
is helping us with advance flight planning.
More than 70 per cent of Executive Club redemptions are
made online and this year we introduced an enhanced mileage
calculator helping customers work out where they can go with
their miles.
Service style
We are committed to providing excellent service and this
year we have updated and modernised our service style vision,
driven directly by feedback from employees. We are now
making sure everyone is aware of the new service style to help
them offer a brilliant service whether they work in the airports,
onboard, in the contact centres or in customer relations.
Baggage policy
As a result of the lifting of hand baggage restrictions by
the UK Department for Transport, with the exception of
Newquay airport, we were able to reintroduce our hand
baggage allowance of two pieces for all passengers travelling
to, from and through UK airports.
We also launched our new checked baggage policy. First
and Club World passengers are now entitled to three bags.
In addition, unlike many of our competitors, all of our customers
are now able to carry, free of charge and in addition to their
normal checked baggage allowance, one piece of sporting
equipment, from our defined list of sporting items.
BA World Cargo
In September 2007, the LIFT loyalty and reward programme
was launched to support key regional customers. The programme
is the first of its kind in the air cargo industry and this is reflected
in the high level of customer enrolment.
Premia, our new premium products facility at Heathrow, has
seen its first full year of operation. Volumes of specialist and
time-sensitive cargo have increased significantly as our
customers have recognised the added value that our new
building provides to the logistics supply chain.
British Airways 2007/08 Annual Report and Accounts / 47
The marketplace – customers
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Environmental regulation
Our activities are covered by a number of environmental
regulations as discussed on page 23.
Climate change
We have made good progress in implementing a comprehensive
climate change programme. This includes fuel and energy
efficiency initiatives, support for effective policy measures to
address absolute emissions growth, voluntary carbon offsetting
and support for scientific research.
We have developed a company-wide target to improve carbon
efficiency, expressed in grams of CO
2
per passenger kilometre
(gCO
2
/pkm), by 25 per cent from 111 grams in 2005 to 83 grams
in 2025. In 2007 our performance was 110 gCO
2
/pkm.
CO
2
emissions actual and targeted
This goal is now one of our overall corporate goals, signalling
the importance of climate change to our business (as discussed
on page 35).
During the year we have carried out an extensive assessment
of our carbon footprint, applying the greenhouse gases (GHG)
protocol corporate standard guidelines. Our carbon footprint
in 2007/08 was 17.7 million tonnes.
In January 2008, we launched a significant upgrade to our
passenger carbon offset scheme introducing a ‘one click’
highly visible option into the ba.com booking process. This
scheme helps fund UN certified emission reduction initiatives
in developing countries, such as clean energy projects in China
and Brazil.
We continue to work to secure the timely and pragmatic
inclusion of aviation CO
2
emissions into the EU Emissions
Trading Scheme in preference to aviation taxes which we
believe are ineffective in tackling climate change. We are actively
leading the development of a global agreement in aviation
climate policy – both within industry (e.g. at IATA and AEA and
as a leading member of the UK Sustainable Aviation Group)
and in broader global forums such as the World Economic
Forum and the Gleneagles Climate Change Dialogue, and
the European Round Table of Industrialists.
2025
2007
2005
83
110
111
gCO
2
/pkm
We are also supporting a number of climate change scientific
research projects. These include work led by Cambridge
University to investigate research pathways for improving
understanding of non-CO
2
aircraft climate effects, the
European Commission IAGOS project which is investigating
the feasibility of using aircraft to collect atmospheric data in-
flight and work by the Global Canopy Programme to prevent
deforestation – a large source of climate change emissions.
Waste
The total amount of waste managed through contracts at
Heathrow and Gatwick has decreased by 3.3 per cent during
the year. We continue to develop new waste management
initiatives including recycling waxed paper coffee cups, plastic
lids, unwanted office furniture and recycling newspapers
offered onboard.
In 2007 we recycled 30 per cent of waste at Heathrow and
Gatwick. We have set ourselves the target of recycling half
our waste by 2010.
The proportion of waste at Heathrow and Gatwick disposed to
landfill reduced by 9.2 per cent. We continue to work towards
a target of zero waste to landfill by 2010.
Water
Water is a valuable resource and consumption is routinely
monitored whenever possible. During the year, we cut water
consumption at Heathrow and Gatwick by 8.8 per cent
compared to the previous year.
Noise
We are subject to restrictions on departure noise and night
flights at many airports worldwide. Major changes to current
noise management systems are subject to the requirements
of the ‘Balanced Approach’ established by the Committee on
Aviation Environmental Protection (CAEP) of the International
Civil Aviation Organisation (ICAO). These are designed to
ensure that noise management is balanced and targeted.
Last year at Heathrow, we contravened the noise limits 47 times,
a reduction of 28 per cent, principally as a result of Boeing
747-400 departures being delayed into the night period.
However, we continue to look for new ways to reduce noise
and work continues on the Departures Code of Practice, with
other stakeholders, which will also include ground operations.
At Heathrow, our Continuous Descent Approach adherence
48 / British Airways 2007/08 Annual Report and Accounts
Corporate responsibility continued
Environment
(for fuel efficiency and noise reduction) was 95 per cent for
daytime and 94 per cent for night-time for the last calendar
year, compared to 84 per cent for daytime and 88 per cent
for night-time for the airport average.
Air quality
Aircraft engines are regulated for low altitude emissions and
areas around many airports have to meet stringent air quality
limits. To help reduce NO
X
emissions, we continue to use
reduced take-off thrust to the lowest available when possible
for our aircraft operations worldwide. We are also working with
ICAO to define aircraft emissions’ characteristics and continue
to work with CAEP to help them model the impact of aircraft
emissions on local air quality.
British Airways NO
x
emissions to 1,000 feet
(metric tonnes)
Terminal 5
In the planning for Terminal 5 an independent environmental
assessment advisory group (EAAG) was established to
minimise the environmental impact of the terminal’s design,
construction and operation. Together with BAA and the EAAG,
we focused on improving links to public transport, reducing
noise and emissions, exploiting innovations in energy, water
and waste management, and maximising the use of sustainable
resources. Features included innovative vacuum flush toilets,
taps and showers fitted with water-saving devices, using timber
from managed sustainable sources for lounge furniture and
veneers, and cladding shower pavilions with faux timber
converted from recycled plastic milk bottles.
Using aircraft stands with fixed ground power and pre-
conditioned air means we will rely less on aircraft auxiliary
power units (APUs), reducing noise and carbon emissions.
Ground fleet
We are also improving our performance on the ground.
In Terminal 5, we invested £25 million in 550 new vehicles,
including 38 new buses specified to the future Euro 5 exhaust
emission standard. Remote monitoring by telematics technology
will be used to manage fleet efficiency. A fuel management
2007
2006
2005
1,107
1,096
1,080
system will be fitted to refuelling equipment at Heathrow.
We are part of the Heathrow Clean Vehicles Programme which
aims to improve the environmental performance of our ground
vehicle fleet.
Fleet modernisation
Improved environmental performance was a major consideration
behind our order in September 2007 of 12 Airbus A380
aircraft and 24 Boeing 787 aircraft to replace some of our
Boeing 767-300 and 747-400 aircraft. All aircraft options were
evaluated using environmental criteria for fuel efficiency, total
NO
X
emissions, external noise and noise footprints, internal
cabin noise and ground noise for ramp operations including
the use of the APU. The aircraft we have selected are greener,
cleaner and quieter, with both the Airbus A380 and Boeing 787
rated as producing a quarter of the noise level of the Boeing
747-400, on approach.
Summary of environmental achievements and targets
Target 2007* 2006* 2005*
Carbon efficiency gCO
2
/pkm 83** 110 110 111
CO
2
emissions (million tonnes)*** 17.7 16.6 16.1
Total waste at Heathrow and Gatwick –
including our catering companies (metric tonnes) 26,041 26,920 28,456
% recycling 50%
(Heathrow and Gatwick) by 2010 30.1 28.9 30.6
Waste to landfill (tonnes)
(Heathrow and Gatwick) zero by 2010 3,688 4,063 4,540
Waste per passenger (kg) reduce by
(Heathrow and Gatwick) 2% per annum 0.76 0.78 0.83
Heathrow departure noise violations – day 1 9 7
Heathrow departure noise violations – night 46 56 37
Continuous Descent Approach
(Heathrow) % day 95 95 84 94
Continuous Descent Approach
(Heathrow) % night 95 94 88 93
Heathrow air quality/NO
X
emissions
to 1,000 ft (metric tonnes) 1,107 1,096 1,080
* calendar years.
** by 2025 based on 2005.
*** 2007 includes aircraft, property and vehicles; prior years include aircraft only.
Biodiversity
We remain committed to protecting and enhancing the
240 acres of Harmondsworth Moor surrounding our Waterside
headquarters at Heathrow, and have retained the Wildlife Trust’s
new Biodiversity Benchmark.
British Airways 2007/08 Annual Report and Accounts / 49
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
We remain committed to
protecting and enhancing the
240 acres of Harmondsworth
Moor surrounding our Waterside
headquarters at Heathrow.
Corporate responsibility continued
Community investment
Connecting communities
We are committed to developing strong community
partnerships. Our priority is to invest in education and youth
development, supporting employees, sustainable tourism,
heritage and the environment. In 2007/08, we supported
130 community and conservation organisations worldwide,
donating travel awards, excess baggage and cargo.
We continue to be a member of both the London Benchmarking
Group (LBG) and Business in the Community’s (BITC) Percent
Club. The LBG’s benchmarking model is used to assess our
total contributions to the community.
Education and youth development
Our Community Learning Centre – close to our Waterside
headquarters at Heathrow – has welcomed over 44,000 young
people and adult learners since opening in 1999. Interactive,
airline-focused programmes relevant to the school curriculum
are delivered to local school pupils. Programmes include global
education weeks delivered in partnership with the United
Nations International Children’s Emergency Fund (UNICEF),
focusing on places we fly to. The children are immersed in the
culture of the country they are studying and also learn about
the UN Convention on the Rights of the Child.
Languages
The British Airways’ Language Flag Award is offered to
schools across the UK and has been recognised by both the
Foreign and Commonwealth Office and the British Language
Champion Scheme in recognition of its work on the promotion
of language learning.
Partnerships
In the UK, through corporate partnership with the Natural
History Museum, we have developed programmes to provide
opportunities for pupils from Heathrow schools to visit the
museum, meet scientists and experience the work of the
Darwin Centre. Overseas, we have been working with the
Mukuru Promotion Centre in Nairobi, Kenya, for over five
years supporting over 4,000 children. On the development of
IT and education programmes, 15 teachers have participated in
teacher exchange programmes to gain a better understanding
of both the UK and Kenyan education systems. This programme
will continue to be developed in 2008/09.
Change for Good
Our partnership with UNICEF, Change for Good, raised
£2.5 million in the year to March 31, 2008. The onboard
collection programme, supported by over 2,400 cabin crew
champions, enabled us to fund UNICEF’s work with vulnerable
children. Programmes included HIV testing, treatment and
counselling (Tanzania), HIV-prevention (Ghana) and emergency
cyclone relief (Bangladesh). Change for Good launched the
first branded Change for Good toy, Fudge the Dog. In 2008
Change for Good will celebrate its £25 million milestone.
Employee fundraising
Over 4,000 retired and current employees donated over
£600,000 directly from their payroll to their chosen charities
through our Giving Scheme. In addition, we hosted 10 fundraising
events raising over £160,000 for a range of employee-
supported charities. Our employees have been taking part in
the BA Fun Run for over 14 years, raising over £735,000 for
Cancer Research UK. During 2007/08, our World Cargo team
collected and delivered 15 tonnes of high-quality gifts, donated
by employees from around the airline.
Donations
BITC reported our total direct and in-kind donations for
2007/08 at £5.7 million (2006/07: £6.3 million). Of these,
direct charitable donations amounted to £398,000 (2006/07:
£1.2 million). Over the past year we have donated more than
£800,000 of surplus merchandise to charities in the UK
and overseas.
50 / British Airways 2007/08 Annual Report and Accounts
British Airways 2007/08 Annual Report and Accounts / 51
Corporate governance
The names and details of the current directors are set out below.
All served throughout the financial year ended March 31, 2008.
Board members as at May 15, 2008.
Chairman
Martin Broughton
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 (June 2006). Chairman of the Nominations
Committee. Martin is President of the Confederation of British
Industry (CBI).
Chief Executive
Willie Walsh
Executive Board Member since May 2005, becoming Chief
Executive in October 2005. Formerly Chief Executive of Aer Lingus,
he is an honorary board member of Flight Safety International.
Chief Financial Officer
Keith Williams
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 in January 2006. He is a chartered accountant.
Non-executive directors
Maarten van den Bergh
Independent non-executive director since 2002, senior independent
non-executive director since July 2004. Nominations, Remuneration
and Safety Review Committees. Maarten is Chairman of Akzo
Nobel NV, Deputy Chairman of BT Group and non-executive
director of Royal Dutch Shell plc.
Baroness Kingsmill
Independent non-executive director since November 2004. Audit,
Nominations 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 a senior adviser to
The Royal Bank of Scotland and a member of the Microsoft
European Policy Council.
Jim Lawrence
Independent non-executive director since November 2006.
Remuneration Committee. Jim is Chief Financial Officer of
Unilever and serves on the Board of Avnet, Inc..
Chumpol NaLamlieng
Independent non-executive director since November 2005.
Audit Committee. 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 non-executive director
of The Siam Commercial Bank Public Co. Ltd.
Dr Martin Read
Independent non-executive director since May 2000. Chairman
of the Remuneration Committee. Nominations Committee.
Martin was Group Chief Executive of LogicaCMG plc from 1993
to 2007. Senior adviser to Candover Partners Limited and served
as non-executive director at Asda Group plc (1996 to 1999) and
The Boots Company PLC (1999 to 2006).
Alison Reed
Independent non-executive director since December 2003.
Chairman of the Audit Committee. Remuneration Committee.
Alison was previously Group Finance Director of Marks & Spencer
plc and Standard Life plc. She is a chartered accountant.
Ken Smart
Independent non-executive director since July 2005. Chairman of
the Safety Review Committee. Audit Committee. Ken is Chairman
of the UK Aviation and Maritime Industries Confidential Human
Factors Incident Reporting Programme (CHIRP), a member of
the Flight Safety Foundation Board of Governors and a Visiting
Professor at Cranfield University.
Baroness Symons
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.
Company Secretary
Alan Buchanan
Joined the airline in 1990 as Principal Legal Adviser Finance,
becoming Company Secretary in April 2000. Alan is also Head
of Risk Management.
All directors are subject to retirement every three years and are
eligible for re-election by the shareholders. In accordance with the
Company’s Articles of Association, Willie Walsh, Maarten van den
Bergh, Baroness Kingsmill, Ken Smart and Baroness Symons will
retire and seek re-election by shareholders at the annual general
meeting to be held on July 15, 2008. Biographical notes about the
directors seeking re-election are set out in the explanatory notes
of the Notice of annual general meeting.
Details of the directors’ remuneration and share interests are set
out in the report of the Remuneration Committee on pages 65
to 73.
52 / British Airways 2007/08 Annual Report and Accounts
Board of directors
British Airways 2007/08 Annual Report and Accounts / 53
Leadership team
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
In the day-to-day running of the Company, the Chief Executive is
supported by the Chief Financial Officer and the Leadership team,
the members of which as at May 15, 2008 are:
Robert Boyle
Commercial Director. Joined the airline in 1993 in Corporate
Finance, becoming Commercial Director in October 2006.
Prior to this he was Director of Planning.
Paul Coby
Chief Information Officer. Joined the airline in 1996 as Information
Management Systems Supply Board Manager, becoming Chief
Information Officer in 2000.
Garry Copeland
Director of Engineering. Joined the airline in 1989. Having held
various positions including Chief Powerplant Engineer and GM
Engineering and Quality Services, he became Director of
Engineering in September 2006.
Roger Maynard
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.
Tony McCarthy
Director People and Organisational Effectiveness. Joined the airline
in December 2007 from Royal Mail.
Robert Webb QC
General Counsel. Joined the airline in 1998 and has responsibility
for Legal, Government and Industry Affairs, Safety, Security and
British Airways Health Services.
The number of Board and Committee meetings attended by each director during the year is shown in the table below:
Audit Nominations Remuneration Safety Review
Board Meetings Committees Committees Committees Committees
attended in the attended in the attended in the attended in the attended in the
period or period period or period period or period period or period period or period
Director of service of service of service of service of service
Total in period 84154
Martin Broughton 8/8 1/1
Willie Walsh 8/8
Keith Williams 8/8
Maarten van den Bergh 7/8 1/1 4/5 4/4
Jim Lawrence* 6/8 2/3 1/1 2/3
Baroness Kingsmill 8/8 4/4 1/1 4/4
Chumpol NaLamlieng 7/8 4/4 4/4
Dr Martin Read 8/8 1/1 5/5
Alison Reed 8/8 4/4 5/5
Ken Smart 8/8 4/4 4/4
Baroness Symons 8/8 3/4 3/4
*Due to Jim Lawrence’s appointment as Chief Financial Officer of Unilever in September 2007, he was unable to attend two Board Meetings, one Audit Committee and
one Safety Review Committee. As a consequence of this appointment a review of the Committees took place and he stood down from both the Audit and Safety Review
Committees on November 1, 2007 and joined the Remuneration Committee on January 1, 2008.
The six members of the Leadership team are designated as persons discharging managerial responsibility, along with the 11 directors.
The directors present their Report and Accounts for the
year ended March 31, 2008. The accounts are set out on
pages 77 to 127.
Principal activities
The main activities of British Airways Plc and its subsidiary
undertakings are the operation of international and domestic
scheduled air services for the carriage of passengers, freight
and mail and the provision of ancillary services.
Results for the year
Profit for the year attributable to members of British Airways
Plc amounted to £680 million, against a profit on the same
basis of £290 million in the previous year.
Business review
The Companies Act 1985 and the Disclosure and
Transparency Rules of the UK Listing Authority (DTRs) require
the Company to include a business review in its Directors’
report as per section 234ZZB of the Companies Act 1985
and DTR 4.1.8. The information that fulfils the business review
can be found in the following sections of the annual report
which are incorporated into this report by cross reference:
•
Chief Financial Officer’s statement on pages 12 to 17;
•
Business review on pages 18 to 37;
•
Corporate responsibility on pages 38 to 50; and
•
Corporate governance statement on pages 59 to 61.
The Board of directors
The names and details of the directors who served during
the year are set out on page 52 and form part of this
Directors’ report.
Directors’ interests
A statement of the interests in shares of the Company
(or derivatives or any other financial instruments relating
to those shares) of each director (including the interests of
their connected persons of which the Company is aware)
as at March 31, 2008 and any changes in those interests
from that date until the date of this report can be found
in the Remuneration report on pages 65 to 73 and form
part of this Directors’ report.
Directors’ and officers’ liability insurance
The Company has purchased insurance against directors’
and officers’ liability as permitted by the Companies Act 1985
and Companies Act 2006 for the benefit of the directors and
officers of the Company and its subsidiaries.
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, bashares.com by clicking
on the heading Corporate Governance.
Directors’ statement as to disclosure of information
to the auditor
The directors who are members of the Board at the time
of approving the Directors’ report and business review are
listed on page 52. Having made enquiries of fellow directors
and of the Company’s auditor, each of these directors
confirms that:
•
To the best of each director’s knowledge and belief there is
no information relevant to the preparation of the auditor’s
report of 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 make him or
herself aware of relevant audit information and to establish
that the Company’s auditor is aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of Section 234ZA(2) of
the Companies Act 1985.
Statement of directors’ responsibilities in relation
to the financial statements
The directors are responsible for preparing the annual report
and the financial statements in accordance with applicable
United Kingdom law and those International Financial Reporting
Standards (IFRS) as adopted by the European Union (EU).
The directors are required to prepare financial statements for
each financial year, which present fairly the financial position of
the Company and of the Group and the financial performance
and cash flows of the Company and of the Group for that
period. In preparing those financial statements, the directors
are required to:
•
Select suitable accounting policies and then apply them
consistently;
•
Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
•
Provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users
54 / British Airways 2007/08 Annual Report and Accounts
Directors’ report
British Airways 2007/08 Annual Report and Accounts / 55
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and
financial performance; and
•
State that the Group has complied with IFRS, subject to
any material departures disclosed and explained in the
financial statements.
The directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time
the financial position of the Company and of the Group and
enable them to ensure that the financial statements comply
with the Companies Act 1985 and Article 4 of the IAS
Regulation. They are also responsible for safeguarding the
assets of the Group and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
In addition, the directors are responsible for the maintenance
and integrity of the corporate and financial information
included in the Company’s website. Legislation in the UK
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Directors’ responsibility statement pursuant to DTR 4
The directors confirm that, to the best of each person’s knowledge:
(a) the Group and Parent Company financial statements in
this report, which have been prepared in accordance with
IFRS as adopted by the EU, IFRIC interpretation and those
parts of the Companies Act 1985 applicable to companies
reporting under IFRS, give a true and fair view of the assets,
liabilities, financial position and profit of the Company and
of the Group taken as a whole; and
(b) the management report contained in this report includes
a fair review of the development and performance of the
business and the position of the Company and the Group
taken as a whole, together with a description of the
principal risks and uncertainties that they face.
Corporate governance
Information on corporate governance is set out in the statements
on pages 59 to 61 which form part of this Directors’ report.
Employee involvement
Information on employee involvement is set out within the
corporate responsibility report on pages 38 to 50 and forms
part of this Directors’ report.
Diversity and inclusion
Information on the Company’s policy on equal opportunities for
disabled employees is set out within the corporate responsibility
report on pages 38 to 50 and forms part of this Directors’ report.
Charitable donations
Information on charitable donations is set out within the
corporate responsibility report on pages 38 to 50 and
forms part of this Directors’ report.
Political donations
At the annual general meeting in 2006, shareholders passed
a resolution to authorise the making of political donations
and the incurring of political expenditure for the purposes
of section 347C of the Companies Act 1985 for a period
of four years. As from October 1, 2007, the provisions of
the Companies Act 1985 relating to political donations and
expenditure were repealed and replaced by provisions of the
Companies Act 2006. The resolution passed at the annual
general meeting in 2006 is treated, by virtue of applicable
transitional provisions, as complying with the requirements
of section 367 of the Companies Act 2006 (notwithstanding
that it does not comply with the requirements of that section
as to the heads under which donations and expenditure are
to be stated). A new resolution will, however, be proposed
at the annual general meeting to be held on July 15, 2008 to
authorise donations or expenditure under the heads specified
in section 367(3) of the Companies Act 2006, for a further
period of four years. This authorisation is being taken on a
four-year basis as a precaution only and the directors have
no present intention of using it. In the event that any political
donation is made or political expenditure incurred, the Board
would seek further shareholder approval.
The Board has repeatedly confirmed that it does not make
political donations or incur political expenditure within the
ordinary meaning of those words and that it has no intention
of doing so. The amount of political donations made and
political expenditure incurred in the period from April 1, 2007
to March 31, 2008 was £nil (2006/07: £nil).
Waiver of dividends
The British Airways Employee Benefits Trust (Jersey) Limited,
which holds British Airways shares for the purpose of satisfying
awards and options granted to employees under the Company’s
employee share schemes, has waived its rights to dividend. The
Trustee does not vote the shares that it holds. At March 31,
2008 there were 2,087,147 shares held in the Trust.
Going concern
After making enquiries, the directors have a reasonable
expectation 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.
Payment policy
Information on the policy and practice of the Company
regarding payment of the Company’s creditors can be found
within the corporate responsibility report on pages 38 to 50
and forms part of this Directors’ report.
Impact of change of control
The following significant agreements contain provisions
entitling the counterparties to exercise termination or other
rights in the event of a change of control of the Company:
•
All of the Company’s share schemes contain provisions
relating to a change in control. Other than the Performance
Share Plan, which is subject to the satisfaction of any
performance conditions at that time, all outstanding options
would normally vest and become exercisable on a change
of control;
•
Joint business agreement with Iberia, which coordinates
schedules, marketing, sales, freight, pricing and customer
service activities;
•
Codeshare agreements with American Airlines, Cathay
Pacific, Iberia, bmi, Qantas and Aer Lingus; and
•
Contracts to sell miles to Alaska Airlines, American Airlines,
Lloyds TSB and Tesco.
Neither of the executive directors’ service contracts provides
for compensation to be paid in the event of change of control
of the Company.
Substantial interests in shares
The Company has been notified pursuant to the DTRs of the
following interests in 3 per cent or more of the Company’s
issued ordinary shares as at May 15, 2008:
Name of Percentage Direct Indirect
shareholder of holding % %
INVESCO plc 11.05 Nil 11.05
Standard Life plc 9.07 7.69 1.38
Barclays PLC 6.90 6.90 Nil
AMVESCAP Plc 6.74 Nil 6.74
AXA S.A. 4.85 0.75 4.10
Legal & General Group Plc 4.07 4.07 Nil
Receipts and returns to shareholders
Dividend
No interim dividend was paid during the year. The Board has
decided to recommend the payment of a final dividend of
5 pence per share.
Prior to this the Company last paid a dividend in July 2001.
Share issues, buy-backs and treasury shares
The authorised share capital of the Company is unchanged
from the previous year. However, there has been an increase in
the issued share capital. Details of the current authorised and
issued share capital are set out in the sections headed ‘Shares
and Shareholders’ and ‘Capital Structure and Shareholder
Rights’ respectively.
Under UK legislation, the Board can be given authority to allot
shares in the Company by the passing of an ordinary resolution
at a general meeting of the Company. The Board currently has
authority to allot shares in the Company up to an aggregate
nominal value of £89 million by virtue of a resolution passed
at the annual general meeting of the Company held on July 14,
2003. This authority expires on July 15, 2008 and shareholders
will be asked to renew this authority at the 2008 annual
general meeting.
Without prejudice to any special rights previously conferred
on the holders of any shares or class of shares for the time
being issued, any share in the Company may be issued with
such preferred, deferred or other special rights, or subject to
such restrictions, whether as regards dividend, return of capital,
voting or otherwise, as the Company may from time to time
by ordinary resolution determine (or, in the absence of any
such determination, as the Board may determine) and, subject
to the provisions of the Statutes, the Company may issue any
shares which are, or at the option of the Company and/or the
holder are, liable to be redeemed.
The Articles of Association of the Company can be altered
by the passing of a special resolution by the shareholders at
a general meeting of the Company.
Rules about the appointment and replacement of directors are
set out in the Company’s Articles of Association. The directors’
powers are conferred on them by UK legislation and by the
Company’s Articles of Association.
At the annual general meeting held in July 2007 authority
was given to conduct share buy-backs up to approximately
10 per cent of the Company’s issued ordinary share capital,
subject to certain limitations relating to the maximum and
minimum prices that may be paid for any shares bought back.
56 / British Airways 2007/08 Annual Report and Accounts
Directors’ report continued
British Airways 2007/08 Annual Report and Accounts / 57
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
The authority gives the Company flexibility in managing its
balance sheet. The authority will be exercised only if, in the
opinion of the Board, this will result in an increase in earnings
per share and would be in the best interests of shareholders
generally. The Company did not conduct any share buy-backs
in 2007/08. Shareholders will be asked to renew this authority
at the 2008 annual general meeting.
The Articles of Association permit the Company to hold any
shares which are bought back in treasury. However, the Company
is not able to do this without first seeking the authority from
shareholders to conduct share buy-backs. Treasury shares
can be sold quickly (subject to insider dealing rules) and cost
effectively, giving the Company additional flexibility in the
management of its capital base. Whilst in treasury, the shares
are treated as if cancelled so that no dividends are paid on
them and they have no voting rights. No shares were held
in Treasury during the year ended March 31, 2008.
Shares and shareholders
The number of ordinary shares issued and fully paid as
at March 31, 2008 was 1,153,105,000 (March 31, 2007:
1,151,575,000). The increase over March 31, 2007 reflects
the issue of new ordinary shares to satisfy the share options
exercised during the year under the British Airways Share
Option Plan 1999. See note 32 to the financial statements.
Capital structure and shareholder rights
The authorised share capital of the Company is £378,000,000
divided into 1,512,000,000 ordinary shares of 25 pence each
and one special voting share of 25 pence. All ordinary shares
have equal rights to dividends and capital and to vote at
general meetings of the Company. The rights attached to the
ordinary shares, in addition to those conferred on their holders
by law, are set out in the Company’s Articles of Association.
The special voting share has no dividend rights, limited
capital rights and restricted voting rights. The sole function
of the special voting share is to ensure that the votes capable
of being cast by the UK shareholders of the Company, taken
as a whole, need never fall below a majority. Its voting rights
would only be triggered if the number of UK shares represent,
or are reasonably likely to represent at the time of the next
scheduled annual general meeting, 50 per cent or less of the
issued ordinary share capital and if the Board considers that,
as a result, any air service operating right which is currently
granted to, or enjoyed by, the Company may be materially
restricted, suspended or revoked. Once its voting rights have
been triggered, the special voting share entitles the holder
to such number of votes as, when aggregated with the votes
which are capable of being cast by holders of the UK shares,
are equal to 50 per cent of the total number of votes which
are capable of being cast, plus one. On any resolution, votes
cast by the holder of the special voting share may only be
cast in the same manner and proportion as the votes cast
by the UK shareholders. Full details of the rights attaching to
the special voting share are set out in the Company’s Articles
of Association. The special voting share is held by The Law
Debenture Trust Corporation Plc.
The directors may, in the case of shares held in certificated
form, in their absolute discretion refuse to register a transfer
of shares (not being fully paid shares) provided that, where any
such shares are admitted to the Official List of the UK Listing
Authority, such discretion may not be exercised in such a way
as to prevent dealings in the shares of that class from taking
place on an open and proper basis. The directors may also
refuse to register a transfer of shares (whether fully paid or
not) in favour of more than four persons jointly. Full details
of restrictions on the transfer of shares are set out in the
Company’s Articles of Association.
The directors may, in their absolute discretion, refuse to
register any transfer of the special voting share whatsoever.
Where, under the Articles of Association, a person has been
served with an Affected Share Notice, the shares which are
the subject of such notice may, subject to the specific terms
of the relevant notice, no longer confer on the holder any right
to exercise any rights conferred by membership in relation to
general meetings, including to attend or vote either personally
or by proxy at any general meeting of the Company or any
meeting of the holders of any class of shares. In addition, the
rights to attend, speak and demand a poll which would have
attached to the shares, but for the restrictions set out in the
Affected Share Notice, shall vest in the Chairman of the
relevant meeting.
The person on whom an Affected Share Notice has been
served may also be required to dispose of the shares which are
the subject of such notice, in accordance with the provisions of
the Articles of Association.
Where, under the Articles of Association, a person has been
served with a direction notice as a result of default for the
prescribed period in providing the Company with the required
information concerning interests in shares held by them those
shares shall no longer confer on the holder any right to vote
either personally or by proxy at a general meeting of the
Company or exercise any other rights conferred by membership
in relation to general meetings of the Company or meetings of
the holders of any class of shares.
58 / British Airways 2007/08 Annual Report and Accounts
Directors’ report continued
In addition, if the person served with a direction notice holds at
least a 0.25 per cent interest in number or nominal value of the
issued shares of that class in the Company, then the Board may
also withhold payment of all or part of any dividends payable to
such person in respect of the shares which are the subject of
the direction notice and refuse to register any transfer of such
shares until such time as the default is remedied and the Board
determines that the direction notice shall cease to have effect.
There may also be restrictions on the transfer of ordinary
shares or on the exercise of voting rights attached to them
where (i) the Company has exercised its right to suspend their
voting rights or to prohibit their transfer following the omission
of their holder or any person interested in them to provide
the Company with information requested by it in accordance
with Part 22 of the Companies Act 2006; or (ii) their holder
is precluded from exercising voting rights by the FSA’s listing
rules or the City Code on Takeovers and Mergers.
During 2007/08, the Company delisted its American Depositary
Shares (ADSs) from the New York Stock Exchange (NYSE) and
deregistered and terminated its reporting obligations under the
Securities Exchange Act of 1934.
The Company maintains an American Depositary Receipts
(ADR) programme in the US as a Level I programme. This
means that the Company’s ADSs are traded on the over-the-
counter market. Each ADR is the equivalent of 10 ordinary
shares and each ADR holder is entitled to the financial rights
attaching to such shares, although the ADR depositary is the
registered holder of the shares. As at March 31, 2008, the
equivalent of 26.2 million shares were held in ADR form
(March 31, 2007: 33.7 million shares).
Where shareholders choose to appoint proxies to vote on their
behalf on a poll at shareholder meetings (or any adjournment
thereof), such appointments must, under the Articles of
Association of the Company, be received (whether sent by
post or by electronic communication) at such office or address
as may be specified in the relevant notice of meeting not less
than 48 hours before the time appointed for holding the
meeting (or any adjournment thereof).
For the annual general meeting to be held on July 15, 2008,
shareholders can appoint a proxy online via the Company’s
website or by posting the proxy form to the address set out
in the notice of meeting. Proxies (whether submitted online or
by post) must be received by 11am on Sunday July 13, 2008.
If the shares are held in British Airways Investor Services, the
Company Nominee, voting instructions must be received by
11am on Saturday July 12, 2008.
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 (EEA).
At March 31, 2008, 31 per cent of the ordinary shares of the
Company were held by non-UK nationals (March 31, 2007:
39 per cent) and 19 per cent of the ordinary shares were held
by persons who were not nationals of states comprising the
EEA (March 31, 2007: 16 per cent). Although there are no
large interests of single or associated non-UK nationals, the
directors cannot rule out the possibility that the directors 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.
Shareholder analysis
As at March 31, 2008 there were 214,254 shareholders
(April 30, 2007: 217,727). An analysis is given below.
Percentage Percentage
Size of shareholding of shareholders of shares
1 – 1,000 88.09 4.65
1,001 – 5,000 10.56 3.67
5,001 – 10,000 0.77 0.96
10,001 – 50,000 0.32 1.13
50,001 – 100,000 0.06 0.72
100,001 – 250,000 0.06 1.68
250,001 – 500,000 0.04 2.78
500,001 – 750,000 0.02 2.54
750,001 – 1,000,000 0.02 2.42
Over 1,000,000 0.06 79.45
100.00 100.00
Percentage Percentage
Classification of shareholding of shareholders of shares
Individuals 97.94 9.53
Bank or Nominee 1.75 88.29
Insurance companies 0.01 0.02
Pension trusts 0.01 0.13
Investment trusts 0.02 0.01
Other corporate bodies 0.27 2.02
100.00 100.00
Auditors
Resolutions to reappoint the retiring auditor, Ernst & Young LLP,
and to authorise the directors to determine their remuneration
will be proposed at the 2008 annual general meeting.
Overseas branches
The Company flies to a number of destinations around the
world (see inside front cover). In addition to the overseas
branches it has established in many of these countries, it
has overseas branches in countries to which it does not fly
to such as New Zealand.
Approved by the Board and signed on its behalf by
Alan Buchanan
Company Secretary
May 15, 2008
This corporate governance statement forms part of, and
should be read in conjunction with, the Directors’ report
set out on pages 54 to 58.
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
adopted the code of best practice set out in Section 1 of the
Combined Code as amended from time to time and appended
to the Listing Rules of the Financial Services Authority (the
‘Combined Code’) as its corporate governance statement.
In accordance with the Listing Rules, the Company is
required to report firstly on how it applies the principles
of the Combined Code and secondly to confirm that it has
applied the Code’s provisions or, where it has not, to provide
an explanation. The following section outlines the way in which
the Company has applied the main and supporting principles
in the Code.
The Board provides 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.
As a unitary Board, all directors are involved in, and responsible
for, the development of the Company’s strategy. The non-
executive directors review the performance of the Company
with the executive directors on a regular basis. The Board
delegates certain of its functions to committees consisting of
non-executive directors as detailed within this section. 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 of the directors’ responsibilities in respect of the
financial statements is set out on pages 54 and 55 and a
statement on going concern is given on page 55.
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 bashares.com.
Of the 11 members serving at the year end, excluding the
Chairman, two were executive directors and eight were non-
executive directors. The eight 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 eight 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 regular 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 an
appropriate induction and further 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. They are also encouraged to attend the
annual investor day to meet major shareholders. 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. The
Committee is responsible for ensuring that there are adequate
succession plans to maintain the appropriate blend of skills and
experience both on the Board and in the Leadership team.
In addition to the Nominations Committee, the Board has
three other specific Board Committees: Audit, Remuneration
and Safety Review. Each of the Committees meets regularly
under terms of reference set by the Board. Copies of these are
also available on bashares.com. Every Committee has authority
to take external advice as required. A Standing Committee,
consisting of the Chairman or senior independent non-executive
director, one executive and one non-executive director, is also
available when necessary. The work carried out by each of the
four specific Committees is described in their respective reports.
The Board receives briefings on changes in regulation or
law, as circumstances require. A significant example of this is
the process the Board and the Company have gone through
during the year to ensure that the Company’s decision-making
processes take account of the changes to directors’ duties
made in the Companies Act 2006. As a result, management
is now required to ensure that factors such as the impact
of proposals on relationships with suppliers or on the
environment are taken into account in order to ensure the
long-term success of the Company.
British Airways 2007/08 Annual Report and Accounts / 59
Corporate governance statement
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
60 / British Airways 2007/08 Annual Report and Accounts
Corporate governance statement continued
The Board receives regular feedback on investors’ views. As
part of its commitment to ensuring that the Board presents a
balanced and understandable assessment of the Company’s
financial position and prospects, an external review of the
Company’s investor relations function was carried out during
the year. Feedback from this exercise was used to ensure the
information given to those attending or watching the annual
investor day in March 2008 was appropriate to their needs.
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 presentations from these institutional investor events are
also available to private shareholders through the Company’s
investor relations website, bashares.com. The annual investor
day in March 2008 was attended by every member of the
Board and major investors were given the opportunity to
discuss corporate governance matters with non-executive
directors in one-to-one meetings. Private shareholders receive
the Company’s shareholder 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. Since 2000, all voting at
the annual general meeting has been by way of a poll to ensure
that the views of all shareholders are taken into account.
Towards the end of 2007/08, a performance evaluation of the
Board, its committees and individual directors 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. 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 to review the
performance of the Chairman, taking account of the views of
the executive directors.
Throughout the year, the Company has complied with all
relevant provisions set out in Section 1 of the Combined Code.
Internal control
The directors are responsible for, and reviewing the
effectiveness of, 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. These controls are designed to manage rather
than eliminate the risk of failure to achieve business objectives
due to circumstances which may reasonably be foreseen and
can only provide reasonable and not absolute assurance
against material misstatement or loss. The Company has a
Statement of Business Principles applicable to all employees.
The Company also has a Code of Business Conduct and Ethics
which 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 awareness
of controls, 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 2007/08, the Company has
worked to enhance controls in relation to IT risks.
The business agenda is determined by the business plan
(see pages 34 and 35) which represents the operational and
financial evaluation of the corporate strategy, setting out the
British Airways 2007/08 Annual Report and Accounts / 61
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
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.
A comprehensive management accounting system is in
place providing management with financial and operational
performance measurement indicators. 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. Throughout 2007/08, the
Capital Investment Committee was instrumental in maintaining
tight control of capital and external expenditure and headcount.
All major corporate projects are audited regularly.
Corporate governance remains key to the business. The
Company continues to review its internal control framework
to ensure it maintains a strong and effective internal control
environment. The effectiveness of the framework has been
under regular review by the Leadership team. The Group will
continue to comply with the Combined Code on corporate
governance and the UK Listing Authority rules.
Business controls are reviewed on an ongoing basis by the
internal audit function 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. A risk-based
annual audit plan for the calendar year 2007, which provides
assurance over key business processes and commercial and
financial risks facing the Company, was approved by the Audit
Committee in November 2006. A further risk-based audit plan
for the first six months of 2008 was approved by the Audit
Committee in January 2008 to cover the transition phase
to a 12-month audit plan from July 2008 to June 2009.
The Audit Committee considers significant control matters
raised by management and both the internal and external
auditors and reports its findings to the Board. Where weaknesses
are identified, the Audit Committee ensures that appropriate
action is taken by management. No significant failings or
weaknesses were identified during 2007/08.
Risk management approach
The Company has put in place a structure and process to
help identify, assess and manage risks. This process has been
in place throughout the year to which these statements apply
and up to the date of their approval.
The Risk Group consists of the Leadership team and the
Heads of Internal Control and Risk Management. Meeting
quarterly, it reviews the Company’s key risks contained in the
corporate risk register and ensures that all new and emerging
risks are appropriately evaluated and any further actions
identified. The Risk Group also provides policy and guidance
to those responsible for managing the individual risks, and to
the departmental risk leaders. The management of each major
area of corporate risk is subject to review by an appropriate
‘assurance body’. This includes a review of the controls in
place to mitigate the risks and the further actions being taken
by management. The Risk Group reports bi-annually to the
Audit Committee to assist the Board in the management of
risk in accordance with the revised guidance for directors on
the Combined Code (June 2006).
The Board carried out a risk review in December 2007 in
preparation for its review of the annual business plan at its
meeting in January 2008.
During 2007/08, the Company has continued to monitor any
staff concerns about possible improprieties relating to financial
reporting or other matters. This can be in confidence through
a third-party helpline if the staff member so chooses.
62 / British Airways 2007/08 Annual Report and Accounts
Report of the Audit Committee
Members: Alison Reed (Chairman), Baroness Kingsmill,
Chumpol NaLamlieng, Ken Smart, Baroness Symons, Jim
Lawrence (until November 1, 2007).
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 Committee met four times during
2007/08 and has held closed meetings and has also met
privately with both the external and internal auditors.
Regular attendees at Committee meetings, at the invitation
of the Committee, included the Chairman, the Chief Executive,
Chief Financial Officer, the Head of Internal Control, the
Group Financial Controller, the Group Reporting Manager
and representatives from the external auditors.
The Audit Committee is responsible for exercising the full
powers and authority of the Board in accounting and financial
reporting matters. The full terms of reference, which were
amended following the delisting from the New York Stock
Exchange, are available on the Company’s website at
bashares.com.
The key duties of the Committee include to:
•
Monitor the integrity of the Company’s financial statements
prior to their submission to the Board and any formal
announcements relating to the Company’s financial performance;
•
Review 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;
•
Keep 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;
•
Oversee 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 external auditor is only permitted to carry out work
for the Group in the following categories: audit work; advice
and assurance on accounting standards; tax and regulatory
requirements; tax compliance, planning and advice; due
diligence in relation to alliances, investments and joint
ventures; and the provision of attestation reports or comfort
letters confirming compliance or reasonableness as required
by third parties. Managers are required to obtain prior
approval before contracting such services from the external
auditor. The Audit Committee has also specified certain non-
audit services which the external auditor may not supply to
the Group such as bookkeeping and actuarial services; and
•
Take responsibility for the oversight of the Company’s policy
on whistleblowers and the risk management process (see
Internal Control on pages 60 and 61).
Items reviewed during the year include:
Financial reporting
The Committee reviewed the draft annual and interim
management report before recommending their publication to
the Board. The Committee discussed with the Chief Executive,
Chief Financial Officer and external auditors the significant
accounting policies, estimates and judgements applied in
preparing these reports.
Internal controls
The Committee has an ongoing process for reviewing the
effectiveness of the system of internal controls. During
2007/08 it considered reports from the Head of Internal
Control summarising the work planned and undertaken,
recommending improvements and describing actions taken
by management.
Terminal 5 Readiness Programme
The Committee reviewed reports from Internal Control
in relation to the Company’s preparation for the move to
Terminal 5.
Internal audit
The Committee evaluated the performance of internal audit
from the quality of reports and recommendations from the
Head of Internal Control. An external quality assessment of
internal audit was undertaken by PricewaterhouseCoopers
and overall the report commended the Company’s Internal
Control team.
Risk group
The Committee reviewed the reports produced by the risk
management process during the year. The Committee also
reviewed and approved the Company’s new Insurance
Governance Statement.
Whistleblowing
The confidential helpline run by Safecall, which allows
employees to raise concerns, is working well and confidence in
it is continuing. The Committee receives regular reports on the
confidential reporting system to ensure that the Company’s
whistleblowing processes work appropriately.
British Airways 2007/08 Annual Report and Accounts / 63
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
Reappointment of external auditors
The Committee may make recommendations to the Board,
to be put to shareholders for approval at the annual general
meeting, in relation to the appointment, reappointment and
removal of the Company’s external auditors.
Auditor independence
The Committee reviews the work undertaken by the external
auditor and assesses annually its independence and objectivity.
In doing so, it takes into account relevant professional and
regulatory requirements and the relationship with the auditor
as a whole, including the provision of any non-audit services.
The Committee monitors the auditor’s compliance with
relevant regulatory, ethical and professional guidance on
the rotation of partners, as well as assessing annually its
qualifications, expertise, resources and the effectiveness of
the audit process, including a report from the external auditor
on its own internal quality procedures.
Audit Committee effectiveness
The Committee prepares and reviews with the Board an
annual performance evaluation of the Committee. The findings
of the review ensure that the Committee is satisfied that it is
operating effectively, meeting all applicable legal and regulatory
requirements.
Other issues
Details of the fees paid to the external auditor during 2007/08
can be found in note 6 to the financial statements.
The terms of reference of the Committee are reviewed at least
annually and any changes are recommended to the Board.
As mentioned above, they were changed during the year.
64 / British Airways 2007/08 Annual Report and Accounts
Report of the Safety Review Committee
Members: Ken Smart (Chairman), Baroness Kingsmill, Chumpol
NaLamlieng (to May 7, 2008), Baroness Symons, Jim Lawrence
(to January 2008), and Maarten van den Bergh.
The Safety Review Committee meets at least four times per
year to consider matters relating to the operational safety of
the airline and subsidiary airlines as well as health and safety
issues. The full terms of reference, which were amended
during the year, are available on the Company’s website at
bashares.com.
The Safety Review Committee reviews reports from the
various safety boards within the airline including the senior
management’s safety review board. Where appropriate the
Committee also reviews relevant reports published by the
UK Air Accident Investigation Branch (AAIB), major incidents
to other operators and external reports. During 2007/08,
issues raised at the Safety Review Committee included:
•
The restructuring and centralisation of the team responsible
for the Company’s safety data. This has delivered improved
consistency and enhanced value of the data provided,
which is used as a basis for the Company’s safety actions;
•
The development and monitoring of the British Airways
Safety Plan ensuring that safety remains the Company’s
highest value. The plan sets high-level safety goals across all
operational departments leading to a continuous development
in the safety culture and sets measurements to effectively
monitor the Company’s safety performance; and
•
Presentations on various topics including the Boeing 777
accident at Heathrow on January 17, 2008. This enabled
the Board at a very early stage to be assured that the
Company had taken appropriate action in regard to the
safety of continued operations.
The Chief Executive is the named Accountable Manager for
the Company for the purposes of the Air Operators Certificate
and the Joint Airworthiness Requirements – Operations
(JAR-Ops). As the Accountable Manager, he chairs meetings
at bi-monthly intervals of the four 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 General Manager Corporate and Air
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.
During the year under review, management has introduced
a new Safety Review Board chaired by the Chief Executive
which meets in advance of each meeting of the Committee.
This has improved the flow of information about issues which
have arisen and enables management to be clear about the
issues and proposed actions to address them.
Information not subject to audit
Members: Dr Martin Read (Chairman), Maarten van den Bergh,
Alison Reed, Jim Lawrence (from January 1, 2008).
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 53), 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.
The Company currently participates in four main salary
survey sources – run by Hay, Monks (PwC), New Bridge Street
Consultants 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 aware of the risk of an upward ratcheting of
remuneration that can result from the use of pay surveys.
New Bridge Street Consultants LLP (which became Hewitt
New Bridge Street on March 18, 2008 (Hewitt)) 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. The Chairman, Chief Executive, Chief Financial
Officer, Company Secretary, Acting Director for People,
Director People and Organisational Effectiveness and 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 Hewitt. Towers Perrin
and Hay provided no other services to the Company other
than advice on remuneration matters during 2007/08. In
addition to its advice on remuneration, Hewitt also provided
some advice to the Company on general employee reward
and on pensions. PwC also provided other services relating
to the Internal Control function of the Company.
Where appropriate, the Committee consults with investors
about its proposals. 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 2008/09 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.
Remuneration package
The Committee reviewed the remuneration package for
executive directors during the year to ensure that it remains
consistent with this policy. It concluded that the structure of
the existing package remains generally appropriate, but that
the executive directors’ total target remuneration was
significantly below market median, primarily due to below-
market levels of incentive opportunity. The Committee
considers that the Chief Executive and Chief Financial Officer
are high calibre, talented individuals and that the Company
needs to offer its senior executives competitive remuneration
packages with a sufficient level of incentive pay to retain them
and to reward them appropriately if the Company performs well.
Therefore, as noted on page 66, following consultation with
the Company’s major shareholders and the main shareholder
bodies, the Committee decided to increase the bonus maximum
for the executive directors for 2008/09. The proposed
changes are intended to bring the executive directors’ total
target remuneration closer to the market median.
The package for the executive directors for 2007/08 and
2008/09 consists of a basic salary, benefits-in-kind (including
private healthcare, 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
60 per cent of total target remuneration (excluding pension
arrangements).
British Airways 2007/08 Annual Report and Accounts / 65
Report of the Remuneration Committee
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
66 / British Airways 2007/08 Annual Report and Accounts
Report of the Remuneration Committee continued
The policy in relation to base salaries aims to target base salaries
at around 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. 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 similar companies from the survey sources
referred to previously. The Committee has regard to the
performance of the individuals and the pay and employment
conditions elsewhere in the Company when determining
annual salary increases.
The Committee has recently reviewed base salaries and from
July 1, 2008, Willie Walsh’s base salary will be £735,000 and
Keith Williams’ will be £440,000.
Annual bonus
The amount of annual bonus available for distribution to senior
executives for 2007/08 was subject to a maximum limit of
100 per cent of salary.
An executive director was potentially able to earn up to
10 per cent of salary based on his personal contribution against
objectives. In addition, whatever was earned for personal
performance was then subject to a multiplier based on the
Company’s performance against the following measures:
Performance measure Potential multiplier
Operating margin Up to 4.5 x
Customer recommendation Up to 1.5 x
Punctuality Up to 1.5 x
Employee involvement Up to 1.5 x
No multiplier was to be applied unless the minimum operating
margin target was achieved. The Committee retained discretion
to prevent any bonus payments if the Company’s performance
was judged by it to be inadequate.
The Company achieved its operating margin target of 10 per cent,
but did not achieve its targets in respect of customer
recommendation, punctuality and employee involvement, and
no bonus multiplier was awarded in respect of these measures.
Half of the bonus is payable in the form of deferred shares
(under the British Airways Deferred Share Plan) which vest
after three years (as detailed on page 68), normally subject
to continued employment over that period. On vesting,
executives will receive the benefit of any dividends paid
over the deferral period.
For 2008/09, an executive director’s bonus will be based
one third on operating margin, one third on customer
recommendation and one third on punctuality. The Committee
will continue to set demanding targets on each of these
measures. Unlike previous years, these three measures will
operate independently. However, no bonus will be payable on
the customer recommendation or punctuality measures unless
the Company reports a pre-tax profit. The Committee was
not satisfied that the employee involvement measure used in
2007/08 was appropriate for use in 2008/09 and has asked
that this should be reviewed over the next year with a view
to reintroducing it in 2009/2010.
As was mentioned on page 65, the Committee decided to
increase the bonus maximum for the Chief Executive and
Chief Financial Officer for 2008/09. Accordingly, a total
maximum of 150 per cent and 125 per cent of salary
respectively would be available if the Company achieved
the maximum performance on all of the three measures.
The amount of bonus awarded is then determined according
to personal performance. If nothing is earned on the Company
measures, up to 15 per cent of salary and 12.5 per cent of
salary is payable as a cash-only bonus for personal performance.
Otherwise half of any bonus will be payable in the form of
deferred shares as was the case for 2007/08. The Committee
also retains discretion to prevent any bonus payments if the
Company’s performance is judged by it to be inadequate.
Long-Term Incentive Arrangements
British Airways Performance Share Plan 2005
The British Airways Performance Share Plan (PSP) is the
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. The plan was approved by shareholders at
the annual general meeting in 2005. The PSP consists of an
award of the Company’s shares which vests subject to the
achievement of predefined performance conditions (see
below) 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
under the PSP. For the 2008 award, both the Chief Executive
and the Chief Financial Officer will receive this level of award.
Other members of the Leadership team will receive awards
equivalent to 100 per cent of their respective base salaries.
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 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 award as mentioned on page 72.
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 groups of airlines used in the 2005, 2006 and
2007 awards are shown in the table below:
Air Canada Lufthansa
Air France Northwest Airlines
Air New Zealand (2005 award only)
Alitalia Qantas Airways
All Nippon Airlines Ryanair
American Airlines SAS
Cathay Pacific Airways Singapore Airlines
Continental Airlines Southwest Airlines
Delta Airlines United Airlines
(2005 award only) (2006 and 2007 awards only)
easyJet US Airways
Iberia (2006 and 2007 awards only)
It is currently intended that the comparator group for awards
that are made in 2008 will be the above companies, except
that Air Berlin will replace Southwest Airlines. Southwest
Airlines is not deemed to be a suitable comparator as its
operation is confined to the US domestic market.
British Airways 2007/08 Annual Report and Accounts / 67
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
For the 50 per cent of the shares that are subject to the operating margin performance condition, vesting will be as follows:
Average annual operating margin over performance period
25% of shares 100% of shares
(ie. 12.5% of total (ie. 50% of total
Award Performance period 0% vests award) vest award) vest
2005 award 2005/06 – 2007/08 Less than 7% 7% 10%+
2006 award 2006/07 – 2008/09 Less than 8% 8% 10%+
2007 award 2007/08 – 2009/10 Less than 8% 8% 11%+
2008 award 2008/09 – 2010/11 Less than 5% 5% 10%+
A sliding scale of vesting operates for performance between the minimum and maximum vesting points.
As with previous awards under the PSP, the Remuneration Committee has set an operating margin target which takes into account
anticipated market and economic conditions and is considered to be stretching.
68 / British Airways 2007/08 Annual Report and Accounts
Report of the Remuneration Committee continued
Shareholding guideline
A shareholding guideline has been adopted, linked to the
two 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.
British Airways Deferred Share Plan 2005
The British Airways Deferred Share Plan (DSP) was adopted
by the Board in September 2005 and is the mechanism for
delivering the deferred element of the annual bonus. The only
award under the DSP to date was made in November 2006.
An award of deferred shares to the value of 50 per cent of the
bonus earned was made to qualifying executives. Other than
on retirement or redundancy 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.
For further information regarding these schemes, see pages 71
to 73 which contains details of awards to executive directors
granted this year and in prior years under current and historic
share incentive schemes and also see note 33 to the financial
statements.
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. No plans are currently
in operation.
Service contracts
Each of the two executive directors serving at the year end 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.
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
Keith Williams January 1, 2006 terminable on 12 months’ notice
There are no express provisions for compensation payable
upon early termination of the executive directors’ contracts
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 on Executive Contracts and
Severance. The executives’ contracts include a pay in lieu of
notice provision and are subject to mitigation provisions during
the second six months of the notice period. Neither of the
contracts provides for compensation to be paid in the event
of a change of control of the Company. Copies of the two
service contracts can be viewed on the Company’s website.
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 before an executive can accept
such an appointment and permission will only be given in
appropriate circumstances. During the year in question,
Willie Walsh earned fees of €31,000 as a non-executive
director of Fyffes Plc. He retired from the Board of Fyffes Plc
on October 31, 2007.
Pension schemes
The Company has three main pension schemes. Two of these,
APS and 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.
Willie Walsh is a member of BARP and receives a contribution
of 12 per cent of salary. 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. Only basic salary is pensionable. Further details
of pension provision are set out on page 70.
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. Following a review by the Committee, it was set
at £350,000 in July 2007, taking into account the level of fees
payable in similar companies and recognising his above average
time commitment. 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
last reviewed in October 2006) were £40,000 per annum, with
the chairmen of the Audit, Remuneration and Safety Review
Committees and the senior independent non-executive
director each receiving £10,000 per annum in addition to
these fees. No other fees are paid for attendance at Board
committees. The Chairman and the non-executive directors’
fees are not pensionable. They are, however, eligible for non-
contractual travel concessions.
Service agreements
The dates of the Chairman’s and current non-executive
directors’ appointments are as follows:
Date of election/ Expiry
Non-executive Date of appointment last re-election date
Martin Broughton May 12, 2000 July 18, 2006 2009
Maarten van den Bergh July 1, 2002 July 19, 2005 2008
Baroness Kingsmill November 1, 2004 July 19, 2005 2008
Jim Lawrence November 1, 2006 July 18, 2007 2010
Chumpol NaLamlieng November 1, 2005 July 18, 2006 2009
Dr Martin Read May 12, 2000 July 18, 2006 2009
Alison Reed December 1, 2003 July 18, 2007 2010
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 94. Either party can terminate
on one month’s written notice. Neither the Chairman nor any
of 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.
Total shareholder return
This graph shows the value, by March 31, 2008, of £100 invested in British Airways
Plc on March 31, 2003 compared with the same value invested in the FTSE 100
Index. The other points plotted are the values at intervening financial year ends.
Value (£)
0
100
200
300
400
500
31 Mar 03 31 Mar 04 31 Mar 05 31 Mar 06 31 Mar 07
FTSE 100
British Airways
Source: Thomson Financial
31 Mar 08
British Airways 2007/08 Annual Report and Accounts / 69
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
70 / British Airways 2007/08 Annual Report and Accounts
Report of the Remuneration Committee continued
Information subject to audit
Directors’ remuneration
Payments relating
Performance-related bonuses**
Basic salary Taxable to termination Value of Total Total
and fees benefits* of employment Cash deferred shares 2007/08 2006/07
£’000 £’000 £’000 £’000 £’000 £’000 £’000
Executive directors
Willie Walsh 679 22 0 0 701 625
Keith Williams 407 15 67 67 556 396
Non-executive directors
Martin Broughton 338 30 368 330
Maarten van den Bergh 50 50 46
Baroness Kingsmill 40 1 41 39
Jim Lawrence 40 1 41 17***
Chumpol NaLamlieng 40 1 41 39
Dr Martin Read 50 50 46
Alison Reed 50 50 46
Ken Smart 50 50 46
Baroness Symons 40 1 41 39
Aggregate emoluments 1,784 71 67 67 1,989 1,669
* Taxable benefits include a company car, fuel, private health insurance and personal travel.
** Given his overall responsibility for the Company’s affairs, Willie Walsh and the Remuneration Committee mutually agreed that it would be inappropriate for him to receive
any annual bonus for 2007/08.
*** Figures shown from date of appointment.
Martin George, a former director: Martin George’s defence costs in relation to the competition law investigations are covered by the Company’s Directors’ and Officers’ Liability
Policy. However, the policy is subject to an excess which is payable by the Company. In the year to March 31, 2008, the Company paid £273,000 in relation to his defence costs,
and further amounts are likely to be payable. He also received £213,000 in relation to his termination of employment in accordance with the payment in lieu of notice clause in
his contract, as he had been unable to find alternative employment.
The base salaries for the executive directors are currently £700,000 for Willie Walsh and £415,000 for Keith Williams.
The pension entitlements of the executive directors were:
Transfer value*
Increase, before of increase before
Accumulated Increase in inflation, in inflation, less
accrued benefits accrued benefits accrued benefits director’s
March 31, 2008 during the year during the year contributions
££££
Keith Williams 85,076 11,390 8,516 55,700
The transfer value* of each director’s accrued benefits at the end of the financial year is as follows:
Director’s Movement,
contributions less director’s*
March 31, 2008 March 31, 2007 during the year contributions
££££
Keith Williams 872,178 857,064 33,810 (18,696)
*
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)’.
Keith Williams is a member of both the NAPS and an unfunded unapproved retirement scheme, which, under the terms of his
service contract, will provide a total retirement benefit at age 60 equivalent to 1/56th of pensionable pay for each year of service
up to March 31, 2007. For service after April 1, 2007, he is entitled to 1/60th of pensionable pay for each year of service, payable
at age 65. In line with other NAPS members, Mr Williams is entitled to buy-back to 1/56th payable at age 60 should he so elect.
Willie Walsh is a member of BARP, a defined contribution scheme and the Company paid contributions during the year of £81,046
(2007: £73,296).
Directors’ beneficial interests in shares
British Airways Plc
Ordinary Shares
March 31, April 1,
2008 2007
Current Board members
Martin Broughton 69,090 49,090
Willie Walsh 22,000 0
Keith Williams 5,000 0
Maarten van den Bergh 2,000 2,000
Baroness Kingsmill 2,000 2,000
Chumpol NaLamlieng 20,000 10,000
Dr Martin Read 8,000 8,000
Alison Reed 10,000 10,000
Ken Smart 2,000 0
Baroness Symons 0 0
Total 140,090 81,090
British Airways Plc
American Depositary Shares*
March 31, April 1,
2008 2007
Jim Lawrence 1,000 1,000
*Each American Depositary Share is equivalent to 10 ordinary shares.
There have been no changes to the shareholdings set out above between March 31, 2008 and the date of this report.
No director has any beneficial interest in any subsidiary undertaking of the Company.
Directors’ share options
The following directors held options to purchase ordinary shares in the Company granted under the British Airways Share Option
Plan 1999. The Plan was closed after the final grant in 2005/2006. The Plan provided for the grant of 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. Options granted under the plan are subject to a
performance condition as detailed below:
British Airways Share Option Plan 1999
Market
Number of Options Options price at Gain Options Number of
options as exercised lapsed date of made on granted options as
Date of at April 1, Exercise during during exercise exercise during Exercisable Expiry at March 31
grant 2007 price the year the year £ £ the year from date 2008
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 69,927 276p June 23, 2008 June 23, 2015 69,927
Total 443,927 443,927
The performance condition applicable to share options granted in June 2005 listed above requires the Remuneration Committee
to be satisfied that there has been an increase in the EPS of the Company which is at least 4 per cent per annum more than the
increase in the Retail Price Index during three consecutive financial years ending on March 31, 2008. EPS is calculated as set out
in the Statement of Investment Practice No. 1 of the Institute of Investment Management and Research (IIMR).
British Airways 2007/08 Annual Report and Accounts / 71
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
72 / British Airways 2007/08 Annual Report and Accounts
Report of the Remuneration Committee continued
The options granted in 2005 were tested at the end of 2007/08. In 2004/05, the Company’s EPS under the IIMR definition was
29.3 pence. Taking this base figure and adding RPI plus 4 per cent per annum gives a target EPS level of 36.1 pence. EPS for
2007/08 using the IIMR definition was 49.1 pence. The Remuneration Committee therefore determined that the performance
condition had been satisfied in relation to the grants made in 2005. These options will become exercisable on the third
anniversary of the original grant, June 23, 2008.
The performance conditions in relation to options granted in prior years have been satisfied and those options vested accordingly.
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 British Airways Performance Share Plan (PSP). The LTIP operated from 1996 to 2004 and
was replaced by the PSP in 2005.
Market
Number of Awards Options price at Gain Awards Awards Number of
awards as vesting exercised date of made on lapsing made awards as
Date of at April 1, during during exercise exercise during during at March 31,
Plan award 2007 the year the year £ £ the year the year 2008
Willie Walsh PSP August 30, 2005 319,148 319,148
PSP November 24, 2006 185,950 185,950
PSP August 9, 2007 254,854 254,854
Total 505,098 254,854 759,952
Keith Williams LTIP June 9, 2003 46,631 46,631
LTIP June 16, 2004 29,788 22,141 7,647 22,141
PSP August 30, 2005 34,219 34,219
PSP Nov 24, 2006 77,479 77,479
PSP August 9, 2007 125,910 125,910
Total 188,117 22,141 7,647 125,910 306,380
LTIP awards were subject to the Company’s TSR performance relative to the constituents of the FTSE 100. No awards would have
vested for below median performance. For awards granted in 2003 and 2004, 30 per cent vest for median performance, 65 per cent
would have vested for upper quartile performance and 100 per cent would have vested for upper decile performance.
•
In respect of awards granted in 2003, the Company was the 13th highest performing company out of the 93 remaining FTSE 100
companies over the performance period April 1, 2003 to March 31, 2006. This placed the Company on the 86th percentile
meaning that 90.67 per cent of the shares originally awarded vested and the remainder of the award lapsed; and
•
In respect of awards granted in 2004, the Company was the 20th highest performing company out of the 92 remaining FTSE 100
companies over the performance period April 1, 2004 to March 31, 2007. This placed the Company on the 79th percentile
meaning that 74.33 per cent of the shares originally awarded vested and the remainder of the award lapsed.
Upon vesting of the LTIP awards, the Remuneration Committee having considered in both cases that underlying financial performance
was satisfactory, participants were granted nil-cost options in accordance with the rules of the scheme. Options are exercisable
for seven years from the date of vesting of the relevant LTIP award. No payment is due upon the exercise of these options.
PSP awards granted in 2005, 2006 and 2007 are subject to the performance conditions outlined earlier in this report on page 67.
In each case, the performance conditions will be measured over a single three-year performance period, which begins on April 1
prior to the award date. 50 per cent of the award is subject to TSR performance measures against a group of airlines, and 50 per cent
is subject to average operating margin performance.
The award granted in 2005 was tested at the end of 2007/08. As a result, none of the shares subject to the TSR performance
condition will vest, and 31.25 per cent of the award will vest based on the operating margin performance condition. Taking the
TSR performance condition and operating margin performance together, 31.25 per cent of the total original award will vest on
the third anniversary of the award, August 30, 2008.
The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the 2007 PSP award,
(August 9, 2007), was 412 pence.
Deferred Share Plan
The following directors held conditional awards over ordinary shares of the Company granted under the British Airways Deferred
Share Plan:
Relates to bonus Number of Number of
earned in respect of awards as at Awards released Awards lapsing Awards made awards as at
performance in Date of award April 1, 2007 during the year during the year during the year March 31, 2008
Willie Walsh 2005/06 Nov 24, 2006 27,800 27,800
Keith Williams 2005/06 Nov 24, 2006 16,991 16,991
The value of the deferred share awards outlined above was previously included in the Directors’ Remuneration table for the
financial year to which the bonus relates.
Share scheme dilution limits
The Company follows the guidelines laid down by the Association of British Insurers (ABI). These restrict the issue of new shares
under all the Company’s share schemes in any 10-year period to 10 per cent of the issued ordinary share capital and restricts the
issues under the Company’s discretionary schemes to 5 per cent in any 10-year period. As at March 31, 2008, the headroom
available for the all employee share schemes was 5.10 per cent and 0.15 per cent for the discretionary schemes.
The highest and lowest prices of the Company’s shares during 2007/08 and the share price at March 31, 2008 were:
2008 2007*
At March 31 234.25 486.00
Highest in the year 519.00 577.50
Lowest in the year 218.00 320.00
*Closing price of the ordinary shares as at March 30, 2007.
Approved by the Board and signed on its behalf by
Dr Martin Read
Non-executive director and Chairman of the Remuneration Committee
May 15, 2008
British Airways 2007/08 Annual Report and Accounts / 73
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
Members: Martin Broughton (Chairman), Maarten van den
Bergh, Dr Martin Read and Baroness Kingsmill.
The Committee is chaired by the Chairman and all other
members of the Committee are independent non-executive
directors. All non-executive Board members are invited to
attend its meetings and the Chief Executive attends as necessary.
However, no Board member participates in any discussion of
his or her own performance. The Committee has written terms
of reference covering the authority delegated to it by the Board.
The full terms of reference are available on the Company’s
website at bashares.com.
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.
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.
Under the Company’s Articles of Association, all directors are
required to offer themselves up for re-election every three
years. Following a review of their respective performances as
part of the Board evaluation exercise the Committee has put
forward for re-election at the annual general meeting in July
2008 Willie Walsh, Maarten van den Bergh, Baroness Kingsmill,
Ken Smart and Baroness Symons. Their biographical details are
set out in the explanatory notes of the notice of annual general
meeting and demonstrate the skills and experience which they
bring to the benefit of the Company.
74 / British Airways 2007/08 Annual Report and Accounts
Report of the Nominations Committee
British Airways 2007/08 Annual Report and Accounts / 75
Independent auditor’s report to
the members of British Airways Plc
Overview of the year
Business review Corporate responsibility
Corporate governance
Financial statements
Shareholder information
We have audited the Group and Parent Company financial
statements (the ‘financial statements’) of British Airways Plc
for the year ended March 31, 2008 which comprise the
Group Consolidated Income Statement, the Group and Parent
Company Balance Sheets, the Group and Parent Company Cash
Flow Statements, the Group and Parent Company Statements
of Changes in Equity and the related Notes 1 to 38. These
financial statements have been prepared under the accounting
policies set out therein. We have also audited the information
in the Directors’ Remuneration Report that is described as
having been audited.
This report is made solely to the Company’s members, as
a body, in accordance with Section 235 of the Companies
Act 1985. Our audit work has been undertaken so that we
might state to the Company’s members those matters we are
required to state to them in an auditor’s report and for no
other purpose. To the fullest extent permitted by law, we
do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our
audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report,
the Directors’ Remuneration Report and the financial
statements in accordance with applicable United Kingdom law
and International Financial Reporting Standards (IFRS) as
adopted by the European Union are set out in the statement of
directors’ responsibilities.
Our responsibility is to audit the financial statements and the
part of the Directors’ Remuneration Report to be audited in
accordance with relevant legal and regulatory requirements
and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view and whether the financial
statements and the part of the Directors’ Remuneration Report
to be audited have been properly prepared in accordance with
the Companies Act 1985 and, as regards the Group financial
statements, Article 4 of the IAS Regulation. We also report
to you whether in our opinion the information given in the
Directors’ report and business review is consistent with the
financial statements.
In addition we report to you if, in our opinion, the Company
has not kept proper accounting records, if we have not
received all the information and explanations we require
for our audit, or if information specified by law regarding
directors’ remuneration and other transactions is not disclosed.
We review whether the Corporate Governance Statement
reflects the Company’s compliance with the nine provisions
of the 2006 Combined Code specified for our review by the
Listing Rules of the Financial Services Authority, and we report
if it does not. We are not required to consider whether the
Board’s statements on internal control cover all risks and
controls, or form an opinion on the effectiveness of the
Group’s corporate governance procedures or its risk and
control procedures.
We read other information contained in the Annual Report
and consider whether it is consistent with the audited financial
statements. The other information comprises only the Directors’
report and business review, the unaudited part of the Directors’
Remuneration Report, the Chairman’s Statement, the Chief
Executive’s Statement, the Chief Financial Officer’s report
and the Corporate Governance Statement. We consider the
implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the financial
statements. Our responsibilities do not extend to any other
information.
Basis of audit opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the Auditing
Practices Board. An audit includes examination, on a test basis,
of evidence relevant to the amounts and disclosures in the
financial statements and the part of the Directors’ Remuneration
Report to be audited. It also includes an assessment of the
significant estimates and judgments made by the directors
in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the Group’s and
Company’s circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary
in order to provide us with sufficient evidence to give
reasonable assurance that the financial statements and the part
of the Directors’ Remuneration Report to be audited are free
from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in
the financial statements and the part of the Directors’
Remuneration Report to be audited.
Opinion
In our opinion:
•
The Group financial statements give a true and fair view, in
accordance with IFRS as adopted by the European Union,
of the state of the Group’s affairs as at March 31, 2008 and
of its profit for the year then ended;
•
The Parent Company financial statements give a true and fair
view, in accordance with IFRS as adopted by the European
Union as applied in accordance with the provisions of the
Companies Act 1985, of the state of the Parent Company’s
affairs as at March 31, 2008;
•
The financial statements and the part of the Directors’
Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985 and,
as regards the Group financial statements, Article 4 of the
IAS Regulation; and
•
The information given in the Directors’ report and business
review is consistent with the financial statements.
Ernst & Young LLP
Registered auditor
London
May 15, 2008
76 / British Airways 2007/08 Annual Report and Accounts
Independent auditor’s report to
the members of British Airways Plc
continued
British Airways 2007/08 Annual Report and Accounts / 77
Financial statements
Group
£ million Note 2008 2007
Traffic revenue
Passenger 7,541 7,263
Cargo 616 598
8,157 7,861
Other revenue 596 631
Revenue 3 8,753 8,492
Employee costs
7 2,166 2,277
Depreciation, amortisation and impairment
4 692 714
Aircraft operating lease costs 68 81
Fuel and oil costs 2,055 1,931
Engineering and other aircraft costs 451 414
Landing fees and en route charges 528 517
Handling charges, catering and other operating costs 977 930
Selling costs 359 436
Currency differences 6 18
Accommodation, ground equipment and IT costs 576 618
Total expenditure on operations before non-recurring items 7,878 7,936
Operating profit before non-recurring items 875 556
Credit arising on changes to pension scheme
35 – 396
Provision for settlement of competition investigations 29 – (350)
Operating profit
4 875 602
Fuel derivative gains/(losses) 12 (12)
Finance costs
8 (175) (168)
Finance income
8 111 129
Net financing income/(expense) relating to pensions
8 34 (19)
Retranslation (charges)/credits on currency borrowings
8 (11) 13
Profit on sale of property, plant and equipment and investments
9 14 47
Share of post-tax profits in associates accounted for using the equity method
19 26 5
(Charges)/income relating to financial assets 10 (3) 14
Profit before tax 883 611
Tax 11 (187) (173)
Profit after tax from continuing operations 696 438
Loss from discontinued operations (after tax) 5 (2) (134)
Profit after tax 694 304
Attributable to:
Equity holders of the parent 680 290
Minority interest 14 14
694 304
Earnings/(loss) per share
Continuing operations:
Basic
12 59.2p 37.2p
Diluted 12 58.8p 36.8p
Discontinued operations:
Basic
12 (0.2)p (11.7)p
Diluted 12 (0.2)p (11.7)p
Total:
Basic
12 59.0p 25.5p
Diluted 12 58.6p 25.2p
78 / British Airways 2007/08 Annual Report and Accounts
Group consolidated income statement
For the year ended March 31, 2008
British Airways 2007/08 Annual Report and Accounts / 79
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Group Company
£ million Note 2008 2007 2008 2007
Non-current assets
Property, plant and equipment:
14
Fleet 5,976 6,153 5,794 5,957
Property 977 932 924 876
Equipment 310 272 301 266
7,263 7,357 7,019 7,099
Goodwill
17 40 40 – –
Landing rights
17 159 139 159 139
Software
17 22 33 22 34
221 212 181 173
Investments in subsidiaries
19 – – 2,207 1,185
Investments in associates
19 227 125 – –
Available-for-sale financial assets
20 80 107 24 41
Employee benefit assets
35 85 116 85 116
Derivative financial instruments
31 80 8 80 8
Prepayments and accrued income 19 20 9 10
Total non-current assets 7,975 7,945 9,605 8,632
Non-current assets held for sale 16 – 8 – 8
Current assets and receivables
Inventories
21 112 76 109 74
Trade receivables
22 586 654 574 635
Other current assets
23 308 268 371 336
Derivative financial instruments
31 278 78 278 78
Other current interest-bearing deposits
24 1,181 1,642 399 1,639
Cash and cash equivalents
24 683 713 433 662
1,864 2,355 832 2,301
Total current assets and receivables 3,148 3,431 2,164 3,424
Total assets 11,123 11,384 11,769 12,064
Shareholders’ equity
Shareholders’ equity:
Issued share capital
32 288 288 288 288
Share premium 937 933 937 933
Investment in own shares (10) (10) (10) (10)
Other reserves 34 1,818 1,000 1,344 683
Total shareholders’ equity 3,033 2,211 2,559 1,894
Minority interest 34 200 200 – –
Total equity 3,233 2,411 2,559 1,894
Non-current liabilities
Interest-bearing long-term borrowings
27 2,751 2,929 2,971 3,113
Employee benefit obligations
35 330 1,142 322 1,134
Provisions for deferred tax
11 1,154 930 1,069 855
Other provisions
29 210 153 185 114
Derivative financial instruments
31 33 6 33 6
Other long-term liabilities 26 168 188 132 150
Total non-current liabilities 4,646 5,348 4,712 5,372
Current liabilities
Current portion of long-term borrowings
27 423 417 421 413
Trade and other payables
25 2,590 2,726 3,849 3,924
Derivative financial instruments
31 57 18 57 18
Current tax payable 4 54 3 38
Short-term provisions 29 170 410 168 405
Total current liabilities 3,244 3,625 4,498 4,798
Total equity and liabilities 11,123 11,384 11,769 12,064
Willie Walsh
Keith Williams
May 15, 2008
Balance sheets
At March 31, 2008
Group Company
£ million Note 2008 2007 2008 2007
Cash flows from operating activities
Operating profit 875 602 855 607
Operating loss from discontinued operations (2) (122) – –
Credit arising on changes to pension scheme – (396) – (396)
Depreciation, amortisation and impairment 692 834 672 695
(Group includes £120 million from discontinued operations in 2007)
Operating cash flow before working capital changes 1,565 918 1,527 906
Decrease/(increase) in inventories, trade and other receivables 96 61 89 (136)
Decrease in trade and other payables and provisions (354) (15) (351) (18)
Cash payment to NAPS pension scheme
35 (610) (240) (610) (240)
Provision for settlement of competition investigations – 350 – 350
Payment to DOJ in settlement of competition investigations
29 (149) – (149) –
Other non-cash movements 3 (2) (32) (2)
Cash generated from operations 551 1,072 474 860
Interest paid (182) (188) (169) (170)
Taxation (66) (128) (56) (127)
Net cash flow from operating activities 303 756 249 563
Cash flows from investing activities
Purchase of property, plant and equipment
14 (596) (331) (592) (326)
Purchase of intangible assets
17 (33) (36) (32) (36)
Purchase of interest in associate
19 (54) – – –
Purchase of subsidiary undertaking
19 – – (1,016) (13)
Purchase of minority interest – (13) – –
Proceeds from sale of associated companies – 3 – –
Proceeds from sale of other investments – 52 – 52
Proceeds from sale of property, plant and equipment 11 7 11 7
Insurance recoveries from write-off of Boeing 777 aircraft 51 – 51 –
Cash inflow/(outflow) from disposal of subsidiary company 1 (149) – –
Interest received 117 113 123 112
Dividends received 3 1 4 20
Decrease in interest-bearing deposits 458 389 1,238 390
Net cash flow from investing activities (42) 36 (213) 206
Cash flows from financing activities
Proceeds from long-term borrowings 172 – 172 –
Repayments of borrowings (68) (97) (57) (77)
Payment of finance lease liabilities (356) (388) (355) (383)
Exercise of share options 4 50 4 50
Purchase of own shares – (12) – (12)
Distributions made to holders of perpetual securities (14) (14) – –
Net cash flow from financing activities (262) (461) (236) (422)
Net (decrease)/increase in cash and cash equivalents (1) 331 (200) 347
Net foreign exchange difference (29) (16) (29) (11)
Cash and cash equivalents at April 1 713 398 662 326
Cash and cash equivalents at March 31 24 683 713 433 662
80 / British Airways 2007/08 Annual Report and Accounts
Cash flow statements
For the year ended March 31, 2008
British Airways 2007/08 Annual Report and Accounts / 81
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Group
Investment Other Total
Issued Share in own reserves shareholders’ Minority Total
£ million capital premium shares (note 34) equity interest equity
At April 1, 2007 288 933 (10) 1,000 2,211 200 2,411
Profit for the period 680 680 14 694
Exchange differences and other movements 24 24 24
Net movement on cash flow hedges 119 119 119
Share-based payments 3 33
Tax effect of share-based payments (7) (7) (7)
Deferred tax – rate change adjustment 6 66
Share of other movements in reserves of associates (2) (2) (2)
Net losses on available-for-sale financial assets (5) (5) (5)
Total income and expense for the period 818 818 14 832
Issue of shares 4 44
Distributions (14) (14)
At March 31, 2008 288 937 (10) 1,818 3,033 200 3,233
For the year ended March 31, 2007 Group
Investment Other Total
Issued Share in own reserves shareholders’ Minority Total
£ million capital premium shares (note 34) equity interest equity
At April 1, 2006 283 888 690 1,861 213 2,074
Profit for the period 290 290 14 304
Exchange differences and other movements (3) (3) (3)
Net movement on cash flow hedges (4) (4) (4)
Share-based payments 10 10 10
Tax effect of share-based payments 18 18 18
Share of other movements in reserves of associates 88 8
Net gains on available-for-sale financial assets 33 3
Total income and expense for the period 322 322 14 336
Exercise of share options 2 (12) (10) (10)
Issue of shares 545 50 50
Purchase of own shares (12) (12) (12)
Purchase of minority interest (13) (13)
Distributions (14) (14)
At March 31, 2007 288 933 (10) 1,000 2,211 200 2,411
For the year ended March 31, 2008 Company
Issued Share Investment Other reserves Total
£ million capital premium in own shares (note 34) equity
At April 1, 2007 288 933 (10) 683 1,894
Profit for the period 540 540
Share-based payments 3 3
Tax effect of share-based payments (7) (7)
Deferred tax – rate change adjustment 6 6
Net movement on cash flow hedges 119 119
Total income and expense for the period 661 661
Issue of shares 4 4
At March 31, 2008 288 937 (10) 1,344 2,559
For the year ended March 31, 2007 Company
Issued Share Investment Other reserves Total
£ million capital premium in own shares (note 34) equity
At April 1, 2006 283 888 653 1,824
Profit for the period 18 18
Share-based payments 10 10
Tax effect of share-based payments 18 18
Net movement on cash flow hedges (4) (4)
Total income and expense for the period 42 42
Exercise of share options 2 (12) (10)
Issue of shares 545 50
Purchase of own shares (12) (12)
At March 31, 2007 288 933 (10) 683 1,894
Statements of changes in equity
For the year ended March 31, 2008
1 Authorisation of financial statements and
compliance with IFRSs
The Group’s and Company’s financial statements for the year ended
March 31, 2008 were authorised for issue by the Board of Directors
on May 15, 2008 and the balance sheets were signed on the Board’s
behalf by Willie Walsh and Keith Williams. British Airways Plc is a public
limited company incorporated and domiciled in England and Wales. The
Company’s ordinary shares are traded on the London Stock Exchange.
The Group has prepared its consolidated financial statements in
accordance with International Financial Reporting Standards (IFRSs)*
as adopted by the European Union (EU). IFRSs as adopted by the
EU differ in certain respects from IFRSs as issued by the International
Accounting Standards Board (IASB). However, the consolidated
financial statements for the periods presented would be no different
had the Group applied IFRSs as issued by the IASB. References to
‘IFRS’ hereafter should be construed as references to IFRSs as adopted
by the EU. The principal accounting policies adopted by the Group
and by the Company are set out in note 2.
The Company has taken advantage of the exemption provided under
Section 230 of the Companies Act 1985 not to publish its individual
income statement and related notes.
*For the purposes of these statements, IFRS also includes International Accounting
Standards (IAS).
2 Summary of significant accounting policies
Basis of presentation
The basis of presentation and accounting policies set out in this
Report and Accounts have been prepared in accordance with the
recognition and measurement criteria of IFRS, which also include
International Accounting Standards (IAS), as issued by the IASB and
with those of the Standing Interpretations issued by the International
Financial Reporting Interpretations Committee (IFRIC) of the IASB.
The financial statements for the prior period include reclassifications
that were made to conform to the current period presentation. The
amendments have no material impact on the financial statements.
These financial statements have been prepared on a historical cost
convention except for certain financial assets and liabilities, including
derivative financial instruments and available-for-sale financial assets
that are measured at fair value. The carrying value of recognised assets
and liabilities that are subject to fair value hedges are adjusted to record
changes in the fair values attributable to the risks that are being hedged.
The Group’s and Company’s financial statements are presented
in pounds sterling and all values are rounded to the nearest million
pounds (£m), except where indicated otherwise.
Basis of consolidation
The Group accounts include the accounts of the Company and its
subsidiaries, each made up to March 31, together with the attributable
share of results and reserves of associates, adjusted where appropriate
to conform with the Group’s accounting policies.
Subsidiaries are entities controlled by the Group. Control exists when
the Group has the power either directly or indirectly to govern the
financial and operating policies of the entity so as to obtain benefit
from its activities. Subsidiaries are consolidated from the date of their
acquisition, which is the date on which the Group obtains control, and
continue to be consolidated until the date that such control ceases.
All intra-group account balances, including intra-group profits, have
been eliminated in preparing the consolidated financial statements.
Minority interests represent the portion of profit or loss and net assets
in subsidiaries that are not held by the Group and are presented
separately within equity in the consolidated balance sheet.
Revenue
Passenger and cargo revenue is recognised when the transportation
service is provided. Passenger tickets net of discounts are recorded
as current liabilities in the ‘sales in advance of carriage’ account until
recognised as revenue. Unused tickets are recognised as revenue
using estimates regarding the timing of recognition based on the terms
and conditions of the ticket and historical trends. Other revenue is
recognised at the time the service is provided. Commission costs are
recognised at the same time as the revenue to which they relate and
are charged to cost of sales.
Revenue recognition – mileage programmes
The Group operates two principal loyalty programmes. The airline
frequent flyer programme operates through the airline’s ‘Executive
Club’ and allows frequent travellers to accumulate ‘BA Miles’ mileage
credits that entitle them to a choice of various awards, primarily
free travel. The estimated direct incremental cost of providing free
redemption services, including British Airways’ flights, in exchange for
redemption of miles earned by members of the Group’s ‘Executive
Club’ is accrued as members of the scheme accumulate mileage.
These costs are charged to cost of sales.
In addition, ‘BA Miles’ are sold to commercial partners to use in
promotional activity. The fair value of the miles sold is deferred and
recognised as revenue on redemption of the miles by the participants
to whom the miles are issued. The cost of providing free redemption
services is recognised when the miles are redeemed.
The Group also operates the AIRMILES scheme, operated by the
Company’s wholly-owned subsidiary Airmiles Travel Promotions
Limited. The scheme allows companies to purchase miles for use in
their own promotional activities. Miles can be redeemed for a range
of benefits, including flights on British Airways and other carriers. The
fair value of the miles sold is deferred and recognised as revenue on
redemption of the miles by the participants to whom the miles are
issued. The cost of providing free redemption services is recognised
when the miles are redeemed.
Segmental reporting
The Group’s primary reporting segments comprise business segments
and the secondary format is based on geographic segments. Business
segments are based on the internal management structure and system
of internal financial reporting. They reflect components of the Group
with distinguishable revenues, costs and assets and are subject to risks
82 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts
British Airways 2007/08 Annual Report and Accounts / 83
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
different from those of other reportable segments due either to the
products they provide or the markets in which they operate. The
nature of the primary business segments is set out below.
a Business segments
The airline business segment comprises the Group’s main scheduled
passenger and cargo operations and revenues ancillary to the provision
of those services. The airline business utilises the Group’s aircraft assets
flexibly across the worldwide route network.
The regional airline business segment comprised the Group’s scheduled
regional operation and revenues ancillary to the provision of those
services. The regional airline business utilised a dedicated fleet of
aircraft to provide services from UK regional airports principally to
shorthaul destinations within the UK and Europe. The regional airline
business segment was re-presented as discontinued operations in the
March 31, 2007 financial statements.
Non-airline businesses primarily include Airmiles Travel Promotions Ltd,
BA Holidays Ltd and Speedbird Insurance Company Ltd.
Transfer prices between business segments are set on an arm’s-length basis.
b Geographical segments
i) Turnover by origin: The analysis of turnover by origin is derived
by allocating revenue to the area in which the sale was made.
ii) Geographical analysis of net assets: The major revenue-earning asset
of the Group is the aircraft fleet, the majority of which are registered
in the UK. Since the Group’s aircraft fleet is employed flexibly across
its worldwide route network, there is no suitable basis of allocating
such assets and related liabilities to geographical segments.
Intangible assets
a Goodwill
Where the cost of a business combination exceeds the fair values
attributable to the net assets acquired, the resulting goodwill is capitalised
and tested for impairment annually and whenever indicators exist
that the carrying value may not be recoverable. Prior to the adoption
of IFRS 3, which was applied prospectively from April 1, 1999 any
goodwill that had been recognised on acquisition was amortised over
a period not exceeding 20 years. Prior to March 31, 1998 goodwill
was set off against reserves on the acquisition of a business or an
equity interest in an associate. Such goodwill is not recognised on
transition to IFRS. Any goodwill arising on the acquisition of equity-
accounted entities is included within the cost of those entities.
Goodwill is allocated to cash-generating units for the purpose of
impairment testing.
b Landing rights
Landing rights acquired from other airlines are capitalised at cost or
at fair value and amortised on a straight-line basis over a period not
exceeding 20 years.
c Software
The cost of purchase or development of computer software that is
separable from an item of related hardware is capitalised separately and
amortised over a period not exceeding four years on a straight-line basis.
The carrying value of intangibles is reviewed for impairment if
events or changes in circumstances indicate the carrying value
may not be recoverable.
Property, plant and equipment
Property, plant and equipment is held at cost. The Group has a
policy of not revaluing property, plant and equipment. Depreciation
is calculated to write off the cost less estimated residual value, on
a straight-line basis, over the useful life of the asset. Residual values,
where applicable, are reviewed annually against prevailing market
values for equivalently aged assets and depreciation rates adjusted
accordingly on a prospective basis.
The carrying value is reviewed for impairment when events or changes
in circumstances indicate the carrying value may not be recoverable
and the cumulative impairment losses are shown as a reduction in the
carrying value of property, plant and equipment.
a Capitalisation of interest on progress payments
Interest attributed to progress payments, and related exchange
movements on foreign currency amounts, made on account of
aircraft and other significant assets under construction is capitalised
and added to the cost of the asset concerned.
b Fleet
All aircraft are stated at the fair value of the consideration given after
taking account of manufacturers’ credits. Fleet assets owned, or held
on finance lease or hire purchase arrangements, are depreciated at
rates calculated to write down the cost to the estimated residual value
at the end of their planned operational lives on a straight-line basis.
Cabin interior modifications, including those required for brand changes
and relaunches, are depreciated over the lower of five years and the
remaining life of the aircraft.
Aircraft and engine spares acquired on the introduction or expansion
of a fleet, as well as rotable spares purchased separately, are carried as
property, plant and equipment and generally depreciated in line with
the fleet to which they relate.
Major overhaul expenditure, including replacement spares and
labour costs, is capitalised and amortised over the average expected
life between major overhauls. All other replacement spares and other
costs relating to maintenance of fleet assets (including maintenance
provided under ‘power-by-the-hour’ contracts) are charged to the
income statement on consumption or as incurred respectively.
c Property and equipment
Provision is made for the depreciation of all property and equipment,
apart from freehold land, based upon expected useful lives, or in the
case of leasehold properties over the duration of the leases if shorter,
on a straight-line basis.
2 Summary of significant accounting policies
continued
d Leased and hire purchase assets
Where assets are financed through finance leases or hire purchase
arrangements, under which substantially all the risks and rewards
of ownership are transferred to the Group, the assets are treated
as if they had been purchased outright. The amount included in the
cost of property, plant and equipment represents the aggregate of
the capital elements payable during the lease or hire purchase term.
The corresponding obligation, reduced by the appropriate proportion
of lease or hire purchase payments made, is included in borrowings.
The amount included in the cost of property, plant and equipment
is depreciated on the basis described in the preceding paragraphs
and the interest element of lease or hire purchase payments made is
included in interest payable in the income statement. Total minimum
payments, measured at inception, under all other lease arrangements,
known as operating leases, are charged to the income statement in
equal annual amounts over the period of the lease. In respect of
aircraft, certain operating lease arrangements allow the Group to
terminate the leases after a limited initial period (normally 10 years),
without further material financial obligations. In certain cases the
Group is entitled to extend the initial lease period on pre-determined
terms; such leases are described as extendable operating leases.
Inventories
Inventories, including aircraft expendables, are valued at the lower of
cost and net realisable value. Such cost is determined by the weighted
average cost method.
Interests in associates
An associate is an undertaking in which the Group has a long-term
equity interest and over which it has the power to exercise significant
influence. The Group’s interest in the net assets of associates is included in
investment in associates in the consolidated balance sheet and its interest
in their results is included in the income statement, below operating
profit. Certain associates make up their annual audited accounts to
dates other than March 31. In the case of Iberia, published results
up to the year ended December 31 are included. In other cases,
results disclosed by subsequent unaudited management accounts
are included. The attributable results of those companies acquired or
disposed of during the year are included for the periods of ownership.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand and deposits with
any qualifying financial institution repayable on demand or maturing
within three months of the date of acquisition and which are subject
to an insignificant risk of change in value.
Other current interest-bearing deposits
Other current interest-bearing deposits, principally comprising funds
held with banks and other financial institutions, are carried at amortised
cost using the effective interest method. Such financial assets are classified
as held to maturity when the Group has the positive intention and
ability to hold to maturity. Gains and losses are recognised in income
when the deposits are derecognised or impaired, as well as through
the amortisation process.
Trade and other receivables
Trade and other receivables are stated at cost less allowances made
for doubtful receivables, which approximates fair value given the short
dated nature of these assets. A provision for impairment of trade
receivables (allowance for doubtful receivables) is established when
there is objective evidence that the Group will not be able to collect
all amounts due according to the original terms of the receivable.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial
assets that are not classified as loans and receivables. After initial
recognition, available-for-sale financial assets are measured at fair
value, with gains or losses recognised as a separate component of
equity until the investment is derecognised or until the investment
is determined to be impaired, at which time the cumulative gain or
loss previously reported in equity is included in profit or loss.
The fair value of quoted investments is determined by reference to bid
prices at the close of business on the balance sheet date. Where there
is no active market, fair value is determined using valuation techniques.
Where fair value cannot be reliably estimated, assets are carried at cost.
Employee benefits
Employee benefits, including pensions and other post-retirement benefits
(principally post-retirement healthcare benefits) are presented in these
financial statements in accordance with IAS 19 ‘Employee Benefits’.
For the Group’s defined benefit plans, post-retirement obligations are
measured at discounted present value whilst plan assets are measured
at fair value at the balance sheet date. The cost of current service costs
are recognised in the income statement so as to recognise the cost
of providing the benefit on a straight-line basis over the service lives
of the employees using the projected unit credit method. Past service
costs are recognised when the benefit has been given. The financing
cost and expected return on plan assets are recognised within
financing costs in the periods in which they arise. The accumulated
effect of changes in estimates, changes in assumptions and deviations
from actuarial assumptions (actuarial gains and losses) that are less
than 10 per cent of the higher of pension benefit obligations and
pension plan assets at the beginning of the year are not recorded.
When the accumulated effect is above 10 per cent the excess amount
is recognised in the income statement over the estimated average
remaining service period.
Amounts paid to defined contribution post-retirement schemes are
recognised within the income statement when the payments fall due.
Other employee benefits are recognised when the obligation exists
for the future liability.
Share-based payments
The fair value of employee share option plans is measured at the date of
grant of the option using an appropriate valuation model. The resulting
cost, as adjusted for the expected and actual level of vesting of the
options, is charged to income over the period in which the options vest.
At each balance sheet date before vesting, the cumulative expense
is calculated; representing the extent to which the vesting period
has expired and management’s best estimate of the achievement or
otherwise of non-market conditions, of the number of equity instruments
that will ultimately vest. The movement in cumulative expense since
the previous balance sheet date is recognised in the income statement
with a corresponding entry in equity.
84 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 85
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Taxation
Current tax assets and liabilities are measured at the amount expected
to be recovered from or paid to the taxation authorities, based on tax
rates and laws that are enacted or substantively enacted at the balance
sheet date.
Deferred income tax is recognised on all temporary differences arising
between the tax bases of assets and liabilities and their carrying amounts
in the financial statements, with the following exceptions:
•
Where the temporary difference arises from the initial recognition
of goodwill or of an asset or liability in a transaction that is not a
business combination that at the time of the transaction affects
neither accounting nor taxable profit or loss;
•
In respect of taxable temporary differences associated with
investments in subsidiaries or associates, where the timing of the
reversal of the temporary differences can be controlled and it is
probable that the temporary differences will not reverse in the
foreseeable future; and
•
Deferred income tax assets are recognised only to the extent that
it is probable that taxable profit will be available against which the
deductible temporary differences, carried forward tax credits or
tax losses can be utilised.
Deferred income tax assets and liabilities are measured on an
undiscounted basis at the tax rates that are expected to apply when
the related asset is realised or liability is settled, based on tax rates
and laws enacted or substantively enacted at the balance sheet date.
Income tax is charged or credited directly to equity if it relates to
items that are credited or charged to equity. Otherwise income tax
is recognised in the income statement.
Provisions
Provisions are made when an obligation exists for a future liability
in respect of a past event and where the amount of the obligation
can be reliably estimated. Restructuring provisions are made for
direct expenditures of a business reorganisation where the plans
are sufficiently detailed and well advanced, and where appropriate
communication to those affected has been undertaken at the balance
sheet date. If the effect is material, expected future cash flows are
discounted using a current pre-tax rate that reflects, where appropriate,
the risks specific to the liability. Where discounting is used the increase
in the provision due to unwinding the discount is recognised as a
finance cost.
Foreign currency translation
Transactions in foreign currencies are initially recorded in the
functional currency, sterling, by applying the spot exchange rate ruling
at the date of the transaction. Monetary foreign currency balances are
translated into sterling at the rates ruling at the balance sheet date. All
other profits or losses arising on translation are dealt with through the
income statement except where hedge accounting is applied.
The net assets of foreign operations are translated into sterling
at the rate of exchange ruling at the balance sheet date. Profits and
losses of such operations are translated into sterling at average rates
of exchange during the year. The resulting exchange differences are
taken directly to a separate component of equity until all or part of the
interest is sold when the relevant portion of the cumulative exchange
is recognised in income.
Derivatives and financial instruments
Under IAS 39 ‘Financial Instruments – Recognition and Measurement’,
financial instruments are recorded initially at fair value. Subsequent
measurement of those instruments at the balance sheet date reflects
the designation of the financial instrument. The Group determines the
classification at initial recognition and re-evaluates this designation at
each year end except for those financial instruments measured at fair
value through the income statement.
Other investments (other than interests in associates) are designated
as available-for-sale financial assets and are recorded at fair value.
Any change in the fair value is reported in equity until the investment
is sold when the cumulative amount recognised in equity is recognised
in income. In the case of equity securities classified as available-for-sale
investments, a significant or prolonged decline in the fair value of the
security below its cost is considered as an indicator that the security
is impaired. If any such evidence exists for available-for-sale financial
assets, the cumulative gain or loss previously reported in equity is
included in the income statement. Exchange gains and losses on
monetary items are taken to income unless the item has been designated
and is assessed as an effective hedging instrument in accordance with
the requirement of IAS 39. Exchange gains and losses on non-monetary
investments are reflected in equity until the investment is sold when
the cumulative amount recognised in equity is recognised in income.
Long-term borrowings are recorded at amortised cost. Certain leases
contain interest rate swaps that are closely related to the underlying
financing and, as such, are not accounted for as an embedded derivative.
Derivative financial instruments; comprising interest rate swap
agreements, foreign exchange derivatives and fuel hedging derivatives
(including options, swaps and futures) are measured at fair value on
the Group balance sheet.
Cash flow hedges
Changes in the fair value of derivative financial instruments are reported
through operating income or financing according to the nature of the
instrument, unless the derivative financial instrument has been designated
as a hedge of a highly probable expected future cash flow. Gains and
losses on derivative financial instruments designated as cash flow
hedges and assessed as effective for the period, are taken to equity in
accordance with the requirements of IAS 39. Gains and losses taken to
equity are reflected in the income statement when either the hedged
cash flow impacts income or its occurrence ceases to be probable.
Certain loan repayment instalments denominated in US dollars and
Japanese yen are designated as cash flow hedges of highly probable
future foreign currency revenues. Exchange differences arising from
the translation of these loan repayment instalments are taken to
equity in accordance with IAS 39 requirements and subsequently
reflected in the income statement when either the future revenue
impacts income or its occurrence ceases to be probable.
Impairment in financial assets
The Group assess at each balance sheet date whether a financial asset
or group of financial assets is impaired.
2 Summary of significant accounting policies
continued
Investment in own shares
Shares in the Company held by the Group are classified as ‘Investments
in own shares’ and shown as deductions from shareholders’ equity at
cost. Consideration received for the sale of such shares is also recognised
in equity, with any difference between the proceeds from the sale and
the original cost being taken to reserves.
No gain or loss is recognised in the performance statements on the
purchase, sale, issue or cancellation of equity shares.
Derecognition of financial assets and liabilities
A financial asset or liability is generally derecognised when the contract
that gives rise to it has been settled, sold, cancelled or expired.
Where an existing financial liability is replaced by another from
the same lender on substantially different terms, or the terms of
an existing liability are substantially modified, such an exchange
or modification is treated as a derecognition of the original liability
and the recognition of a new liability, such that the difference in the
respective carrying amounts together with any costs or fees incurred
are recognised in the income statement.
Exceptional items
Exceptional items are those that in management’s view need to be
disclosed by virtue of their size or incidence. Such items are included
on the income statement under a caption to which they relate, and
are separately disclosed in the notes to the consolidated financial
statements. Certain exceptional items have been classified as non-
recurring items and they are included on the face of the consolidated
income statement.
Discontinued operations
Disposal groups are classified as discontinued operations where they
represent a major line of business or geographical area of operations.
Key accounting estimates and judgements
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and
expenses. These estimates and associated assumptions are based
on historical experience and various other factors believed to be
reasonable under the circumstances. Actual results could differ from
these estimates. These underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revision affects only that
period, or in the period of the revision and future periods if these are
also affected. The estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts of assets
and liabilities within the next financial year are discussed below.
a) Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment
for all non-financial assets at each reporting date. Goodwill is tested
for impairment annually and at other times when such indicators exist.
The recoverable amounts of cash-generating units have been determined
based on value-in-use calculations. These calculations require the use
of estimates (note 18).
Other non-financial assets are tested for impairment when there are
indicators that the carrying amounts may not be recoverable.
b) Share-based payments
The Group measures the cost of equity-settled transactions with
employees by reference to the fair value of the equity instruments
at the date at which they are granted. Estimating fair value requires
determining the most appropriate valuation model for a grant of
equity instruments, which is dependent on the terms and conditions
of the grant. This also requires determining the most appropriate
inputs to the valuation model including the expected life of the
option, volatility and dividend yield and making assumptions about
them. The assumptions and models used are disclosed in note 33.
c) Pensions and other post-retirement benefits
The cost of defined benefit pension plans and other post-employment
medical benefits is determined using actuarial valuations. The actuarial
valuation involves making assumptions about discount rates, expected
rates of return on assets, future salary increases, mortality rates and
future pension increases. Due to the long-term nature of these schemes,
such estimates are subject to significant uncertainty (note 35).
d) Impairment of available-for-sale financial assets
The Group classifies certain financial assets as available-for-sale and
recognises movements in their fair value in shareholders’ equity. When
the fair value declines, management makes assumptions about the
decline in value to determine whether it is an impairment that should
be recognised in the income statement. Impairment losses recognised
in the income statement is disclosed in note 10.
e) Passenger revenue recognition
Passenger revenue is recognised when the transportation is provided.
Unused tickets are recognised as revenue using estimates regarding
the timing of recognition based on the terms and conditions of the
ticket and historical trends.
Impact of new International Financial Reporting Standards
The accounting policies adopted are consistent with those of the
previous financial year except as follows:
IFRS 7 ‘Financial Instruments – Disclosures’; effective for annual
periods beginning on or after January 1, 2007. This standard replaces
disclosure rules previously set out in IAS 32 ‘Financial Instruments:
Presentation and Disclosures’. IFRS 7 requires disclosure of additional
information about the Group’s financial instruments, of adoption of
the new standards and the nature and extent of risks to which they
give rise. More specifically, the Group is required to make specified
minimum disclosures about credit risk, liquidity risk and market risk.
There is no effect on reported income or shareholders’ equity. All
disclosures relating to financial instruments including all comparative
information have been updated to reflect the new requirements.
IAS 1 ‘Presentation of Financial Statements’; effective for annual
periods on or after January 1, 2007. This amendment requires the
Group to make new disclosures to enable users of the financial
statements to evaluate the Group’s objectives, policies and processes
for managing capital. All disclosures relating to the Group’s objective,
policies and processes for managing capital, including all comparative
information, have been updated to reflect the new requirements.
86 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 87
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
IFRIC 8 ‘Scope of IFRS 2 – Group and Treasury Share Transactions’;
effective for annual periods beginning on or after May 1, 2006. This
interpretation requires IFRS 2 to be applied to any arrangements
in which the entity cannot identify specifically some or all of the
goods received, in particular where equity instruments are issued for
consideration which appears to be less than fair value. This interpretation
had no impact on the Group.
IFRIC 9 ‘Reassessment of Embedded Derivatives’; effective for annual
periods beginning on or after January 1, 2007, which states that the
date to assess the existence of an embedded derivative is the date
that an entity first becomes party to the contract, with reassessment
only if there is a change to the contract that significantly modifies the
cash flows. This interpretation had no impact to the Group.
IFRIC 10 ‘Interims and Impairment’; effective for annual periods
beginning on or after November 1, 2006, which requires that an entity
must not reverse an impairment loss recognised in a previous interim
period in respect of goodwill or an investment in either an equity
instrument or a financial asset carried at cost. This interpretation has
not had any impact on the timing or recognition of impairment losses
as the Group already accounted for such amounts using principles
consistent with IFRIC 10.
IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’; effective
for annual periods beginning on or after March 1, 2007, which requires
arrangements whereby an employee is granted rights to an entity’s
instruments to be accounted for as an equity-settled scheme, even if
the entity buys the instruments from another party, or the shareholders
provide the equity instruments needed. This interpretation had no
impact on the Group.
New standards, amendments and interpretations
not yet effective
The IASB and IFRIC issued the following standards and interpretations
with an effective date after the date of these financial statements:
IFRIC 13 ‘Customer Loyalty Programmes’, effective for annual periods
beginning on or after July 1, 2008. IFRIC 13 addresses accounting
by entities that operate or otherwise participate in customer loyalty
programmes for their customers. IFRIC 13 applies to sales transactions
in which the entities grant their customers award credits that, subject to
meeting any further qualifying conditions, the customers can redeem
in the future for free or discounted goods or services. The interpretation
requires that an entity recognises credits that it awards to customers as
a separately identifiable component of revenue, which would be deferred
at the date of the initial sale. IFRIC 13 will become mandatory for the
Group’s consolidated financial statements beginning April 1, 2009 with
earlier application permitted. The Group expects to early adopt IFRIC 13
from April 1, 2008 with initial adoption expected to result in a reduction
in opening shareholders’ equity.
IFRIC 14 ‘IAS 19 – The limit on a defined benefit asset, minimum
funding requirement and their interaction’; effective for annual periods
beginning on or after July 1, 2008. IFRIC 14 provides guidance on
assessing the limit in IAS 19 on the amount of the surplus that can
be recognised as an asset. The Group will apply IFRIC 14 from April 1,
2008, but management has not yet determined the potential effect of
this interpretation.
IAS 1 (Amendment) ‘Presentation of Financial Statements’ –
A Revised Presentation; effective for annual periods beginning on
or after January 1, 2009, requires separate presentation of owner
and non-owner changes in equity by introducing the statement of
comprehensive income. The statement of recognised income and
expense will no longer be presented. Whenever there is a restatement
or reclassification, an additional balance sheet, as at the beginning of
the earliest period presented, will be required to be published. There
will be no effect on the Group’s reported income or net assets. IAS 1
revised has not yet been adopted by the EU.
IFRS 3 (Revised) ‘Business Combinations’; effective for annual periods
beginning on or after July 1, 2009, requires the purchase method of
accounting to be applied to business combinations but will introduce
some changes to existing accounting treatment. Management does
not expect this interpretation to impact the Group.
IAS 27 (Amendment) ‘Consolidated and Separate Financial Statements’;
effective for annual periods beginning on or after July 1, 2009, requires
the effects of all transactions with non-controlling interests to be
recorded in equity if there is no change in control. Such transactions
will no longer result in goodwill or gains or losses. Where control is
lost, any remaining interest in the entity is remeasured to fair value
and a gain or loss recognised in the income statement. Management
does not expect this interpretation to impact the Group.
IFRS 2 (Amendment) ‘Share-based Payment’; effective for annual periods
beginning on or after January 1, 2009, clarifies that only service conditions
and performance conditions are vesting conditions, and other features
of a share-based payment are not vesting conditions. In addition, it
specifies that all cancellations, whether by the entity or by other
parties, should receive the same accounting treatment. Management
does not expect this amendment to impact the Group.
IAS 23 (Amendment) ‘Borrowing Costs’; effective for annual periods
beginning on or after January 1, 2009, requires an entity to capitalise
borrowing costs directly attributable to the acquisition, construction
or production of a qualifying asset as part of the cost of that asset.
The option of immediately expensing those borrowing costs will be
removed. Management does not expect this amendment to impact
the Group, as the Group’s current policy is to capitalise borrowing
costs on qualifying assets.
IAS 32 (Amendment) ‘Financial Instruments: Presentation’ and IAS 1
(Amendment) ‘Presentation of Financial Statements’ – ‘Puttable Financial
Instruments and Obligations Arising on Liquidation’; both effective for
annual periods beginning on or after January 1, 2009, require entities
to classify as equity certain financial instruments provided certain
criteria are met. The instruments to be classified as equity are puttable
financial instruments and those instruments that impose an obligation
on the entity to deliver to another party a pro rata share of the net
assets of the entity only on liquidation. Management does not expect
this amendment to impact the Group.
IFRIC 12 ‘Service Concession Arrangements’; effective for annual
periods beginning on or after January 1, 2008. Management does
not expect this interpretation to impact the Group.
IFRS 8 ‘Operating Segments’; effective for annual periods beginning on
or after January 1, 2009, subject to EU endorsement. IFRS 8 requires a
‘management approach’, under which segment information is presented
on the same basis as that used for internal reporting purposes. The
Group will apply IFRS 8 from April 1, 2009. Management has not yet
determined the potential effect of the standard.
3 Segment information
a Business segments
For the year ended March 31, 2008
Continuing operations
Airline Non-airline Discontinued
£ million business business Unallocated Total operations* Total
Revenue
Sales to external customers ** 8,561 192 8,753 8,753
Inter-segment sales 31 31 31
Segment revenue 8,592 192 8,784 8,784
Segment result 850 25 875 (2) 873
Other non-operating income 9 9 9
Profit/(loss) before tax and finance costs 859 25 884 (2) 882
Net finance costs (41) (41) (41)
Profit/(loss) on sale of assets 16 (2) 14 14
Share of associates’ profit 26 26 26
Income tax expense (187) (187) (187)
Profit/(loss) after tax 901 23 (228) 696 (2) 694
Assets and liabilities
Segment assets 10,797 99 10,896 10,896
Investment in associates 227 227 227
Total assets 11,024 99 11,123 11,123
Segment liabilities 3,260 298 3,558 3,558
Unallocated liabilities *** 4,332 4,332 4,332
Total liabilities 3,260 298 4,332 7,890 7,890
Other segment information
Property, plant and equipment – additions 636 1 637 637
Intangible assets – additions 40 40 40
Depreciation, amortisation and impairment 690 2 692 692
Exceptional items (note 4b) 1 1 1
* As disclosed in note 5, BA Connect, which previously comprised the majority of the ‘Regional airline business’ segment, was disposed of in March 2007. The results
of operations for BA Connect are now presented as discontinued operations.
** Sales to external customers within the ‘Non-airline business’ segment include certain elements of other revenue related to the ‘Airline business’ segment.
*** Unallocated liabilities primarily include deferred taxes of £1,154 million (2006/07: £930 million) and borrowings of £3,174 million (2006/07: £3,346 million) which
are managed on a Group basis.
88 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 89
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
3 Segment information continued
For the year ended March 31, 2007
Continuing operations
Airline Non-airline Discontinued
£ million business business Unallocated Total operations* Total
Revenue
Sales to external customers** 8,294 198 8,492 233 8,725
Inter-segment sales 36 1 37 3 40
Segment revenue 8,330 199 8,529 236 8,765
Segment result 600 2 602 (122) 480
Other non-operating income/(expense) 22(3)(1)
Profit/(loss) before tax and finance costs 602 2 604 (125) 479
Net finance costs (45) (45) (5) (50)
(Loss)/profit on sale of assets (1) 48 47 (28) 19
Share of associates’ profit 555
Income tax (expense)/credit (173) (173) 24 (149)
Profit/(loss) after tax 606 50 (218) 438 (134) 304
Assets and liabilities
Segment assets 11,147 112 11,259 11,259
Investment in associates 125 125 125
Total assets 11,272 112 11,384 11,384
Segment liabilities 4,307 336 4,643 4,643
Unallocated liabilities*** 4,330 4,330 4,330
Total liabilities 4,307 336 4,330 8,973 8,973
Other segment information
Property, plant and equipment – additions 336 1 337 2 339
Intangible assets – additions 41 41 41
Depreciation, amortisation and impairment 712 2 714 120 834
Exceptional items (note 4b) 38 38 38
* As disclosed in note 5, BA Connect, which previously comprised the majority of the ‘Regional airline business’ segment, was disposed of in March 2007. The results
of operations for BA Connect are now presented as discontinued operations.
** Sales to external customers within the ‘Non-airline business’ segment include certain elements of other revenue related to the ‘Airline business’ segment.
*** Unallocated liabilities primarily include deferred taxes of £1,154 million (2006/07: £930 million) and borrowings of £3,174 million (2006/07: £3,346 million) which
are managed on a Group basis.
b Geographical segments – by area of original sale
Continuing operations Discontinued operations Group
£ million 2008 2007 2008 2007 2008 2007
Europe: 5,576 5,316 224 5,576 5,540
United Kingdom 4,357 4,160 184 4,357 4,344
Continental Europe 1,219 1,156 40 1,219 1,196
The Americas 1,697 1,731 7 1,697 1,738
Africa, Middle East and Indian subcontinent 821 803 2 821 805
Far East and Australasia 659 642 659 642
Revenue 8,753 8,492 233 8,753 8,725
4 Operating profit
a Operating profit is arrived at after charging/(crediting):
Depreciation, amortisation and impairment of fixed assets
Group
£ million 2008 2007
Owned assets 362 340
Finance leased aircraft 119 116
Hire purchased aircraft 118 153
Other leasehold interests 62 77
Impairment reversals on property, plant and equipment (2)
Amortisation of intangible assets 31 30
Total depreciation, amortisation and impairment expense 692 714
Operating lease costs
Group
£ million 2008 2007
Minimum lease rentals – aircraft 80 90
– property 119 136
Sub-lease rentals received (16) (16)
Net onerous lease provision (release)/arising (9) 1
174 211
Cost of inventories
Group
£ million 2008 2007
Cost of inventories recognised as an expense, mainly fuel and other 2,128 2,012
Includes write-down of inventories to net realisable value 5
b Exceptional items
Group
£ million 2008 2007
Recognised in operating profit:
Employee costs – restructuring costs 1 84
Credit arising on changes to pension scheme (396)
Provision for settlement of competition investigations 350
1 38
During the prior year the Group incurred restructuring costs in relation to organisational changes across the business including costs associated
with the reduction in management numbers announced in November 2005.
5 Discontinued operations
On November 3, 2006 the Group announced that it had reached an agreement in principle to sell the regional operation of its subsidiary airline
BA Connect to the Flybe Group Ltd. The acquisition of BA Connect by the Flybe Group Ltd excluded the London City airport routes and the
BA Connect-operated service from Manchester to New York. The disposal was completed on March 5, 2007. The business sold comprised the
majority of the ‘Regional airline business’ segment as disclosed in the financial statements for the year ended March 31, 2006. The Group paid
the Flybe Group Ltd £129 million, and took a 15 per cent investment in the Flybe Group Ltd, valued at £49 million at March 31, 2007.
Following the sale of the regional business of BA Connect to the Flybe Group Ltd in March 2007, the Group has agreed contractual terms to
transfer its regional ground handling to aviance UK. The restructuring provision included in discontinued operations relates to costs associated
with the reduction in staff at the regional airports, whose employment was attributed to the BA Connect operations and third-party flights.
90 / British Airways 2007/08 Annual Report and Accounts
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British Airways 2007/08 Annual Report and Accounts / 91
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Financial statements
Shareholder information
5 Discontinued operations continued
Prior to the sale and transfer of the operations to discontinued operations, an impairment review was carried out on the assets, including goodwill,
of the BA Connect business, prompted by the ongoing deterioration in trading performance against plan. This resulted in an impairment charge
of £106 million, representing goodwill of £32 million and fleet assets of £74 million. The pre-tax impairment charge gave rise to a deferred tax
credit of £22 million that has been recognised in the income statement (discontinued operations).
The £2 million loss from discontinued operations for the year ended March 31, 2008 is attributed to the resolution of uncertainties that arose
from the terms of the disposal transaction, primarily adjustments to the restructuring provision previously reported within discontinued operations.
a Results from discontinued operations
The results from discontinued operations, which have been included in the consolidated income statement, are as follows:
Group
£ million 2008 2007
Revenue 233
Operating expenses (231)
Impairment (106)
Restructuring costs (2) (18)
Operating loss (2) (122)
Disposal transaction costs (3)
Loss arising on disposal of net assets (28)
Net finance costs (5)
Loss before tax (2) (158)
Tax:
UK corporation tax credit 3
Tax arising from disposal of discontinued operations (4)
Total current income tax credit (discontinued operations) (1)
Deferred tax credit (note 11c) 25
Total tax credit (note 5b) 24
Loss from discontinued operations (2) (134)
Analysis of deferred tax credit above:
Fixed asset related temporary differences 29
Pensions (4)
Deferred tax credit 25
b Reconciliation of the tax charge relating to discontinued operations
The tax credit for the year on the loss from discontinued operations is less than the notional tax credit on those losses calculated at the
UK corporation tax rate of 30 per cent (2006/07: 30 per cent). The differences are explained below:
Group
£ million 2008 2007
Accounting loss before income tax from discontinued operations (2) (158)
Accounting loss multiplied by standard rate of corporation tax in the UK of 30 per cent (2006/07: 30 per cent) (1) (47)
Effects of:
Non-deductible expenses 1 5
Untaxed profits on disposals 8
Goodwill write-off 10
Total tax credit on discontinued operations for the year (note 5a) (24)
5 Discontinued operations continued
c Assets and liabilities of the discontinued operations at the date of disposal
The major classes of assets and liabilities of the discontinued operations at the date of disposal were as follows:
Group
£ million 2008 2007
Tangible assets 78
Intangible assets 1
Deferred tax asset (note 11c) 8
Other non-current assets 4
Expendable spares and other inventories 3
Trade receivables 23
Cash and cash equivalents 129
Other provisions (43)
Other long-term liabilities (85)
Trade payables (41)
Total net assets disposed of – 77
Investment in Flybe Group Ltd (consideration) 49
Loss arising on disposal of net assets – (28)
Cash and cash equivalents in BA Connect on disposal (129)
Settlement of trade receivable with the Company (17)
Transaction costs (3)
Cash outflow from disposal of BA Connect – (149)
The cash flows relating to the discontinued operations to the date of disposal were as follows:
Operating cash flows 16
Investing cash flows (2)
Financing cash flows (20)
Excludes £149 million cash outflow from disposal of BA Connect.
6 Auditors’ remuneration
Group Company
£’000 2008 2007 2008 2007
Group auditors – Audit fees
Fees payable to the Group’s auditors for the audit of the Group’s accounts 1,985 2,020 1,985 2,020
Fees payable to the Group’s auditors and its associates for other services:
Audit of the Group’s subsidiaries pursuant to legislation 271 271
Other services pursuant to legislation* 57 1,266 43 1,248
Other services relating to taxation 308 81 308 81
Services relating to corporate finance transactions 286 9 286 9
All other services 113 678 113 678
3,020 4,325 2,735 4,036
*The ‘Other services pursuant to legislation’ amount in 2007 is primarily attributed to Sarbanes Oxley section 404 audit fees. Compliance with Sarbanes Oxley is no longer
required due to the Company’s deregistration from the New York Stock Exchange during the year ended March 31, 2008.
Of the Group fees, £2,788,000 relates to the UK (2006/07: £4,234,000) and £232,000 relates to overseas (2006/07: £91,000).
Of the Company fees, £2,527,000 relates to the UK (2006/07: £3,969,000) and £208,000 relates to overseas (2006/07: £67,000).
The audit fees payable to Ernst & Young LLP are approved by the Audit Committee having been reviewed in the context of other companies
for cost effectiveness.
The committee also reviews and approves the nature and extent of non-audit services to ensure that independence is maintained.
92 / British Airways 2007/08 Annual Report and Accounts
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British Airways 2007/08 Annual Report and Accounts / 93
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
7 Employee costs and numbers
a Staff costs
The average number of persons employed during the year was as follows:
Group Company
Number 2008 2007 2008 2007
United Kingdom 39,193 41,409 36,962 37,718
Overseas 5,947 6,661 5,159 5,721
45,140 48,070 42,121 43,439
Group Company
£ million 2008 2007 2008 2007
Wages and salaries 1,433 1,522 1,362 1,400
Social security costs 150 158 142 145
Costs related to pension scheme benefits 216 308 211 296
Other post-retirement benefit costs 4 3 3 3
Other employee costs 363 364 352 346
Total employee costs 2,166 2,355 2,070 2,190
Employee costs relating to continuing operations 2,166 2,277 2,072 2,180
Employee costs/(income) relating to discontinued operations 78 (2) 10
In addition, included in ‘Wages and salaries’ is a total expense of share-based payments of £3 million (2006/07: £10 million) that arises from
transactions accounted for as equity-settled share-based payment transactions.
Other employee costs include allowances, severance and accommodation for crew.
Employee costs for 2006/07 exclude the £396 million credit arising on changes to NAPS which is disclosed separately on the face of the
income statement.
b Directors’ emoluments
Group
£’000 2008 2007
Fees 734 648
Salary and benefits 1,123 1,484
Aggregate gains made by directors on the exercise of options 555
1,857 2,687
During the year, one director accrued benefits under defined benefit pension schemes and one director accrued benefits under a defined
contribution pension scheme.
The Directors’ Remuneration report discloses full details of directors’ emoluments and can be found on pages 65 to 73.
8 Finance costs and income
Group
£ million 2008 2007
a Finance costs
On bank loans* 36 34
On finance leases 70 68
On hire purchase arrangements 31 45
On other loans* 39 23
Interest expense 176 170
Unwinding of discounting on provisions** 10 1
Interest capitalised (15) (5)
Change in fair value of cross currency and interest rate swaps 4 2
175 168
* Total interest expense for financial liabilities not at fair value through the income statement is £75 million (2006/07: £57 million).
** Current year unwinding of discount is on the competition investigation, restoration and handback provisions (see note 29).
Interest costs on progress payments are capitalised at a rate based on LIBOR (London Interbank Offered Rate) plus 0.5 per cent to reflect
the average cost of borrowing to the Group unless specific borrowings are used to meet the payments in which case the actual rate is used.
Group
£ million 2008 2007
b Finance income
Bank interest receivable (total interest income for financial assets not at fair value through the income statement) 111 129
111 129
c Financing income and expense relating to pensions
Net financing income/(expense) relating to pensions 34 (18)
Amortisation of actuarial losses on pensions (1)
34 (19)
d Retranslation charges/(credits) on currency borrowings 11 (13)
9 Profit on sale of property, plant and equipment and investments
Group
£ million 2008 2007
Net profit on sale of property, plant and equipment 12
Write-off of Boeing 777 aircraft (60)
Insurance recoveries on Boeing 777 aircraft 63
Net profit on disposal of investment in WNS 48
Net loss on sale of other investments (1) (1)
14 47
A prior year sale of seven Boeing 767 aircraft resulted in a provision to cover guarantees. This has subsequently been released and has resulted
in a net profit of £12 million.
A £60 million loss on disposal has been recognised as a result of the incident involving a Boeing 777 at Heathrow in January 2008. This is offset
by a £63 million recovery of insurance proceeds, of which £51 million was received during the year.
10 Income and charges relating to financial assets
Group
£ million 2008 2007
Income from available-for-sale financial assets* 5 16
Amounts written off investments** (8) (2)
(3) 14
* Includes £4 million (2006/07: £3 million) attributable to interest earned on loans to the Airline Group Ltd, an available-for-sale financial asset and a £nil (2006/07: £12 million)
reversal of prior year provisions on loans to the Airline Group Ltd.
**£6 million attributable to impairment of investment in the Flybe Group Ltd (see note 20) and £2 million (2006/07: £2 million) impairment of investment in Inter-Capital and
Regional Rail Ltd, a loss-making entity that manages Eurostar UK Ltd until 2010.
94 / British Airways 2007/08 Annual Report and Accounts
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British Airways 2007/08 Annual Report and Accounts / 95
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
11 Tax
a Tax on profit on ordinary activities
Tax charged in the income statement relating to continuing operations
Group
£ million 2008 2007
Current income tax (continuing operations)
UK corporation tax 72 171
Relief for foreign tax paid (2) (5)
Advance corporation tax credit (47) (22)
UK tax 23 144
Foreign tax 1 1
Adjustments in respect of prior years – UK corporation tax (8) (14)
Adjustments in respect of prior years – overseas tax (10)
Total current income tax charge (continuing operations) 16 121
Deferred tax
Effect of the change in the rate of UK corporation tax on opening balances (76)
Property, plant and equipment related temporary differences (57) (74)
Pensions 237 178
Unremitted earnings of associated companies 5
Advance corporation tax charge/(credit) 47 (52)
Share option deductions written back 5 2
Other temporary differences (2) (12)
Adjustments in respect of prior years 12 10
Total deferred tax charge (continuing operations) 171 52
The deferred tax charge in the year has been calculated at a rate of 30 per cent on items reversing
during the year and at 28 per cent on items creating a new deferred tax balance at March 31, 2008.
Tax charge in the income statement (continuing operations) 187 173
Tax credit relating to discontinued operations (note 5a) (24)
Total tax charge in the income statement 187 149
Tax charged/(credited) directly to equity
Group
£ million 2008 2007
Current tax
Current income tax credit to reserves relating to exercise of share options (17)
Deferred tax
Deferred tax on net movement on revaluation of cash flow hedges charge/(credit) 67 (41)
Deferred tax on foreign exchange in reserves (credit)/charge (21) 41
Deferred tax on share options in issue charge/(credit) 7 (1)
Corporation tax rate change for items charged directly to reserves (6)
Tax charge/(credit) taken directly to equity 47 (18)
11 Tax continued
b Reconciliation of the total tax charge
The tax charge for the year on the profit from continuing operations is less than the notional tax charge on those profits calculated at the
UK corporation tax rate of 30 per cent (2006/07: 30 per cent).
The differences are explained below:
Group
£ million 2008 2007
Accounting profit before tax from continuing operations 883 611
Accounting profit multiplied by standard rate of corporation tax in the UK of 30 per cent (2006/07: 30 per cent) 265 183
Effects of:
Provision for the settlement of competition investigations 105
Non-deductible expenses 5 2
Untaxed profits on disposals charge/(credit) 1 (17)
Tax effect arising from associates’ profits being disclosed on an after tax basis (7) (1)
Tax on associates’ unremitted earnings 2
Accounting effect of preference share minority interest (4) (4)
Adjustments in respect of prior years charge/(credit) 4 (14)
Recognition of previously written-off advance corporation tax (74)
Other differences (5) (7)
Effect of corporation tax change in income statement deferred tax movement 2
Effect of corporation tax change on opening deferred tax balances (76)
Total tax charge for the year on profit from continuing operations (note 11a) 187 173
c Deferred tax
The deferred tax included in the balance sheet is as follows:
Group Company
£ million 2008 2007 2008 2007
Fixed asset related temporary differences 1,105 1,213 1,019 1,124
Pensions (56) (291) (54) (289)
Exchange differences on funding liabilities 68 97 67 97
Advance corporation tax (47) (72) (47) (72)
Tax losses carried forward (1)
Tax on subsidiary and associated companies unremitted earnings 18 8 4 2
Tax on fair value profits recognised on cash flow hedges 78 11 78 11
Tax on share options (3) (15) (3) (15)
Other temporary differences (8) (21) 5 (3)
1,154 930 1,069 855
Movement in provision
Group Company
2008 2007 2008 2007
Balance at April 1 930 896 855 792
Deferred tax charge relating to profit arising from continuing operations (note 11a) 171 52 167 64
Deferred tax credit relating to loss arising from discontinued operations (note 5a) (25)
Deferred tax charge/(credit) reported directly in reserves (note 11a) 47 (1) 47 (1)
Deferred tax relating to sold companies (note 5c) 8
Deferred tax charge arising on acquisition of equity in Iberia 3
Revaluation of foreign currency balances 3
Balance at March 31 1,154 930 1,069 855
d Factors that may affect future tax charges
The Group has unutilised UK capital losses of £198 million (2006/07: £217 million). These losses can be carried forward indefinitely and offset
against any future UK chargeable gains that may arise. No deferred tax asset has been recognised in respect of these capital losses as their
utilisation is not currently anticipated. The Group has made £69 million (2006/07: £100 million) of rollover relief claims that have reduced the
tax basis of fixed assets. No deferred tax liability has been recognised in respect of the potential tax liability arising from these claims as they
could be offset by the UK capital losses carried forward.
96 / British Airways 2007/08 Annual Report and Accounts
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Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
11 Tax continued
The Group has now fully recognised its advance corporation tax surplus brought forward of £94 million. £47million of the asset has been offset
against UK corporation tax liabilities for the years to March 31, 2008. The remainder of the asset (£47 million) has been recognised as a deferred
tax asset at March 31, 2008 as it is anticipated that the advance corporation tax will be offset against UK corporation tax liabilities within the
foreseeable future.
Deferred tax has been provided on the unremitted earnings of associate companies where it is not considered that the Group can control the
timing or manner of the reversal of the temporary difference associated with such earnings. In addition, deferred tax has been provided for tax
arising on dividends expected to be paid by the Group’s overseas subsidiaries in the foreseeable future. If the retained earnings of other overseas
subsidiary companies were to be remitted to the parent company by way of dividend, the temporary differences upon which the Group has not
provided for deferred tax would be £19 million (2006/07: £18 million).
The UK corporation tax rate reduced from 30 per cent to 28 per cent from April 1, 2008. This rate change will affect the amount of future cash
tax payments to be made by the Group and has also reduced the size of the Group’s balance sheet deferred tax liability at March 31, 2008.
The Finance Bill 2008 proposed that from April 1, 2008 the rate of capital allowances applicable to plant and machinery expenditure will
be reduced from 25 per cent to 20 per cent per annum on a reducing balance basis and the rate of allowances applicable to long-life assets
increases from 6 per cent to 10 per cent also on a reducing balance basis. If enacted, these changes to the capital allowance rates will impact
the rate at which tax relief is received on expenditure on new aircraft as the Group currently applies the agreement between the British Airline
Transport Association and the UK tax authorities under which such expenditure is treated as half plant and machinery and half long-life asset.
The Finance Bill 2008 also proposed the phased abolition of industrial buildings allowances by March 31, 2011. It is estimated that the abolition
of these tax allowances will cost the Group £79 million of future tax relief. This number is subject to adjustment if the Group makes substantial
acquisitions or disposals of buildings that qualify for industrial buildings allowances before March 31, 2011. At the balance sheet date this proposed
change in legislation was still subject to parliamentary agreement and its accounting effect, which will be an increase in the Group’s net deferred
tax liability, will not be reflected in the Group’s financial statements until the legislation has been substantively enacted.
12 Earnings per share
Group
Profit Earnings per share
2008 2007 2008 2007
£m £m Pence Pence
Profit for the year attributable to shareholders and basic earnings per share 680 290 59.0 25.5
Represented by:
Continuing operations 682 424 59.2 37.2
Discontinued operations (2) (134) (0.2) (11.7)
Diluted profit for the year attributable to shareholders and diluted earnings per share 680 290 58.6 25.2
Represented by:
Continuing operations 682 424 58.8 36.8
Discontinued operations (2) (134) (0.2) (11.7)
Weighted average number of shares for basic EPS (’000) 1,150,537 1,141,133
Dilutive potential ordinary shares:
Employee share options (’000) 8,093 10,810
Weighted average number of shares for diluted EPS (’000) 1,158,630 1,151,943
Basic earnings per share are calculated on a weighted average number of ordinary shares in issue after deducting shares held for the purposes
of Employee Share Ownership Plans including the Long Term Incentive Plan.
The Group has granted additional options over shares to employees that were not dilutive during the period but which may be dilutive in the
future. Details of the Group’s share options can be found in note 33.
13 Dividends proposed
The Directors propose a dividend of 5 pence per share (totalling £58 million) for the year ended March 31, 2008. The dividend will be submitted
for approval at the annual general meeting to be held on July 15, 2008. These financial statements do not reflect the dividend payable, which will
be accounted for as a reduction in shareholders’ equity in the year ending March 31, 2009.
14 Property, plant and equipment
a Group
£ million Fleet Property Equipment Group total
Cost
Balance at April 1, 2006 11,318 1,427 780 13,525
Additions (note 14d) 258 62 19 339
Disposals (344) (63) (66) (473)
Reclassifications 10 20 30
Reclassifications to assets held for sale (note 16) (19) (28) (47)
Balance at March 31, 2007 11,223 1,398 753 13,374
Additions (note 14d) 428 122 87 637
Disposals (262) (12) (36) (310)
Balance at March 31, 2008 11,389 1,508 804 13,701
Depreciation and impairment
Balance at April 1, 2006 4,712 453 478 5,643
Charge for the year 640 87 47 774
Disposals (267) (55) (64) (386)
Impairment 33
Reclassifications 1 1 20 22
Reclassifications to assets held for sale (note 16) (16) (23) (39)
Balance at March 31, 2007 5,070 466 481 6,017
Charge for the year 542 72 47 661
Disposals (199) (7) (34) (240)
Balance at March 31, 2008 5,413 531 494 6,438
Net book amounts
March 31, 2008 5,976 977 310 7,263
March 31, 2007 6,153 932 272 7,357
Analysis at March 31, 2008
Owned 2,572 952 300 3,824
Finance leased 1,728 1,728
Hire purchase arrangements 1,549 1,549
Progress payments 127 25 10 162
5,976 977 310 7,263
Analysis at March 31, 2007
Owned 2,533 836 250 3,619
Finance leased 1,699 1,699
Hire purchase arrangements 1,819 1,819
Progress payments 102 96 22 220
6,153 932 272 7,357
The net book amount of property comprises:
Group total
2008 2007
Freehold 274 282
Long leasehold improvements 256 261
Short leasehold improvements* 447 389
977 932
*Short leasehold improvements relates to leasehold interests with a duration of less than 50 years.
As at March 31, 2008 bank and other loans of the Group are secured on fleet assets with a cost of £477 million (2007: £477 million),
and letters of credit of £330 million in favour of the British Airways Pension Trustees are secured on certain aircraft (2007: £380 million).
Included in the cost of tangible assets for the Group is £345 million (2007: £330 million) of capitalised interest.
98 / British Airways 2007/08 Annual Report and Accounts
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Overview of the year
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Financial statements
Shareholder information
14 Property, plant and equipment continued
b Company
£ million Fleet Property Equipment Company total
Cost
Balance at April 1, 2006 10,749 1,337 705 12,791
Additions 255 62 19 336
Disposals (120) (61) (55) (236)
Transfers to subsidiary companies (1) (1)
Reclassifications 10 20 30
Reclassifications to assets held for sale (note 16) (19) (28) (47)
Balance at March 31, 2007 10,875 1,310 688 12,873
Additions 427 121 81 629
Disposals (260) (10) (33) (303)
Balance at March 31, 2008 11,042 1,421 736 13,199
Depreciation and impairment
Balance at April 1, 2006 4,517 423 413 5,353
Charge for the year 536 84 43 663
Disposals (120) (54) (53) (227)
Transfers to subsidiary companies (1) (1)
Impairment 33
Reclassifications 1 1 20 22
Reclassifications to assets held for sale (note 16) (16) (23) (39)
Balance at March 31, 2007 4,918 434 422 5,774
Charge for the year 527 70 45 642
Disposals (197) (7) (32) (236)
Balance at March 31, 2008 5,248 497 435 6,180
Net book amounts
March 31, 2008 5,794 924 301 7,019
March 31, 2007 5,957 876 266 7,099
Analysis at March 31, 2008
Owned 2,394 899 292 3,585
Finance leased 1,728 1,728
Hire purchase arrangements 1,549 1,549
Progress payments 123 25 9 157
5,794 924 301 7,019
Analysis at March 31, 2007
Owned 2,338 780 244 3,362
Finance leased 1,698 1,698
Hire purchase arrangements 1,819 1,819
Progress payments 102 96 22 220
5,957 876 266 7,099
The net book amount of property comprises:
Company total
2008 2007
Freehold 226 232
Long leasehold improvements 256 261
Short leasehold improvements* 442 383
924 876
* Short leasehold improvements relate to leasehold interests with a duration of less than 50 years.
As at March 31, 2008 bank and other loans of the Company are secured on fleet assets with a cost of £404 million (2007: £404 million).
Included in the cost of tangible assets for the Company is £343 million (2007: £327 million) of capitalised interest.
14 Property, plant and equipment continued
c Depreciation
Fleets are generally depreciated over periods ranging from 18 to 25 years after making allowance for estimated residual values. Effective annual
depreciation rates resulting from those methods are shown in the following table:
Group
Per cent 2008 2007
Boeing 747-400 and 777-200 3.7 3.7
Boeing 767-300 4.8 4.9
Boeing 757-200 4.4 4.4
Airbus A321, A320, A319, Boeing 737-400 4.9 4.9
For engines maintained under ‘Power-by-the-hour’ contracts, the depreciation lives and residuals are the same as for the aircraft fleets to which
the engines relate. For all other engines, the engine core is depreciated to residual value over the average remaining life of the related fleet.
Major overhaul expenditure is depreciated over periods ranging from 54 to 78 months, according to engine type. During the year, the Group
changed the depreciation period for the RB211 engine, used on Boeing 747 and 767 fleets, from 54 months to 78 months. The change resulted
in a £32.5 million decrease in annual depreciation charge for this engine type.
Property, apart from freehold land, is depreciated over its expected useful life subject to a maximum of 50 years. Equipment is depreciated over
periods ranging from four to 20 years, according to the type of equipment.
d Analysis of Group tangible asset additions
Group total
£ million Fleet Property Equipment 2008 2007
Cash paid 434 106 56 596 331
Capitalised interest 4 11 15 5
Accrual movements (10) 5 31 26 3
428 122 87 637 339
15 Capital expenditure commitments
Capital expenditure authorised and contracted for but not provided in the accounts amounts to £5,189 million for the Group (2007: £554 million)
and £5,185 million for the Company (2007: £553 million).
The outstanding commitments include £5,162 million for the acquisition of four Boeing 777 aircraft scheduled for delivery in 2009, 19 Airbus
A320 family (from 2008 to 2010), 12 Airbus A380 aircraft (from 2012 to 2014) and 24 Boeing 787 aircraft (from 2012 to 2015).
16 Assets held for sale
Assets held for sale comprise non-current assets and disposal groups that are held for sale rather than for continuing use within the business.
The carrying value represents the estimated sale proceeds less costs to sell.
During the year ended March 31, 2008 aircraft with a fair value (less costs to sell) of £3 million (2007: £3 million) and property with a fair value
of £5 million (2007: £nil) were sold.
At March 31, 2008 there were no assets held for sale (2007: £8 million).
100 / British Airways 2007/08 Annual Report and Accounts
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British Airways 2007/08 Annual Report and Accounts / 101
Overview of the year
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Financial statements
Shareholder information
17 Intangible assets
a Group
£ million Goodwill Landing rights Software Group total
Cost
Balance at April 1, 2006 72 144 135 351
Additions 31 10 41
Disposals (2) (2)
Impairment (32) (32)
Balance at March 31, 2007 40 175 143 358
Additions 28 12 40
Disposals (2) (2)
Balance at March 31, 2008 40 203 153 396
Amortisation
Balance at April 1, 2006 29 89 118
Disposals (2) (2)
Charge for the year 72330
Balance at March 31, 2007 36 110 146
Disposals (2) (2)
Charge for the year 82331
Balance at March 31, 2008 44 131 175
Net book amounts
March 31, 2008 40 159 22 221
March 31, 2007 40 139 33 212
b Company
£ million Landing rights Software Company total
Cost
Balance at April 1, 2006 118 135 253
Additions 31 10 41
Reclassifications 16 16
Net transfer from subsidiary companies 10 10
Disposals (2) (2)
Balance at March 31, 2007 175 143 318
Additions 28 11 39
Disposals (1) (1)
Balance at March 31, 2008 203 153 356
Amortisation
Balance at April 1, 2006 22 89 111
Reclassifications 22
Charge for the year 11 22 33
Net transfer from subsidiary companies 11
Disposals (2) (2)
Balance at March 31, 2007 36 109 145
Charge for the year 82331
Disposals (1) (1)
Balance at March 31, 2008 44 131 175
Net book amounts
March 31, 2008 159 22 181
March 31, 2007 139 34 173
Landing rights are depreciated over a period of 20 years.
c Analysis of Group intangible asset additions
Group total
£ million Landing rights Software 2008 2007
Cash paid 21 12 33 36
Non-cash additions 7 7 5
Total additions 28 12 40 41
18 Impairment of goodwill
Prior to the disposal of the regional business of BA Connect, goodwill acquired through business combinations was allocated for the purposes of
impairment reviews to two cash-generating units with separately identifiable cash inflows and which were reportable business segments. The two
segments were the airline cash-generating unit and the regional airline cash-generating unit.
In the quarter ending September 30, 2006, an impairment review was performed on the assets, including goodwill of the regional airline business
in accordance with IAS 36, using value in use. This was prompted by the ongoing deterioration in trading performance against plan. This resulted
in a goodwill impairment charge of £32 million. This impairment charge was reflected in discontinued operations.
The carrying amount of goodwill is now wholly reflected in the airline cash-generating unit.
Group
£ million 2008 2007
Carrying amount of goodwill 40 40
The recoverable amount of the airline unit has been measured on the basis of its value in use, by applying cash flow projections based on the
financial budgets approved by the Board covering a two-year period. Cash flows beyond the two-year period are projected to increase by the
long-term growth rate of 2.5 per cent. The pre-tax discount rate applied to the cash flow projections is 8.9 per cent (2007: 8.9 per cent). This
discount rate is derived from the Group’s post-tax weighted average cost of capital, adjusted for the risks specific to the market.
The calculation of value in use for the airline unit is most sensitive to the following assumptions:
•
Operating margin;
•
Discount rates; and
•
Long-term growth rate.
Operating margins are based on the estimated effects of planned business efficiency and business change programmes, approved and enacted
at the balance sheet date. These are adjusted for the volatile trading conditions that have impacted the airline unit over the past three years. The
trading environment is subject to both regulatory and competitive pressures that can have a material effect on the operating performance of the
business. Foreseeable events are unlikely to result in a change in the projections of a significant nature so as to result in the unit’s carrying amount
exceeding its recoverable amount.
The discount rate reflects management’s estimate of the long-run return on capital employed for the airline unit. Changes in the cash-generating
unit’s sources of funding or the cost of that funding (referring to long-term market rates) could result in changes to the discount rates used. An
increase in discount rates by 1.5 points (2007: 4.1 points) would result in the airline unit’s carrying amount being equal to its recoverable amount.
A sensitivity analysis was performed by reducing the risk-adjusted cash flow projections (decrease in margins and increase in capital expenditures)
by 10 per cent, which did not lead to an impairment of goodwill.
19 Investments
a Group
Investments in associates
Group
£ million 2008 2007
Balance at April 1 125 131
Exchange movements 24 (3)
Additions* 57
Share of attributable results 23 3
Share of movements on other reserves (2) 8
Reclassification of Comair Ltd (10)
Disposals (4)
Balance at March 31 227 125
*£3 million of the additions are non-cash, attributed to deferred tax liabilities recognised on Iberia’s unremitted earnings.
102 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 103
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
19 Investments continued
Market value of listed associates
Group total
£ million 2008 2007
275 256
Details of the investments that the Group accounts for as associates using the equity method are set out below:
Country of
Percentage of Principal incorporation and
equity owned activities Holding principal operations
Iberia, Lineas Aéreas de España, S.A. (’Iberia’)* 13.15 Airline operations Ordinary shares Spain
*Held by a subsidiary company.
The Group accounts for its investment in Iberia as an associate although the Group holds less than 20 per cent of the issued share capital as the
Group has the ability to exercise significant influence over the investment due to the Group’s voting power (both through its equity holding and its
representation on key decision-making committees) and the nature of the commercial relationships with Iberia. On November 15, 2006 the Group
acquired the minority interest held by American Airlines in BA & AA Holdings Ltd, the subsidiary that holds the interest in Iberia (see note 34).
In February 2008, the Group purchased 28.7 million additional shares in Iberia at an average price of €2.34 per share (£54 million), taking its
holding to 13.15 per cent (2007: 9.95 per cent). The acquisition of additional shares in Iberia resulted in goodwill of £9 million, which has been
reflected in investment in associates.
On June 9, 2006 the Group’s shareholding in Comair Ltd was reduced from 18.3 per cent to 12.9 per cent. Due to the Group’s ability to exercise
significant influence, the investment in Comair Ltd was accounted for using the equity method. In September 2006, the Group’s shareholding in
Comair Ltd decreased to 10.92 per cent and the Group no longer had the ability to exercise significant influence over the investment, at which
time the investment was reclassified as an available-for-sale financial asset.
The following summarised financial information of the Group’s investment in associates is shown based on the Group’s share of results and net assets:
Group total
£ million 2008 2007
Non-current assets 218 168
Current assets 414 222
Current liabilities (234) (145)
Non-current liabilities (188) (128)
Share of net assets 210 117
Goodwill attributable to investments in associates 17 8
Revenues 556 399
Net profit after tax 26 5
b Company
Investments in associates and subsidiaries
Company
Total Total
£ million Cost Provisions 2008 2007
Balance at April 1 2,191 (1,006) 1,185 1,350
Exchange movements 17 17 (1)
Additions 1,016 1,016 125
Intra group transfer (5) (5)
Provision* (6) (6) (289)
Balance at March 31 3,219 (1,012) 2,207 1,185
Investments in associates
Balance at April 1 1
Disposals (1)
Balance at March 31
*The 2007 provision of £289 million includes a provision of £287 million on investments in subsidiaries, which was recorded as a result of the sale of the regional business
of BA Connect.
The Company accounts for its investments in subsidiaries and associates using the cost method.
The Group’s and Company’s principal investments in subsidiaries, associates and other investments are listed on page 130.
19 Investments continued
During the year, the Company invested £999 million in a subsidiary funded by the transfer of interest-bearing deposits to the subsidiary whose
primary purpose is to invest the Company’s excess cash. In addition, in the current year the Company invested £17 million in a subsidiary relating
to the launch of a new airline, OpenSkies.
20 Available-for-sale financial assets
Group Company
£ million 2008 2007 2008 2007
Available-for-sale financial assets 80 107 24 41
Available-for-sale financial assets are measured at fair value. For listed investments the fair value comprises the market price at the balance sheet date.
For unlisted investments the fair value is estimated by reference to the discounted cash flow analysis or by reference to other valuation methods.
On March 5, 2007 the Group acquired a 15 per cent investment in the Flybe Group Ltd in connection with the disposal of the regional business
of BA Connect. At March 31, 2007 this investment was valued at £49 million.
The Group performed a review of its investment in the Flybe Group Ltd and due to an expected significant and prolonged decline in fair value,
associated with fuel price increases, the Group recognised a £6 million impairment of the investment. The impairment charge has been reflected
in the income statement relating to other financial assets.
Available-for-sale investments include investments in listed ordinary shares, which by their nature have no fixed maturity date or coupon rate.
The table below shows total listed and unlisted available-for-sale investments.
Group Company
£ million 2008 2007 2008 2007
Listed 13 17
Unlisted 67 90 24 41
80 107 24 41
21 Inventories
Group Company
£ million 2008 2007 2008 2007
Expendables and consumables 112 76 109 74
22 Trade receivables
Group Company
£ million 2008 2007 2008 2007
Trade receivables 598 670 586 651
Less: provision for doubtful receivables 12 16 12 16
Net trade receivables 586 654 574 635
Movements in the provision for doubtful trade receivables were as follows:
£ million Group Company
At April 1, 2006 17 17
Provision for doubtful receivables 22
Exchange movement on revaluation (1) (1)
Receivables written off during the year (1) (1)
Unused amounts reversed (1) (1)
At March 31, 2007 16 16
Provision for doubtful receivables 77
Receivables written off during the year (7) (7)
Unused amounts reversed (4) (4)
At March 31, 2008 12 12
The fair value of trade receivables is equal to their carrying value.
104 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 105
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
22 Trade receivables continued
As at March 31, the ageing analysis of trade receivables is as follows:
Past due but not impaired
Neither
past due
£ million Total nor impaired < 30 days 30-60 days > 60 days
Group
2008 586578116
2007 654637926
Company
2008 574567115
2007 635624326
Trade receivables are generally non-interest-bearing and on 30 days’ terms.
23 Other current assets
Group Company
£ million 2008 2007 2008 2007
Amounts owed by subsidiaries 116 99
Other debtors 103 68 102 68
Prepayments and accrued income 205 200 153 169
308 268 371 336
24 Cash, cash equivalents and other current interest-bearing deposits
a Cash and cash equivalents
Group Company
£ million 2008 2007 2008 2007
Cash at bank and in hand 180 594 175 589
Short-term deposits falling due within three months 503 119 258 73
Cash and cash equivalents 683 713 433 662
Other current interest-bearing deposits maturing after three months 1,181 1,642 399 1,639
At March 31, 2008 the Group and Company had the following undrawn general and committed aircraft financing facilities:
million Currency £ equivalent
US dollar facility expiring June 2010 $266 134
US dollar facility expiring December 2015 $115 58
US dollar facility expiring December 2015 $509 256
US dollar facility expiring December 2015 $940 472
US dollar facility expiring December 2015 $1,615 812
Japanese yen facility expiring January 2011 ¥75,000 381
At March 31, 2007 the Group and Company had the following undrawn general and committed aircraft financing facilities:
million Currency £ equivalent
US dollar facility expiring December 2007 $172 88
US dollar facility expiring May 2008 $180 92
US dollar facility expiring June 2012 $15 8
Japanese yen facility expiring January 2011 ¥75,000 325
The decrease in other current interest-bearing deposits maturing after three months, for the Company, is due to the investment in a new
subsidiary (see note 19).
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for periods up to three months
depending on the cash requirements of the Group and earn interest based on the floating deposit rates. The fair value of cash and cash equivalents
is £683 million for the Group (2007: £713 million) and for the Company £433 million (2007: £662 million).
At March 31, 2008 the Group and Company had no outstanding bank overdrafts (2007: £nil).
Included within cash and cash equivalents at March 31, 2007 was £560 million held in escrow for the benefit of the NAPS. This was subsequently
paid to the pension fund on April 2, 2007.
24 Cash, cash equivalents and other interest-bearing deposits continued
Other current interest-bearing deposits are made for periods in excess of three months with maturity typically within 12 months and earn
interest based on the market rates available at the time the deposit was made.
At March 31, 2008 the Group and Company had unused overdraft facilities of £20 million (2007: £20 million) and €20 million (£16 million)
(2007: €20 million (£14 million) respectively).
The Group and Company held undrawn uncommitted money market lines of £45 million as at March 31, 2008 (2007: £45 million).
b Reconciliation of net cash flow to movement in net debt
Group
£ million 2008 2007
(Decrease)/increase in cash and cash equivalents during the year (1) 331
Net cash outflow from decrease in debt and lease financing 424 485
Decrease in current interest-bearing deposits maturing after three months (458) (389)
New loans and finance leases taken out and hire purchase arrangements made (179) (9)
Reduction in finance leases and loans due to disposal of BA Connect 85
Changes in net debt resulting from cash flows (214) 503
Exchange and other non-cash movements (105) 147
Movement in net debt during the year (319) 650
Net debt at April 1 (991) (1,641)
Net debt at March 31 (1,310) (991)
c Analysis of net debt
Group
Balance at Net Other Disposal of Balance at
£ million April 1 cash flow non-cash BA Connect Exchange March 31
Cash and cash equivalents 398 331 (16) 713
Current interest-bearing deposits maturing after three months 2,042 (389) (11) 1,642
Bank and other loans (1,116) 97 57 16 (946)
Finance leases and hire purchase arrangements (2,965) 388 (9) 28 158 (2,400)
Year to March 31, 2007 (1,641) 427 (9) 85 147 (991)
Cash and cash equivalents 713 (1) (29) 683
Current interest-bearing deposits maturing after three months 1,642 (458) (3) 1,181
Bank and other loans (946) 68 2 (876)
Finance leases and hire purchase arrangements (2,400) 184 (7) (75) (2,298)
Year to March 31, 2008 (991) (207) (7) (105) (1,310)
25 Trade and other payables
Group Company
£ million 2008 2007 2008 2007
Trade creditors 648 723 621 697
Unredeemed frequent flyer liabilities 21 24 21 24
Amounts owed to subsidiary companies 1,543 1,515
Other creditors:
Other creditors 577 560 572 556
Other taxation and social security 40 39 40 39
617 599 612 595
Accruals and deferred income:
Sales in advance of carriage 911 1,008 892 979
Accruals and deferred income 393 372 160 114
1,304 1,380 1,052 1,093
2,590 2,726 3,849 3,924
106 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 107
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
26 Other long-term liabilities
Group Company
£ million 2008 2007 2008 2007
Other creditors 13 5 7
Accruals and deferred income 155 183 125 150
168 188 132 150
27 Long-term borrowings
Group Company
£ million 2008 2007 2008 2007
aCurrent
Loans, finance leases and hire purchase arrangements:
Bank and other loans 113 68 102 57
Finance leases* 64 80 73 87
Hire purchase arrangements 246 269 246 269
423 417 421 413
b Non-current
Loans, finance leases and hire purchase arrangements:
Bank and other loans 764 878 554 657
Finance leases* 1,376 1,275 1,567 1,476
Hire purchase arrangements 611 776 611 776
Loans from subsidiaries 239 204
2,751 2,929 2,971 3,113
*Included in finance leases for the Company is £200 million (2007: £209 million) of finance leases with other subsidiaries of the Group, of which £9 million (2007: £8 million)
is classified as current.
Bank and other loans are repayable up to the year 2019. Bank and other loans of the Group amounting to US$132 million (2007: US$155 million),
and £410 million (2007: £437 million) and bank loans of the Company amounting to US$132 million (2007: US$155 million) and £189 million
(2007: £205 million) are secured on aircraft. Euro-sterling notes, other loans and loans from subsidiary undertakings are not secured. Finance
leases and hire purchase arrangements are all secured on aircraft or property assets.
c Bank and other loans
Bank and other loans comprise the following:
Group Company
£ million 2008 2007 2008 2007
£250 million fixed rate 8.75 per cent eurobonds 2016 248 248 248 248
£100 million fixed rate 10.875 per cent eurobonds 2008 61 61 61 61
Floating rate sterling mortgage loans secured on aircraft 201 213 153 162
Floating rate US dollar mortgage loans secured on aircraft 67 79 67 79
Fixed rate sterling mortgage loans secured on aircraft 209 224 36 42
Floating rate US dollar mortgage loans not secured on aircraft 40 45 40 45
European investment bank loans 51 76 51 77
877 946 656 714
Less: current instalments due on bank loans 113 68 102 57
764 878 554 657
£250 million fixed rate 8.75 per cent unsecured eurobonds 2016 are repayable in one instalment on August 23, 2016.
£100 million fixed rate 10.875 per cent unsecured eurobonds 2008 are repayable in one instalment on June 15, 2008.
Floating rate sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.53 per cent and
0.59 per cent above LIBOR. The loans are repayable between 2015 and 2019.
Floating rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.40 per cent and
0.99 per cent above LIBOR. The loans are repayable between 2009 and 2016.
Fixed rate sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest at 6.14 per cent to 7.35 per cent.
The loans are repayable between 2012 and 2016.
Floating rate US dollar mortgage loans are unsecured and bear interest of 0.09 per cent above LIBOR. The loans are repayable in 2014.
European investment bank loans are secured on certain property assets of the Group and bear interest of between 0.20 per cent below LIBOR
and LIBOR. The loans are repayable between 2014 and 2017.
27 Long-term borrowings continued
d Total loans, finance leases and hire purchase arrangements
Group Company
£ million 2008 2007 2008 2007
Loans
Bank:
US dollar $211m $242m $211m $242m
Sterling £461m £514m £240m £282m
568 637 347 405
Euro-sterling notes:
Sterling 309 309 309 309
Loans from subsidiary undertakings:
Euro €300m €300m
239 204
Finance leases:
US dollar $1,205m $991m $1,205m $990m
Sterling £834m £849m £1,034m £1,058m
1,440 1,355 1,640 1,563
Hire purchase arrangements:
Japanese yen ¥112,442m ¥129,694m ¥112,442m ¥129,694m
US dollar $89m $104m $89m $104m
Sterling £244m £430m £244m £430m
857 1,045 857 1,045
3,174 3,346 3,392 3,526
e Obligations under finance leases and hire purchase contracts
The Group uses finance leases and hire purchase contracts principally to acquire aircraft. These leases have both renewal options and purchase
options. These are at the option of the Group. Future minimum lease payments under finance leases and hire purchase contracts are as follows:
Group Company
£ million 2008 2007 2008 2007
Future minimum payments due:
Within one year 389 440 407 458
After more than one year but within five years 1,218 1,298 1,303 1,380
In five years or more 1,268 1,306 1,431 1,500
2,875 3,044 3,141 3,338
Less: finance charges allocated to future periods 578 644 644 730
Present value of minimum lease payments 2,297 2,400 2,497 2,608
The present value of minimum lease payments is analysed as follows:
Within one year 310 349 319 348
After more than one year but within five years 989 1,048 1,040 1,102
In five years or more 998 1,003 1,138 1,158
2,297 2,400 2,497 2,608
108 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 109
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
28 Operating lease commitments
The Group has entered into commercial leases on certain properties, equipment and aircraft. These leases have durations ranging from five years
for aircraft to 150 years for ground leases. Certain leases contain options for renewal.
a Fleet
The aggregate payments, for which there are commitments under operating leases as at March 31, fall due as follows:
Group Company
£ million 2008 2007 2008 2007
Within one year 77 81 62 65
Between one and five years 169 141 143 103
Over five years 17 27 17 27
263 249 222 195
b Property and equipment
The aggregate payments, for which there are commitments under operating leases as at March 31, fall due as follows:
Group Company
£ million 2008 2007 2008 2007
Within one year 86 88 82 83
Between one and five years 244 181 229 165
Over five years, ranging up to the year 2145 1,612 1,483 1,603 1,471
1,942 1,752 1,914 1,719
The Group and Company sub-leases surplus rental properties and aircraft assets held under non-cancellable leases to third parties and subsidiary
companies. These leases have remaining terms of one to eight years and the assets are surplus to the Group’s requirements.
Future minimum rentals receivable under non-cancellable operating leases are as follows:
Group Company
£ million 2008 2007 2008 2007
Fleet
Within one year 6 6 1 2
Between one and five years 13 16 2
19 22 3 2
Property and equipment
Within one year 5 2 5 1
Between one and five years 19 4 19 4
Over five years 1 1 1 1
25 7 25 6
29 Provisions for liabilities and charges
Group
Restoration
Insurance Onerous and handback
£ million provisions lease contracts provisions Severance Litigation Other Total
At April 1, 2007:
Current 1 16 38 355 410
Non-current 27 26 91 9 153
27 27 107 38 355 9 563
Arising during the year 822368148
Utilised (7) (11) (32) (153) (203)
Release of unused amounts (13) (11) (9) (5) (38)
Unwinding of discount 2 8 10
At March 31, 2008 22 11 112 7 218 10 380
Analysis:
Current 29 7 134 170
Non-current 22 11 83 84 10 210
22 11 112 7 218 10 380
Company
Restoration
Onerous and handback
£ million lease contracts provisions Severance Litigation Other Total
At April 1, 2007:
Current 16 34 355 405
Non-current 18 87 9 114
18 103 34 355 9 519
Arising during the year 22368140
Utilised (6) (11) (30) (153) (200)
Release of unused amounts (3) (8) (5) (16)
Unwinding of discount 2 8 10
At March 31, 2008 11 109 5 218 10 353
Analysis:
Current 29 5 134 168
Non-current 11 80 84 10 185
11 109 5 218 10 353
Insurance provisions relate to provisions held by the Group’s captive insurer, Speedbird Insurance Company Limited, for incurred but not
reported losses. Such provisions are held until such time as further claims are considered unlikely under the respective insurance policies.
The onerous lease provision relates partly to the sub-lease of five Jetstream 41 aircraft to Eastern Airways and six Avro RJ100 aircraft to Swiss
International Air Lines. This provision will be fully utilised by October 2011. In addition, the provision includes amounts relating to properties
leased by the Group that are either sub-leased to third parties or are vacant with no immediate intention to utilise the property. This provision
will be fully utilised by April 2045.
Restoration and handback costs include provision for the costs to meet the contractual return conditions on aircraft held under operating leases.
The provision also includes amounts relating to leased land and buildings where restoration costs are contractually required at the end of the
lease. Where such costs arise as a result of capital expenditure on the leased asset, the restoration costs are also capitalised. This provision will
be utilised by March 2145.
The severance provision at March 31, 2008 relates to committed voluntary severance costs expected to be paid during the next financial year.
The Company has settled $300 million (£149 million) in respect of all investigations into its cargo and passenger business in the US with the
Department of Justice. It has agreed a settlement of £121.5 million with the Office of Fair Trading in respect of longhaul passenger fuel surcharges.
These amounts are included within the litigation analysis above. There are ongoing investigations into the Company’s cargo surcharges by the
European Commission and other jurisdictions. These investigations are likely to continue for some time. The Company is also subject to related
class action claims. The final amount required to pay the remaining claims and fines is subject to uncertainty. A detailed breakdown of the remaining
provision is not presented as it may seriously prejudice the position of the Company in these regulatory investigations and potential litigation.
Other provisions include staff leaving indemnities relating to amounts due to staff under various overseas contractual arrangements.
110 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 111
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
30 Financial risk management objectives and policies
The Group is exposed to a variety of financial risks: market risk (including foreign currency risk, interest rate risk and fuel price risk), credit risk
and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise
potential adverse effects on the Group’s financial performance.
The Group enters into derivative transactions in order to manage certain market risks. All such transactions are carried out within guidelines
approved by the Board.
Group treasury carries out financial risk management under governance approved by the Board. Group treasury identifies, evaluates and
hedges financial risks. The Board provides written principles for overall risk management, as well as written policies covering specific areas,
such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investment of excess liquidity.
a Fuel price risk
The Group is exposed to fuel price risk. The Group’s fuel price 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.
The following table demonstrates the sensitivity of financial instruments to a reasonably possible change in fuel prices, with all other variables
held constant, on profit before tax and equity:
Group Company
2008 2007 2008 2007
Increase/ Effect on Effect on Increase/ Effect on Effect on
decrease in profit Effect on profit Effect on decrease in profit Effect on profit Effect on
fuel price before tax equity before tax equity fuel price before tax equity before tax equity
per cent £ million £ million £ million £ million per cent £ million £ million £ million £ million
10 14 166 670 10 14 166 670
(10) (11) (163) (11) (59) (10) (11) (163) (11) (59)
b Foreign currency risk
The Group is exposed to currency risk on revenue, purchases and borrowings that are denominated in a currency other than sterling.
The currencies in which these transactions are primarily denominated are euro, US dollar and Japanese yen. The Group generates a surplus
in most currencies in which it does business. The US dollar can be an exception as capital expenditure, debt repayments and fuel payments
denominated in US dollars can create a deficit.
The Group can experience adverse or beneficial effects arising from foreign exchange rate movements. The Group seeks to reduce foreign
exchange exposures 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 and US dollars.
The Group utilises its yen debt repayments as a hedge of future US dollar and yen revenues.
Forward foreign exchange contracts and currency options are used to cover near-term future revenues and operating payments in a variety
of currencies.
30 Financial risk management objectives and policies continued
The following table demonstrates the sensitivity of financial instruments to a reasonably possible change in the US dollar, Japanese yen and euro
exchange rates, with all other variables held constant, on profit before tax and equity.
Strengthening/ Effect on Strengthening/ Effect on Strengthening/ Effect on
(weakening) in profit Effect on (weakening) in profit Effect on (weakening) in profit Effect on
US dollar rate before tax equity
Japanese yen rate
before tax equity euro rate before tax equity
per cent £ million £ million per cent £ million £ million per cent £ million £ million
Group
2008 10 (4) (42) 10 (7) (57) 10 (2) (26)
(10) 3 32 (10) 5 47 (10) 2 22
2007 10 (8) (49) 10 (8) (49) 10 (11)
(10) 7 36 (10) 6 40 (10) 10
Company
2008 10 (6) (42) 10 (7) (57) 10 (2) (26)
(10) 5 32 (10) 5 47 (10) 2 22
2007 10 (10) (49) 10 (8) (48) 10 (11)
(10) 8 36 (10) 6 40 (10) 10
c Interest rate risk
The Group is exposed to changes in interest rates on floating debt and cash deposits.
The following table illustrates the sensitivity of financial instruments on profit before tax for the year to a reasonably possible change in interest
rates, with effect from the beginning of the year. There was no impact on shareholders’ equity. These changes are considered to be reasonably
possible based on observation of current market conditions. The calculations are based on financial instruments held at each balance sheet date.
All other variables were held constant.
March 31, 2008
Effect on profit before tax
100 basis points 100 basis points
£ million increase decrease
Group
Variable rate instruments 3(3)
Company
Variable rate instruments (3) 3
March 31, 2007
Effect on profit before tax
100 basis points 100 basis points
£ million increase decrease
Group
Variable rate instruments 4(4)
Interest rate swap 1(1)
Company
Variable rate instruments 4(4)
Interest rate swap 1(1)
d Credit risk
The Group is exposed to credit risk to the extent of non-performance by its counterparties in respect of financial assets receivable. However, the
Group has policies and procedures in place to ensure credit risk is limited by placing credit limits on each counterparty. The Group continuously
monitors counterparty credit limits and defaults of counterparties, incorporating this information into credit risk controls. It is the Group’s policy
that all counterparties who wish to trade on credit terms are subject to credit verification procedures.
The maximum exposure to credit risk is limited to the carrying value of each class of asset as summarised in note 31.
The Group does not hold any collateral to mitigate this exposure. Credit risks arising from acting as guarantor are disclosed in note 36.
112 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 113
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
30 Financial risk management objectives and policies continued
e Liquidity risk
Prudent liquidity risk management includes maintaining sufficient cash and interest-bearing deposits, the availability of funding from an adequate
amount of credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying business, Group treasury
maintains flexibility in funding by maintaining availability under committed credit lines.
The table below analyses the Group’s financial assets and liabilities into relevant maturity groupings based on the remaining period at the balance
sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and include interest.
Group
Within More than Total
£ million 6 months 6-12 months 1-2 years 2-5 years 5 years 2008
Cash and cash equivalents 683 683
Other current interest-bearing deposits 861 360 1,221
Trade receivables 586 586
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations (169) (220) (523) (695) (1,268) (2,875)
Fixed rate borrowings (98) (21) (51) (150) (468) (788)
Floating rate borrowings (20) (37) (56) (143) (211) (467)
Trade and other payables (1,163) (1,163)
Derivative financial instruments:
Cross currency swaps (1) (1) (2)
Forward currency contracts (15) (4) (1) (20)
Fuel derivatives (20) (18) (18) (12) (68)
Forward currency contracts 5 3 8
Fuel derivatives 170 100 68 12 350
820 163 (581) (989) (1,948) (2,535)
Group
Within More than Total
£ million 6 months 6-12 months 1-2 years 2-5 years 5 years 2007
Cash and cash equivalents 713 713
Other current interest-bearing deposits 1,016 707 1,723
Trade receivables 654 654
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations (252) (188) (373) (925) (1,306) (3,044)
Fixed rate borrowings (37) (42) (119) (155) (513) (866)
Floating rate borrowings (22) (34) (59) (159) (261) (535)
Trade and other payables (1,230) (1,230)
Derivative financial instruments:
Forward currency contracts (2) (1) (3)
Fuel derivatives (1) (14) (6) (21)
Interest rate swaps 22
Forward currency contracts 11
Fuel derivatives 19 56 8 83
859 486 (549) (1,239) (2,080) (2,523)
30 Financial risk management objectives and policies continued
Company
Within More than Total
£ million 6 months 6-12 months 1-2 years 2-5 years 5 years 2008
Cash and cash equivalents 433 433
Other current interest-bearing deposits 414 414
Trade receivables 574 574
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations (182) (225) (543) (760) (1,431) (3,141)
Fixed rate borrowings (92) (24) (47) (138) (986) (1,287)
Floating rate borrowings (18) (33) (51) (126) (172) (400)
Trade and other payables (2,679) (2,679)
Derivative financial instruments:
Cross currency swaps (1) (1) (2)
Forward currency contracts (15) (4) (1) (20)
Fuel derivatives (20) (18) (18) (12) (68)
Forward currency contracts 5 3 8
Fuel derivatives 170 100 68 12 350
(1,410) (201) (592) (1,025) (2,590) (5,818)
Company
Within More than Total
£ million 6 months 6-12 months 1-2 years 2-5 years 5 years 2007
Cash and cash equivalents 662 662
Other current interest-bearing deposits 1,016 704 1,720
Trade receivables 635 635
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations (265) (193) (392) (988) (1,500) (3,338)
Fixed rate borrowings (29) (44) (113) (136) (930) (1,252)
Floating rate borrowings (21) (30) (54) (143) (214) (462)
Trade and other payables (2,719) (2,719)
Derivative financial instruments:
Forward currency contracts (2) (1) (3)
Fuel derivatives (1) (14) (6) (21)
Interest rate swaps 22
Forward currency contracts 11
Fuel derivatives 19 56 8 83
(704) 480 (557) (1,267) (2,644) (4,692)
f Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns
for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio, net debt as a percentage of total capital. Net debt
is defined as the total borrowings, finance leases and hire purchase liabilities, net interest-bearing deposits and cash and cash equivalents less overdrafts.
See note 24 for details of the calculation of net debt. Total capital is defined as the total of capital, reserves, minority interests and net debt.
The gearing ratios at March 31, 2008 and 2007 were as follows:
£ million (except ratios) 2008 2007
Capital reserves 3,033 2,211
Add minority interests 200 200
Total equity 3,233 2,411
Net debt (a) 1,310 991
Total capital (b) 4,543 3,402
Gearing ratio (a)/(b) 28.8 29.1
The decrease in the gearing ratio during 2008 resulted primarily from increased equity due to higher operating profit. The impact of this on the
gearing ratio was partially offset by the increased borrowings relating to the purchase of three Airbus 320s, and lower cash balances as a result
of the £610 million cash injection into NAPS together with the $300 million (£149 million) payment made to the US Department of Justice in
respect of anti-competitive activity.
114 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 115
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
31 Financial instruments
a Fair values of financial assets and financial liabilities
The carrying amounts and fair values of the Group’s financial assets and liabilities at March 31, 2008 are set out below:
Group Company
£ million Carrying value Fair value Carrying value Fair value
Financial assets
Cash and cash equivalents 683 683 433 433
Other liquid deposits maturing over three months 1,181 1,181 399 399
Available-for-sale financial assets 80 80 24 24
Forward currency contracts 8888
Fuel derivatives 350 350 350 350
Financial liabilities
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations 2,297 2,324 2,497 2,526
Fixed rate borrowings 518 526 584 586
Floating rate borrowings 359 359 311 311
Cross currency swaps 2222
Forward currency contracts 20 20 20 20
Fuel derivatives 68 68 68 68
The fair values of the Group’s financial assets and liabilities at March 31, 2007 are set out below:
Group Company
£ million Carrying value Fair value Carrying value Fair value
Financial assets
Cash and cash equivalents 713 713 662 662
Other liquid deposits maturing over three months 1,642 1,642 1,639 1,639
Available-for-sale financial assets 107 107 41 41
Interest rate swap arrangements 2222
Forward currency contracts 1111
Fuel derivatives 83 83 83 83
Financial liabilities
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations 2,400 2,406 2,608 2,615
Fixed rate borrowings 553 592 575 605
Floating rate borrowings 393 393 343 343
Forward currency contracts 3333
Fuel derivatives 21 21 21 21
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:
Available-for-sale financial assets and loan notes
•
Listed fixed asset investments are stated at market value as at March 31, 2008. For other investments the fair value is estimated by reference
to a discounted cash flow that is not expected to reverse.
Bank and other loans, finance leases, hire purchase arrangements and the non-Japanese yen denominated portions of hire
purchase arrangements carrying fixed rates of interest
•
The repayments which the Group is committed to make have been discounted at the relevant interest rates applicable at March 31, 2008.
Japanese yen denominated portions of hire purchase arrangements carrying fixed rates of interest
•
These amounts relate to the tax equity portions of Japanese leveraged leases which are personal to the Group, cannot be assigned and could
not be refinanced or replaced in the same cross border market on a marked-to-market basis and accordingly, a fair value cannot be determined.
The carrying value of £569 million (2007: £561 million) has therefore been included as the fair value above.
Euro-sterling notes and Euro-sterling bond 2016
•
Quoted market value.
31 Financial instruments continued
b Fair values of financial assets and financial liabilities
Interest rate swaps
•
Discounted cash flow analysis, to determine the estimated amount the Group would receive or pay to terminate the agreements.
Forward currency transactions
•
The marked-to-market value of the instruments.
Over The Counter (OTC) fuel derivatives
•
The marked-to-market value of the instruments.
c Hedges
i Cash flow hedges
At March 31, 2008 the Group and Company held four principal risk management activities that were designated as hedges of future forecast
transactions. These were:
A hedge of a proportion of future long-term revenue receipts by future debt repayments in foreign currency hedging future foreign exchange risk.
A hedge of certain short-term revenue receipts by foreign exchange contracts hedging future foreign exchange risk.
A hedge of certain short-term foreign currency operational payments by forward exchange contracts hedging future foreign exchange risk.
A hedge of future jet fuel purchases by forward crude, gas oil and jet kerosene derivative contracts hedging future fuel price risk.
To the extent that the hedges were assessed as highly effective, a summary of the amounts included in equity and the periods in which the
related cash flows are expected to occur are summarised below:
March 31, 2008
Group
More than
£ million 0-6 months 6-12 months 1-2 years 2-5 years 5 years Total
Debt repayments to hedge future revenue (1) (1) (5) (10) (17)
Forward contracts to hedge future payments 10 1 1 12
Hedges of future fuel purchases (148) (94) (45) (2) (289)
(139) (94) (44) (7) (10) (294)
Related deferred tax charge 83
Total amount included within equity (211)
Notional value of financial instruments used as cash flow hedging instruments:
Group Company
Notional Notional
£ million amount amount
To hedge future currency revenues against US dollars $143m $143m
To hedge future currency revenues against sterling £235m £235m
To hedge future operating payments against US dollars $440m $440m
Hedges of future fuel purchases $4,143m $4,143m
Debt repayments to hedge future revenue – Japanese yen ¥100,798m ¥100,798m
– US dollars $1,307m $1,307m
March 31, 2007
Group
More than
£ million 0-6 months 6-12 months 1-2 years 2-5 years 5 years Total
Debt repayments to hedge future revenue 4 1 5 39 44 93
Forward contracts to hedge future payments (1) (1) (2)
Hedges of future fuel purchases 2992 40
32 9 7 39 44 131
Related deferred tax charge (39)
Total amount included within equity 92
116 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 117
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
31 Financial instruments continued
Notional value of financial instruments used as cash flow hedging instruments:
Group Company
Notional Notional
£ million amount amount
To hedge future currency revenues against US dollars $73m $73m
To hedge future currency revenues against sterling £144m £144m
To hedge future operating payments against US dollars $261m $261m
Hedges of future fuel purchases $2,440m $2,440m
Debt repayments to hedge future revenue – Japanese yen ¥118,729m ¥118,729m
– US dollars $1,140m $1,140m
The ineffective portion recognised in the income statement that arises from cash flow hedges amounts to a gain of £12 million (2006/07: £12 million loss).
ii Fair value hedges
The Group has no hedges designated as fair value hedges.
iii Net investments in foreign operations
The Group has no hedges designated as hedges of net investments in foreign operations.
Company
The Company undertakes hedging activities on behalf of other companies within the Group and performs the treasury activities of the Group
centrally. As a result, the disclosures above apply to the Company as for the Group.
32 Share capital
Group and Company
2008 2007
Number of Number of
Ordinary shares of 25 pence each shares 000s £ millions shares 000s £ millions
Authorised
At April 1 and March 31 1,512,000 378 1,512,000 378
Allotted, called up and fully paid
At April 1 1,151,575 288 1,130,882 283
Exercise of options under Employee Share Options Schemes 1,530 – 20,693 5
At March 31 1,153,105 288 1,151,575 288
33 Share options
The Group operates share-based payment schemes as part of the total remuneration package provided to employees – these schemes comprise
both share option schemes where employees acquire shares at a grant price and share award plans whereby shares are issued to employees at no
cost, subject to the achievement by the Group of specified performance targets. Details of the performance criteria to be met for each of the
schemes, and details of the awards to the directors, are set out in the Remuneration report on pages 65 to 73.
a Share Option Plan 1999
The British Airways Share Option Plan granted options to qualifying employees based on performance at an option price which was not less than
the market price of the share at the date of the grant (or the nominal value if shares are to be subscribed and this value is greater than the market
value). The options are subject to a three-year vesting period. Upon vesting, options may be exercised at any time until the 10th anniversary of
the date of grant with the exception of grants made during 2004/05 when there will be a single re-test after a further year which will measure
performance of the Group over the four-year period from the date of grant. No further grants of options under the Share Option Plan will be
made other than those during 2005/06 in relation to performance during 2004/05 (for which there will be no re-testing).
b Long Term Incentive Plan
The Long Term Incentive Plan (LTIP) awarded options to senior executives conditional upon the Company’s achievement of a performance
condition measured over three financial years. If granted, all options are immediately exercisable for seven years and no payment is due upon
exercise of the options. No further awards under the Long Term Incentive Plan have been made since June 16, 2004.
33 Share options continued
c Performance Share Plan
From 2005 the Group introduced a Performance Share Plan for senior executives. Options over shares will be awarded conditional on the
achievement of a variety of performance conditions and will vest after three years subject to the executive remaining employed by the Group.
A further award will be made that will vest based on the achievement of performance conditions over the following three financial years. No
payment is due upon exercise of the options. Executives awarded shares under the Performance Share Plan will be expected to retain no fewer
than 50 per cent of the shares (net of tax) which vest from the new schemes until they have built up a shareholding equivalent to 100 per cent
of basic salary.
d Deferred Share Plan
In 2006 the Group introduced a Deferred Share Plan (DSP) granted to qualifying employees based on performance and service tests. It will
be awarded when a bonus is triggered subject to the employee remaining in employment with the Group for three years after the grant date.
The relevant management population will receive a percentage of their bonus in cash and the remaining percentage in shares through the DSP.
The maximum deferral is 50 per cent.
e Share option summary
Group and Company
Deferred Share Plan Performance Share Plan LTIPs Share Option Plan
Weighted Weighted Weighted Weighted Weighted
Number average Number average Number average Number average average
of shares fair value of shares fair value of shares fair value of shares exercise price fair value
000s £ 000s £ 000s £ 000s £ £
Outstanding at April 1, 2006* 1,789 4,395 42,047 2.57
Granted in the year 843 4.84 1,101 4.35
Exercised during the year **/*** (2,336) (20,689) 2.38
Expired/cancelled (13) (247) (576) (2,018) 2.81
Outstanding at April 1, 2007 830 2,643 1,483 19,340 2.74
Granted in the year 1,444 2.61
Exercised during the year **/*** (157) (1,530) 2.71
Expired/cancelled (43) (191) (44) (896) 2.73
Outstanding at April 1, 2008 787 3,896 1,282 16,914 2.75
Options exercisable:
At March 31, 2008 7 4.84 1,282 11,413 2.74
At March 31, 2007 1,483 7,642 2.82
Range of exercise prices at March 31, 2008 for Share Option Plan
Options outstanding Options exercisable
Weighted Weighted Weighted
Number average average Number average
of shares remaining life exercise price of shares exercise price
Range of exercise prices 000s (years) £ 000s £
£1.57 – £2.61 2,784 4.82 1.67 2,784 1.67
£2.62 – £3.20 10,073 6.79 2.70 4,572 2.62
£3.21 – £3.94 4,057 2.40 3.61 4,057 3.61
16,914 5.41 2.75 11,413 2.74
Range of exercise prices at March 31, 2007 for Share Option Plan
Options outstanding Options exercisable
Weighted Weighted Weighted
Number average average Number average
of shares remaining life exercise price of shares exercise price
Range of exercise prices 000s (years) £ 000s £
£1.57 – £2.61 3,024 5.84 1.67 3,024 1.67
£2.62 – £3.20 11,848 7.76 2.69 150 2.64
£3.21 – £3.94 4,468 3.42 3.61 4,468 3.61
19,340 6.46 2.74 7,642 2.82
* Included within this balance are options over 5,235,228 (2007: 5,708,227) shares that have not been recognised in accordance with IFRS 2 as the options were granted
on or before November 7, 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2.
** The weighted average share price at the date of exercise for the options exercised is £4.19 (2007: £5.04).
*** Part of the exercise of share options during the year met through shares previously held by British Airways Employee Benefits Trust (Jersey) Limited.
For the share options outstanding as at March 31, 2008, the weighted average remaining contractual life is five years (2007: six years).
For options granted during the year the weighted average option life was three years (2007: three years).
118 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 119
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
33 Share options continued
The fair value of equity-settled share options granted is estimated as at the date of grant using a binomial lattice or Monte-Carlo model, taking into account
the terms and conditions upon which the options were granted. The following table lists the inputs to the models for the options granted in the year:
2008 2007
Expected share price volatility (per cent) 24 28
Historical volatility (per cent) 24 28
Expected comparator group volatility (per cent) 19-96 19-116
Expected comparator correlation (per cent) 28 23
Expected life of options (years) 3 3
Weighted average share price 4.03 4.94
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. Volatility was calculated
with reference to the Group’s weekly share price volatility. The expected volatility reflects the assumption that the historical volatility is indicative of future
trends, which may also not necessarily be the actual outcome. The fair value of the Performance Share Plans also takes into account a market condition of
total shareholder returns as compared to strategic competitors. No other features of options granted were incorporated into the measurement of fair value.
The share-based payments charge has been recorded in the income statement as follows:
£ million 2008 2007
Employee costs 3 10
34 Other reserves and minority interests
a Group
Group
Retained Unrealised Currency Minority
£ million earnings gains and losses translation Total interests*
Balance at April 1, 2006 589 100 1 690 213
Profit for the period attributable to shareholders 290 290
Exchange differences and other movements (3) (3)
Share-based payments 10 10
Tax effect of share-based payments 18 18
Fair value of cash flow hedges transferred to passenger revenue (3) (3)
Fair value of cash flow hedges transferred to fuel and oil costs (61) (61)
Fair value of cash flow hedges transferred to currency differences 12 12
Net change in fair value of cash flow hedges 48 48
Share of other movements in reserves of associates 88
Purchase of minority interests** (13)
Net gains on available-for-sale financial assets 33
Total income and expense for the period 326 (1) (3) 322 (13)
Exercise of share options (12) (12)
Balance at March 31, 2007 903 99 (2) 1,000 200
Profit for the period attributable to shareholders 680 680
Exchange differences and other movements 24 24
Share-based payments 3 3
Tax effect of share-based payments (7) (7)
Deferred tax – rate change adjustment 6 6
Fair value of cash flow hedges transferred to passenger revenue (5) (5)
Fair value of cash flow hedges transferred to fuel and oil costs (136) (136)
Fair value of cash flow hedges transferred to currency differences 15 15
Net change in fair value of cash flow hedges 245 245
Share of other movements in reserves of associates (2) (2)
Net losses on available-for-sale financial assets (5) (5)
Total income and expense for the period 680 114 24 818
Balance at March 31, 2008 1,583 213 22 1,818 200
* Included within minority interests are €300 million of 6.75 per cent fixed coupon euro perpetual preferred securities issued by British Airways Finance (Jersey) L.P. in which
the general partner is British Airways Holdings Limited, a wholly-owned subsidiary of the Company. The holders of these securities have no rights against Group undertakings
other than the issuing entity and, to the extent prescribed by the subordinated guarantee, the Company. The effect of the securities on the Group as a whole, taking into
account the subordinate guarantee and other surrounding arrangements, is that the obligations to transfer economic benefits in connection with the securities do not go
beyond those that would normally attach to preference shares issued by a UK company.
**On November 15, 2006 the Group acquired the minority interest held by American Airlines in BA & AA Holdings, the subsidiary that held the Group’s interest in Iberia.
The consideration paid was £13 million.
34 Other reserves and minority interests continued
b Company
Company
Retained Unrealised
£ million earnings gains and losses Total
Balance at April 1, 2006 557 96 653
Profit for the period attributable to shareholders 18 18
Share-based payments 10 10
Tax effect of share-based payments 18 18
Fair value of cash flow hedges transferred to passenger revenue (3) (3)
Fair value of cash flow hedges transferred to fuel and oil costs (61) (61)
Fair value of cash flow hedges transferred to currency differences 12 12
Net change in fair value of cash flow hedges 48 48
Total income and expense for the period 46 (4) 42
Exercise of share options (12) (12)
Balance at March 31, 2007 591 92 683
Profit for the period attributable to shareholders 540 540
Share-based payments 3 3
Tax effect of share-based payments (7) (7)
Deferred tax – rate change adjustment 6 6
Fair value of cash flow hedges transferred to passenger revenue (5) (5)
Fair value of cash flow hedges transferred to fuel and oil costs (136) (136)
Fair value of cash flow hedges transferred to currency differences 15 15
Net change in fair value of cash flow hedges 245 245
Deferred tax related to fair value movements
Total income and expense for the period 542 119 661
Balance at March 31, 2008 1,133 211 1,344
The unrealised gains and losses reserve records fair value changes on available-for-sale investments and the portion of the gain or loss on
a hedging instrument in a cash flow hedge that is determined to be an effective hedge.
The currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign
subsidiaries and associates.
Total shareholders’ equity also includes the balance classified as share capital that includes the total net proceeds (both nominal value and
share premium) on issue of the Company’s equity share capital, comprising 25 pence ordinary shares. Investment in own shares consists of
shares held by British Airways Employee Benefits Trust (Jersey) Limited, a wholly-owned subsidiary, for the purposes of the Employee Share
Ownership plans including the Long Term Incentive Plan. At March 31, 2008 the Group and Company held 2,087,147 shares for the Long
Term Incentive Plan and other employee share schemes (2007: 1,994,079 shares). The purchase of shares was financed by the Company
granting a loan to British Airways Employee Benefits Trust (Jersey) Limited.
35 Pension costs
The Company operates two funded principal defined benefit pension schemes in the UK, the Airways Pension Scheme (APS) and the New Airways
Pension Scheme (NAPS) both of which are closed to new members. APS has been closed to new members since March 31, 1984 and NAPS
closed to new members on March 31, 2003. From April 1, 2003 the Company commenced a new defined contribution scheme, the British
Airways Retirement Plan (BARP), of which all new permanent employees over the age of 18 employed by the Company and certain subsidiary
undertakings in the UK may become members. The assets of the scheme are held in separate trustee-administered funds. Benefits provided
under APS are based on final average pensionable pay and, for the majority of members, are subject to increases in payment in line with the
Retail Price Index (RPI). Those provided under NAPS are based on final average pensionable pay reduced by an amount (the ‘abatement’) not
exceeding one and a half times the government’s lower earnings limit. NAPS benefits are subject to RPI increases in payment up to a maximum
of 5 per cent in any one year.
120 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 121
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
35 Pension costs continued
In February 2007, following consultation with members and agreement with the Trustees, the Group amended NAPS for future service to restrict
future increases in pensionable pay to RPI and increase the normal retirement age to 65. The change in scheme rules to restrict future increases in
pensionable pay was treated as a curtailment under IAS 19, resulting in a £396 million credit, due to the reduction of the Defined Benefit Obligation
for NAPS. In addition, the Group agreed to make a one-off cash injection of £800 million into NAPS, of which £240 million was paid in February 2007,
with the remaining balance of £560 million paid in April 2007 and an additional £50 million was paid in March 2008. The Group also agreed to
make annual contributions of approximately £280 million a year for the next 10 years, and issued guarantees of up to £100 million over the next
two years, subject to financial performance. The Group also issued to APS, guarantees of up to £230 million over the next nine years.
Most employees engaged outside the UK are covered by appropriate local arrangements. The Company provides certain additional post-retirement
healthcare benefits to eligible employees in the US. The Company participates in a multi-employer defined benefit plan operated in the US by
the International Association of Machinists (IAM) and presents the plan in the financial statements as if it were a defined contribution plan as it is
not possible to allocate the assets and liabilities of the scheme due to the nature of the scheme. Contributions to the IAM plan were £1.9 million
(2007: £1.8 million).
Pension contributions for APS and NAPS were determined by actuarial valuations made as at March 31, 2006 using assumptions and methodologies
agreed between the Company and the Trustees of each scheme. At the date of the actuarial valuation, the market values of the assets of APS and
NAPS amounted to £6,650 million and £5,832 million respectively. The value of the assets represented 100 per cent (APS) and 74 per cent (NAPS)
of the value of the benefits that had accrued to members after allowing for assumed increases in earnings. These valuations showed that employer
contributions at an average rate of 34.6 per cent of pensionable pay for APS and 20.7 per cent of pensionable pay for NAPS were appropriate
from April 1, 2007 (from April 1, 2006 to March 31, 2007 the contributions were expressed as a multiple of standard employees’ contributions,
3.75 times for APS, 2.8 times for NAPS). For NAPS, the contribution rate to be paid by the employer from April 1, 2007 depends on the normal
retirement age chosen by members.
Employer contributions in respect of overseas employees have been determined in accordance with best local practice.
Total employer contributions to defined contribution pension plans both in the UK and overseas for the year were £17 million (2007: £14 million).
The Company’s contributions to APS and NAPS in the next year as determined by the actuarial review completed in March 2006 and agreement
with the Trustees, are expected to be approximately £305 million.
Employee benefit obligations comprise:
Group
£ million 2008 2007
Obligations arising under defined benefit pension plans and post-retirement benefits 204 1,021
Obligations arising under post-retirement medical benefit plans 116 109
Total obligations arising under post-retirement benefits 320 1,130
Other employee benefit obligations 10 12
330 1,142
The assets and liabilities of the schemes at March 31 are:
Year ended March 31, 2008
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
Scheme assets at fair value
Equities 4,488 147 4,635 1,033 20 1,053
Bonds 1,882 68 1,950 5,079 15 5,094
Others 978 6 984 556 556
Fair value of scheme assets 7,348 221 7,569 6,668 35 6,703
Present value of scheme liabilities 7,705 384 8,089 5,432 29 5,461
(357) (163) (520) 1,236 6 1,242
APS irrecoverable surplus 1,159 1,159
Net pension (liability)/asset (357) (163) (520) 77 6 83
Net pension (liability)/asset represented by:
Net pension (liability)/asset recognised (148) (172) (320) 77 8 85
Cumulative actuarial (losses)/gains not recognised (209) 9 (200) (2) (2)
(357) (163) (520) 77 6 83
35 Pension costs continued
Year ended March 31, 2007
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
Scheme assets at fair value
Equities 4,359 169 4,528 1,610 20 1,630
Bonds 1,604 67 1,671 4,023 14 4,037
Others 590 2 592 858 858
Fair value of scheme assets 6,553 238 6,791 6,491 34 6,525
Present value of scheme liabilities 8,110 397 8,507 6,076 27 6,103
(1,557) (159) (1,716) 415 7 422
APS irrecoverable surplus 306 306
Net pension (liability)/asset (1,557) (159) (1,716) 109 7 116
Net pension (liability)/asset represented by:
Net pension (liability)/asset recognised (964) (166) (1,130) 109 7 116
Cumulative actuarial (losses)/gains not recognised (593) 7 (586)
(1,557) (159) (1,716) 109 7 116
The pension plans have not invested in any of the Group’s own financial instruments nor in properties or other assets used by the Group.
The amounts recognised in the income statement for the year are analysed as follows:
Year ended March 31, 2008
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
Current service cost 170 7 177 20 20
Past service cost 1 1 1 1
Recognised in arriving at operating profit 171 7 178 21 21
Expected return on scheme assets (495) (18) (513) (341) (2) (343)
Immediate recognition of losses and the effect of the asset ceiling 55 55
Interest costs on scheme liabilities 425 23 448 318 1 319
Other finance cost (70) 5 (65) 32 (1) 31
Year ended March 31, 2007
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
Current service cost 264 7 271 23 23
Past service cost 29 29 10 10
Credit arising on changes to pension scheme (396) (396)
Recognised in arriving at operating profit (103) 7 (96) 33 33
Expected return on scheme assets (392) (18) (410) (330) (2) (332)
Immediate recognition of losses and the effect of the asset ceiling 64 64
Interest costs on scheme liabilities 388 23 411 284 1 285
Amortisation of actuarial losses in excess of the corridor 11
Other finance cost (4) 6 2 18 (1) 17
122 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 123
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
35 Pension costs continued
The amount of unrecognised cumulative actuarial gains and losses is as follows:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total Other schemes Total
Amount of unrecognised actuarial losses at April 1, 2006 (483) (16) (499)
Actual return on scheme assets 357 (3) 354 (1) (1)
Less: Expected return on scheme assets (392) (18) (410) (2) (2)
(35) (21) (56) (3) (3)
Other actuarial (losses)/gains (113) 52 (61) 3 3
Settlement of BRAL scheme (9) (9)
Charge arising due to changes to pension scheme 38 38
Amortisation of actuarial losses in excess of the corridor 11
Cumulative unrecognised actuarial losses at March 31, 2007 (593) 7 (586)
Actual return on scheme assets 6 (8) (2) 3 3
Less: Expected return on scheme assets (495) (18) (513) (2) (2)
(489) (26) (515) 1 1
Other actuarial gains/(losses) 873 28 901 (3) (3)
Cumulative unrecognised actuarial losses at March 31, 2008 (209) 9 (200) (2) (2)
Scheme assets and liabilities are measured by qualified actuaries. Scheme assets are stated at their market values at the respective balance
sheet dates and overall expected rates of return are established by applying published brokers’ forecasts to each category of scheme assets.
Group
At March 31, 2008 At March 31, 2007
Per cent per annum NAPS APS* Other schemes NAPS APS Other schemes
Inflation 3.5 3.5 3.0-5.0 3.0 3.0 3.0-4.0
Rate of increase in salaries 3.5 4.0 1.5-5.5 3.5 3.5 3.0-6.0
Rate of increase of pensions in payment 3.4 3.5 1.5-11.0 2.9 2.9 2.0-11.0
Discount rate 6.6 7.0 2.0-6.6 5.3 5.4 2.0-7.0
Expected rate of return on scheme assets 6.9 5.2 4.0-7.6 6.9 5.4 5.5-8.3
*Rate of increase in salaries is 4.0 per cent per annum for three years, 1.0 per cent in excess of RPI to March 2016 and 1.5 per cent in excess of RPI thereafter (2006/07: Rate
of increase in salaries is 4.0 per cent to March 2016 and 4.5 per cent thereafter).
Rate of increase in healthcare costs are based on medical trend rates of 11 per cent grading down to 5 per cent over six years (2006/07: 11 per cent
to 5 per cent over six years).
In the UK, mortality rates are calculated using the 00-series standard mortality tables for APS and the PA80 standard mortality tables for NAPS
(the two largest Group and Company schemes). The standard mortality tables were selected based on the the actual recent mortality experience
of members and were adjusted to allow for future mortality changes. In the US, mortality rates were based on the 1994 GAM Static tables. If the
post-retirement mortality tables used for APS and NAPS were to be changed such that the life expectancy of members was increased by one
year, the defined benefit obligations would increase by approximately £120 million in APS and £150 million in NAPS.
If the discount rate were to be decreased by 0.1 per cent without changing any other assumptions, the defined benefit obligations would increase
by approximately £60 million in APS and £130 million in NAPS.
A one percentage point change in the assumed rate of increase in healthcare costs would have the following effects:
£ million Increase Decrease
Effect on aggregate service cost and interest cost (2) 2
Effect on defined benefit obligation (21) 17
35 Pension costs continued
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
As at April 1, 2006 7,902 538 8,440 5,867 30 5,897
Current service cost 264 7 271 23 23
Past service cost 29 29 10 10
Interest cost 388 23 411 284 1 285
Benefits paid (210) (15) (225) (388) (1) (389)
Employee contributions 58 58 8 8
Settlement of BRAL scheme* (104) (104)
Credit arising on changes to pension scheme (434) (434)
Actuarial losses/(gains) 113 (52) 61 272 (3) 269
As at March 31, 2007 8,110 397 8,507 6,076 27 6,103
Current service cost 170 7 177 20 20
Past service cost 1 1 1 1
Interest cost 425 23 448 318 1 319
Benefits paid (202) (15) (217) (375) (2) (377)
Employee contributions 74 74 8 8
Actuarial (gains)/losses (873) (28) (901) (616) 3 (613)
As at March 31, 2008 7,705 384 8,089 5,432 29 5,461
*As a result of the sale of BA Connect, the Company issued to the BRAL scheme a guarantee of £50 million over the next two years.
The defined benefit obligation comprises £7 million (2007: £7 million) arising from unfunded plans and £8,082 million (2007: £8,500 million)
from plans that are wholly or partly funded.
Changes in the fair value of plan assets are analysed as follows:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
As at April 1, 2006 5,832 318 6,150 6,650 36 6,686
Expected return on plan assets 392 18 410 330 2 332
Employer contributions 508 6 514 29 29
Contributions by employees 58 58 8 8
Benefits paid (210) (15) (225) (388) (1) (389)
Settlement of BRAL scheme (68) (68)
Actuarial losses (27) (21) (48) (138) (3) (141)
As at March 31, 2007 6,553 238 6,791 6,491 34 6,525
Expected return on plan assets 495 18 513 341 2 343
Employer contributions 917 6 923 21 21
Contributions by employees 74 74 8 8
Benefits paid (202) (15) (217) (375) (2) (377)
Actuarial (losses)/gains (489) (26) (515) 182 1 183
As at March 31, 2008 7,348 221 7,569 6,668 35 6,703
124 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 125
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
35 Pension costs continued
History of experience gains and losses:
Employee benefit obligations Employee benefit assets
£ million NAPS Other schemes Total APS Other schemes Total
As at March 31, 2008
Fair value of scheme assets 7,348 221 7,569 6,668 35 6,703
Present value of defined benefit obligation (7,705) (384) (8,089) (5,432) (29) (5,461)
APS irrecoverable surplus (1,159) (1,159)
(Deficit)/surplus in the scheme (357) (163) (520) 77 6 83
Experience adjustments arising on plan liabilities (873) (28) (901) (616) 3 (613)
Experience adjustments arising on plan assets (489) (26) (515) 182 1 183
As at March 31, 2007
Fair value of scheme assets 6,553 238 6,791 6,491 34 6,525
Present value of defined benefit obligation (8,110) (397) (8,507) (6,076) (27) (6,103)
APS irrecoverable surplus (306) (306)
(Deficit)/surplus in the scheme (1,557) (159) (1,716) 109 7 116
Experience adjustments arising on plan liabilities (113) 52 (61) (272) 3 (269)
Experience adjustments arising on plan assets (27) (21) (48) (138) (3) (141)
As at March 31, 2006
Fair value of scheme assets 5,832 318 6,150 6,650 36 6,686
Present value of defined benefit obligation (7,902) (538) (8,440) (5,867) (30) (5,897)
APS irrecoverable surplus (652) (652)
(Deficit)/surplus in the scheme (2,070) (220) (2,290) 131 6 137
Experience adjustments arising on plan liabilities (920) (25) (945) (285) (5) (290)
Experience adjustments arising on plan assets 794 35 829 581 5 586
As at March 31, 2005
Fair value of scheme assets 4,554 266 4,820 6,031 29 6,060
Present value of defined benefit obligation (6,523) (488) (7,011) (5,603) (24) (5,627)
APS irrecoverable surplus (296) (296)
(Deficit)/surplus in the scheme (1,969) (222) (2,191) 132 5 137
The directors are unable to determine how much of the pension scheme surplus or deficit recognised on transition to IFRS and taken directly
to equity is attributable to actuarial gains and losses since inception of those pension schemes.
36 Contingent liabilities
There were contingent liabilities at March 31, 2008 in respect of guarantees and indemnities entered into as part of the ordinary course of the
Group’s business. No material losses are likely to arise from such contingent liabilities. A number of other lawsuits and regulatory proceedings are
pending, the outcome of which in the aggregate is not expected to have a material effect on the Group’s financial position or results of operations.
The Group and the Company have guaranteed certain borrowings, liabilities and commitments which at March 31, 2008 amounted to £173 million
(2007: £168 million) and £448 million (2007: £397 million) respectively. For the Company these included guarantees given in respect of the fixed
perpetual preferred securities issued by subsidiary undertakings.
The Group is involved in certain claims and litigation related to its operations. In the opinion of management, liabilities, if any, arising from these
claims and litigation will not have a material adverse effect on the Group’s consolidated financial position or results of operations. The Group files
income tax returns in many jurisdictions throughout the world. Various tax authorities are currently examining the Group’s income tax returns. Tax
returns contain matters that could be subject to differing interpretations of applicable tax laws and regulations and the resolution of tax positions
through negotiations with relevant tax authorities, or through litigation, can take several years to complete. While it is difficult to predict the ultimate
outcome in some cases, the Group does not anticipate that there will be any material impact on the Group’s financial position or results of operations.
37 Related party transactions
The Group and Company had transactions in the ordinary course of business during the year under review with related parties.
Group Company
£ million 2008 2007 2008 2007
Associates
Sales to associates 43 45 43 45
Purchases from associates 54 105 54 105
Amounts owed by associates 44
Amounts owed to associates 11
Subsidiaries
Sales to subsidiaries 36 73
Purchases from subsidiaries 126 121
Amounts owed by subsidiaries 116 99
Amounts owed to subsidiaries 1,982 1,928
In addition, the Company meets certain costs of administering the Group’s retirement benefit plans, including the provision of support services
to the Trustees. Costs borne on behalf of the retirement benefit plans amounted to £3.6 million in relation to the costs of the Pension Protection
Fund levy (2006/07: £5.3 million).
Associates
a Iberia, Lineas Aéreas de España, S.A. (Iberia)
During the year, the Group increased its investment in Iberia from 9.95 per cent to 13.15 per cent. Areas of opportunity for cooperation have
been identified, and work continues to pursue and implement these. Sales and purchases between related parties are made at normal market
prices and outstanding balances are unsecured and interest free. Cash settlement is expected within the standard settlement terms specified
by the IATA Clearing House.
As at March 31, 2008, the net trading balance owed by Iberia to the Group amounted to £3.1 million (2007: £0.4 million owed to Iberia).
b Comair Limited (Comair)
Prior to September 30, 2006, the Group’s shareholding in Comair was 18.3 per cent and due to the Group’s ability to exercise significant
influence, the investment in Comair was accounted for using the equity method. On September 30, 2006, the Group’s shareholding in Comair
decreased to 10.92 per cent and the Group no longer had the ability to exercise significant influence over the investment, at which time the
investment was reclassified as an available-for-sale financial asset. Sales and purchases to and from Comair up to September 30, 2006 have
been included in the numbers above.
126 / British Airways 2007/08 Annual Report and Accounts
Notes to the accounts continued
British Airways 2007/08 Annual Report and Accounts / 127
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
37 Related party transactions continued
c Other associates
The remaining net trading balances are due to transactions between the Group and Dunwoody Airline Services (Holdings) Ltd.
Subsidiaries
Transactions with subsidiaries are carried out on an arm’s-length basis. Outstanding balances that relate to trading balances are placed on
inter-company accounts with no specified credit period. Long-term loans owed to and from the Company by subsidiary undertakings bear
market rates of interest in accordance with the inter-company loan agreements.
Directors’ and officers’ loans and transactions
No loans or credit transactions were outstanding with directors or officers of the Company at March 31, 2008 or arose during the year that
need to be disclosed in accordance with the requirements of Schedule 6 to the Companies Act 1985.
In addition to the above, the Group and Company also have transactions with related parties which are conducted in the normal course of
airline business. These include the provision of airline and related services.
Neither the Group nor Company have provided or benefited from any guarantees for any related party receivables or payables. During the
year ended March 31, 2008 the Group has not made any provision for doubtful debts relating to amounts owed by related parties (2007: £nil).
Compensation of key management personnel (including directors)
Group Company
£ million 2008 2007 2008 2007
Short-term employee benefits 4 4 4 4
Share-based payments 2 3 2 3
6 7 6 7
38 Foreign currency translation rates
At March 31 Annual average
£1 equals 2008 2007 2008 2007
US dollar 1.99 1.96 2.01 1.89
Japanese yen 197 231 231 220
Euro 1.26 1.47 1.43 1.47
Total Group operations
2008 2007 2006* 2005 2004
Traffic and capacity
Revenue passenger km (RPK) million 113,016 112,851 109,713 107,892 103,092
Available seat km (ASK) million 149,545 148,321 144,194 144,189 141,273
Passenger load factor per cent 75.6 76.1 76.1 74.8 73.0
Cargo tonne km (CTK) million 4,891 4,695 4,929 4,954 4,461
Total revenue tonne km (RTK) million 16,256 16,112 15,909 15,731 14,771
Total available tonne km (ATK) million 22,829 22,882 22,719 22,565 21,859
Overall load factor per cent 71.2 70.4 70.0 69.7 67.6
Passengers carried ’000 33,161 33,068 32,432 35,717 36,103
Tonnes of cargo carried ’000 805 762 795 877 796
Frequent flyer RPKs as a percentage of total RPKs (note 2) per cent 3.9 3.8 3.9 3.2 4.0
Revenue aircraft km million 644 637 614 661 644
Revenue flights ’000 281 276 280 378 391
Break-even overall load factor per cent 63.6 65.4 63.6 64.3 63.6
Financial
Passenger revenue per RPK pence 6.67 6.44 6.31 6.02 6.30
Passenger revenue per ASK pence 5.04 4.90 4.80 4.51 4.59
Cargo revenue per CTK pence 12.59 12.74 12.94 9.73 10.38
Average fuel price (US cents/US gallon) 245.26 209.60 188.22 136.44 94.49
Operations
Average manpower equivalent (MPE) 42,403 42,683 43,814 47,472 49,072
RTKs per MPE 383.4 377.5 363.1 331.4 301.0
ATKs per MPE 538.4 536.1 518.5 475.3 445.4
Aircraft in service at year end 245 242 284 290 291
Aircraft utilisation (average hours per aircraft per day) 10.91 10.82 10.29 9.83 9.21
Unduplicated route km ’000 629 589 574 623 657
Punctuality – within 15 minutes per cent 63 67 75 76 81
Regularity per cent 98.2 98.5 98.8 98.8 98.8
2008 2007 2006 2005 2004**
Financial**
Interest cover (note 3) times 14.8 16.7 6.0 3.8
Dividend cover times n/a n/a n/a n/a
Operating margin (note 4) per cent 10.0 7.1 8.5 7.2
Earnings before interest, tax, depreciation, amortisation
and rentals (EBITDAR) million 1,777 1,549 1,666 1,552
Net debt/total capital ratio (note 5) per cent 28.8 29.1 44.2 67.7
Net debt/total capital ratio including operating leases per cent 38.4 39.6 53.0 72.4
Total traffic revenue per RTK pence 50.18 48.79 47.53 44.4
Total traffic revenue per ATK pence 35.73 34.35 33.28 30.94
Total operating expenditure per RTK (note 6) pence 48.46 49.26 47.26 40.85
Total operating expenditure per ATK (note 6) pence 34.51 34.68 33.10 28.48
* Restated for the disposal of the regional business of BA connect.
** Financial ratios are only available under comparative IFRS from the Group's transition date of April 1, 2004.
n/a = not applicable
128 / British Airways 2007/08 Annual Report and Accounts
Operating and financial statistics
For the five years ended March 31, 2008
British Airways 2007/08 Annual Report and Accounts / 129
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Notes
1. Operating statistics do not include those of associate undertakings
(Iberia and Comair) and franchisees (Loganair and Sun Air (Scandinavia)).
2. The carriage of passengers on the 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. 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
(£ million (except ratios)) 2008 2007
Profit before tax 883 611
Net interest payable (a) (64) (39)
Profit adjusted for interest payable (b) 947 650
Interest cover (b)/(a) 14.8 16.7
4. Operating margin is defined as operating profit as a percentage of
revenue. Revenue comprises: passenger revenue (scheduled services
and non-scheduled services), cargo services and other 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, net of
short-term loans and deposits and cash less overdrafts. See note 24
to the financial statements for details of the calculation of net debt.
Total capital is defined as the total of capital, reserves, minority
interests, and net debt. Total capital and the net debt/total capital
ratio are not financial measures under IFRS. However, management
believe these measures are useful to investors when analysing
the extent to which the Group is funded by debt rather than by
shareholders’ funds. See note 30 to the financial statements for
details of the calculation of the net debt/total capital (gearing) ratio.
6. Total expenditure on operations, total expenditure on operations
per RTK and total expenditure on operations per ATK are not
financial measures under IFRS. However, management believes
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 measures internally on a monthly basis as an indication of
management’s performance in reducing costs. The following table
shows a reconciliation of total expenditure on operations per RTK
and total expenditure on operations per ATK for each of the two
most recent financial years:
Year ended March 31
(£ million (except ratios)) 2008 2007
Total expenditure on operations 7,878 7,936
RTKs 16,256 16,112
ATKs 22,829 22,882
Total expenditure on operations per RTK (pence)
48.46 49.26
Total expenditure on operations per ATK (pence)
34.51 34.68
Investments in subsidiaries
The following table includes those principal investments which significantly impact the results or assets of the Group.
These subsidiaries are wholly-owned except where indicated.
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
BA Cash Management LP Investment Company England
BA Cityflyer Ltd Airline operations England
BA European Ltd (trading as OpenSkies) Airline operations England
Britair Holdings Ltd Holding Company England
British Airways 777 Leasing Ltd Aircraft financing England
British Airways Avionic Engineering Ltd Aircraft maintenance England
British Airways Capital Ltd Airline finance Jersey
(89 per cent of founders’ shares owned)
British Airways Holdings Ltd Airline finance Jersey
British Airways Holidays Ltd Package holidays England
British Airways Interior Engineering Ltd Aircraft maintenance England
British Airways Leasing Ltd Aircraft financing England
British Airways Maintenance Cardiff Ltd Aircraft maintenance England
British Airways Regional Ltd Air travel services England
Speedbird Cash Management Ltd Investment Company Bermuda
Speedbird Insurance Company Ltd Insurance Bermuda
The Plimsoll Line Ltd Holding Company England
Investments in associates
Country of
Percentage of Principal incorporation and
equity owned activities principal operations
Iberia, Lineas Aéreas de España, S.A. (’Iberia’)* 13.15 Airline operations Spain
Available for sale and 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
Flybe Group Ltd* 15.0 Airline operations England
Comair Ltd* 10.9 Airline operations South Africa
*Not owned directly by British Airways Plc.
130 / British Airways 2007/08 Annual Report and Accounts
Principal investments
at March 31, 2008
British Airways 2007/08 Annual Report and Accounts / 131
Overview of the year
Business review Corporate responsibility Corporate governance
Financial statements
Shareholder information
Shareholder information
General Information
Financial calendar
Financial year end March 31, 2008
Annual general meeting July 15, 2008
Announcement of 2008/09 results
Three month results to June 30, 2008 August 1, 2008
Six month results to September 30, 2008 November 7, 2008
Nine month results to December 31, 2008 February 6, 2009
Preliminary announcement May 22, 2009
Reports and Accounts June 2009
Registered Office
Waterside, PO Box 365, Harmondsworth, UB7 0GB
Registered number – 1777777
Outside advisers
Company Registrars: Computershare Investor Services Plc,
PO Box 82, The Pavilions, Bridgewater Road, Bristol, BS99 7NH
ADR Depositary: Citibank Shareholder Services, PO Box 43077,
Providence, RI 02940-3077, USA
Unsolicited mail
The Company is obliged by law to make its share register available
on request to other organisations who may then use it as a mailing
list. This may result in receiving unsolicited mail. If you wish to limit
the receipt of unsolicited mail you may do so by writing to the Mailing
Preference Service, an independent organisation whose services are
free to you. Once your name and address have been added to its
records, it will advise the companies and other bodies which support
the service that you no longer wish to receive unsolicited mail.
If you would like more details please write to:
The Mailing Preference Service, FREEPOST 22, London, W1E 7EZ.
The Company asks organisations which obtain its register to support
this service.
ShareGift
Shareholders with small numbers of shares may like to consider
donating their shares to charity under ShareGift, administered
by the Orr Mackintosh Foundation. Details are available from
the Company Registrars.
Airline operations This includes British Airways Plc and BA CityFlyer Ltd.
Available seat kilometres (ASK) The number of seats available for sale multiplied by the distance flown.
Available tonne kilometres (ATK) The number of tonnes of capacity available for the carriage of revenue
load (passenger and cargo) multiplied by the distance flown.
Revenue passenger kilometres (RPK) The number of revenue passengers carried multiplied by the distance flown.
Cargo tonne kilometres (CTK) The number of revenue tonnes of cargo (freight and mail) carried multiplied by the distance flown.
Revenue tonne kilometres (RTK) The revenue load in tonnes multiplied by the distance flown.
Load factor The percentage relationship of revenue load carried to capacity available.
Passenger load factor RPK expressed as a percentage of ASK.
Overall load factor RTK expressed as a percentage of ATK.
Break-even load factor The load factor required to equate total traffic revenue with operating costs.
Frequent flyer RPKs as a percentage The amount of frequent flyer RPKs expressed as a percentage of total RPKs is
of total RPKs indicative of the proportion of total passenger traffic that is represented by redemption
of frequent flyer points in the year.
Revenue per RPK Passenger revenue from Airline scheduled operations divided by Airline scheduled RPK.
Total traffic revenue per RTK Revenue from total traffic (scheduled and non-scheduled) divided by RTK.
Total traffic revenue per ATK Revenue from total traffic (scheduled and non-scheduled) divided by ATK.
Punctuality The industry's standard, measured as the percentage of flights departing within
15 minutes of schedule.
Regularity The percentage of flights completed to flights scheduled, excluding flights cancelled for
commercial reasons.
Unduplicated route kilometres All scheduled flight stages counted once, regardless of frequency or direction.
Interest cover The number of times profit before taxation and net interest expense and interest income
covers the net interest expense and interest income.
Dividend cover The number of times profit for the year covers the dividends paid and proposed.
Operating margin Operating profit/(loss) as a percentage of revenue.
Net debt Loans, finance leases and hire purchase arrangements, net of other current interest bearing
deposits and cash and cash equivalents less overdrafts.
Net debt/total capital ratio Net debt as a ratio of total capital, adjusted to include the discounted value of future
(including operating leases) operating lease commitments.
Total capital Total equity plus net debt.
Net debt/total capital ratio Net debt as a ratio of total capital.
Manpower equivalent Number of employees adjusted for part-time workers, overtime and contractors.
EBITDAR Earnings before interest, tax, depreciation, amortisation and rentals.
n/a Not applicable.
132 / British Airways 2007/08 Annual Report and Accounts
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