INTERNATIONAL
AIRLINES
GROUP
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Strategic Report
Corporate Governance
Financial Statements
Additional Information
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Annual report and accounts 2018
INTERNATIONAL
AIRLINES
GROUP
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Delivering
Achieving
Advancing
Strengthening
Transforming
Creating
Annual report and accounts 2018
CONTENTS
Strategic Report
Financial Statements
Management Report
116 Consolidated income statement
117 Consolidated statement
of other comprehensive income
118 Consolidated balance sheet
119 Consolidated cash flow statement
120 Consolidated statement of changes
in equity
122 Notes to the consolidated
financial statements
172 Group investments
Statement of Directors’ Responsibilities
Independent Auditors’ Report
Additional Information
183 Alternative performance measures
186 Glossary
188 Operating and financial statistics
IBC Shareholder information
2
3
4
6
11
Our highlights
Chairman’s letter
Our network
Chief Executive Officer’s review
Question and answers
with the Chief Executive Officer
12
Business model and strategy
14 Our strategic priorities and key
performance indicators
18
20
British Airways
Iberia
22 Vueling
23 Aer Lingus
24
25
LEVEL
IAG Platform
27 Avios
28
IAG Cargo
29 Digital
30 Risk management and principal
risk factors
37
38
Financial overview
Financial review
49 Regulatory environment
51
Sustainability
Corporate Governance
72 Chairman’s introduction to corporate
governance
74 Board of Directors
76 Corporate governance
88
91
Report of the Audit and
Compliance Committee
Report of the Nominations
Committee
94 Report of the Safety Committee
95 Report of the Remuneration
Committee
IAG is required to prepare a
Management Report in accordance
with Article 262 of the Spanish
Companies Act and Article 49 of the
Spanish Commercial Code. Pursuant to
this legislation, this management report
must contain a fair review of the
progress of the business and the
performance of the company, together
with a description of the principal risks
and uncertainties that it faces. In the
preparation of this report, IAG has
taken into consideration the guide
published in 2013 by the Spanish
National Securities Market Commission
(CNMV) which establishes a number
of recommendations for the
preparation of management reports
of listed companies.
The Management Report is composed
by the following sections:
12 Business model and strategy
14
Our strategic priorities and key
performance indicators
25
IAG Platform
30
Risk management and principal
risk factors
37 Financial overview
38 Financial review
49 Regulatory environment
51
Sustainability
The Annual Corporate Governance
Report is part of this Management
Report but has been prepared
separately.
This report has been file with the
CNMV, together with the required
statistical annex, in accordance with the
CNMV Circular 2/2018, dated June 12.
The Annual Corporate Governance
Report and the statistical annex are
also available on the company’s
website (www.iairgroup.com).
The Non-Financial Information
Statement in response to the
requirements of Law 11/2018, of
December 28, (amending the
Commercial Code, the revised
Capital Companies Law approved
by Legislative Royal Decree 1/2010,
of July 2, 2010 and Audit Law 22/2015,
of July 20, 2015), is part of this
Management Report and is available on
the Company’s website
(www.iairgroup.com).
“IAG continues to deliver in a changing industry. We
are responding to consumer needs, deliver on our
financial targets, operate with sustainability at our
heart and leverage technology to support our vision.
We’re confident that we will continue to deliver for
our customers and shareholders while investing in
the future of our people and airlines. IAG is built to
succeed and we hope you’ll join us on our journey as
we move towards greater achievements together.”
Willie Walsh
Chief Executive Officer
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www.iairgroup.com
1
Our highlights
Operating profit before exceptional items (€m)1
+€280 million vly
Value returned to shareholders3
+25% vly
2
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1
8
2
0
1
7
2
0
1
6
3,230
2,950
2,535
2
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1
8
2
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1
7
2
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1
6
615
c. 700
€1,315m
550
500
€1,050m
495
500
€995m
Dividends
Share buyback
Special dividend
Return on Invested Capital1
17.3%
+1.4pts
ASK: 2.5%
13.2%4
+1.0pts
ASK: 7.1%
13.3%
-0.1pts
ASK: 8.9%
26.8%
+3.8pts
ASK: 10.0%
IAG Platform
INTERNATIONAL
AIRLINES
GROUP
16.6%
+0.9pts
Our financial performance
Statutory results
Total revenue
Operating profit after exceptional items
Profit after tax and exceptional items
Basic earnings per share
Cash and interest-bearing deposits
Interest-bearing long-term borrowings
Alternative performance measures2
Profit after tax before exceptional items
Adjusted earnings per share
Adjusted net debt
Adjusted net debt to EBITDAR
2018
20171
Versus last year
€ 24,406m
€ 3,678m
€ 2,897m
142.7€c
€ 6,274m
€ 7,509m
2018
€ 2,481m
117.7€c
€ 8,355m
1.6
€ 22,880m
€ 2,662m
€ 2,009m
95.2 €c
€ 6,676m
€ 7,331m
6.7%
38.2%
44.2%
49.9%
(6.0%)
2.4%
20171
Versus last year
€ 2,231m
102.2 €c
€ 7,759m
1.5
11.2%
15.1%
7.7%
0.1 pts
1 2017 figures restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’.
2 Alternative performance measure calculations page 183.
3 Presented in the year they were proposed
4 Excluding LEVEL
For definitions see Glossary page 186.
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INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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CHAIRMAN’S LETTER
A business model built for
sustainable growth
“I’m delighted to
welcome you to
our latest Annual
Report which charts
another year of high
achievement for all
our operating airlines
in an increasingly
testing economic
environment.”
Antonio Vázquez
Chairman
2018 was another year of strong growth
for our business, despite significant
economic and political challenges.
agreement between the UK and EU will
be reached which allows flights to
continue as normal.
To report operating profits of €3,230
million before exceptional items (up by
9.5%) on revenues of €24.4 billion is a
significant achievement at a time when oil
prices were volatile and the geo-political
environment uncertain.
Difficulties lie ahead on both these fronts,
but we remain confident we have the
right strategy, supported by a unique
business model and a robust governance
structure, to continue pursuing
long-term growth.
Forecasts from the International Air
Transport Association make good
reading. They predict our industry’s net
profits will increase to $35.5 billion this
year - the tenth consecutive year of profit
for the industry, and, more importantly,
the fifth in a row where returns will
exceed the cost of capital, creating
value for investors.
In some sectors, that wouldn’t make a
headline. In the airline industry, given its
history, it is big news.
It matches our own vocation to deliver
consistent returns to shareholders. We
were delighted to return some €1 billion in
dividends and share buy backs in 2018, for
the second year running.
Liberalisation in Europe has delivered
so much, benefitting around 1 billion
consumers and sustaining thousands
of jobs each year. And IAG remains
confident that its operating companies
will comply with relevant ownership and
control rules post Brexit.
Consolidation remains a prime motivation
for IAG. It takes two different forms – full-
blown M&A activity and, more frequently
in recent times, acquiring distressed
assets from airlines that fail. We have a
business model ideally suited to pursuing
both paths.
Joint business agreements are also
crucial. We’re very pleased that the
agreement between British Airways, Iberia
and LATAM received approval in Brazil,
Uruguay and Colombia, promising real
benefits for travellers between Europe
and South America. Approval from the
Chilean Free Competition Defence Court
was also received in 2018, though this
remains subject to final ruling by the
Chilean Supreme Court following an
appeal. These relationships have
longevity. In February 2019 we celebrated
the 20th anniversary of the oneworld
alliance that includes both British Airways
and Iberia.
Brexit is certainly one of the biggest
challenges we face. However, we remain
confident a comprehensive air transport
This is IAG’s eighth year. We remain a
young company with a unique structure.
To sustain our success we must apply the
highest standards of governance and the
new UK Corporate Governance Code’s
determined aspirations are and will be a
big focus for the Board. We’re thinking
deeply about how IAG - a parent
company, overseeing a diversity of brands
and cultures – can make a meaningful
reality of the Code’s demands, not least
on stakeholder engagement.
We also remain firmly fixed on growing
sustainably. We are on track to meet
our 10 per cent carbon efficiency
improvement target of 87.3gCO2/pkm
by 2020 and are making big progress
on reducing onboard waste.
More widely we are proud of the lead role
we are playing in industry-wide action on
carbon. Our sector is the first to agree a
worldwide mechanism to reduce
emissions and the global CORSIA offset
and reduction programme, which we
advocated for strongly, is an initiative
few industries can match.
I hope in the following pages you can
clearly see that IAG continues to grow
and prosper, much of which is down to
the terrific work done by people across
the Group.
We are all conscious of the challenges
we face, but very excited about the
opportunities that lie ahead.
Antonio Vázquez
Chairman
www.iairgroup.com
3
OUR NETWORK
Our business
around the world
IAG combines leading airlines in the UK, Spain and Ireland,
enabling them to enhance their presence in the aviation
market while retaining their individual brands and current
operations. The airlines’ customers benefit from a larger
combined network for both passengers and cargo, and a
greater ability to invest in new products and services through
improved financial robustness.
See pages 14 – 17 for more about
our strategic priorities.
British Airways
Iberia
Aer Lingus
LEVEL
4
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
Passengers
Available seat kilometres
113million
+7.7% vly
324,808 million
+6.1% vly
Destinations
268
Aircraft
573
+27 aircraft vly
Cargo tonnes kilometres
5,713 million
-0.9% vly
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British Airways
Iberia
Vueling
Aer Lingus
LEVEL
www.iairgroup.com
5
CHIEF EXECUTIVE OFFICER’S REVIEW
Delivering continued
growth across our brands
“IAG’s unique business
model has once again
proved flexible and
resilient, even in an
increasingly turbulent
environment, and all our
airlines performed well in
2018. We go into 2019
committed to achieving
continued growth.”
Willie Walsh
Chief Executive Officer
2018 was a good year for IAG and all
of its airlines, once more underlining the
unique strength and flexibility of our
business model.
We started the year expecting to
see some softening in our markets
compared with 2017, but we were well
positioned to take advantage of
opportunities as they arose.
The macro-economic environment was
relatively good, especially at the start of
the year. As the year progressed, things
became a little more turbulent with
increasing noise around Brexit and
growing worries about the impact
of the China/US trade war.
These issues have an effect on market
sentiment, but we didn’t see much
direct impact on our business. Where
we encountered problems, it was down
to local economic issues, in markets
such as Argentina. Both premium and
non-premium revenues held up strongly
on services to North America and
remained strong in Europe and on our
Asian network.
The sharp rise in fuel prices was a
surprise, however, and it certainly
created problems for some of our
competitors. We took a view at the end
of 2017 that it was probably going to
rise faster than generally expected and
took some important pricing action
through our hedging programme – so
vital to our business, where fuel
accounts for some 25 per cent of our
cost base.
To offset the headwind of higher
prices and increase operating profit
before exceptional items from €2,950
million in 2017 to €3,230 million, while
increasing investment in our customers
right across our airlines, was a very
good achievement.
We’ve been saying for some time that
there is still a lot more we can do. Of
course, it gets more difficult as time
goes on. The more we achieve, the
harder it is to keep improving.
But when I stand back and look across
IAG, balancing the positives and the
negatives, I can’t help but feel a sense
of continued confidence in the future.
I think it is inevitable that Brexit will have
a greater impact in the months ahead. It
has been quite shocking to get so far in
the political process without having any
real clarity about the future. That can't
be positive for the economy.
Whether you are for or against the UK
leaving the EU, all the credible forecasts
I’ve seen predict that Brexit will have a
negative economic impact in the short
to medium term that is likely to damage
consumer confidence and act as a
further drag on business investment.
We need to remain very agile in the
months ahead.
Consolidation
We continue to explore opportunities
to bring new airline brands into IAG and
during the year we held discussions
with Norwegian.
We’ve watched the airline closely over
recent times, initially curious to see if
they could make the low-cost, longhaul
proposition work from the consumer’s
point of view. Most in the industry
doubted they could make a reality of
a fully unbundled longhaul fare, where
the price of the ticket gets you on the
aircraft and everything else, from
bags to food, drink and pillows,
is an extra charge.
We were pleasantly surprised with their
success and it gave us confidence to
believe there was a new segment of the
market to be served, largely focused on
the very price-conscious, leisure-
orientated consumer. The challenge
though is to have a genuinely low-cost
base throughout the operation –
including aircraft, crewing, product
and airports – so that you can
operate profitably. So far, Norwegian
has not been able to prove that.
Nevertheless, having seen real potential
in the model we looked to use it
ourselves with the launch in 2017 of
LEVEL, our own low-cost longhaul
brand. But we also contacted
Norwegian to see if they had an interest
in becoming part of IAG,
6
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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opportunistically acquiring a small stake.
Although we made some progress in
talks, ultimately, we concluded we
would not make an offer. And, as I’d
been clear that we would only hold an
investment if it was a bridge to full
acquisition, we announced our intention
to sell our stake.
We wish Norwegian well. They’ve clearly
got a challenge in trying to strengthen
the balance sheet and generate
additional cash. But we still believe there
is a clear low-cost longhaul market to be
addressed and we will do that
organically through LEVEL.
Measuring customer satisfaction
We are now using the Net Promoter
Score (NPS) in a consistent way across
all our airlines, as a sensitive non-
financial metric to gauge how customers
respond to our services.
NPS is not about measuring our airlines
against each other. More it is about
tracking investment within the individual
airlines to see how they are meeting
customer expectations.
It gives us a huge amount of granular
data, which we analyse in great
detail, and lets us see the cause and
effect of our investment decisions.
If the customer response is not what
we expected, we can dig into the data,
see why and adjust. It is proving a
very useful tool for the Management
Committee as we plan
future investment.
Operational highlights
We saw a strong performance right
across our brands in 2018, even though
each of our airlines experienced
operating challenges.
British Airways had a very stong year,
exceeding many of its targets. The
increased investment in the customer
that we spoke about last year is now
showing real benefits, reflected in a
fantastic, 10 percentage point uplift in
the airline’s NPS.
But there were difficulties too. In late
summer British Airways faced a criminal
data attack that caused huge concern
to our customers and was a big
disappointment to us. In my view the
team handled the situation openly and
with great skill, contacting affected
customers quickly. The cyber security
threat is a nasty reality for all businesses
today and it is growing exponentially. It
requires constant vigilance and we work
closely with the world’s leading experts
to ensure our systems and processes
are robust. It’s a minute-by-minute
challenge that we take very seriously.
British Airways has a lot to look forward
to in 2019 as it celebrates its centenary.
It’s great to be able to trace our roots
right back to August 25, 1919, when our
predecessor company, Aircraft
Transport and Travel, flew its first
scheduled service from Hounslow
Heath, near Heathrow, to Paris. The
centenary provides British Airways with
a platform to focus on its brand with
new advertising, new business class
products and the arrival of the Airbus
A350-1000 in its fleet – all clear
evidence of the increasing investment
we are making in our customers.
British Airways also has the security of
knowing the UK and US have agreed a
new agreement that will take effect
after Brexit, underpinning the airline’s
powerful transatlantic business. There
had been a lot of scaremongering
about this issue, but I was always
confident the alignment of interests
between the UK and US would result
in a new deal, as it has.
Historically, airlines have often made the
mistake of undergoing restructuring and
then assuming the job is done. That is
not what we’ve seen at Iberia, where the
extraordinary transformation achieved
in recent years is continuing to evolve in
the second phase of its Plan de Futuro.
It’s a very structured approach to
transformation and it is showing
through in continued strong
performance, an improving NPS, the
arrival of new aircraft with the delivery
of the Airbus A350-900, and with its
brand well positioned in key markets.
The team at Iberia deserve great credit
for all they’ve achieved but also for
recognising that there is always more to
do. They refuse to be complacent and
know that further change will secure
Iberia’s position in its main markets, will
give us continued confidence to invest
and will offer its people a secure future.
They’ve done a great job.
Aer Lingus continues to justify the
investment we made in it. It has been
a great acquisition for IAG and I’m
convinced the team there has been able
to achieve so much more than they
could have done as a stand-alone airline.
We’ve seen significantly more expansion
on North Atlantic routes than initially
planned and this will continue in 2019
with the arrival of long-range Airbus
A321s, allowing them to target new
destinations, including Minneapolis/St
Paul and Montreal. Thanks to our
investment, Dublin is becoming a major
transatlantic hub, bringing profitable
growth to Aer Lingus and significant
economic benefits to Ireland.
We were sad Stephen Kavanagh
decided to step down as CEO but
delighted he has agreed to remain on
the Aer Lingus Board. He deserves huge
congratulations for all he has achieved.
Sean Doyle has stepped in to replace
him, moving across from British Airways,
and has hit the ground running. It's
proof of the fantastic talent we have
within IAG. People talk of seamless
transition. Well, this was a very good
example of that, although inevitably
Sean will bring a different style of
leadership to the role as he picks
up where Stephen left off.
Vueling got hit very hard by last
summer’s air traffic control crisis within
Europe, not least as a disproportionate
number of flights from its Barcelona
base pass through airspace controlled
from the ATC centre in Marseille, a
particular bottleneck.
The problems were severe. For the first
eight months of the year there was a
3.5 per cent increase in all airlines’ flights
through European airspace. In the three
peak months of June, July and August
delays increased by 115 per cent with
the average length of disruption
increasing by 190 per cent. Some 61 per
cent of delays were caused by
ATC staffing issues, 30 per cent by
weather and 9 per cent the result of
strikes by controllers.
Clearly, many of these problems were
outside Vueling’s control yet affected its
NPS metrics, although they have
recovered strongly since and the airline
continues to make great progress in
other respects. The focus in the year
ahead will be on increasing operational
resilience as Vueling prepares for further
air traffic problems this summer. Helped
by analysis of the NPS data, the team is
working hard to ensure we make the
right scheduling decisions and have the
right recovery plans in place to help
customers through any disruption.
The ATC situation needs to change,
and we have been campaigning with
our competitors through the trade
association, Airlines for Europe,
to ensure this issue gets properly
addressed by ATC operators. We
are also pleased the European
Commission has responded positively
to our calls for action.
LEVEL has made good progress since
its launch two years ago. It continues to
build a strong market in Barcelona,
without cannibalising Iberia services to
Latin America from Madrid. Opening in
Paris has proved more challenging. We
are addressing operational issues at the
new base, but are confident the brand
has got real resonance there.
This year LEVEL has also started a
shorthaul operation with the launch of
a base in Vienna.
IAG Cargo had one of its strongest
years on record, as we continued to
offset the continuing imbalance in
supply and demand by focusing on the
premium end of the market. There will
be challenges in the year ahead. Market
statistics show there was a decline in
traffic at the end of 2018 due to the US/
China trade standoff. Fortunately, our
www.iairgroup.com
7
CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED
Our investment case
Our unique structure drives growth and innovation to generate industry leading
shareholder returns.
Unique approach
• Disciplined capital
allocation
• Active portfolio
management
• Flexibility and rapid
decision making
• Platform with centralised
functions to enable scale
and plug & play
Portfolio of world-
class brands
• Portfolio caters to a
diversified customer base
• Distinct brands with clear
customer focus
• Complementary networks
• Airlines focused on
operational performance
Innovation
• Dynamic and creative culture
• Driving digital innovation in the
airline industry
• Digital platform to grow revenues
streams, enhance customer loyalty
and drive cost efficiencies
400+applicants
to our latest and biggest
accelerator from 40 countries
61.1%
18.7%
INTERNATIONAL
AIRLINES
GROUP
capital
allocation
Brand contribution to growth
British Airways
Iberia
Vueling
Aer Lingus
Level
+6.1
IAG total growth
measured in ASKs
Cost efficiency
• Reduction in CASK ex-fuel at constant
currency since IAG’s formation in 2011
11.1%
cost reduction
since 2011
c.5.0%
target reduction
by 2023
8
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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10.7%
5.9%
Other Group Companies
3.6%
Global leadership
positions
• Leading the consolidation
of the airline sector
• Home markets: Barcelona,
Dublin, London, Madrid
• Key routes: North
Atlantic, South Atlantic,
and intra-Europe
• Joint businesses help grow
our global reach
#1 position in
Barcelona
London
Madrid
#2 in Dublin
Our structure creates additional
shareholder value over and above
the individual values generated by
our operating companies. We have
a unique structure with a strong
neutral parent company, unlike
other European airline groups
which protect the interests of their
main airline. IAG’s independence
enables dispassionate, flexible and
rapid decision-making. We’re
disciplined and allocate capital to
our operating companies based on
strict return criteria in line with our
Return on Invested Capital (RoIC)
target of 15 per cent, which is
significantly more than our cost
of capital. And we manage a great
portfolio of profitable businesses,
each with an attractive and distinct
market positioning, which
diversifies our exposure to both
mature and fast-growing customer
segments. Synergies as a result of
the creation of IAG generated an
additional annual €856 million of
operating income by 2015, when
we last reported group synergies,
a figure that will have increased
further with our growth in size and
profitability since 2015.
The result of our unique structure
is superior returns to shareholders,
with both EPS and dividend
growth, and further cash returns.
Our RoIC has exceeded targets
since 2015 and generated 16.6 per
cent in 2018, significantly higher
than most of our competitors. The
operating margin of all our
companies has improved since
they joined IAG and we continue
to deliver the synergies of our
combined airlines.
“We need to remain
very agile in the
months ahead.”
exposure in Asia is less pronounced than
others. But, despite a more uncertain
market outlook, we are investing in
technology and in new facilities at our
major hubs in a clear signal of our
continued confidence.
Avios continues to grow and has
enhanced the relationship with its
partners while simplifying the business.
UK members of the Avios Reward
Scheme were moved into the British
Airways Executive Club which gave
them more options to collect and spend
the currency. And they can become
even more aware of Avios opportunities
via a new rewards app. This is one of
many digital initiatives that Avios has,
and will continue to, embrace. Pay with
Avios, where customers can cut their
airfare using the currency, has been a
particular success and now accounts for
30 per cent of all redemptions.
Financial goals and outlook
At our Capital Markets Day in November
we updated the market on our five-year
financial goals.
We’ve increased our forecast capital
spending up to 2023 to reflect increased
investment in aircraft, product and IT,
and set higher targets for capacity and
EBITDAR. But our other goals remained
unchanged, including our challenging
targets for an operating profit margin of
12 per cent to 15 per cent and return on
capital invested of 15 per cent.
The message we wanted to convey to
investors was clear – that even in a
higher fuel price environment we are
sticking to our goals.
2019 will bring new challenges, with
Brexit the biggest unknown. But we
refuse to be distracted by the
uncertainty and are very focused
on continuing IAG’s recent record
of success.
www.iairgroup.com
9
CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED
Management team
IAG Management Committee led by Willie Walsh is responsible for the overall direction and strategy of the Group, the
delivery of synergies and co-ordination of central functions.
Robert Boyle
Director of Strategy
Steve Gunning
Director of Global Services
Julia Simpson
Chief of Staff
Chris Haynes
General Counsel
Alex Cruz
Chairman and Chief Executive Officer
of British Airways
Luis Gallego Martin
Chairman and Chief Executive Officer
of Iberia
Javier Sanchez Prieto
Chief Executive Officer of Vueling
Stephen Kavanagh
Chief Executive Officer of Aer Lingus
Andrew Crawley
Chief Executive Officer of Avios
On January 1, 2019 Sean Doyle was
appointed as Chief Executive Officer
of Aer Lingus. Stephen Kavanagh
will continue as non-executive
director on the Board of Aer Lingus.
Lynne Embleton
Chief Executive Officer of
IAG Cargo
Sean Doyle
Chief Executive Officer of Aer Lingus
Executive Directors not pictured: Willie Walsh, Chief Executive Officer; Enrique Dupuy de Lôme, Chief Financial Officer
See pages 74-75 for our Board of Directors. For a full biography of each member please visit www.iairgroup.com.
10
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
Q&A with Chief
Executive Officer
Willie Walsh
Willie Walsh
Chief Executive Officer
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“The message we
wanted to convey
to investors was clear
– that even in a higher
fuel price environment
we are sticking to
our goals.”
the UK. I’m delighted that other airlines
and the Government agree with us that
expansion must be done in a cost-
efficient way that doesn’t result in
higher passenger charges.
Q How have initiatives to
innovate and invest in
technology enabled you to
disrupt your business and change the
way you do things?
Investing in technology is both exciting
and frightening. We’ve seen examples of
how technology can disrupt what we do
and also opportunities to invest in it to
benefit customers. A great example is
the Mototok remotely controlled tug
that allows us to be much more efficient
when aircraft push back from the stand.
Previously this led to delays but we now
have this fantastic bit of technology that
we can use at Heathrow.
disappointing. It’s not the sort of
performance you expect from a
company like Rolls-Royce. We’re
receiving compensation, but, to be
honest, I’d prefer to have the engines
functioning properly. It’s fundamental to
our future relationship with Rolls-Royce
that they respond positively to this issue
in 2019, because the situation last year
was completely unacceptable.
Q What are you doing
to increase diversity
across the Group?
IAG is a very diverse organisation, but
we have a challenge ensuring that
women can progress right to the top.
We’ve got so much great talent but if
they can’t progress, then we are losing
out. We’re looking at opportunities for
everyone across IAG but with particular
focus on women in roles that have
traditionally been seen as male –
engineering, pilots, senior management.
I’m optimistic that, with the right actions
and buy-in from everyone, we’ll improve
our performance.
Q Why has LEVEL launched
shorthaul operations
in Vienna?
It was an opportunistic move. We
acquired an Austrian Air Operator’s
Certificate to take advantage of
additional slots in Vienna and use the
LEVEL brand to give it more exposure
in Central Europe. We’re very pleased
with the performance so far. This launch
re-enforces the strength of the IAG
business model – a single economic
entity, with multiple operating airlines,
using the right brands in the right
markets to target the right customers.
Q How is IAG
responding to cyber
security threats?
Every organisation, including IAG, is
alive to these threats. They’re growing
exponentially and we have to respond
almost minute-by-minute, each day to
ensure our systems and processes are
robust enough to deal with them. To do
so we work with world-class experts
and, when required, can call on them for
additional help.
Q What is the impact of Rolls-
Royce’s Trent 1000 engine
problems?
We faced many problems with the Trent
1000 engine in 2018, which meant a
number of our aircraft were unavailable
during the year. This was very
Q Following UK Parliamentary
approval for a third runway at
Heathrow last June, why has
progress stalled since then?
Heathrow continues to struggle to
justify the cost and, to date we’ve not
seen a sufficiently robust plan to give us
confidence to support expansion. This is
a critical issue – not just for us, but for
IAG (LSE)
599.00
Watch the full interview on our website
www.iairgroup.com
www.iairgroup.com
11
BUSINESS MODEL
Our business model is built to
maximise choice and value creation
What we do
IAG combines leading airlines in Ireland, the UK and Spain, enabling
them to enhance their presence in the aviation market while
retaining their individual brand’s operations.
The airlines each target different customer markets and
geographies, providing choice across the full spectrum of customer
needs and travel occasions.
The airlines’ customers benefit from a larger combined
network for both passengers and cargo and greater ability to
invest in new products and services through improved
financial robustness.
Inputs and resources
How we create value
A portfolio of world‑class
brands and operations
The Group portfolio consists
of unique operating companies,
from full service longhaul to
low-cost shorthaul carriers,
each targeting specific customer
needs and geographies.
Global leadership positions
573
fleet
685
routes
268
destinations
3
joint businesses
A common integrated platform
IAG’s common integrated platform allows the
Group to exploit revenue and cost synergies that
the operating companies could not achieve alone.
IAG Connect Digital MRO / Fleet
Unrivalled customer propositions
• Ensure our operating companies collectively
deliver an unrivalled proposition able to fulfil
customers’ needs across the full spectrum
of travel occasions
• Use consolidation and develop organic options
to differentiate the Group from its competitors
and ensure customer demands are met where
they are currently underserved
• Deepen customer centricity to win
a disproportionate share in each
customer segment
Value accretive
and sustainable growth
• Pursue value accretive organic and
inorganic growth options to reinforce existing
or pursue new global leadership positions
• Attract and develop the best people in
the industry
• Set the industry standard for environmental
stewardship, safety and security
Efficiency and innovation
• Reduce costs and improve efficiency by
leveraging Group scale and synergy
opportunities
• Engage in Group-wide innovation and digital
mindset to enhance productivity and best
serve our customers
• Drive incremental value with external business-
to-business services
12
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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How we’re organised
IAG is the parent company of the Group, exerting vertical and
horizontal influence over its portfolio of companies. IAG is
supported by its Management Committee which is made up
of CEOs from across the operating companies and IAG senior
management. The portfolio sits on a common integrated
platform driving efficiency and simplicity while allowing each
operating company to achieve its individual performance
targets and maintain its unique identity.
Our vision
To be the world’s leading airline group,
maximising sustainable value creation for our
shareholders and customers.
Unrivalled
customer
propositions
1
Strengthening
a portfolio
of world-class
brands and
operations
2
Growing global
leadership
positions
3
Enhancing
IAG’s common
integrated
platform
Efficiency
and
innovation
Value
accretive
and sustainable
growth
The value we deliver
Shareholders
66 €cents
Full year dividend 31 €cents and
14.8% increase year on year
Special dividend 35 €cents
Customers
16.3
Net Promoter
Score
-0.5pts vly
Employees
64,734
Manpower
equivalent
8.0%
Workforce
voluntary turnover
+2.1% vly
0% vly
27%
Female Senior executive
+3pts vly
Community and environment
€343 million
Income tax paid
+44.7% vly
91.9g CO2/pkm
Carbon efficiency
-0.4% vly
www.iairgroup.com
13
Strategic priorities and key
performance indicators
Strategic priority
Strengthening a portfolio of world‑class
brands and operations
How we
create value
Our
performance
Unrivalled customer proposition
Our activity in 2018
Following the detailed review of its customers’
emotional and functional needs in 2017, the Group
committed to strengthening its customer focus
throughout 2018. Each of the airlines invested
significantly in improving their customer experience.
British Airways delivered catering improvements and
opened new lounges, including a new First lounge at
JFK. British Airways also continued its investment in
technology to solve customer pinch points and
ensure speed and efficiency, trialling chatbots,
automating certain processes in periods of
disruption, extending the use of biometric boarding
gates in the US and rolling out a new homepage and
selling flow. Iberia delivered an improved customer
experience in its premium economy product, with
more space, bigger in-flight entertainment and
better catering, and it also took delivery of its first
Airbus A350, providing more new generation aircraft
to its fleet. Aer Lingus continued to build its
compelling competitive position, focusing on cost
reduction and growth to deliver price reductions to
its customers. Investment was targeted in areas that
would enhance its customer experience and keep
Aer Lingus’ Net Promoter Score measure at its
highest level, including baggage tracking and
repatriation services, mobile web, improved longhaul
service and the full delivery of AerClub.
Despite Air Traffic Control (ATC) challenges, Vueling
has also continued to modernise and transform its
operations and customer experience, increasing its
market depth, creating new boarding groups to
minimise queues, commencing a refresh of cabin
interiors, with in-seat power and Wi-Fi, and delivering
an enhanced retail offering.
The LEVEL brand was selected as the brand to
launch IAG’s new shorthaul operations from Vienna,
operating 14 shorthaul routes to a mix of European
destinations including London, Paris, Barcelona, Ibiza,
Milan, Larnaca and Dubrovnik. Longhaul LEVEL
services also launched from Paris to the French
Caribbean, Montreal and New York.
Our priorities for 2019
IAG remains focused on strengthening its customer
centricity to ensure its operating companies continue
to adapt and focus their business models to reflect
and meet changing customer expectations. 2019 will
be a significant year for British Airways, in particular,
as it celebrates its centenary.
Customer product improvements will be ongoing
with a renewed focus on the commercial systems
that underpin the customer journey and booking
flow to ensure we can deliver greater personalised
service, customer choice and control.
KPI or industry
measure
Net Promoter Score (NPS)
2018
16.3
vly -0.5pts
2023 target
32.0
Definition and purpose
NPS is a non-financial metric which measures the
customer’s sentiment and loyalty to a brand. At IAG
a transactional NPS is measured: Customers respond
about the likelihood to recommend an IAG operating
carrier no more than 7 days after taking a flight.
Including NPS targets in the company bonus scheme
has driven a stronger focus on improving the
customer experience which together with customer
advocacy drive competitive advantage leading to
faster organic growth.
R
Performance
IAG’s NPS in 2018 decreased 0.5pts versus last year's
reported figure for the period April-December.
Product upgrades and service enhancements rolled
out across the airlines were well received by
customers. However, this upside was offset by the
challenging ATC environment in Europe and its
impact on the operational performance of our
operating carriers, in particular at Vueling.
14
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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Strategic priority
Growing global leadership positions
How we
create value
Our performance
Value accretive and sustainable growth
Our activity in 2018
IAG reinforced its leadership positions in its home
markets of London, Madrid, Barcelona, Dublin and
Rome with the addition of 48 new routes, including
the introduction of LEVEL longhaul routes from Paris
and LEVEL shorthaul routes from Vienna. The Group
continued to optimise its longhaul network and
customer proposition together with its joint business
partners and received approval for its South
American joint business with LATAM from the
Chilean competition authorities, though following
appeal this remains subject to final ruling by the
Chilean Supreme Court. American and IAG also
submitted a joint request to the US Department
of Transport for the Atlantic Joint Business’
antitrust immunity to be extended to Aer Lingus
to join the business.
On 12 April 2018, IAG announced that it considered
Norwegian Air Shuttle ASA (Norwegian) to be an
attractive investment and had acquired a 4.61%
ownership position in the airline. This was
subsequently diluted to 3.93% after Norwegian
carried out an equity raising. IAG continued to follow
Norwegian with interest during 2018 and had several
discussions with Norwegian regarding a possible
offer for the shares in the company. However, on 24
January 2019, IAG announced that it did not intend
to make an offer for Norwegian and that it would be
selling its 3.93% shareholding in Norwegian. IAG
confirms it has now fully disposed of its holding in
Norwegian.
The Group continues in its efforts to be a leading
airline group with regard to sustainability and in
December 2018, in partnership with Velocys, Shell
and the UK Department for Transport, announced its
option to acquire a site at Immingham to develop the
country’s first commercial scale waste-to-jet-fuel
project, for which planning permission is expected to
be sought in 2019.
Our priorities for 2019
All the airlines in the Group continue to focus on
value accretive growth as they launch new routes
and deepen existing services, up-gauge aircraft,
introduce new generation fleet and deliver improved
connections at hub airports. Longhaul expansion
remains focused on the Group’s key markets in North
and South America, but also sees new routes to Asia
and South Africa.
IAG will continue to prioritise its assessment of
consolidation opportunities in Europe to further
enhance its existing portfolio and shape industry
consolidation where strategically attractive targets
are identified for growth or entry into new markets.
KPI or industry
measure
RoIC (%)1 2
15.7%
16.6%
Targeting
sustainable
15%
13.1%
2016
2017
2018
A
R
Definition and purpose
RoIC is defined as EBITDAR, less adjusted aircraft
operating lease costs and less adjusted depreciation,
divided by invested capital. We use 12 months rolling
RoIC to assess how well the Group generates returns
in relation to the capital invested in the
business together with its ability to fund growth
and to pay dividends.
Performance
The Group's RoIC rose 0.9 points versus last year.
The increase reflects an improvement in EBITDAR of
7 per cent on 3 per cent higher invested capital.
Lease adjusted operating margin (%)1 2
A
14.2%
14.4%
12.0%
15%
12%
2016
2017
2018
Definition and purpose
Lease adjusted operating margin is the Group
operating result before exceptional items adjusted
for leases as a percentage of revenue. We use this
indicator to measure the efficiency and profitability
of our business and improvement in the financial
performance of the Group.
Performance
Lease adjusted operating margin remains within our
target with a slight improvement to 14.4 per cent.
This was supported by strong revenue and
continued focus on non-fuel costs which helped
offset the significant rise in fuel costs.
Long-term planning goals
2019-2023
A
Alternative performance measure
R
Measure linked to remuneration
of Management Committee
1 Comparative years restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9
‘Financial instruments’.
2 Alternative performance measures calculations pages 183-185.
www.iairgroup.com
15
OUR STRATEGY CONTINUED
KPI or industry
measure
Average growth (ASKs)
2018
6.1%
Target
2019‑2023*
6.0%
per annum
Definition and purpose
Capacity in the airline industry is measured in
available seat kilometres (ASKs) which is the
number of seats available for sale multiplied by
the distance flown.
Planned growth
Strong financial performance across all operating
companies in the Group has allowed IAG to increase
its average growth rate over the course of this
year’s business planning cycle. We have good
flexibility in our fleet plans to reduce our capacity
if needed.
* Last year’s growth target over 2018–2022 was 5% per annum.
Average CAPEX (€m)2
2018
2,228
Target
2019‑2023*
2,600
per annum
Definition and purpose
We track the planned capital expenditure (CAPEX)
through our business planning cycle to ensure it is in
line with achieving our other financial targets.
Planned CAPEX:
IAG recognises the need to continue investing in
fleet, customer product, IT and infrastructure
projects which will all improve our customer
offerings and competitiveness in the market.
In 2018, we increased our forecasted average net
CAPEX spend for 2019 – 2023 to €2,600 million, an
increase of €500 million per annum over our 2018
– 2022 forecast. Our 2018 net CAPEX of €2,228
reflects the significant level of fleet acquisitions
during the year with 32 deliveries net of 13 sale and
leaseback transactions.
* Last year’s average CAPEX target over 2018–2022 was €2,100 per annum.
EBITDAR (€m)1 2
c€7,200
c€6,500*
5,022
5,374
4,490
2016
2017
2018 2019/23
(average
per annum)
A
Definition and purpose
EBITDAR is the Group operating profit before
exceptional items, depreciation, amortisation and
impairment and aircraft operating lease costs. It is an
indicator of the profitability of the business and of
the core operating cash flows generated by our
business model. This measure is not impacted by the
financing structure of our aircraft.
Performance
EBITDAR increased €352 million versus last year
reflecting the Group’s profitable growth as the
EBITDAR margin was broadly flat with ASKs up 6.1
per cent and contributing to increasing our operating
cash flows.
* Last year’s average EBITDAR target over 2018–2022 was €6,500 million per annum.
Equity free cash flow (€m)1 2
A
2,620
€2,500
1,964
1,801
2016
2017
2018
Definition and purpose
Equity free cash flow is defined as EBITDA before
exceptional items less cash tax, cash interest paid
and received and cash capital expenditure net of
proceeds from sale of property, plant and equipment
and intangible assets. It reflects the cash generated
by the business that is available to return to our
shareholders, to improve leverage and to undertake
inorganic growth opportunities.
Performance
The Group’s equity free cash flow was €819 million
lower than 2017, reflecting a €1 billion increase in
CAPEX partially offset by higher EBITDA. As
expected the Group’s equity free cash flow was
below our average long-term planning goal reflecting
a high net CAPEX year with 19 aircraft delivered on
balance sheet. The Group continues to focus on its
capital discipline and flexibility.
1 Comparative years restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9
‘Financial instruments’.
2 Alternative performance measures calculations pages 183-185.
16
INTERNATIONAL AIRLINES GROUP
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Strategic priority
Enhancing the common integrated platform
How we
create value
Our performance
Efficiency and innovation
Our activity in 2018
In 2018, the Group continued its focus on efficiency
and cost reduction programmes that also ensured
customer and shareholder value creation. Digital
innovation has remained a core part of the Group’s
focus, continuing the Hangar 51 accelerator
programmes to attract global talent, making
strategic investments in promising early stage and
emerging technology players in the travel market
such as ‘deepair solutions’, ‘Cirravia’ and ‘monese’
and automating the business above and below the
wing. IAG Cargo invested in its online capability with
upselling functionality, digitisation of documents with
eFreight and ePouch to remove the reliance on
paper documents and provide an associated
weight reduction. It has also introduced customer
tracking devices for real time updates on location
and delivery.
The Group has continued to develop capabilities to
support data customisation and data analytics,
creating a Group data warehouse allowing storage of
the Group’ data to drive operational resilience,
efficiency and customer improvements. Avios is
using these capabilities to review its loyalty
proposition and is working with British Airways and
Iberia to better tailor their member offerings. Avios
also successfully transitioned its travel reward
programme into the British Airways Executive Club,
allowing members a smoother online experience and
even more ways to collect and spend Avios.
The Group has continued to roll out Wi-Fi
connection on its fleet at the same time as
developing its ‘.air’ portal, which will be able to offer
in-flight entertainment, shopping and Wi-Fi and allow
customers to pair their smartphone or tablet to the
seatback screen to pay for on-board purchases.
Our priorities in 2019
In 2019, IAG will continue to invest in enhancing its
common integrated platform to provide quality
services and solutions across the Group at a faster
pace and lower unit cost while supporting innovation
across the Group. This will ensure ongoing customer
improvements and operational resilience from the
Group’s airlines.
KPI or industry
measure
Adjusted EPS (€ cents)1 2
12%+
average growth
per annum
117.7
102.2
88.3
+15.1%
+15.8%
2016
2017
2018
Adjusted net debt to EBITDAR1 2
Investment
grade zone
1.8
1.5
1.6
2016
2017
2018
A
R
A
Definition and purpose
Adjusted earnings per share represents the diluted
earnings for the year before exceptional items
attributable to ordinary shareholders. This indicator
reflects the profitability of our business and the core
elements of value creation for our shareholders.
Growing earnings indicates that the Group is on the
right path to create value for its shareholders.
Performance
We grew our adjusted earnings per share by 15.1 per
cent in 2018. Profit after tax before exceptional items
improved by 11.2 per cent versus 2017 reflecting a
strong operating profit performance. The adjusted
EPS measure also benefited 3.5pts from the share
buyback programme.
Definition and purpose
Adjusted net debt to EBITDAR is calculated as
long-term borrowings plus capitalised operating
aircraft lease costs less current interest bearing
deposits and cash and cash equivalents divided
by EBITDAR.
We use this measure to monitor our leverage and to
assess financial headroom through the same lens as
financial institutions.
R
Performance
The Group’s financial headroom remained strong in
2018 with adjusted net debt to EBITDAR at 1.6 a
slight increase from 2017.
Adjusted net debt rose by €596 million to €8,355
million primarily from a reduction in cash reflecting
higher CAPEX net of financing, repayment of the
perpetual securities and a one-time payment for the
closure of NAPS to future accrual.
Long-term planning goals
2019-2023
A
Alternative performance measure
R
Measure linked to remuneration
of Management Committee
1 Comparative years restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9
‘Financial instruments’.
2 Alternative performance measures calculations pages 183-185.
www.iairgroup.com
17
Increasing investment
to sustain our growth
“Our plan balances
three key priorities –
achieving higher
network growth,
investing heavily in
our customers and our
people and sustaining
a financial performance
for the long-term.”
These achievements came in a
tough year. We faced rising fuel costs,
intense competition, difficult weather
and air traffic control strikes. The
reliability of our operation was affected
by the ongoing Rolls‑Royce engine
issues impacting our Boeing 787 fleet. In
September, we suffered a criminal data
breach which caused great concern to
us as we take the protection of data
very seriously. We are sorry for the
disruption this caused our customers.
The team has leveraged the expertise of
strategic global partners to help ensure
early detection of future threats.
Despite these challenges, our revenues
have held up, increasing 5.7 per cent
versus last year. Combined with a
continued tight control of costs, the
closure of legacy pension schemes and
the completion of our restructuring
programme, we achieved an operating
profit of £1,952 million before
exceptional items and a return on
invested capital (RoIC) of 17.3 per cent.
From this solid base we are focusing
hard on our three key priorities –
achieving continued network growth,
investing heavily in customers and
people and sustaining our strong
financial performance.
Highlights of 2018
Modernisation of the fleet continued
at pace during the year. We took
delivery of five more Boeing 787s to
support our growing longhaul operation
and 2018 also saw the first fuel‑efficient
NEOs, seven Airbus A320s and one
Airbus A321 – join our shorthaul fleet,
offering customers a brand new interior,
in‑seat power and a more efficient way
to fly. Customers also responded well to
improvements we have made to existing
aircraft, not least on Boeing 777s
operating from Gatwick and Boeing
747s where refurbished cabins include
new seats and new in‑flight
entertainment systems.
In the air and on the ground, our overall
plan is to continue to invest in the areas
that our customers value most. New
World Traveller catering was introduced
during the year, with satisfaction scores
among longhaul customers rising as a
result. New Club World catering has
now been rolled out across the network
and we launched upgraded Club Europe
food on shorthaul sectors in September.
On the ground we opened new lounges
at JFK, Rome and Aberdeen and
upgraded facilities at 11 shorthaul
airports to ensure that, from end‑to‑
end of their journeys, customers enjoy
a premium service.
We have used technology
developments to enhance our
customers’ experience and reduce pinch
points in their journey. Improvements to
ba.com have streamlined the booking
process, increasing the number of
customers who book with us directly,
and we have delivered additional
functionality on our app, allowing our
customers to do more through their
mobile phones. In the US, we were the
first airline to introduce biometric
boarding without the use of a boarding
pass or passport with trials conducted in
Orlando and Los Angeles. This
technology has enabled us to board an
Airbus A380 in half the time, reducing
queuing time for our customers and
creating a more stress‑free journey.
Alex Cruz
Chairman and Chief Executive Officer
of British Airways
British Airways statistics
Lease adjusted
operating
margin (%)
15.6%
vly +0.8pts
RoIC
17.3%
vly +1.4pts
Punctuality
Fleet
76.0%
vly ‑4pts
293
vly +0 aircraft
2018 was the second year of our
extensive programme to turn British
Airways into a truly customer‑focused
airline. The plan is well underway and I
am glad to say we have already seen the
benefits flowing through in ways our
customers can clearly see, with our Net
Promoter Score (NPS) up compared
with 2017.
Yet again we achieved stronger profits
during the year, creating a solid
foundation for further growth over the
next five years starting in 2019, British
Airways’ centenary year. As we
approach this important anniversary,
it was great to announce that we had
raised a record £20 million for Flying
Start, our charity partnership with
Comic Relief, a full two years ahead
of schedule.
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INTERNATIONAL AIRLINES GROUP
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In shorthaul our priority is to capitalise
on our strong position in London. That
means using dynamic peak summer
scheduling to increase seat factors at
Heathrow, expanding our Gatwick
presence by using slots acquired in 2018
to their full potential and expanding at
London City by adding four new aircraft
to the fleet from 2019.
Significant investment in customers
and our people
Our customers and our people are a key
focus and as we start our centenary
year, you will see a significant increase
in investment in both. Indeed, to
underline that commitment we have
increased our planned investment in
improving the customer experience
over the next five years from the
£4.5 billion previously announced
to £6.7 billion.
Benefits of this increased investment
will continue to show throughout 2019.
A new Club World seat, with all‑aisle
access, gate‑to‑gate entertainment,
more stowage and greater privacy,
will be launched on our first Airbus
A350 in the second half of 2019 and
rolled out across the longhaul fleet in
the coming years. We will upgrade the
product in both First and World
Traveller Plus cabins where customers
will enjoy improved catering and
amenities in the first half of 2019,
including better food with more choice
and extra comforts, such as pyjamas,
amenity kits, quilts and larger pillows.
New in‑flight entertainment systems will
also be embodied to more aircraft. Wi‑Fi
will be fully installed on 80 per cent of
our longhaul and all of our shorthaul
aircraft by the year end. Lounge
renovations at JFK (Club),
San Francisco, Johannesburg and
Geneva will be completed this year
and, as we grow the network, we
will launch new facilities, all the time
improving the food and beverages
we offer in existing lounges.
Technology will play an increasingly
important role in ensuring a smooth
experience for customers and we will
continue investing significantly in the
digital experience. For instance, we want
to further improve ba.com and the app
to make every step of the journey –
from booking a flight to returning home
– as easy and seamless as possible.
We continued to build on our network
and schedule in London, two core
strengths of our business. We are
number one at Heathrow and London
City and number two at Gatwick, by
seat share. Shorthaul seat factors rose
by three points in the summer
compared with 2017, with newly
acquired slots at Gatwick performing
very well. We now have the flexibility to
fly to more leisure destinations,
operating a dynamic schedule more
closely matched to customer demand.
New longhaul routes were launched in
2018 to places such as Durban, the
Seychelles and Nashville.
Achieving higher growth
We already offer more choice of
destinations than any other UK airline
and we are determined to strengthen
our position by growing faster, offering
more destinations and frequencies
across the world. To reflect that
ambition we have increased our
projected compound annual growth
rate over the next five years to 3 – 4
per cent, up by 1 percentage point.
We operate the most comprehensive
network between Europe and North
America. Following new route
announcements to Pittsburgh and
Charleston, we will soon serve 34
destinations, consolidating our position
as the largest longhaul carrier into North
America by points served. We have had
great success in opening routes to
markets such as Austin, New Orleans
and Nashville and will look for further
opportunities in the US. As we develop
the longhaul network further, our
relationship with joint business partners
will remain critical in offering customers
better frequency and easier connections
in the markets we serve. 2019 will see us
launch new services to Islamabad and
Osaka as we continue to expand our
presence elsewhere in the world.
Thanks to its range, capacity and cost
efficiency, the Boeing 787 allows us to
launch new routes quickly and
effectively. We have a further 12 Boeing
787s on order to bolster our current
fleet of 30 aircraft. The Airbus A380 is
helping us cement our position in key
cities, flying to nine airports worldwide
where demand exists. In sought after
markets like New York we are using
aircraft with a higher proportion of
premium seats. The Airbus A350 will
arrive in 2019 and will be a great
replacement for our retiring Boeing
747s, offering the same capacity but
with a much‑improved product, greater
customer comfort and greater fuel
efficiency.
We are increasingly keen to trial new
digital technologies. We are testing
chatbots to assist our contact centres
and robot process automation where
it can help customers and our people.
Elsewhere we will deploy Mototoks –
the remote controlled aircraft tugs that
we have used so successfully in
shorthaul to increase efficiency at
departure time – on longhaul aircraft
and we will extend trials of biometric
boarding to other US stations, including
Houston and New York in 2019.
But we cannot hope to deliver for
our customers without the right people
with the right training. Our people
are critical to delivering the best
customer experience.
This year we will recruit some 3,000
people, of which around 2,000 will be
cabin crew. All of them will receive an
extra five days training, while service
training for the remainder of our
28,500 front‑line colleagues will also
be increased.
At Heathrow our newly launched First
Contact Resolution programme is
transforming how our people interact
with customers in the terminal, giving
them the skills and tools to resolve
problems and issues at first contact. For
example, this will increase our rebooking
capability when services are
disrupted, so that colleagues can
provide customers with the kind of
consistent service and personal
attention that makes all the difference
at stressful times.
Sustaining our financial performance
We are determined to keep growing
and investing in our business. But those
ambitions depend on the third critical
part of our plan – our need to sustain
our strong financial performance for
the long‑term.
Maintaining our discipline on cost
and capital is absolutely vital if we are
to meet our targets to achieve a 15 per
cent lease‑adjusted operating margin
and a 15 per cent return on invested
capital over the economic cycle.
Meeting these stretching targets will be
challenging but we will make sure British
Airways continues to thrive.
At the end of another strong year,
where we demonstrated the resilience
of the business in the face of some
tough challenges, I am confident that we
can indeed meet those targets. I look
forward to an exciting 2019 and,
especially, to celebrating our centenary
year with colleagues across the business
and customers around the world.
www.iairgroup.com
19
Striving for excellence through
continued transformation
“Our transformational
Plan de Futuro, now in
its phase 2, is clearly
focused on achieving
excellence right across
our operations,
although there is still
work to do I am fully
confident in the
performance of our
team.”
2018 – striving for excellence
2018 was a good year for Iberia. We
were particularly pleased to continue
making such good progress with phase
2 of the Plan de Futuro despite facing
increasingly intense competition in the
marketplace. Our financial performance
was in line with the growth targets we
set out for IAG investors in November
2017 at our Capital Markets Day. We
recorded an operating profit of €437
million, up €61 million from last year, and
a return on invested capital of 13.2 per
cent, up by 1 point, thanks to continued
tight control of our costs and good
performance of passenger revenues,
especially in our longhaul and at Iberia
Express, which compensated for the
fuel price increase and negative
foreign exchange.
Capacity and revenue growth
We increased overall capacity by 7 per
cent with expansion across our network.
In longhaul we launched services to San
Francisco, embedded our new Premium
Economy class and took delivery of two
new generation Airbus A350‑900s. We
also passed a major milestone in our
efforts to build a strategic alliance with
LATAM, with the Chilean Free
Competition Defence Court approving
our proposed joint business in October
2018, though following appeal this
remains subject to final ruling by the
Chilean Supreme Court.
In shorthaul there was good growth
too as we used Iberia Express to
strengthen our network, adding four
new destinations. We brought two fuel
efficient Airbus A320neos into the fleet
and continued to retrofit our existing
Airbus A320s with in‑seat power
and slimmer seats for greater
customer comfort.
Revenue performance was strong,
passenger unit revenues and load
factors were up across the business.
Point of sale grew particularly well in
Spain and North America, partially
offsetting a weaker performance in
South American markets, notably
Argentina and Brazil.
Several recent innovations are
supporting this revenue growth. The
full roll out of Premium economy in
the longhaul fleet has been extremely
successful, meeting customer
expectations and achieving amongst
the highest NPS levels of our products.
Equally we have been investing in our
Premium product on the ground, for
instance refurbishing our Premium
Lounges in Madrid and continuing to
offer new digital solutions in all our
points of contact.
We added a new fare structure allowing
customers to select the level of
“bundling” of services closest to their
needs, in particular the launch of the
new Optima longhaul fare has been
highly successful amongst our target
segments (“Trade up” and
“premium” segments).
We have worked closely with
British Airways and IAG to improve
distribution, with more than 600
agencies now signed up to our new
model using new distribution channels.
These display more pricing points
compared with the industry’s traditional
channels, offering our customers greater
choice and flexibility.
Continued cost control
We continue to bear down on cost
as part of phase 2 of Plan de Futuro.
A prime focus is to achieve a market
leading cost per available seat km
(CASK) excluding fuel. To do
so we are concentrating on building
a more efficient fleet and achieving
economies of scale in our supply chain,
working with GBS, IAG’s centralised
business services headquartered
in Krakow, Poland.
Luis Gallego Martin
Chairman and Chief Executive
Officer of Iberia
Iberia statistics
Lease adjusted
operating
margin (%)
10.0%
vly +0.4pts
RoIC
13.2%
vly +1.0pt
Punctuality
Fleet
87.2%
vly ‑2.8pts
104
vly +6 aircraft
The transformation of Iberia is
continuing under our comprehensive
Plan de Futuro, first launched five years
ago. In the first phase we focused on
returning the airline to profitability. Now,
under phase 2, we are concentrating on
achieving excellence across every
aspect of our operations.
While the work we have done to date is
extensive, it’s clear that we have a long
way to go to achieve our ambitions for
the airline. That means 2019 will again be
a demanding year for us, with a lot of
hard work still to do.
But we are looking ahead with cautious
optimism, convinced we can take
advantage of our cost base to gain an
increasing competitive edge and sustain
our financial performance, while
continuing to invest heavily in our
brand, our customers and in key
digital projects.
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People are one of the fundamental
pillars of our success and vital to the
continued transformation of Iberia.
Colleagues across the business deserve
great credit for what we have achieved
in these years of transformation.
In August 2018 we reached a labour
agreement with our pilots and aim to
reach similar balanced settlements with
other collectives within the business in
the months ahead. Our intention
through these agreements is clear. We
want to pursue our growth plan for
Iberia within a work environment that is
both stable and fair.
We also launched Plan Person@ during
the year, to reinforce our commitment
to IAG’s diversity principles, and to
provide a platform for people across the
business to have a real say on our future
and a real chance to be heard.
Investing in customers
Customers are, of course, absolutely
key too and 2018 saw us intensify our
investment in product, brand and digital
services to support our offer.
We fully refurbished our two VIP
lounges at Madrid Barajas airport,
improved in‑flight entertainment and
connectivity services and upgraded our
customer relationship management
systems. Changes we have made are
resonating with customers and we were
pleased to see it reflected in our Net
Promoter Score results. However the
increased European Air Traffic Control
industry delays experienced have had a
negative impact on our overall NPS. In
spite of the difficult circumstances, we
continue delivering high punctuality and
were thrilled to win a fourth Skytrax
star, confirming that Iberia’s product
and customer service are regarded as
being right up with the best comparable
airlines in the world. Despite this
fantastic external endorsement, we
increased investment in our brand to
strengthen our leadership position in the
premium segment in Spain and to
reinforce our standing in Latin America
and in our core European markets.
Digital technology will play an increasing
role right across our business in the
years ahead. To reflect its importance
in terms of our operations and our
customers, we created a new team
dedicated to innovation, digitalisation
and the management of Plan de Futuro.
The team has been tasked with thinking
in completely new ways about how we
use digital in three contexts – within the
workplace, in relation to our customers
and in how we manage our crews,
maintenance and handling.
Wider transformation
2018 was also a positive year for the
transformation of our non‑airline
businesses. In Handling we continued
focusing on increased efficiency and
greater cost discipline through the
launch of its own transformation
programme, Go Up.
Maintenance is making good progress
on a road map laid out under IAG’s
Maintenance Strategy Project to
improve the profitability and overall
sustainability of the business. The early
signs are good and new contracts
signed with other airlines point to the
opportunities that lie ahead as it
strengthens its position.
2019 – rising to the challenge
The year ahead looks set to be a
challenging one. Increasing
competition, fuel price volatility and
political uncertainty in some of our
most important markets will
undoubtedly test us.
But we look at these challenges as a
chance to continue the process of
change that has been so important to
Iberia over the last five years and an
opportunity to consolidate the gains
we have made.
We have created a very efficient cost
base, and subject to the renewal of
our labour agreements and market
conditions, we should be well placed
to continue on the path of
profitable growth.
New services, new fleet
A priority will be to build our longhaul
business with a particular focus on core
markets in Latin America. Daily services
to Montevideo and Rio de Janeiro are
planned and we will increase flights to
Bogota to build our presence in
Colombia. To consolidate our position
in Central America we will increase
frequencies to Mexico and increase
capacity on routes to Guatemala and
Salvador. Elsewhere in the world we will
build on our still relatively new, but
quickly maturing position in the Asian
market, adding more summer flights
to Tokyo.
We will add new short and medium haul
services to strengthen our position in
Europe. This effort will see us increase
services to the Canary and Balearic
Islands as well as to major European
cities such as Brussels, Berlin and
Hamburg, helped by the addition of two
new aircraft.
Our fleet renewal plans will gather pace
in 2019, bringing efficiency benefits as
well as the chance to increase revenue.
Four more Airbus A350‑900s and six
Airbus A320neos – respectively 30 per
cent and 17 per cent more efficient than
the aircraft they replace – will be
delivered during the year.
Following the success of our cabin
modifications on Airbus A320 aircraft,
we will retrofit our Airbus A321s with the
new slim seating. This will add an extra
20 cabin seats, allowing us to boost
revenue while still offering customers
more comfort and greater legroom.
A number of important customer
projects will come to fruition during the
year, helping us to tailor our value
proposition to target customers and
transform the service we deliver in the
air and on the ground. In the next 12
months we should be in a position to
understand our customer needs more
clearly and measure our success in
meeting them more accurately. Some
examples of these include working
towards the transition of our catering
supplier in Madrid, launching Wi‑Fi on
our shorthaul fleet and improving the
boarding experience in short and
medium haul flights, by focusing on the
main pinch point which is the removal of
hand bags at the gate. We will also be
offering members of our loyalty
programmes better incentives and
even greater value.
The digital transformation of our
business will also accelerate in 2019.
This will help us improve the travel
experience with greater connectivity,
improved boarding, in‑flight
experiences, and customised options for
individual customers. Iberia will provide
new digital services and hyper
personalised experiences via mobile,
social and virtual assistant channels
(such as voice in Amazon Alexa/Google
Assistant, or Iberia Chatbot), also
enhancing interactions through
traditional channels for those customers
who need it. We will generate new
advanced analytics capabilities in our
data excellence centre. As part of our
transformation priorities, Iberia will
continue turning legacy systems into
service platforms under the principles
of data protection regulations and
cybersecurity. Open innovation and
start‑ups will keep on helping us to
increase digitalisation.
Outlook
It’s been an eventful but successful five
years for Iberia.
We are by no means complacent
about the progress we have made to
date and are always aware that there
is more we can do to keep transforming
the business.
We are determined to step up our
efforts to achieve excellence across the
business and are confident we can do
just that.
We are ready for the challenges that lie
ahead and, as I have said, determined to
turn them into opportunities for Iberia.
www.iairgroup.com
21
Delivering solid financial results
in a challenging environment
“Vueling again delivered
solid financial results,
despite facing a very
disruptive European Air
Traffic Control (ATC)
environment”
Javier Sanchez-Prieto
Chief Executive Officer of Vueling
Vueling statistics
Lease adjusted
operating
margin (%)
11.8%
vly ‑1.0pts
RoIC
13.3%
vly ‑0.1pts
Punctuality
Fleet
68.4%
vly ‑11.5pts
121
vly +16 aircraft
Overview
In 2018 Vueling delivered solid financial
results, despite the worst European
air traffic control (ATC) operating
environment in recent history. We
continued to transform and modernise
our customer offering while making
further progress on our Vueling
NEXT transformation.
2018: A challenging but
productive year
In 2018, we invested and strengthened
our company in several areas.
1. We delivered on our market strategy.
This strengthened our positions in
key markets by 3 points of market
share in Barcelona and Spain‑Canaries
and 4 points in Spain‑Balearics. We
also maintained capacity discipline
and flexibility to quickly adjust to
future headwinds.
2. We expanded through “smart”
growth. 2018 saw us return to
growth. We increased asset utilisation
(+4% block hours per aircraft per day
vs. 2017), densified our network
(+4% weekly departures per route)
and managed seasonality.
3. We made our processes more
consistent and reliable. We
implemented new boarding groups
and minimised queues, especially in
Barcelona. We expanded our self‑
check‑in kiosks and bag drop
locations in key airports.
4. We invested in our operation to
address ATC challenges. Our
operational performance was solid
and in line with our peers although
ATC disruptions are sadly becoming
more frequent. We are actively taking
steps to mitigate their impact on our
customers and our business by
reducing the complexity of our routes,
isolating routes from problematic
ATC regions, and refining where
we base our aircraft, crews and
maintenance capabilities.
5. We continued transforming our
customer experience. In 2018 we
made important progress towards our
goal of providing the best customer
experience amongst European
low‑cost carriers. We enhanced our
retail offering, refreshed our cabins,
started installing in‑seat power and
on‑board Wi‑Fi and introduced a
disruption self‑management system.
6. We changed our product offerings to
better meet customers’ needs. We
launched two new fare types,
TimeFlex for passengers who need to
save time and want flexibility and
Family fares. We also introduced
unbundled Space Flex products that
give customers more legroom,
amongst other benefits.
7. We invested in the digital innovation
that underpins our transformation.
Our digital, innovation and data
science teams – now more than 400
people strong, including development
partners – really delivered in 2018.
Vueling was the first airline to allow
customers to save boarding passes in
Google Pay. Our customers can now
check their Vueling flight status with
Amazon Alexa and receive their
tickets through WhatsApp. Biometric
boarding will soon be a reality. We
made significant leaps in how we
leverage data and use advanced
analytics to solve business problems
such as ATC forecasting, demand
forecasting, dynamic pricing of
ancillaries, airport queue management,
and process automation.
Continuing the Vueling NEXT
transformation
In 2019 we will continue our NEXT
transformation programme including
growth and stabilisation with an evolved
operating model, aiming to provide the
number one low‑cost carrier customer
experience, better integrating our
network, operations and maintenance.
As a leading low‑cost carrier, we
continue strengthening our cost
discipline and we keep driving more
innovations in our operation and our
customer experience.
Conclusion
In 2019 we celebrate our 15th
anniversary as a company, which gives
us occasion to reflect on how far we
have come. We are proud to now serve
more than 32 million customers each
year, reaching 130 destinations, over
3,500 direct employees and 121 aircraft.
At Vueling, we see the challenging
operating environment as an
opportunity. Our DNA is digital and
innovative. We have a clear vision and
managerial discipline to guide our
growth. We are committed to our
customers, employees and delivering
returns and we have the right
momentum to continue improving our
operational reliability, customer
experience and financial returns.
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An investment case
for growth
“2018 has been a year
of record operating
performance and
return on invested
capital, demonstrating
the investment
case for further
profitable growth.”
Stephen Kavanagh
Chief Executive Officer of Aer Lingus
Aer Lingus statistics
Lease adjusted
operating
margin (%)
16.8%
vly +0.6pts
RoIC
26.8%
vly +3.8pts
Punctuality
Fleet1
74.0%
vly ‑7.4pts
56
vly +4 aircraft
Overview
In 2018 we continued our mission to
be the leading value carrier across
the North Atlantic, enabled by a
profitable and sustainable shorthaul
network. This is supported by a guest
focussed ethos and brand, and a
digitally enabled value proposition.
We believe that Aer Lingus is delivering
on this ambition, with a compelling
position in the markets we serve,
creating opportunity for further
profitable growth.
Aer Lingus achieved a record
operating result in 2018 and the
Group’s highest return on invested
capital, whilst maintaining high levels
of guest satisfaction. We believe this
strong operational and financial
performance is sustainable, and the
opportunity remains for Aer Lingus to
grow Dublin as a major hub connecting
Europe and North America. This will be
enabled by investments in airport
infrastructure at Dublin and will also
provide significant social and economic
benefits for a range of stakeholders
in Ireland.
The virtuous model
The ambition of Aer Lingus has
been leveraged to create a compelling
competitive position. Our value model
is demand‑led, and centred on cost,
product and service; an operating
model that is simple by design. We
believe it has been a virtuous model
since IAG acquired Aer Lingus, with
over 35 per cent growth since 2015.
Reduced unit costs have enabled
investment in growth and price
competitiveness, with retained margin
increases delivering a record return
on invested capital.
We are a guest‑focused business and at
the heart of our virtuous model is Net
Promoter Score, which was maintained
at industry leading levels through 2018.
Our ‘Voice of Guest’ surveys are integral
to the design and delivery of product
and service, with demand‑led
investment decisions made in line
with our value principles. Key to Net
Promoter Score is our operational and
on‑time performance, for which we are
best‑in‑class at Dublin and we have
received external validation with a
Skytrax 4‑star ranking and APEX
5‑star ranking.
A competitive product and brand
Aer Lingus has a competitive product
and a well‑positioned brand. Together
with a network which has depth,
breadth and connectivity, and the
quality of our partners, the geographical
advantage of Dublin places Aer Lingus
at a significant advantage to other
carriers serving the transatlantic market.
During January 2019, we launched a
new modernised brand, to reflect the
airline we have become and the value
proposition we offer, while faithful to
the brand heritage and the proud legacy
of 82 years of successful operations
serving Ireland. Throughout 2019 we will
continue to invest in product including
providing complimentary alcohol during
dining on our transatlantic services
and a new free social media Wi‑Fi
package for all guests travelling in
our economy cabin.
There will be further fleet growth and
significant investment in brand spend
and product changes. We will introduce
AerSpace, a differentiated product on
our shorthaul network, self‑service
technology in areas such as baggage
tracking, and will launch direct services
to Minneapolis and Montreal. New
technology long‑range Airbus A321LR
aircraft will enter the fleet during the
summer season, unlocking new gateway
opportunities to North America,
improving on‑board product and
delivering reduced costs.
Conclusion
Aer Lingus remains committed to its
successful value model strategy
which continues to create sustainable
value for the Group. We will continue
to develop and progress our
opportunities for growth, remaining
committed to delivering high levels of
guest satisfaction and operating
performance. As I step down as Chief
Executive Officer I look forward to
continuing on the Board of Aer Lingus
as non‑executive director and working
with Sean Doyle as he transitions into
his new role as Chief Executive Officer.
I would like to thank all my colleagues
for their support during my time in Aer
Lingus and wish Sean and all of my
colleagues continued success.
1 Includes 4 Boeing 757 and 2 Avro RJ85 on wet lease.
www.iairgroup.com
23
Expansion of IAG’s
new low-cost brand
LEVEL longhaul network
LEVEL shorthaul network
More than an airline
LEVEL is not a traditional, vertically
integrated airline business. Instead, the
LEVEL model separates the production
and operational aspects from the
commercial and customer facing
elements of the business. As a result,
LEVEL is agile and able to rapidly take
advantage of new opportunities as it
did in 2018 in Paris and Vienna.
The LEVEL brand is fresh and modern
and is integrated into all elements of
the customer experience.
Overview
2018 was LEVEL’s first full year of
operation from its base in Barcelona
and also saw significant expansion for
the brand with the launch of longhaul
services from Paris and the
development of a shorthaul low‑cost
operation from Vienna.
LEVEL was designed to more effectively
target price sensitive leisure customers.
It leverages the scale and capability of
IAG to deliver a high‑quality product at
the lowest possible cost with a service
model that puts the customer in control
of their flight experience.
Following the appointment of its CEO
in September 2018, LEVEL has been
transforming from its project‑based
structure to a fully constituted
business. 2019 will see continued
growth of the LEVEL operations and
further development of the customer
offer, ancillary product portfolio and
commercial model to support
further expansion.
A year of growth
LEVEL added two additional Airbus
A330‑200 aircraft to its operation in
2018 with the launch of longhaul
services from Paris Orly flying to
Point‑a‑Pitre, Fort de France, Newark
and Montreal. It also introduced four
Airbus A321‑200 aircraft, extending the
LEVEL brand to shorthaul operations
from Vienna, flying to destinations
across Europe including London, Paris,
Barcelona, Ibiza and Dubrovnik.
Continued positive performance
Strong customer demand and continued
improvement in the cost base allowed
LEVEL’s Barcelona operations to
maintain positive underlying profit
performance in its first full year of
operations, while the transformation
of the former OpenSkies operation in
France has already seen significant
non‑fuel unit costs savings.
Passengers
888 thousand
Destinations
25
Aircraft
9
Looking forward
In 2019, LEVEL will invest in
consolidating and enhancing its
commercial model and customer
experience, enhancing its
ancillary product portfolio, making
improvements to the flylevel.com
website with a mobile first focus
and development of the LEVEL app.
LEVEL will also take delivery of two
additional Airbus A330‑200
longhaul aircraft and three new
Airbus A320‑200 shorthaul aircraft.
New longhaul routes will launch from
Barcelona to Santiago de Chile in March
2019 and to New York JFK in July 2019.
LEVEL’s shorthaul operations will also
grow in 2019 with its new shorthaul base
in Amsterdam opening in the summer.
24
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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IAG PLATFORM
Delivering quality and efficiency
while enabling Group-wide
innovation
The IAG Platform is now a well‑established part of the Group. It allows IAG to
achieve revenue and cost synergies that the operating companies could not attain
alone and provides a plug and play platform new operating companies can join and
exploit. The Group has already extracted significant value from the IAG Platform
with opportunities to further enhance and support innovation.
IAG Platform
MRO / Fleet
IAG Connect
Digital
The IAG Platform includes the IAG
Cargo and Avios businesses; IAG GBS,
which delivers IT, procurement and
finance support; IAG Connect, which
is responsible for the Group’s in‑flight
connectivity strategy and in‑flight
e‑commerce platform; and Group
initiatives in maintenance and
digital innovation.
Global Business Services (GBS)
Leveraging the benefits of an efficient
and competitive platform.
IAG GBS was established in 2014,
following which it was engaged in a
period of fast‑paced start up activity
centralising the core finance, IT and
procurement functions of certain parts
of the Group, starting with British
Airways and Iberia and rolling out to
Aer Lingus and Vueling. In 2018, GBS
has focused on consolidating the
considerable achievements from those
first years while continuing to drive
further improvements across the Group
in areas such as supplier management,
automation of processes and
operational resilience.
Group IT
In 2018, Group IT’s focus on cyber
security was brought to the fore
following the malicious attack on British
Airways’ customer data. The team has
leveraged the expertise of strategic
global partners to help ensure early
detection of future threats through an
enhanced 24/7 Security Operations
Centre. Relevant testing and scans for
all operating companies to support
Payment Card Industry (PCI)
compliance and fulfil the Group’s
requirements for implementation of the
General Data Protection Regulation
(GDPR) has been deployed. IT has
continued to partner with world‑class
global providers whose expertise is
helping support a resilient and scalable
IT platform for the Group. The focus has
also been on enhancing the Group’s
disaster recovery service which has
included mitigating the obsolescence of
the technology stack and securing a
stable, workable plan for the migration
of critical core business applications.
In 2019, IT will continue to progress
toward its target operating model,
providing flexible and scalable solutions
across the Group at a faster pace and
lower unit cost, while also improving
ongoing operational resilience.
Procurement
In 2018, Group Procurement launched
a new procurement platform that has
streamlined more processes and driven
further synergies for the Group. New
digital tools, such as the Ariba Network
and Hoovers, have been deployed to
provide a more robust and automated
approach to supplier relationship
management. Non‑fuel cost savings of
more than €250 million were delivered
across the Group in 2018.
Over the coming year Group
Procurement will continue to focus on
streamlining the supply base to progress
towards stability and effective
Corporate Social Responsibility with the
Group’s partners. It will continue to
develop its key supplier relationships to
deliver value to the Group in a
professional manner.
Finance
GBS Finance continues to focus on the
simplification, harmonisation and
automation of processes to improve
efficiency and constantly evaluates
opportunities for further cost savings.
IAG Connect and .air portal
Throughout 2018 the embodiment
of the Group’s aircraft with Wi‑Fi
capabilities continued. IAG Connect
rolled out the ‘.air’ portal with Iberia
and LEVEL on their new aircraft
deliveries (Airbus A350 and Airbus
A330, respectively), whilst also
enhancing the .air portal on existing
British Airways and Iberia Wi‑Fi
equipped longhaul aircraft. The portal
allows for a consistent customer
experience regardless of the aircraft,
while the airlines can tailor the offer
to align with their brand and individual
customer propositions. The Group
portal has been installed and operates
on all newly connected aircraft across
the Group.
2019 will continue to be a year of
delivery for IAG Connect with the team
already working with Aer Lingus and
British Airways to define the product
that will be flying on Airbus A321 and
Airbus A350 aircraft in the second half
of next year. IAG Connect will also
commence the rollout of shorthaul
connectivity on British Airways, Iberia
and Vueling aircraft, whilst continuing
work with the Group to enhance the
‘.air’ portal with new features, partners
and services.
See page 27 for more information
on Avios
See page 28 for more information
on IAG Cargo
See page 29 for more information
on Digital
www.iairgroup.com
25
IAG PLATFORM CONTINUED
As a result of some technical challenges
arising on the embodiment of certain
aircraft, IAG’s target to install 90 per
cent of its aircraft with Wi‑Fi
connectivity in 2019 is now expected to
be reached by the second half of 2020.
Maintenance, repair and overhaul
(MRO) and Fleet
In 2018 the Group made significant
progress in the transformation of its
MRO activities through the execution of
the strategy defined to ensure
competitiveness in cost, quality and
operational performance. The main
achievements include:
• transformation of the engine shop and
narrow body airframe maintenance
divisions which are now more
competitive facilities providing
services for both Group airlines as well
as external customers
• optimisation of inventory
management capabilities which have
allowed us to reduce inventory
• optimisation of the supply chain
spend jointly with GBS
Procurement including further
outsourcing of products
The focus in 2019 for the Group MROs
is to deliver the next set of targets to
further strengthen our operations
and improve competitiveness of
additional activities:
• outsourcing of certain inventory
management and repair activities
for our fleet
• continuing the transformation
of our wide body airframe
maintenance division
• consolidation of suppliers
in line maintenance
• new repair capabilities in our engine
shop to further differentiate from the
market and add value to the Group
• continued optimisation of our
supply chain
In Fleet, the Group has further
progressed the harmonisation of
common fleets by ensuring
the commonality of maintenance
programmes and modification policies
across our airlines. In 2019, further
progress will be made with the
centralisation of some of the Group's
engineering services.
Aircraft Fleet
Number in service with Group companies
Airbus A318
Airbus A319
Airbus A320
Airbus A321
Airbus A330–200
Airbus A330–300
Airbus A340–600
Airbus A350
Airbus A380
Boeing 747–400
Boeing 757–200
Boeing 767–300
Boeing 777–200
Boeing 777–300
Boeing 787–8
Boeing 787–9
Boeing 787–10
Embraer E170
Embraer E190
Group total
On
balance
sheet fixed
assets
Off balance
sheet
operating
leases
Total
December 31,
2018
Total
December 31,
2017
Changes
since
December 31,
2017
Future
deliveries
Options
1
21
82
27
9
6
11
2
12
35
–
–
41
9
11
9
–
6
9
–
40
159
29
13
10
6
–
–
–
–
–
5
3
1
9
–
–
7
1
61
241
56
22
16
17
2
12
35
–
–
46
12
12
18
–
6
16
1
64
218
51
17
15
17
–
12
36
3
8
46
12
9
16
–
6
15
–
(3)
23
5
5
1
–
2
–
(1)
(3)
(8)
–
–
3
2
–
–
1
–
–
71
21
2
2
–
41
–
–
–
–
–
4
–
–
12
–
–
–
–
128
–
–
–
–
52
–
–
–
–
–
–
–
6
–
–
–
291
282
573
546
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153
186
As well as those aircraft in service the Group also holds 5 aircraft (2017: 5) not in service.
26
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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Avios: the Centre of Excellence
for Loyalty in IAG
“2018 saw the fourth
consecutive year of
growth at Avios since
its formation. We
expect this trend to
continue throughout
2019 as we invest in
new products,
technology and loyalty
and data capabilities.”
product and to obtain travel and leisure
experiences. Avios were used on
8 million flight bookings in 2018.
Key successes in 2018
In simplifying its offering, Avios moved
UK based members from the Avios
Travel Rewards Programme into the
British Airways Executive Club,
transferring over 27 billion Avios points
across two million accounts. The move
brings more collection and redemption
opportunities and better online account
management through BA.com.
Avios delivered strong issuance growth
during the year both from airlines and
finance cards, with the latter due to
increased credit card penetration and
higher member spend. In the UK, we
focused on enhancing our partnerships
including our relationship with American
Express, where 2018 was a milestone
year for Avios issuance. There has also
been strong performance across
other sectors such as retail and
travel including key partners Tesco
and Marriott.
In the USA, Avios has launched new
credit cards with Chase for both Iberia
Plus and Aer Club members. In Asia,
DBS Bank, which is the largest bank in
South East Asia, is offering members
of the DBS$ scheme the opportunity
to convert their points into Avios, with a
strong conversion rate.
Avios continues to simplify the way
members can collect on their everyday
spending. The online eStore, featured on
the IAG airline websites, has increased in
popularity. Members in the UK, France,
Italy, Spain and Ireland can now collect
Avios with over 1,000 retailers on the
eStore. Card linked collection, which
allows members to register any credit
cards to automatically collect in store,
has made collection easier and unlocked
new collection opportunities.
The Pay with Avios product, which
allows members to use their Avios to
discount airline fares, has grown and
now accounts for 30 per cent of total
Avios redeemed. During 2018 we
expanded this product across a number
of our oneworld partner airlines to give
members more choice, as well as
offering them the ability to spend more
Avios to gain larger discounts on the
ticket price.
Avios continues to invest and expand
its digital capabilities. A new British
Airways Executive Club rewards app
was launched, which gives members
the opportunity to engage with the
currency through everyday use,
highlighting relevant collection and
redemption partners. Within the Group,
Avios sees potential to leverage IAG’s
investment in Monese, the 100 per cent
online bank which allows customers to
open a full UK current account instantly
on their mobile, to give breadth to its
financial services portfolio.
Future
In 2019, Avios will continue to focus on
expanding its data capabilities through
the integration of Group data sources.
This helps better segmentation and
communication for Avios members, with
more personalised and targeted content
relevant to them. In 2019, Avios will also
complete its transition to a single loyalty
platform for the currency.
We will also further develop a number
of Group‑wide strategies to improve
member satisfaction and engagement
with the Group’s loyalty programmes.
This will be supported by leveraging
Avios’ member insight and analytics, to
release more new member features on a
regular basis.
www.iairgroup.com
27
Andrew Crawley
Chief Executive Officer of Avios
Avios statistics
Active members Avios issued
in 2018
8.7 million
vly +6.1%
115.1 billion
vly +10.7%
Avios redeemed
in 2018
86.4 billion
vly +4.2%
Overview
Members remain at the heart of what
we do at Avios. By increasing the
opportunities for members to collect
and spend our currency, we can drive
better engagement, both within IAG
with our partners, and ensure loyalty
acts as a greater differentiator in
members’ purchasing decisions. Avios
is constantly analysing and adapting its
products to strengthen propositions and
we are investing in technology to make
collection and spending of Avios
simpler. We are also exploring ways of
connecting loyalty and payment to
deliver more convenience for members.
Members can already collect Avios
when they fly, when they spend on their
credit cards and when they shop with
our retail and travel partners or in our
online eStores. They can use their Avios
to fly on IAG, oneworld and Avios
partner airlines, to obtain discounts on
airline fares using the “Pay with Avios”
IAG CARGO
Delivering strong results
“In a busy year,
characterised by
changing market
conditions, IAG Cargo
delivered strong results
through business
investment and growth
in premium products.”
Lynne Embleton
Chief Executive Officer of IAG Cargo
Overview
A combination of overall positive market
conditions across all regions and a focus
on premium products led to a record
financial performance for IAG Cargo.
Throughout 2018 we moved key
consumer and industrial goods across
our global network and product suite;
transporting essential pharmaceuticals
via Constant Climate, urgent machinery
parts with Critical and supporting large
project movements with our Perform
product. We have moved aircraft
parts from the UK to China, whisky
from Japan to the US, fresh fruit from
Latin America to Europe, and flower
garlands from India to Canada.
Truly understanding what we
carry has become embedded in
our business and further enhances
our customer proposition.
After a strong start to the year, market
growth began to slow during 2018.
Overall, market conditions were
favourable, particularly in Asia Pacific,
Europe and the UK and Ireland.
Premium products performed well.
Constant Climate revenue grew by 9 per
cent while our Critical consignment
count grew by 35 per cent. Together
with a rapid response to changing fuel
prices, these factors culminated in
robust commercial performance across
IAG Cargo’s hubs in London, Madrid
and Dublin.
Investment and innovation
Throughout 2018 we progressed plans
to adopt technology and digital
solutions, further unlocking the potential
of the business.
In 2018 we undertook the UK's first
airside trial of a self‑driving vehicle at
London Heathrow, to explore the future
of autonomy in airport logistics. We also
began early stage trials of incorporating
drone technology for the first time in an
airside cargo warehouse environment.
Investment in an agile web development
team underpinned our commitment to
deliver a seamless online experience.
Customer feedback, frequent website
improvements and new booking
upgrade functionality all contributed to
rapid growth in online revenue in 2018.
IAG’s Hangar 51 global innovation
programme included a cargo specific
category for the first time this year. We
are now working with innovative
start‑ups in areas of wearable voice
communications and real‑time analytics
and data visualisation to explore how
these technologies can improve
operational performance.
Infrastructure investments continue,
building a new Constant Climate
Centre in Madrid and progressing
construction of our new premium
freight building in London.
We have also begun attracting talent
from a range of sectors including
banking, telecommunications and
manufacturing. The combination of
fresh perspectives and skills, coupled
with existing airfreight expertise, builds
a strong team to embrace the
opportunities ahead.
Products and partnerships
In 2018 IAG Cargo's global network
increased capacity on key routes to
Latin America and added new routes
such as London – Nashville.
Enhancements to the PartnerPlus
alliance programme continued to extend
our global reach. 2019 will see the
addition of Pittsburgh to the network
and direct flights to Osaka and
Islamabad, offering new opportunities
for customers.
During 2018 we launched the Critical
Service Centre, a customer service team
dedicated to serving our highest priority
product, Critical. The team comprises of
emergency solution experts providing a
single point of contact for emergency
shipments, whilst unlocking revenue
potential. We also expanded Critical to
accept pharmaceutical shipments,
offering a solution to the emergency
medical shipment market.
Our time‑critical premium products
played an important role in responding
to events around the world; we
transported vaccines from India to
Venezuela in response to a diphtheria
outbreak, and we moved vast quantities
of fresh produce – including 30,000
heads of lettuce from the US – in
response to shortages across Europe
during the abnormal summer heatwave.
As the logistics partner for the British
Museum, we transported ancient
artefacts with our Secure product for
the ‘I am Ashurbanipal: king of the
world, king of Assyria’ exhibition.
Our continued work with key industries
and institutions around the world
underpins the significant role we play
in global trade.
Conclusion
2018 was a successful year for IAG
Cargo which saw advances in our
products, route network and digital
capability. A strong product portfolio
and agile revenue management allowed
us to benefit from a dynamic market.
We expect the market to be challenging
in 2019, continuing the recent trend of
global airfreight capacity outpacing
market growth. Our strategy remains
unchanged, we will continue to focus on
customer service and to invest in
products, technology and operations to
become the carrier of choice for
customers worldwide.
28
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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DIGITAL
Committed to innovation
Digital portfolio
During 2018, we continued to expand
digital innovations across our operating
companies with enhanced focus
on five key areas: Shop Order Settle,
automation, data, marketplaces
and digital mindset. In addition, we
extended our commitment to innovation
to protect our business and increase
shareholder value by holding our third
and largest Hangar 51 accelerator
programme to date.
Shop Order Settle
Shop Order Settle (Shop Order Pay)
aims to drive the creation of a new
retail platform for the Group to enable
rapid commercial changes delivering
revenue and customer satisfaction
benefits as well as reducing cost.
Throughout 2018, our proofs of concept
have established that a platform
unconstrained by legacy standards and
technology can be a reality. We have
demonstrated how to apply a modern
commerce platform within an airline
while connecting to one of our legacy
Passenger Service Systems.
With the support and drive of Iberia
Express, we worked with a start‑up to
launch a chatbot integrated into a
leading social media platform. The
technology enables the sale of Iberia
Express flights with the transactions
held on a private blockchain, providing
a further alternative to the traditional
Passenger Service System. Work has
also started trialling machine learning
techniques for pricing.
Automation
The Automation agenda aims to
improve operational safety, enhance
regularity and drive efficiency. Our focus
has been on four areas:
• Ramp. Our aircraft pushback device
(Mototok) automated ramp safety
check enabling an arriving aircraft to
turn on to stand as soon as it arrives.
With Heathrow Airport, we are
working on the automation of
Passenger Air Bridges. This
capability, in combination with the
automated safety check, will drive
improvements in arrival punctuality
and customer satisfaction.
• Baggage. We have been working to
deliver automated robotics, removing
the need to manually handle bags
from the conveyor belt into the
aircraft bin; reducing personal injury
rates and increasing productivity.
• Autonomous Vehicle. During 2018 the
first airside autonomous vehicle trial
took place and we have developed
the first Autonomous Baggage Dolly
prototype. Through 2019, we will be
running three further driverless
vehicle trials across the airport which
will help us better understand the
capabilities and define potential
business opportunities.
• Above the wing. We are also working
on customer identity. During 2018, we
have implemented biometric identity
solutions for all Los Angeles and
Orlando flights and at two gates in
New York. Additionally, we have
agreed with the US Government
how, using these systems, we can
reduce the number of incorrectly
documented passengers
and therefore lower the level
of immigration fines.
Data
Data and our ability to leverage that
data is key for IAG. Data allows us to
drive innovation, process change,
customer centricity and benchmarking.
We aim to make the process of
collecting, connecting and using our
data to drive business value as effective,
efficient, easy, safe and secure as
possible. In 2019, we will accelerate the
development of the Nexus group data
platform to enable the deployment of
group data services, artificial intelligence
and other advanced analytics.
Progress has been made this year
through our collaboration with the
Turing Institute on Passenger Revenue
Management Demand Forecasting. In
addition, IAG Cargo has been using
machine learning to optimise pricing
and initial trials are being held with
cargo agents.
Marketplaces
IAG continues to expand LEVEL and
Zenda from new business model
projects to scaled up operations within
the Group. Following support from IAG
Digital, both ventures now have
established teams and are well
positioned for fast growth.
IAG Digital is evaluating several new
opportunities in Maintenance Repair
Overhaul, In‑Flight Commercial and
Blockchain (amongst others) that are
under proof of concept with further
development expected during 2019.
Digital Mindset
Our Digital Mindset transformation
ensures that the Group is attracting and
working with the best digital talent
globally (both internally and externally)
to tackle top business challenges. The
Group’s Hangar 51 accelerator
programme is now in continuous cycle
and our team has evaluated and
screened over 1,200 innovation partners
and new technologies from over 40
countries. The cross‑group initiative
sees our internal business and
technological experts rapidly pilot new
products and services to support our
employees and customers together with
the top start‑ups and scale ups in just
ten weeks. The range of technologies
showcased this year includes next
generation VR headsets to pilot new
immersive entertainment for the
customer, bone‑conduction
communication gear to improve
communication and collaboration in
high noise work environments, machine
vision analytics to automate and map
turnaround efficiency and data
visualisation tools to optimise real
time telematics data and reduce
cargo delays.
Investments
IAG has extended its
commitment to innovative growth
through enhanced investment
activity via Hangar 51 Ventures.
The Group now has an active
multi‑million pound venture fund
evaluating strategic deals across
the travel ecosystem.
We are delighted to announce new
investments in Blockchain and
Fintech designed to enhance IAG’s
services in loyalty and travel and
we expect more exciting
opportunities to come!
www.iairgroup.com
29
Delivering value by embedding the
risk management culture
The Board of Directors has overall
responsibility for ensuring that IAG has
an appropriate risk management
framework, including the determination
of the nature and extent of risk it is
willing to take to achieve its strategic
objectives. It has oversight of the
Group’s operations to ensure that
internal controls are in place and
operate effectively. Management is
responsible for the execution of the
agreed plans. IAG has an Enterprise Risk
Management (ERM) policy which has
been approved by the Board.
This policy sets the framework for a
comprehensive risk management
process and methodology, ensuring a
robust assessment of the risks facing
the Group, including emerging risks.
This process is led by the Management
Committee and its best practices are
shared across the Group.
Risk owners are responsible for
identifying and managing risks in their
area of responsibility within the key
underlying business processes. All risks
are assessed for likelihood and impact
against the Group Business Plan and
strategy. Key controls and mitigations
are documented including appropriate
response plans. Every risk has clear
Management Committee oversight.
Risk management professionals ensure
that the framework is embedded across
the Group. They maintain risk maps for
each operating company and at the
Group level, and ensure consistency
over the risk management process.
Risk maps are reviewed by each
operating company’s management
committee, which consider the accuracy
and completeness of the map,
significant movements in risk and any
changes required to the response plans
addressing those risks. Each operating
company’s management committee
confirms to its operating company
board as to the identification,
quantification and management of
risks within its operating company as
a whole annually.
The management committee of each
operating company escalates risks that
have Group impact or require Group
consideration in line with the Group
ERM framework.
At the Group level, key risks from the
operating companies, together with
Group-wide risks, are maintained in a
Group risk map. The IAG Management
Committee reviews risk during the year
including the Group risk map semi-
annually in advance of reviews by the
Audit and Compliance Committee in
accordance with the 2016 UK
Corporate Governance Code and
the Spanish Good Governance Code
for Listed Companies.
The IAG Board of Directors discusses
risk at a number of meetings in addition
to the risk map review, including a
review of the assessment of Group
performance against its risk appetite.
IAG has a risk appetite framework which
includes statements informing the
business, either qualitatively or
quantitatively, on the Board’s appetite
for certain risks. Each risk appetite
statement formalises how performance
is monitored either on a Group-wide
basis or within major projects. These
statements were reviewed for relevance
and appropriateness of tolerances at the
year end and it was confirmed to the
Board that the Group continued to
operate within each of the risk
appetite statements.
The highly regulated and commercially
competitive environment, together with
the businesses’ operational complexity,
exposes the Group to a number of risks.
We remain focused on mitigating these
risks at all levels in the business although
many remain outside our control; for
example, changes in political and
economic environment, government
regulation, events outside of our control
causing operational disruption, fuel price
and foreign exchange volatility and the
competitive landscape.
Risks are grouped into four categories:
strategic, business and operational,
financial including tax, compliance and
regulatory risks.
Guidance is provided below on the key
risks that may threaten the Group’s
business model, future performance,
solvency and liquidity.
Where there are particular
circumstances that mean that the risk
is more likely to materialise, those
circumstances are described below.
The list is not intended to be exhaustive.
Strategic risks
Open competition and markets are in
the long-term best interests of the
airline industry and consumers. IAG
has a high appetite for continued
deregulation and consolidation. The
Group seeks to mitigate the risk from
government intervention or changes to
the regulation of monopoly suppliers.
In general the Group’s strategic risk
was stable during the year with
continued competitor capacity growth
being monitored and assessed within
the Group. The Group continues to
support deregulation, manage the
supplier base and explore opportunities
for consolidation.
Business and operational risks
The safety and security of customers
and employees is a fundamental value.
The Group balances the resources
devoted to building resilience into
operations and the impact of disruption
on customers.
The Group airlines were impacted by
the significant level of Air Traffic Control
strikes in Europe, requiring additional
resilience to be built into the networks.
The theft of data from British Airways
customers in September 2018 as a result
of a criminal attack on its website
demonstrates the increased risk threat
around cyber. The Group continues to
lead the response to technical and
organisational security defences and
incident response plans for each
operating company.
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INTERNATIONAL AIRLINES GROUP
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Financial risks
IAG balances the relatively high
business and operational risks inherent
in its business through adopting a
low appetite for financial risk. This
conservative approach involves
maintaining adequate cash balances
and substantial committed financing
facilities. There are clear hedging
policies for fuel price and currency
risk exposure which explicitly consider
appetite for fluctuations in cash
and profitability resulting from
market movements.
However, the Group is also careful
to understand its hedging positions
compared to competitors to
ensure that it is not commercially
disadvantaged by being over-hedged
in a favourable market.
In 2018, events in the political and
economic landscape continued to
create uncertainty, increasing the
volatility of the fuel price and
foreign exchange.
Compliance and regulatory
The Group has no tolerance
for breaches of legal and
regulatory requirements.
Link to strategy
1
Strengthening a portfolio
of world-class brands
and operations
Growing global
leadership
positions
2
Enhancing
IAG’s common
integrated
platform
3
Key: Risk trend
Increase
Stable
Decrease
See pages 12-17
for our Strategy
Strategic
Risk
Airports,
infrastructure
and critical
third parties
1
3
Risk context
Management and mitigation
IAG is dependent on and may be affected
by infrastructure decisions or changes in
policy by governments, regulators or
other entities which impact operations
but are outside of the Group’s control.
London Heathrow has no spare runway capacity. In October
2016, the UK government confirmed a third runway expansion
proposal at Heathrow and IAG continues to promote an
efficient, cost effective, ready to use and fit for purpose third
runway solution.
IAG is dependent on the oil industry
making sufficient investment in the fuel
supply infrastructure to ensure that our
flight operations can be delivered as
scheduled.
IAG is dependent on the performance of
suppliers such as airport operators, border
control and caterers.
IAG is dependent on the timely entry of
new aircraft and the engine performance
of aircraft to improve operational
efficiency and resilience.
IAG is dependent on resilience within
the operations of Air Traffic Control
(ATC) services to ensure that our flight
operations are delivered as scheduled.
The Group’s airlines participate in the slot trading market,
including at London airports.
The Group enters into long-term contracts with fuel suppliers to
ensure fuel supply at a reasonable cost.
Potential fuel shortages are addressed by contingency plans,
including appropriate investment in securing fuel supply.
Capacity issues are regularly reviewed by the IAG Management
Committee and form part of the annual Business Plan.
Supplier performance risks are mitigated by active supplier
management and contingency plans.
The Group mitigates engine and fleet performance risks to
the extent possible by working closely with the engine and
fleet manufacturers.
The Group has been impacted by ongoing issues with Rolls
Royce Trent and Pratt and Witney engines in the year.
The Group continues to lobby and raise awareness of the
negative impacts of air traffic control strikes and ATC
performance issues on the aviation sector and economies
across Europe.
www.iairgroup.com
31
RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED
Strategic
Risk
Brand
reputation
1
Competition
1
2
Consolidation
and
deregulation
2
Digital
disruption
1
2
3
Risk context
Management and mitigation
The Group’s brands have significant
commercial value. Erosion of the brands,
through either a single event or a series
of events, may adversely impact the
Group’s leadership position with
customers and ultimately affect future
revenue and profitability.
If the Group is unable to meet the
expectations of its customers and does
not engage effectively to maintain their
emotional attachment, then the Group
may face brand erosion and loss of
market share.
The markets in which the Group operates
are highly competitive. The Group faces
direct competition on its routes, as well as
from indirect flights, charter services and
other modes of transport. Competitor
capacity growth in excess of demand
growth could materially impact margins.
Some competitors have lower cost
structures or have other competitive
advantages such as government support
or benefits from insolvency protection.
Although the airline industry is competitive,
we believe that the customer would benefit
from further consolidation. Failing airlines
can be rescued by government support,
delaying the opportunity for more efficient
airlines to capture market share and
expand. Mergers and acquisitions amongst
competitors have the potential to adversely
affect our market position and revenue.
Joint business arrangements such as the
agreements with American Airlines, JAL
and Qatar Airways include delivery risks
such as realising planned synergies and
agreeing the deployment of additional
capacity within the joint business. Any
failure of a joint business or a joint
business partner could adversely
impact our business.
The Group has a number of franchise
partners that feed traffic into our hubs or
major outstations. Any failure of a franchise
partner will reduce traffic feed.
The Group is reliant on the other members
of the oneworld alliance to help safeguard
the alliance proposition.
Competitors and new entrants to the travel
market may use technology to more
effectively disrupt the Group’s business
model or technology disruptors may use
tools to position themselves between our
brands and our customers.
Each brand is supported by initiatives within the Group Business
Plan, where capital expenditure is reviewed and approved by the
Board of Directors.
The Group has undertaken a significant review of the portfolio of
brands within IAG to understand customer preferences and
better position its offerings.
There are multiple product investments across the Group’s
brands to enhance on-board product, ancillaries, lounges and
customer experience. Success of these investments is measured,
including their impact on customer satisfaction through the Net
Promoter Score (NPS).
The Group allocates substantial resources to safety, operational
integrity and new aircraft to maintain its market position.
The IAG Management Committee devotes one weekly meeting
per month to strategic issues. The Board of Directors discusses
strategy throughout the year and dedicates two days per year to
review the Group’s strategic plans.
The Group strategy team supports the Management Committee
by identifying where resources can be devoted to exploit
profitable opportunities. The airlines’ revenue management
departments and systems optimise market share and yield
through pricing and inventory management activity.
The Group is continually reviewing its product offerings and
responds through initiatives to improve the customer experience.
In 2018, IAG continued expansion of LEVEL, launching short haul
operations from Vienna and long haul operations from Paris.
The Group’s strong global market positioning, leadership in
strategic markets, alliances, joint businesses, cost competitiveness
and diverse customer base help mitigate competition risk.
The Group maintains rigorous cost control and targeted product
investment to remain competitive.
The Group has the flexibility to react to market opportunities
arising from competitors.
The Group continues to consider organic and inorganic
growth options.
The portfolio of brands provides flexibility in this regard as
capacity can be deployed at short notice as needed.
The IAG Management Committee regularly reviews the
commercial performance of joint business agreements.
The Group maintains a leading presence in oneworld to ensure
that the alliance attracts and retains the right members, which is
key to ongoing development of the network.
The Group’s focus on the customer experience, together with the
Group’s exploitation of technology, reduces the impact digital
disruptors can have.
The Group continues to develop platforms such as the New
Distribution Capability, changing distribution arrangements and
moving from indirect to direct channels.
The Hangar 51 programme continues to create early
engagement and leverages new opportunities with start-ups and
technology disruptors.
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Strategic
Risk
Government
intervention
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Risk context
Management and mitigation
Some of the markets in which the
Group operates remain regulated by
governments, in some instances controlling
capacity and/or restricting market entry.
Changes in such restrictions may have
a negative impact on margins.
Regulation of the airline industry covers
many of our activities including route flying
rights, airport landing rights, departure
taxes, security and environmental controls.
Excessive taxes or increases in regulation
may impact on the operational and financial
performance of the Group.
The Group’s government affairs department monitors
government initiatives, represents the Group’s interest and
forecasts likely changes to laws and regulations.
The Group’s ability to comply with and influence changes to
regulations is key to maintaining operational and financial
performance. The Group continues to monitor and discuss the
negative impacts of government policies such as the imposition
of Air Passenger Duty (APD).
Business and operational
Cyber attack
and data
security
The Group could face financial loss,
disruption or damage to brand
reputation arising from an attack on the
Group’s systems by criminals, terrorists
or foreign governments.
2
3
If the Group does not adequately protect
customer and employee data, it could
breach regulation and face penalties and
loss of customer trust.
Event causing
significant
network
disruption
An event causing significant network
disruption may result in lost revenue and
additional costs if customers or employees
are unable to travel.
Example scenarios include persistent air
traffic control industrial action; war; civil
unrest or terrorism; closure of airports or
airspace; major failure of the public
transport system; the complete or partial
loss of the use of terminals; adverse
weather conditions or pandemic.
IAG is dependent on IT systems for
most key business processes. The failure
of a critical system may cause significant
disruption to the operation and
lost revenue.
Increasingly the integration within IAG’s
supply chain means that the Group is also
dependent on the performance of
suppliers’ IT infrastructure, e.g. airport
baggage operators.
Airport charges represent a significant
operating cost to the airlines and have
an impact on operations. Whilst certain
airport and security charges are itemised to
passengers, others are not.
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3
IT systems
and IT
infrastructure
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Landing fees
and security
charges
2
3
The IAG Management Committee regularly reviews cyber risk and
supports Group-wide initiatives to enhance defences and
response plans.
The Committee ensures that the Group is up to date with industry
standards and addresses identified weaknesses.
There is oversight of critical systems and suppliers to ensure that
the Group understands the data it holds, that it is secure and
regulations are adhered to.
A GDPR programme was implemented across the Group in 2018
as part of its ongoing privacy programmes.
During 2018, the Network and Information Systems (NIS)
Directive was implemented. British Airways, Iberia, Vueling and
Aer Lingus are all within scope of the requirements, which are
being addressed as part of a broader programme of activity to
continuously improve cyber defences.
In September, British Airways reported the theft of data from its
customers as a result of a criminal attack on its website.
The fast moving nature of this risk means that the Group will
always retain a level of vulnerability.
Management has business continuity plans to mitigate this risk to
the extent feasible.
The significant level of ATC strikes in Europe impacted the Group
airlines operational performance. Response plans to manage and
reduce impact on the Group’s customers and operations have
been put in place.
System controls, disaster recovery and business continuity
arrangements exist to mitigate the risk of a critical system failure.
The Group continues to work with world class partners and is
increasing resilience by implementing agreed plans which
include investing in new technology, updates and a robust
operating platform.
The Group engages in regulatory reviews of supplier pricing, such
as the UK Civil Aviation Authority’s periodic review of charges at
London Heathrow and London Gatwick airports.
The Group is active both at an EU policy level and in
consultations with airports covered by the EU Airport
Charges Directive.
In some cases, regulation provides some assurance that such
costs will not increase in an uncontrolled manner.
www.iairgroup.com
33
RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED
Business and operational
Risk context
Risk
Management and mitigation
People and
employee
relations
The Group has a large unionised
workforce represented by a number
of different trade unions.
Collective bargaining takes place on a regular basis with the operating
companies' human resources departments with a significant level of
negotiation across the Group’s operating companies.
1
3
Political and
economic
conditions
1
2
Any breakdowns in the bargaining
process with the unionised
workforces may result in subsequent
strike action which may disrupt
operations and adversely affect
business performance.
IAG remains sensitive to political
and economic conditions in the
markets globally. Deterioration in
either a domestic market or the
global economy may have a
material impact on the Group’s
financial position, while foreign
exchange and interest rate
movements create volatility.
Management focuses on leveraging employee expertise and ensuring
the development of talent. Succession planning is in place across all
operating companies and we aim to move our best people across
our businesses.
The IAG Board of Directors and the Management Committee review
the financial outlook and business performance of the Group through
the financial planning process and regular reforecasts. These reviews
are used to drive the Group’s financial performance through the
management of capacity and the deployment of that capacity
in geographic markets, together with cost control, including
management of capital expenditure and the reduction of
operational and financial leverage.
External economic outlook, fuel prices and exchange rates are carefully
considered when developing strategy and plans and are regularly
reviewed by the Board of Directors and IAG Management Committee
as part of the monitoring of financial and business performance.
Wider macro economic trends are being monitored such as tensions
between the US and China, currency devaluation in Argentina and the
changing political landscape.
Following the UK referendum decision in 2016, the UK is expected to
leave the EU on March 29, 2019. The Group has continued to engage
extensively with the relevant authorities to ensure IAG’s views on
post-Brexit aviation arrangements are understood and taken into
account. This has included frequent dialogue with the UK, Spanish and
Irish governments, as well as the European Commission and Members
of the European Parliament. The completion of a Withdrawal
Agreement between the negotiators confirmed that there would be no
change to aviation arrangements until the end of the transition period
on December 31, 2020 and that the future relationship between the
parties would include a comprehensive air transport agreement.
As the Withdrawal Agreement is subject to ratification by the UK and
EU parliaments, both the European Commission and the UK
Government published separate plans to allow air services to continue
in the event that the Withdrawal Agreement (or an amended version of
it) cannot be ratified. These include mechanisms to permit flights
between the UK and the EU and recognition of each other’s safety
certification, approvals and security regimes. As part of this, the EU is in
the process of adopting a Regulation on basic connectivity between the
EU and UK that may result in some restrictions on code share flexibility.
In addition, in November the UK signed new air services agreements
with the USA and Canada to replace existing EU-wide agreements once
the UK leaves the EU, securing market access and regulatory
arrangements for the future.
IAG has had detailed and constructive engagement with its national
regulators and governments about ownership and control. These
discussions will continue, including with the European Commission, and
IAG remains confident that its operating companies will comply with
the relevant ownership and control rules post Brexit. IAG is a Spanish
company, its airlines have long-established Air Operator Certificates
(AOCs) and substantive businesses in Ireland, France, Spain and the UK
and IAG has had other structures and protections in its by-laws since it
was set up in 2011.
IAG’s assessment remains that, even in the event of no-deal, Brexit will
have no significant long-term impact on its business.
34
INTERNATIONAL AIRLINES GROUP
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Risk
Risk context
Safety/security
incident
2
Financial
Debt funding
2
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Financial risk
2
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Tax
2
3
The safety and security of our customers
and employees are fundamental values for
the Group. A failure to prevent or respond
effectively to a major safety or security
incident may adversely impact the
Group’s brands, operations and
financial performance.
The Group has substantial debt that will
need to be repaid or refinanced. The
Group’s ability to finance ongoing
operations, committed aircraft orders and
future fleet growth plans is vulnerable to
various factors including financial market
conditions and financial institutions’
appetite for secured aircraft financing.
Volatility in the price of oil and petroleum
products can have a material impact on
our operating results.
The Group is exposed to currency risk on
revenue, purchases and borrowings in
foreign currencies.
The Group is exposed to currency
devaluation of cash held in currencies
other than the airlines’ local currencies of
euro and sterling.
Interest rate risk arises on floating rate
debt and floating rate leases.
The Group is exposed to non-
performance of financial contracts by
counterparties for activities such as
money market deposits, fuel and currency
hedging. Failure of financial counterparties
may result in financial losses.
The Group is exposed to systemic tax
risks arising from either changes to tax
legislation or a challenge by tax
authorities on interpretation of tax
legislation. There is a reputational risk that
the Group’s tax affairs are questioned by
the media or other representative bodies.
Management and mitigation
The corresponding safety committees of each of the airlines
of the Group satisfy themselves that it has the appropriate
resources and procedures which include compliance with
Air Operator Certificate requirements. Incident centres
respond in a structured way in the event of a safety or
security incident.
The IAG Management Committee regularly reviews the
Group’s financial position and financing strategy.
The Group continues to have good access to a range of
financing solutions. The Group’s high cash balances and
committed financing facilities mitigate the risk of short-term
interruptions to the aircraft financing market.
Fuel price risk is partially hedged through the purchase of oil
derivatives in forward markets. The objective of the hedging
programme is to increase the predictability of cash flows and
profitability. The IAG Management Committee regularly
reviews its fuel and currency positions.
The approach to fuel risk management is set out in note 25 to
the Group financial statements.
The Group seeks to reduce foreign exchange exposures
arising from transactions in various currencies through a
policy of matching and actively managing the surplus or
shortfall through treasury hedging operations.
The approach to financial risk management is set out in note
25 to the Group financial statements.
When there are delays in the repatriation of cash coupled with
the risk of devaluation, risk is mitigated by the review of
commercial policy for the route.
The impact of rising interest rates is mitigated through
structuring selected new debt and lease deals at fixed rates
throughout their term. The approach to interest rate risk
management and proportions of fixed and floating debt is set
out in note 25 to the Group financial statements.
The approach to financial risk management, interest rate risk
management, proportions of fixed and floating debt
management and financial counterparty credit risk
management and the Group’s exposure by geography is set
out in note 25 to the Group financial statements.
The Group adheres to the Tax Policy approved by the IAG
Board and is committed to complying with all tax laws, to
acting with integrity in all tax matters and to working openly
with tax authorities. Tax risk is managed by the operating
companies with oversight from the IAG Tax Department. Tax
risk is overseen by the Board through the Audit and
Compliance Committee.
www.iairgroup.com
35
RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED
Compliance and regulatory
Risk
Risk context
Group governance
structure
3
Non-compliance
with key regulation
including
competition,
bribery and
corruption law
The governance structure the Group put
in place at the time of the merger had a
number of complex features, including
nationality structures to protect British
Airways’ and Iberia’s route and
operating licences.
IAG could face a challenge to its
ownership and control structure.
The Group is exposed to the risk of
individual employees’ or groups of
employees’ unethical behaviour resulting
in reputational damage, fines or losses to
the Group.
Management and mitigation
The governance structure is being extended to other
Group airlines, including Aer Lingus (see page 34 for
further details).
IAG will continue to engage with the relevant regulatory
bodies as appropriate regarding the Group structure.
The Group has clear frameworks in place including
comprehensive Group-wide policies designed to
ensure compliance.
There are mandatory training programmes in place to educate
employees in these matters.
Compliance professionals specialising in competition law and
anti-bribery legislation support and advise our businesses.
2
3
Viability statement
The directors have assessed the viability
of the Group over the five years to
December 2023.
The directors have determined that a
five-year period is an appropriate
timeframe for assessment as it is in line
with the Group Business Plan strategic
planning period.
The directors have evaluated the
impact of severe but plausible downside
scenarios on the Group Business Plan
and assessed the likely effectiveness
of the mitigations that management
reasonably believes would be available
and effective over this period. Each
scenario considered the impact on
liquidity, solvency and the ability to
raise financing over the period to
December 2023.
The scenarios modelled considered the
potential impact of a global economic
downturn, fuel price shock and the
impact of risks that would result in
operational disruption. These scenarios
considered the principal risks which
could have the greatest potential
impact on viability in that period.
Based on this assessment, the
directors have a reasonable expectation
that the Group will be able to continue
in operation and meet its liabilities as
they fall due over the period to
December 2023.
36
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
FINANCIAL OVERVIEW
Delivering sustainable returns
“The Group’s financial
performance reflects
our ability to deliver
sustainable returns
in a challenging
environment”
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Chief Financial Officer
The financial performance of IAG
through 2018 has been a strong one
in an economic environment that
was challenging but reflecting
interesting growth opportunities in
our strategic markets.
Our fuel cost increased although in a
smoother way than market prices due
to our hedging positions, and demand
continued improving through the year
showing a rare synchronised economic
trend of the worldwide major
economies. This underlying trend
has been coexisting with mounting
uncertainties on end of cycle and
geopolitical concerns.
We have achieved an operating profit of
€3,230 million before exceptional items,
a year on year improvement of €280
million and, met or exceeded our key
financial targets with an adjusted margin
of 14.4 per cent, return on Invested
Capital of 16.6 per cent and adjusted
earnings per share growth of 15.1 per
cent. Our Net Earnings before
exceptional items reached a record
figure of €2,481 million. This robust set
of achievements has been based on the
positive performance of our basic
revenue and cost key metrics. We have
improved both our unit revenues and
our non-fuel unit costs at constant
currency, more than offsetting the fuel
cost increase while growing 6.1 per cent
in ASK terms.
The Group’s cost plans are embedded in
our organisations with the aim of driving
permanent efficiency improvements in
areas such as: supplier chain, labour
productivity and ownership costs,
while at the same time, 2018 has been
a year of great focus on enhancing our
customers’ experiences through
improving lounges, catering,
connectivity and longhaul seats. We
continue to focus on medium term
initiatives, such as IT solutions, new
generation Infrastructure and Data
management projects.
As many other airlines in Europe
we have been suffering increased
disruptions associated with Air Traffic
Control’s lack of adequate resources
and strikes. This has had an
unfavourable impact on our cost
base and also a negative impact on
passenger experience and Net
Promoter Score in some of our airlines.
2018 was a significant year in terms
of CAPEX for the Group and this very
much related to the timetable of new
generation aircraft deliveries, both for
renewal and growth, resulting in a Net
CAPEX figure of €2,228 million.
Correspondingly, our Equity Free Cash
Flow for the year has been reduced to
€1,801 million which is at the low end
of our medium-term range but is
consistent with our plans for the year.
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In the last quarter of the year, S&P and
Moody’s assigned IAG with a long term
credit rating of investment grade with
an outlook of stable. This reflects the
Group’s financial strength and
profitability, competitive market
positioning and resilience, our
Adjusted Net Debt to EBITDAR
ratio remained strong at 1.6 times.
Following these financial achievements,
the Board proposed a final dividend of
16.5 euro cents on February 27th, 2019
and announced its intention to propose
a special dividend of approximately
€700 million in 2019, both subject to
shareholder approval at our AGM in
June. Taken together with the interim
dividend paid in December 2018 this will
represent dividends of €1,315 million
to our shareholders.
Enrique Dupuy de Lôme Chávarri
Chief Financial Officer
www.iairgroup.com
37
FINANCIAL REVIEW
IATA market growths
The air traffic industry had another strong year. Economic
growth is keeping traffic ahead of the industry’s 6.1 per cent
capacity increase with a slight net gain of 0.3 pts in passenger
load factor.
In 2018, airline capacity growth in Europe was one of the
highest regions. The growth was 5.8 per cent as it recovered
from the impacts of terrorist attacks in 2016. The environment
was competitive and passenger load factors increased both of
which impacted yields. Europe recorded the highest
passenger load factor for the year.
North America’s airline capacity growth was 4.7 per cent
during the year and the region retained a position of strong
financial performance.
Latin America’s airline capacity growth was higher than the
total market average at 6.6 per cent and ahead of last year’s
growth of 5.5 per cent. The market environment began to
turnaround in 2017 and showed some improvement in 2018,
however it remained harsh. Passenger load factor in this
region decreased and overall profitability decreased.
Africa was the weakest region for the airline industry with
growth of only 1.0 per cent. Despite the low capacity increase,
load factors improvement was relatively low and passenger
load factor was the lowest of all the regions.
The Middle East’s airline industry growth was moderate and
lower than the market average. Passenger load factor
performance deteriorated from a relatively low base with
demand impacted by the political environment.
Airline capacity growth in the Asia Pacific region was high at
7.9 per cent with diverse performance across the region.
IAG capacity
In 2018, IAG increased capacity by 6.1 per cent, including
LEVEL, for the full year. Capacity was increased in all airlines
and throughout each region except for Asia Pacific.
The increase partially reflects new longhaul routes at British
Airways, Iberia and Aer Lingus and the full year impact of
routes launched in 2017. In shorthaul, new routes were
launched by LEVEL in Vienna, and frequencies in Domestic
and European routes were added by Iberia and Vueling.
IAG passenger load factor reached its highest level since the
creation of IAG at 83.3 points, 0.7 points higher than the
previous year and 1.4 points higher than the IATA average.
IAG Network by region (measured in ASKs)
8.3%
6.9%
12.1%
26.1%
6.1%
16.5%
30.1%
Domestic
Europe
North America
Latin America and Caribbean
Africa, Middle East and South Asia
Asia Pacific
IATA market growths
Year to December 31, 2018
Capacity
ASKs
Passenger
load factor
Europe
North America
Latin America
Africa
Middle East
Asia Pacific
Total market
5.8%
4.7%
6.6%
1.0%
4.9%
7.9%
6.1%
84.5
83.8
81.6
71.4
74.8
81.5
81.9
Higher/
(lower)
0.6 pts
0.2 pts
(0.3)pts
1.0 pts
(0.6)pts
0.5 pts
Domestic
Europe
North America
Latin America and
Caribbean
Africa, Middle East
and South Asia
Asia Pacific
0.3 pts
Total network
Source: IATA Air Passenger Market Analysis
Market segments
IAG capacity
Year to December 31,2018
ASKs higher/
(lower)
Passenger
load factor
9.1%
6.2%
8.0%
85.0
83.2
82.3
Higher/
(lower)
1.8 pts
1.2 pts
0.0 pts
8.7%
84.7
0.7 pts
0.8%
0.0%
6.1%
82.4
84.7
83.3
1.6 pts
0.1 pts
0.7 pts
38
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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Eurozone
Eurozone inflation reached 2.0 per cent, quantitative
easing programmes substantially came to an end, and
unemployment reduced throughout the year. However
consumer confidence ended the year lower than it began,
impacted by protests in France, reduction in the industrial
production growth rate in Germany and deterioration in the
Italian economy. While the Eurozone GDP grew 2.0 per cent,
the airline industry’s passenger capacity rate was 5.8 per cent.
North America
In 2018, US GDP grew 2.9 per cent which was ahead of last
year and forecast. Growth accelerated over the year
benefiting from tax rate reductions and lower unemployment
supporting consumption. The airline industry’s passenger
capacity grew 4.7 per cent while IAG grew 8.0 per cent
serving a new market segment (low cost longhaul), adding
new destinations from Ireland, Spain and the UK and
increasing frequencies.
IAG’s European market, taken together with Domestic, is
home to our airline hubs and represents our largest market.
We grew slightly ahead of the airline industry average
increasing the breadth and depth of our schedules, serving
more cities and adding frequencies.
In IAG’s Domestic markets capacity was higher by 9.1 per cent
with increases at Vueling and Iberia. As part of its NEXT
strategy, Vueling increased frequencies on existing routes and
launched three new routes. Capacity in Iberia’s domestic
market was increased with growth in the Balearics and
Canaries. Passenger load factor performance was strong,
almost two points higher versus last year.
In the Domestic market, the Group’s passenger unit revenues
were up across all airlines. The Group’s domestic performance
improved throughout the year and benefited from the
Spanish government subsidy to residents in the Balearic
and Canaries Islands .
The Group’s European capacity increased year on year.
LEVEL Vienna started shorthaul services in July 2018 with 14
new destinations from the Austrian capital, including London,
Barcelona and Paris. Iberia’s capacity increased through
higher frequencies in several routes, including Madrid to Milan,
Berlin, Paris and Prague. Increases in Vueling came mainly
from additional frequencies on routes from France and Italy to
Spain. Load factor was also up 1.2 points.
IAG’s North American market represents a significant part
of the Group’s capacity with over 30 per cent of total ASKs.
Capacity was increased in British Airways, Iberia, and Aer
Lingus. British Airways started operating two new routes,
Nashville from London Heathrow and Toronto from Gatwick,
as well as growth in several routes including New Orleans, Las
Vegas, Boston and Los Angeles. Iberia’s capacity increase
came mainly from its new route to San Francisco and the full
year impact of routes extended from seasonal services, as
well as routes launched throughout 2017. Aer Lingus’ North
American capacity was increased with the launch of new
routes to Philadelphia and Seattle and the full year impact of
routes launched in 2017. LEVEL’s growth reflects the full year
impact of its longhaul routes from Paris. Seat factor for the
region was maintained at 82.3 per cent. Despite the capacity
increase, passenger numbers grew in line with capacity.
North America passenger unit revenues at ccy were broadly
flat versus last year. Aer Lingus passenger unit revenues
decreased slightly on a capacity increase of 17.2 per cent,
while LEVEL expansion had a dilutive impact on the Group’s
passenger unit revenues due to its lower fares. British Airways
and Iberia’s performances improved versus last year from
higher yields at British Airways and increases in passenger
load factor at Iberia.
GDP growth
In 2018, the Group’s European markets continued to perform
strongly with increases at British Airways, Vueling and Aer
Lingus. Iberia’s passenger unit revenues decreased in Europe
following a year of quarter on quarter improvements and on
a modest capacity increase.
%
4
3
.
%
3
2
.
%
7
2
.
%
3
2
.
%
9
2
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%
1
.
2
GDP growth
%
4
3
.
%
4
2
.
%
2
2
.
%
5
.
1
IMF 2018
forecast
January
2018
%
1
.
4
%
1
.
3
%
7
.
1
%
4
2
.
Actual
2017
UK
Spain
Ireland
Eurozone
%
7
4
.
%
7
2
.
%
4
.
1
%
0
2
.
Actual
2018
Actual
2017
IMF 2018
forecast
January
2018
Actual
2018
US GDP
Canada GDP
www.iairgroup.com
39
FINANCIAL REVIEW CONTINUED
Latin America and Caribbean
Latin America GDP grew in line with last year but significantly
below forecasts. Argentina re-entered recession while
Venezuela’s recession deepened and Brazil’s growth rate was
lower than expectations. The airline industry’s passenger
capacity grew 6.6 per cent while IAG grew 8.7 per cent
however from a lower market share position. As with North
America, IAG’s growth included serving the low cost longhaul
market, new destinations and additional frequencies.
IAG’s capacity in Latin America and Caribbean was increased
with LEVEL’s new routes to Guadalupe and Martinique and
the full year impact of routes launched in June 2017 from
Barcelona. Iberia continued to increase frequencies to Mexico
City during the year, continuing its growth from 2017 and
adding frequencies to Santiago de Chile, Guatemala and El
Salvador. British Airways increased capacity to Santiago de
Chile, Sao Paulo and Rio de Janeiro. Passenger load factor in
this region improved and was again significantly higher than
the industry average.
Latin America and Caribbean passenger unit revenues at ccy
increased around 1.5 per cent, with significant improvements
in the first half of the year offset by reductions in the latter
half. Performance in South America was volatile with
economies such as Argentina and Brazil impacted by the
political uncertainty driving deterioration through the year.
Peru, Ecuador and Colombia performed well. The Caribbean
and Mexican routes also saw fluctuations but generally
performed well.
Africa, Middle East and South Asia (AMESA)
AMESA capacity increased slightly in 2018 from British
Airways’ new routes to Durban and Seychelles, and additional
capacity to Johannesburg and Marrakech. Iberia increased
capacity in Marrakech, partially offset by the cancellation of
services to Equatorial Guinea. Passenger load factor was
strong and was 0.5 points higher than the industry average.
The Group is growing at a slower pace than the airline
industry average in these areas reflecting in part the
challenging political environment and economic conditions.
Africa, Middle East and South Asia passenger unit revenue
performance fluctuated across the routes. Improvements
benefited in part from relatively flat capacity versus last year.
British Airways passenger unit revenue was up at ccy
and Iberia’s African routes such as Dakar and Morocco
performed well.
Asia Pacific
In Asia Pacific, the Group’s capacity was flat versus 2017.
Iberia’s increased services were offset by decreases in British
Airways’ capacity. Passenger load factor remained broadly
flat and continued to be among the highest in the IAG
network. The Group is also growing at a slower pace in the
Asia Pacific region reflecting in part the challenging
competitive and regulatory environment.
Asia Pacific was broadly flat versus last year on flat
capacity with mixed performance across the routes. While
demand has been relatively stable industry capacity has
risen significantly.
GDP growth
%
7
5
.
%
5
5
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%
6
5
.
%
7
2
.
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2
2
.
%
3
.
1
%
6
3
.
%
3
3
.
%
9
.
1
Actual
2017
IMF 2018
forecast
January
2018
Latin America
1
.
%
%3
4
2
.
%
2
.
1
Actual
2018
Middle East, North Africa, Afghanistan and Pakistan
Subsaharan Africa
Asia
40
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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Revenue
€ million
Passenger revenue
Cargo revenue
Other revenue
Total revenue
Higher/(lower)
Per ASK at
ccy
2.4%
2018
21,549
1,173
1,684
24,406
Year over
year at ccy
8.6%
7.2%
18.3%
9.2%
Passenger revenue
On a reported basis, passenger revenue for the Group rose
6.2 per cent versus the prior year, with 2.4 points of adverse
currency, while capacity was increased 6.1 per cent. At
constant currency (‘ccy’), passenger unit revenue (passenger
revenue per ASK) increased 2.4 per cent from higher yields
(passenger revenue/revenue passenger kilometre) up 1.5 per
cent and a 0.7 point rise in passenger load factor. At the
airline level, passenger unit revenue at ccy increased versus
last year at each of the Group’s airlines. On a quarterly
basis, the Group’s passenger unit revenue at ccy was also
positive in every quarter although at a slower pace as the
year progressed.
The Group carried almost 113 million passengers an increase
of 7.7 per cent from 2017, with passenger load factor
improvement of 0.7 points for the Group and at four of the
five airlines. Since April 2017, Net Promoter Score is being
measured consistently for British Airways, Iberia, Vueling and
Aer Lingus. The Group’s Net Promoter Score for 2018 was 16.3
per cent a decrease of 0.5 points versus the reported figure
last year (April to December). Product upgrades and service
enhancements were well received by customers; however,
these improvements were more than offset by the challenging
Air Traffic Control environment. The ATC disruption impacted
Vueling resulting in both Vueling and the Group missing its
2018 NPS target of 20. Iberia’s 2018 score was broadly flat
versus its target, while British Airways and Aer Lingus
exceeded their 2018 targets.
Cargo revenue
The market in 2018 saw a strong start, but growth then
slowed markedly as the year progressed. Cargo revenue for
the period increased by 3.6 per cent, excluding currency
7.2 per cent. Volume measured in tonne kilometres (CTK)
decreased by 0.9 per cent on a capacity increase of 3.8 per
cent. Yield improved by 8.1 per cent at constant currency.
Strategic focus continued to be on premium products,
investing for growth and continuing to modernise the
business. This included the investment in a new Constant
Climate Centre in Madrid, a new Critical Service Centre in
London with a specialised customer service team and an
improving customer experience on IAGCargo.com.
Other revenue
Other revenue rose 15.1 per cent, 18.3 per cent at constant
currency from increases in:
• Iberia’s third party maintenance (MRO) billings and
handling activity,
• BA Holidays bookings,
• Avios revenues from higher points issuance and product
redemptions, and
• Rental revenues, primarily at John F Kennedy airport
Total revenue for the Group rose 6.7 per cent with increases
in passenger, cargo and other revenue. At ccy, total revenue
was up 9.2 per cent, higher than the Group’s ASK growth.
Expenditure before exceptional items
Employee costs
Employee costs increased 1.5 per cent before exceptional
items for the year. At constant currency, employee unit costs
improved 3.3 per cent with pay increases primarily linked to
RPI, offset by efficiency and restructuring initiatives across
the Group.
British Airways closed its New Airways Pension Scheme
(NAPS) to future accrual and British Airways Retirement Plan
(BARP) to future contributions from March 31, 2018. The
schemes have been replaced by a flexible defined
contribution scheme, the British Airways Pension Plan (BAPP).
The changes resulted in a reduction in the NAPS IAS 19
defined benefit liability of €872 million, transitional
arrangement cash costs of €192 million (recognised as an
exceptional) and a reduction in current service cost.
Overall the average number of employees rose by 2.1 per cent
for the Group bringing our average workforce to 64,734 and
productivity increased 3.9 per cent with improvements at
British Airways, Iberia, Vueling and Aer Lingus.
Employee costs
€ million
Employee costs
Productivity
Productivity
Average manpower equivalent
Higher/(lower)
2018
4,812
Year over
year at ccy
2.6%
Per ASK at
ccy
(3.3)%
Higher/(lower)
2018
5,018
64,734
Year over
year
3.9%
2.1%
See note 7 in our Financial statements for more information on our
employee costs and numbers.
www.iairgroup.com
41
FINANCIAL REVIEW CONTINUED
Fuel, oil and emissions costs
Fuel, oil and emissions costs rose by 14.6 per cent in 2018
primarily from higher average fuel prices net of hedging,
partially offset by a weaker USD and from management
efficiencies. Average fuel price rose from approximately $520
per metric tonne in 2017 by 32 per cent to approximately
$685 in 2018. The Group gained fuel efficiencies from new
aircraft and from improved operational procedures
implemented across the airlines. At ccy and on a unit basis,
fuel costs were 12.5 per cent higher.
Supplier costs
0.8%
11.7%
10.3%
32.3%
20.5%
24.4%
Handling, catering and other operating costs
Landing fees and en-route charges
Engineering and other aircraft costs
Property, IT and other costs
Selling costs
Currency differences
Fuel, oil and emissions costs
€ million
Fuel, oil costs and
emissions charges
Higher/(lower)
2018
Year over
year at ccy
Per ASK at
ccy
5,283
19.3%
12.5%
See note 25 in our Financial statements for more information on our
hedging policy.
Supplier costs
Total supplier costs for the year increased 5.0 per cent with
1.5 points of positive currency impacts. At ccy and on a unit
basis, supplier costs rose 0.4 per cent. In 2018, the Group’s
non-ASK related businesses, such as MRO, BA Holidays and
Avios grew. This increased our supplier costs, in particular
Handling, catering and other operating costs and Engineering
and other aircraft costs with a corresponding increase in
Other revenue.
Supplier costs
€ million
Supplier costs:
Handling, catering
and other operating
costs
Landing fees and
en-route charges
Engineering and
other aircraft costs
Property, IT and other
costs
Selling costs
Currency differences
Higher/(lower)
2018
Year over
year at ccy
Per ASK at
ccy
0.4%
2,888
2,184
1,828
918
1,046
73
10.1%
3.0%
7.1%
1.9%
8.2%
0.0%
British Airways’ supplier unit costs at ccy were up slightly.
Investments in customer, incremental BA Holiday costs,
higher selling costs related to the new distribution model and
inflation were mainly offset by lower engineering costs. Iberia
supplier unit costs decreased with efficient growth and
management initiatives offsetting increases in maintenance
costs related to its third-party MRO business and investments
in customer. Vueling supplier unit costs were adversely
impacted by significant ATC disruption costs. Aer Lingus had
a favourable supplier unit cost performance from cost saving
initiatives and efficient growth.
By supplier cost category:
Handling, catering and other operating costs rose 8.0 per
cent, excluding currency up 10.1 per cent. The year on year
comparison is impacted by a €65 million charge in the base
related to operational disruption at British Airways in 2017.
Otherwise the Group’s Handling, catering and other operating
costs rose 12.8 per cent at ccy. Half of this increase can be
attributed to volume, from a 7.7 per cent rise in passengers
carried and from additional activity at BA Holidays. The Group
continued its focus on improving the customer proposition by
investing in lounges, catering and service delivery. Inflation
increases in supplier contracts were partially offset by savings
while disruption costs rose significantly. Air traffic
control strikes and regulations impacted our operational
performance increasing disruption costs throughout 2018, in
particular Vueling’s.
Landing fees and en-route charges were higher by 1.5 per
cent, excluding currency up 3.0 per cent. Costs rose primarily
from higher activity, with flying hours up 5.1 per cent and
sectors flown up 5.2 per cent. Price increases were broadly
net neutral in 2018.
Engineering and other aircraft costs increased 3.1 per cent,
excluding currency up 7.1 per cent. Increases were driven by
additional third party maintenance activity at Iberia (c.4.8
points) and from higher flying hours. These increases have
been partially offset by contractual remedies recognised for
an issue with the Rolls-Royce Trent 1000 engines. British
Airways received compensation for additional costs incurred
due to the reduction in flying hours.
Property, IT and other costs were up 0.3 per cent, excluding
currency up 1.9 per cent. The increase reflects higher IT and
professional costs and inflation on rent and rates.
Selling costs increased 6.5 per cent, excluding currency up 8.2
per cent. Selling costs rose from higher volumes, point of sale
mix and changes in the Group’s distribution model. The Group
launched a new distribution model in November 2017
increasing our selling costs with a corresponding rise in fares
and more direct access to our customers.
42
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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Total exchange impact
on revenue
Total exchange impact
on operating
expenditures
Total exchange impact
on operating profit
2018
Translation
impact
Transaction
impact
Total
exchange
impact
(183)
(389)
(572)
163
280
443
(20)
(109)
(129)
Operating profit before exceptional items
In summary, the Group’s operating profit before exceptional
items for the year was €3,230 million, a €280 million
improvement from last year. The Group’s adjusted operating
margin also improved 0.2 points to 14.4 per cent. These
results reflect a strong revenue performance from a better
macro-economic environment with improvements in our main
strategic markets. Management continued to focus on
customer proposition, operational resilience and delivery of
cost savings. This was partially offset by higher costs from
ATC disruption, while our non-fuel unit cost trend keeps
improving from structural agreements on pensions and
productivity. This performance reflects the Group’s drive
towards achieving a competitive cost base with improved
productivity and management initiatives, aligned with an
improved focus in customer satisfaction, brand value and
resilience of our operational model.
Ownership costs
The Group’s ownership costs were up 3.5 per cent, excluding
currency up 5.7 per cent. The increase reflects higher
depreciation charges for the Boeing 747 fleet from lower
expected residual values and from new owned aircraft (4
Boeing 787s, 2 Airbus A350s, 3 Airbus A330s, 11 Airbus A320
family). The Group has retired its fully depreciated Boeing
767s. Operating lease costs rose mainly due to incremental
wet lease costs incurred to operate the Monarch slots at
London Gatwick airport and additional leased aircraft
primarily Airbus A320s, A321s and A330s, including the
aircraft for LEVEL.
Ownership costs
€ million
Ownership costs
Higher/(lower)
Year over
year
5.7%
Per ASK at
ccy
(0.3)%
2018
2,144
See note 5 in our Financial statements for more on our
ownership costs.
Number of fleet
Number of fleet
Shorthaul
Longhaul
Higher/(lower)
2018
380
193
573
Year over
year
6.4%
2.1%
4.9%
Non-fuel unit costs
At constant currency, total non-fuel unit costs decreased
0.8 per cent. Adjusted by the ‘Other revenue’ (MRO, BA
Holidays, Avios product redemption) category in the income
statement and currency, the reduction was 2.5 per cent.
Adjusted non-fuel unit cost improved at British Airways,
Iberia and Aer Lingus from efficient growth and
management initiatives. At Vueling adjusted non-fuel unit
costs rose, impacted by the challenging ATC environment
increasing disruption costs significantly.
Exchange impact before exceptional items
Exchange rate movements are calculated by retranslating
current year results at prior year exchange rates. The reported
revenues and expenditures are impacted by translation
currency from converting results from currencies other than
euro to the Group’s reporting currency of euro, primarily
British Airways and Avios. From a transaction perspective, the
Group performance is impacted by the fluctuation of
exchange rates, primarily exposure to the pound sterling, euro
and US dollar. The Group generates a surplus in most
currencies in which it does business, except the US dollar, as
capital expenditure, debt repayments and fuel purchases
typically create a deficit which is managed and partially
hedged. At constant currency, the Group’s operating profit
before exceptional items would have been €129 million higher.
The Group hedges its economic exposure from transacting in
foreign currencies. The Group does not hedge the translation
impact of reporting in euros.
www.iairgroup.com
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FINANCIAL REVIEW CONTINUED
Financial performance by Brand
Capacity
Financial performance by Brand
British Airways
£ million
Higher/
(lower)
2.5%
0.7pts
5.2%
4.3%
18.4%
5.7%
14.7%
(1.5%)
2.8%
9.0%
4.2%
2018
29,030
81.0
1,952
54
14
2,020
382
373
774
491
186
11.6%
0.8pts
305
16.8%
Aer Lingus
€ million
Higher/
(lower)
10.0%
(0.1)pts
8.6%
14.9%
7.7%
8.8%
20.9%
8.1%
2.7%
11.1%
6.9%
13.8%
0.6pts
1.9%
2.7%
3.2%
11.9%
8.30
6.73
6.96
(1.1%)
(1.2%)
(1.2%)
1.31
9.8%
(0.9)%
4.59
(4.8%)
2018
184,547
82.5
11,620
769
631
13,020
2,927
2,535
4,586
2,972
1,020
1,952
15.6%
7.64
6.30
7.06
1.59
4.41
ASKs
Seat factor (per cent)
Passenger revenue
Cargo revenue
Other revenue
Total revenue
Fuel, oil costs and emissions
charges
Employee costs
Supplier costs
EBITDAR
Ownership costs
Operating profit before
exceptional items
Adjusted operating margin
Passenger yield
(£ pence or € cents/RPK)
Unit passenger revenue
(£ pence or € cents/ASK)
Total unit revenue
(£ pence or € cents/ASK)
Fuel unit cost
(£ pence or € cents/ASK)
Non-fuel unit costs
(£ pence or € cents/ASK)
Total unit cost
(£ pence or € cents/ASK)
1.8%
11.5%
8.9%
21.0%
56.8%
Aer Lingus
British Airways
Iberia
Vueling
Other Group
companies
Operating profit before exceptionals
2.6%
6.2%
9.4%
13.5%
68.3%
Aer Lingus
British Airways
Iberia
Vueling
Other Group
companies
Aer Lingus operating profit was €305
million, a record performance and an
improvement of €37 million over last
year. Capacity increased 10.0 per cent
from additional flying to new routes
such as Philadelphia and Seattle.
Despite the significant increase in
capacity, Aer Lingus’ adjusted operating
margin rose 0.6 points to 16.8 per cent.
Passenger unit revenues decreased at
outturn rates from lower yields, while
non-fuel unit costs improved.
Aer Lingus achieved significant cost
savings through efficient growth with
higher productivity and from cost
initiatives. This included areas such as
procurement and handling.
See page 23 for more on Aer Lingus’
performance and future plans.
6.00
2.2%
5.91
(1.9%)
British Airways operating profit was £1,952 million, excluding exceptional items, up
£203 million over the prior year on a capacity increase of 2.5 per cent.
Passenger unit revenues rose for the year from higher passenger load factors and
yields. Yields improved with strong business sector performance.
British Airways’ non-fuel unit costs improved during the year; savings were made
in several areas including the head office function, engineering through outsourcing
and property rationalisation.
Overall, British Airways’ adjusted operating margin improved 0.8 points to
15.6 per cent.
See pages 18-19 for more on British Airways’ performance
44
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
Financial performance by Brand
Capacity
ASKs
Seat factor (per cent)
Passenger revenue
Cargo revenue
Other revenue
Total revenue
Fuel, oil costs and emissions
charges
Employee costs
Supplier costs
EBITDAR
Ownership costs
Operating profit before
exceptional items
Adjusted operating margin
Passenger yield
(€ cents/RPK)
Unit passenger revenue
(€ cents/ASK)
Total unit revenue
(€ cents/ASK)
Fuel unit cost
(€ cents/ASK)
Non-fuel unit costs
(€ cents/ASK)
Total unit cost
(€ cents/ASK)
Iberia
€ million
Higher/
(lower)
7.1%
1.4pts
5.9%
3.7%
9.6%
6.6%
10.5%
3.6%
6.2%
7.3%
0.0%
16.2%
0.4pts
2018
68,179
85.5
3,765
251
1,166
5,182
1,023
1,091
2,173
895
458
437
10.0%
6.50
(2.8)%
5.55
(1.1)%
7.60
(0.3)%
Vueling
€ million
Higher/
(lower)
8.9%
0.7pts
13.0%
–
(8.7%)
12.7%
14.3%
19.3%
15.0%
3.1%
0.7%
6.4%
(1.0)pts
2.9%
3.8%
3.6%
2018
37,431
85.4
2,377
–
21
2,398
489
278
1,160
471
271
200
11.8%
7.43
6.35
6.41
1.50
3.2%
1.31
4.9%
5.46
(2.2)%
6.96
(1.1)%
4.57
5.87
4.0%
4.2%
Vueling’s operating profit was €200 million an increase of €12 million despite facing
significant operational disruption from ATC regulations and strikes. Its adjusted
operating margin of 11.8 per cent, was 1.0 points down versus last year.
Vueling developed its network strategy throughout 2018 and has strengthened its
position in key markets. Demand in these markets remained strong, passenger unit
revenues, passenger load factors and yields improved versus last year.
Vueling’s non-fuel unit costs increased significantly primarily from ATC disruption.
Vueling’s NEXT programme continued to target operational improvements and cost
saving initiatives to address the challenging ATC environment, however operating
margin suffered.
See page 22 for more information on Vueling’s performance and future plans.
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8.9%
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56.8%
Operating profit before exceptionals
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Iberia’s operating profit before
exceptional items was €437 million, up
by €61 million versus last year, achieving
an adjusted operating margin of 10.0 per
cent. Capacity for the year was up 9.6
per cent, with a reduction in passenger
unit revenue from lower yields partially
offset by higher passenger load factor.
On the cost side, non-fuel unit costs
reduced. Employee unit costs and
productivity improved through
efficiency initiatives as part of Iberia’s
Plan de Futuro II.
In 2018, Iberia’s Other revenue also
increased by 9.6 per cent, primarily from
its MRO business.
See pages 20-21 for more on
Iberia’s performance
www.iairgroup.com
45
FINANCIAL REVIEW CONTINUED
Exceptional items
For a full list of exceptional items, refer to note 4 of the
Financial statements. Below is a summary of the significant
exceptional items recorded.
During the year, the Group recognised an exceptional net
operating credit of €448 million reflecting:
€678 million net pension credit following the amendments to
British Airways’ NAPS and BARP pension plans noted
previously, reducing the defined benefit liability offset by the
related cash costs
€136 million restructuring costs related to British Airways’
transformation plan aimed to develop a more efficient and
cost effective structure, and
€94 million charge in employee costs to equalise the effects
of Guaranteed Minimum Pensions at British Airways.
In 2017, the Group recognised an exceptional charge of
€288 million related to restructuring costs at British Airways
and Iberia.
Non-operating costs and taxation
Net non-operating costs after exceptional items were €191
million, up from €181 million last year. In 2018, the Group
recognised a net financing pension credit relating to defined
benefit schemes compared to a charge in 2017. Closure of the
British Airways NAPS to future accrual resulted in an
accounting surplus and a net financing credit. This €55 million
improvement was offset by a €57 million swing in net foreign
exchange on the retranslation of monetary non-current assets
and liabilities.
See note 8 in our Financial statements for more on our
non-operating costs.
Taxation
The vast majority of the Group’s activities are taxed in the
countries of effective management of the main operations
- UK, Spain and Ireland, with corporation tax rates during 2018
of 19 per cent, 25 per cent and 12.5 per cent respectively. The
Group’s effective tax rate for the year was 16.9 per cent
(2017: 19.0 per cent) and the tax charge after exceptional
items was €590 million (2017: €472 million).
The Group continues to offset prior year tax losses and other
tax assets against its current year taxable profit. In 2018
the Group paid corporation taxes of €343 million (2017:
€237 million).
See note 9 in our Financial statements for more information on our tax.
Profit after tax and Earnings per share (EPS)
Profit after tax before exceptional items was €2,481 million, up
11.2 per cent. The increase reflects a strong operating profit
performance with higher unit revenues and lower non-fuel
unit costs more than offsetting the significant rise in fuel unit
costs. Fully diluted earnings per share before exceptional
items is one of our key performance indicators and increased
by 15.1 per cent also benefitting from the positive impact of
the share buyback programme.
Profit after tax and exceptional items was €2,897 million
(2017: €2,009 million), up 44.2 per cent.
See note 10 in our Financial statements for more information
on our EPS.
Dividends
The Board is proposing a final dividend to shareholders of
16.5 euro cents per share, which brings the full year dividend
to 31 euro cents per share. Given the Group’s strong cash
position the Board is also proposing a special dividend of
35 euro cents per share, returning approximately €700 million
to shareholders. Subject to shareholder approval at the
Annual General Meeting, the final and special dividends will be
paid, on July 8, 2019 to shareholders on the register on July 5,
2019.
Dividend policy statement
In determining the level of dividend in any year, the Board
considers several factors, including:
• Earnings of the Group;
• On-going cash requirements and prospects of the Group
and its operating companies;
• Levels of distributable reserves by operating company and
efficiency of upstreaming options;
• Dividend coverage; and
• Its intention to distribute regular returns to its shareholders
in the medium and long-term.
The Company received distributions from each of the four
main airlines in 2018, although due to accumulated losses in
certain companies they were not all recorded as distributable
income. Distributions may trigger additional pension
contributions if higher than pre-agreed thresholds, see note
30 of the Financial statements.
Notwithstanding these factors, the Company’s distributable
reserves position was strong, with €5.7 billion available at
December 31, 2018 (2017: €6.1 billion).
46
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Annual Report and Accounts 2018
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Cash flow
€ million
EBITDAR before exceptional
items
Rentals
EBITDA before exceptional
items
Net interest
Taxation
Acquisition of PPE and
intangible assets
Sale of PPE and intangible
assets
Equity free cash flow
Working capital and other
non-cash
Pensions and restructuring
Proceeds from long-term
borrowings
Repayments of long-term
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Dividend paid
Share buyback
Other investing
Other financing
Cash (outflow)/inflow
Opening cash and deposits
Net foreign exchange
Cash and deposits
€ million
British Airways
Iberia
Aer Lingus
Vueling
IAG and other Group
companies
Cash and deposits
2018
2017 Movement
5,374
(890)
5,022
(888)
4,484
(112)
(343)
4,134
(93)
(237)
352
(2)
350
(19)
(106)
(2,802)
(1,490)
(1,312)
574
1,801
306
2,620
270
(1,063)
623
(914)
268
(819)
(353)
(149)
1,078
178
900
(1,099)
(577)
(500)
61
(312)
(341)
6,676
(61)
6,274
2018
2,780
1,191
891
564
848
6,274
(973)
(512)
(500)
72
(21)
573
6,428
(325)
6,676
2017
3,182
1,167
1,025
681
(126)
(65)
–
(11)
(291)
(914)
248
264
(402)
Higher/
(lower)
(402)
24
(134)
(117)
621
6,676
227
(402)
Liquidity and capital risk management
IAG’s objectives when managing capital are to safeguard the
Group’s ability to continue as a going concern, to maintain an
optimal capital structure to reduce the cost of capital and to
provide sustainable returns to shareholders. In November
2018, S+P and Moody’s assigned IAG with a long-term
investment grade credit rating with stable outlook.
The Group monitors capital using adjusted net debt to
EBITDAR and liquidity. In 2018, the Group’s adjusted net debt
to EBITDAR increased slightly to 1.6 from 1.5 in 2017, although
well within an acceptable range. EBITDAR improved and
adjusted net debt increased. Adjusted net debt rose by €596
million to €8,355 million reflecting a lower cash position from
the repayment of perpetual securities and slightly higher
long-term borrowings from an increase in debt for fleet.
EBITDAR rose €352 million versus last year reflecting the
Group’s profitable growth as the EBITDAR margin increased
0.1 pts with ASKs up 6.1 per cent.
The Group’s equity free cash flow (EqFCF) was €1,801 million
in 2018, lower than last year by €819 million and lower than
our average long-term planning goals, impacted by the timing
of CAPEX. EBITDA generation was strong at €4,484 million
while net CAPEX was high at €2,228 million.
In 2018, the Group’s net CAPEX included delivery of thirty-two
new aircraft, five Boeing 787s, two Airbus A350s, four Airbus
A330s and 21 Airbus from the A320 family. This capital
expenditure has been partially offset by €574 million of
proceeds from the sale and leaseback of thirteen new aircraft
(ten Airbus A320 family, one Boeing 787 and two Airbus
A330). In 2017, the Group took delivery of 10 new aircraft,
partially offset by €287 million of proceeds from the sale and
leaseback of seven new aircraft.
During the year, British Airways secured a sale and leaseback
by way of a $609 million EETC bond issue to fund aircraft
deliveries. The bonds were combined with Japanese
Operating Leases with Call Options (“JOLCO”) of $259 million.
The total sum raised was $868 million. The transaction
includes Class AA and Class A Certificates with an underlying
collateral pool consisting of 11 aircraft.
Movements in Working capital and other non-cash generated
€270 million in free cash flow (2017: €623 million) primarily
from the Group’s growth with higher sales in advance of
carriage and impacted by the timing of prepayments.
Pensions and restructuring reflect payments made to the
British Airways APS and NAPS pension plan schemes and
restructuring payments for British Airways’ and Iberia’s
transformation plans. In 2018, a €182 million onetime payment
was made in relation to the closure of the NAPS scheme to
future accrual.
In 2018, the cash Dividend paid reflects the 2017 final dividend
and the 2018 interim dividend.
www.iairgroup.com
47
FINANCIAL REVIEW CONTINUED
During the year IAG carried out a second share buyback
programme as part of the corporate finance strategy to return
cash to shareholders while reinvesting in the business and
managing leverage. The programme total was €500 million
(2017: €500 million) and IAG acquired 65,956,660 ordinary
shares (2017: 74,999,449), which were subsequently
cancelled. The Group has returned over €1 billion to
shareholders in 2018 and €2.7 billion since 2015.
Taking these factors into consideration, the Group’s cash
outflow for the year was €341 million and after net foreign
exchange differences, the decrease in cash net of exchange
was €402 million. Each operating company holds adequate
levels of cash with balances exceeding 20 per cent of
revenues, sufficient to meet obligations as they fall due.
Net debt and adjusted net debt
Net debt
€ million
Debt
Cash and cash equivalents
and interest bearing deposits
Net debt at January 1
(Decrease)/increase in cash
net of exchange
Net cash outflow from
repayments of debt and
lease financing
New borrowings and
finance leases
Decrease/(increase) in net
debt from regular financing
Exchange and other
non-cash movements
Net debt at December 31
Capitalised aircraft lease costs
Adjusted net debt at
December 31
2018
(7,331)
2017
Higher /
(lower)
(8,515)
(1,184)
6,676
(655)
6,428
(2,087)
248
(1,432)
(402)
248
(650)
1,099
973
126
(1,078)
(178)
(900)
21
795
(774)
(199)
(1,235)
(7,120)
389
(655)
(7,104)
(588)
(580)
16
(8,355)
(7,759)
596
The Group’s net debt position increased by €580 million
reflecting a reduction in cash, adverse exchange and a net
neutral impact from regular financing with repayments during
the year offsetting new borrowings.
Off balance sheet arrangements and capital commitments
The Group has entered into commercial leases on certain
property and equipment but primarily for aircraft. Contracts
range in duration for up to 13 years for aircraft with total
payments of €8,664 million (2017: €7,642 million); see note 23
for further details on the timing. The Group’s adjusted net
debt metric includes an estimation for the debt related to the
aircraft operating leases (‘capitalised aircraft lease costs’) by
taking the current year’s aircraft operating lease cost
multiplied by 8.
Capital expenditure authorised and contracted for amounted
to €10,831 million (2017: €12,137 million) for the Group. Most of
this is in US dollars and includes commitments until 2023 for
92 aircraft from the Airbus A320 family, 12 Boeing 787s, 4
Boeing 777s, 41 Airbus A350s, and 4 Airbus A330s.
Overall, the Group maintains flexibility in its fleet plans with
the ability to defer, to exercise options and to negotiate
different renewal terms. IAG does not have any other off-
balance sheet financing arrangements.
See pages 14-17 for our key performance indicators.
See pages 183-185 for our alternative performance measures.
48
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Regulatory environment
The international and strategic nature
of the airline sector, along with its safety
and security critical requirements,
means that it will always be subject to
a wide range of regulatory controls.
IAG monitors and, where possible,
contributes to global, regional and
national regulatory developments where
they affect its business. The UK and EU
Policy agenda in 2018 has been widely
dominated by the developing process
for the UK’s leaving the European Union.
Other major issues in the UK have been
the parliamentary approval of the
National Policy Statement that set out
the policy to expand Heathrow Airport,
and the publication of a Green Paper
describing the Government’s proposed
aviation strategy and which includes
plans for managing sustainable
growth and for a customer charter
for airline passengers.
Brexit
Following the UK referendum decision in
2016, the UK is expected to leave the EU
on March 29, 2019. The Group has
continued to engage extensively with
the relevant authorities to ensure IAG’s
views on post-Brexit aviation
arrangements are understood and taken
into account. This has included frequent
dialogue with the UK, Spanish and Irish
governments, as well as the European
Commission and Members of the
European Parliament. The completion of
a Withdrawal Agreement between the
negotiators confirmed that there would
be no change to aviation arrangements
until the end of the transition period on
December 31, 2020 and that the future
relationship between the parties would
include a comprehensive air
transport agreement.
As the Withdrawal Agreement is
subject to ratification by the UK and
EU parliaments, both the European
Commission and the UK Government
published separate plans to allow air
services to continue in the event that
the Withdrawal Agreement (or an
amended version of it) cannot be
ratified. These include mechanisms to
permit flights between the UK and the
EU and recognition of each other’s
safety certification, approvals and
security regimes. As part of this, the
EU is in the process of adopting a
Regulation on basic connectivity
between the EU and UK that may result
in some restrictions on code share
flexibility. In addition, in November the
UK signed new air services agreements
with the USA and Canada to replace
existing EU-wide agreements once the
UK leaves the EU, securing market
access and regulatory arrangements for
the future.
IAG has had detailed and constructive
engagement with its national regulators
and governments about ownership and
control. Those discussions will continue,
including with the European
Commission, and IAG remains confident
that its operating companies will comply
with relevant ownership rules post
Brexit. IAG is a Spanish company, its
airlines have long established AOCs and
substantive businesses in Ireland,
France, Spain and the UK and IAG has
had other structures and protections in
its by-laws since it was set up in 2011.
IAG’s assessment remains that, even
in the event of no-deal, Brexit will have
no significant long-term impact on
its business.
UK aviation policy
On 26 June the UK Parliament voted to
designate the Government’s Airports
National Policy Statement which
recommends a new runway should be
constructed to the north west of
London Heathrow. IAG strongly
supports the expansion of Heathrow as
a very positive development for its
business and for the wider UK economy.
As in the run up to the designation, IAG
has continued to challenge the
excessive costs of the proposals put
forward by the airport’s operator, HAL,
and has continued to engage with the
CAA to reinforce the need for it to act
to ensure that airport prices are kept
down to allow the project to be
commercially viable.
On 17 December the UK published a
Green Paper for a future aviation
strategy to 2050. This sets out a range
of potential policy positions including
measures to deliver sustainable growth,
to address the perceived needs of
passengers and to encourage access to
new markets. IAG is engaging fully with
the programme for consultation.
Irish aviation policy
IAG broadly welcomes the
infrastructure development plans
proposed by Dublin Airport which
gives effect to the Irish National
Aviation Policy objective to develop
Dublin Airport as an international hub.
The wider economic benefits associated
with such infrastructure investment
were detailed in an economic impact
study conducted in 2018 and estimated
to contribute an additional €18bn to
Ireland’s GDP by 2033.
IAG, through Aer Lingus, continues
to participate actively in the Irish
Government’s National Civil Aviation
Development Forum to ensure its views
on Irish aviation regulatory matters,
aviation policy and Brexit are heard.
www.iairgroup.com
49
REGULATORY ENVIRONMENT CONTINUED
Delays to policy making must be seen
against the background of an urgent
need for action – that IAG has
highlighted – to deal with significant
bottlenecks in the European system. As
traffic continues to grow, congestion at
key points in the airspace and at major
European airports is an increasing focus
for IAG, working closely with its trade
association A4E. The Group has
continued to highlight the pernicious
impacts of air traffic controller strikes on
consumers, to urge the reform of
airspace to make the best use of
existing resources among air navigation
service providers and to seek the reform
of the out of date and ineffective
regulation on airport charges.
IAG has also continued to provide input
to the European Commission’s air
service agreement negotiations with
“third countries”. In 2018 these have
included a further round of talks with
Qatar and completing a new agreement
with Tunisia.
Spanish aviation policy
Spain is forecasting GDP growth of
2.3 percent in 2019, above the forecast
EU average with positive prospects
for the aviation industry. In line with
announcements at the December
2018 Council of Ministers, the Spanish
Government published a decree
including contingency measures for
aviation, in the event that there is no
deal on Brexit so as to secure the
rights of Spanish citizens and airlines.
A significant regulatory decision during
2018 benefited the airline sector when it
was announced that AENA´s airport
charges will be frozen during 2019, and
that ENAIRE is also lowering its en route
charges by 12%. This reduction will save
airlines collectively c.100 million euros.
European aviation policy
European aviation policy has been
dominated by the Brexit process during
2018. This has compounded the existing
delays to EU legislation, and the reform
of existing laws, due to disagreements
over Gibraltar and, as a result, limited
progress has been made in key policy
areas, such as passenger rights.
However, the European Commission has
continued to consult on several aspects
of policy including the future of the
aviation market overall. IAG continues to
monitor and contribute to this activity.
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SUSTAINABILITY
Leading the way on carbon
commitments
Antonio Vázquez
Chairman
Our industry cannot hope to grow
sustainably unless we take our
environmental responsibilities seriously
and in 2018 we saw good progress both
within IAG and in our sector.
The challenge we face was made
explicit in a United Nations Inter-
Governmental Panel on Climate Change
(IPCC) report last October identifying
the need to avoid greater than 1.5
degree temperature rise by 2050.
We have always believed our industry
has a full part to play in the global
reduction of CO2 emissions and we’re
proud to have been a lead player in
some significant initiatives. Aviation is
the only sector to have agreed to
reduce net carbon emissions,
introducing a cap from 2020 and aiming
for a 50% cut by 2050. The industry has
also set up the first global carbon
offsetting scheme, CORSIA, to achieve
these goals.
IAG remains a strong advocate for
change. In December, along with other
international organisations, we pressed
the UK Government to support a Net
Zero Emissions target by 2050. We
have also urged the EU to redesign
European airspace, a move that would
cut emissions by 12% or by 20 million
tonnes a year. This is a very good idea
and only needs political will to
become real.
We are making good progress within
our own operating airlines. In 2018 we
made important steps towards
achieving carbon neutral growth from
2020, particularly under the CORSIA
scheme, for which baseline monitoring
has now started.
On the operational front, our flight
carbon efficiency increased from 92.3
gCO2 /pkm in 2017 to 91.9 gCO2/pkm
last year. We are confident we remain
on track to meet our 2020 target of 87.3
gCO2 /pkm, but are keeping our
performance under close review.
In 2018 our fuel efficiency programmes
delivered 65,000t of CO2 savings and
we made progress in implementing
GoDirect Fuel Efficiency software, which
should bring further improvements in
coming years. New aircraft joining our
fleets delivered up to 20% lower carbon
emissions and a reduction of up to 50%
in noise over the aircraft they replaced.
In April, the UK Government included
Sustainable Aviation Fuels in the
Renewable Transport Fuel Obligation,
providing incentives to produce these
fuels in the UK. In April, our
waste-to-jet fuel project with Velocys
won a Government development grant
and, in December, we announced
plans to build a production facility in
South Humberside.
“We are proud of our
achievements on
carbon reduction,
within IAG and as a
leader in the global
industry. But we are
under no illusions.
There is much more
to do.”
We want to spread the message as
widely as possible. In November, as part
of preparations for British Airway’s
centenary, we launched our “Future of
Fuels Challenge” to UK universities. The
task: to work out how to make the UK a
world leader in producing sustainable
aviation fuels.
We continue to improve our
Sustainability reporting. We have
embraced the recommendations of the
Task Force on Climate Related Financial
Disclosure and enhanced our Carbon
Disclosure Project (CDP) reporting,
earning B management level as a result.
Great energy is going into our
sustainability programme as the
following pages attest.
I can assure you it will remain a major
priority for IAG in the years ahead.
Antonio Vázquez
Chairman
www.iairgroup.com
www.iairgroup.com
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Sustainability overview
Section contents:
Sustainability overview: governance,
strategy, materiality, targets,
stakeholder engagement, disclosures,
challenges and opportunities, climate
related scenarios, UN sustainable
development goals, future focus and
progress since last year.
Sustainability performance:
performance trends against our most
material issues including climate, fuel
efficiency, energy, noise, waste, air
quality, customers and workforce.
Sustainability in action: summary of key
actions in 2018 relating to; climate, fleet,
sustainable aviation fuels, carbon fund,
fuel efficiency, waste, noise, air quality,
supply chain, workforce diversity, work
experience, accessibility, community
giving, modern slavery, occupational
health & safety, ethics & integrity and
anti-bribery & corruption.
Sustainability governance
Our sustainability programmes are
co-ordinated at Group level to develop
and implement sustainability policy and
strategy, establish targets and
programmes and ensure appropriate
governance and accountability across
all our operating companies. The IAG
Management Committee provides the
forum for review, challenge and setting
strategic direction. Further oversight
and direction is provided by the
IAG Board and the Audit and
Compliance Committee.
The IAG Group Sustainability Policy sets
the context and ambition for our
sustainability programmes. It covers our
Group policies and objectives,
governance structure, risk management,
strategy and targets on climate change
and noise, sustainability performance
indicators, communications and
stakeholder engagement plans.
In addition, we have continued to make
progress with the adoption of the IATA
Environmental Assessment (IEnvA)
programme. IEnvA is the airline industry
version of ISO14001 tailored specifically
for airlines and fully certified by the
International Standards Organisation
(ISO). We expect Vueling and British
Airways to achieve Phase 1 certification
early in 2019 and Iberia later in the year.
Sustainability strategy
Sustainability forms part of our
business strategy and is fundamental
to our long-term growth. We have set
our vision to be the world’s leading
airline group on sustainability and
we are committed to minimising
our environmental impact delivering
best practice and demonstrating
thought leadership to drive global
improvements in the aviation
industry’s sustainability performance.
We have aligned our sustainability
programmes to IAG’s strategic priorities
and value propositions:
1. Strengthening a portfolio of world-
class brands and operations
• Ensuring customers have visibility
of, and are engaged in, our
sustainability programmes
2. Growing global leadership positions
• Demonstrating industry leadership,
advocating for carbon pricing
• Maturing our transition pathway
towards low carbon economy
• Leadership in carbon disclosures
3. Enhancing IAG’s common
integrated platform
• Investing in efficient aircraft fleet
and delivering best practice in
operational efficiency
• Innovating and investing to
accelerate progress in sustainable
aviation fuels, future aircraft and low
carbon technologies
We measure our progress against our
vision to be the leading airline group on
sustainability against five strategic aims:
• Clear and ambitious targets relating to
our most material issues
• Low carbon transition pathway
embedded in business strategy
• Management incentives aligned to
delivering low carbon transition plan
• Leadership in carbon disclosures
• Accelerating progress in sustainable
aviation fuels, future aircraft and low
carbon technologies
Workforce governance and training
The structure of the Group means that
each Operating Company has
responsibility for the policies and
procedures relating to its direct
workforce, including the identification
and assessment of risks and the
implementation of appropriate controls
and measures. At the Group level, IAG
has a Directors Selection and Diversity
Policy that sets out the principles that
govern the selection process and the
approach to diversity on the Board of
Directors and the Management
Committee of IAG.
IAG also has a Group-wide Equal
Opportunities policy (Group Instruction
4) intended to address and eliminate
discrimination and promote equality
of opportunity regardless of age,
gender, disability, ethnicity, religion
or sexual orientation.
Due to our diverse Operating
Companies in the Group, all
training policies and programmes are
implemented at Operating Company
level and each is responsible for
determining the specific courses that
are mandatory within their organisation,
the frequency with which training
courses must be completed, and the
employees required to attend. Across
the Group, the following core corporate
training courses are run by all
Operating Companies:
• Code of Conduct (to be added in
2019 with the launch of our new
Group Code)
• Compliance with Competition Laws
• Anti-bribery and Corruption
Compliance
• Data Privacy, Security and Protection
Over 95% of our employees are based
in European countries which comply
with the conventions of the International
Labour Organisation (ILO) covering
subjects that are considered as
fundamental principles and rights at
work: freedom of association and the
effective recognition of the right to
collective bargaining; the elimination
of all forms of forced or compulsory
labour; the effective abolition of
child labour; and the elimination of
discrimination in respect of
employment and occupation.
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Annual Report and Accounts 2018
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Materiality
In autumn 2017 we completed a materiality analysis performed in line with Global Reporting Initiative Sustainability Reporting
Guidelines as well as benchmarking with other materiality frameworks. We engaged a range of our principal external
stakeholders including investors, corporate customers, suppliers and NGOs. The charitable trust Business in the Community
was appointed to provide objective oversight of the process; facilitating workshops, reviewing interview feedback and
preparing a materiality matrix.
In 2018 IAG worked with the Global Reporting Initiative (GRI) and the International Air Transport Association (IATA) to develop
a GRI Sectorial Guidance Handbook for airlines. This will improve consistency and allow comparisons across the industry. The
issues identified by IATA and GRI for the airline sector are aligned with the issues we identified for IAG.
IAG Sustainability material issues
Environment
• Climate change (including
emissions, fleet modernisation,
fuel efficiency and Sustainable
Aviation Fuels)
• Energy use
• Waste
Local Impacts and
development
• Noise
• Local economic
impacts (job creation)
• Air quality
• Community engagement &
charitable support
Workforce
• Employee satisfaction
• Diversity and equality
• Talent management
Future competitiveness
• Financial performance (short
Corporate governance
• Compliance with legislation
term investor returns and long
term sustainability)
• Customer satisfaction
• Carbon pricing
• Innovation, research and
and regulation
• Supply chain management
development
All of these issues are addressed in this
report either in the ‘Sustainability
performance’ table where specific
performance metrics are reported or in
the ‘Sustainability in action’ section
where we describe our most recent
work relating to these topics.
the potential introduction of
management incentives aligned to our
carbon targets to improve the alignment
of our business strategy and
decarbonisation pathway and therefore
support delivery of our climate change
and fuel efficiency targets.
Water and biodiversity are currently not
assessed as material for IAG based on
the scale of our impacts in these areas
and the relative importance assigned
versus other issues assessed by our
stakeholders. However, we keep this
under regular review.
Sustainability targets
For our Group sustainability targets we
focus on two material aspects: Climate
and Noise. Our airlines have additional
targets associated with other non-
financial measures including waste,
energy efficiency, punctuality, customer
net promoter score and diversity,
among others.
IAG climate targets:
• 10% improvement in fuel efficiency to
87.3 gCO2/pkm by 2020 versus
baseline of 97.5 gCO2/pkm in 2014.
• Carbon neutral growth from 2020.
• Net reduction of 50% CO2 emissions
by 2050 versus 2005.
In addition, we are calling for
Government and industry support for a
target of net zero CO2 emissions by
2050. We are also developing details for
IAG noise target:
• To reduce noise per flight by 10%
by 2020 compared to 2015 based
on average aircraft noise
certification standards.
Stakeholder engagement
We actively engage with industry
partners and associations, policy
makers, shareholders, investors and
governments to influence policy and
drive action to meet our sustainability
objectives.
We lobby governments at the domestic,
European and global scale and actively
participate in International Civil Aviation
organisation (ICAO) programmes to
develop global policy for aviation and
environment including on aviation
carbon targets, carbon pricing and
sustainable aviation fuels.
We participate in a range of industry
coalitions and associations to develop
common policy positions and enhance
our lobbying effectiveness. These
include Sustainable Aviation, Airlines 4
Europe, IATA and Air Transport Action
Group (ATAG) as well as specialist
forums such as the Sustainable Aviation
Fuels Users Group.
We partner with suppliers, for example
we are collaborating with fuel suppliers
and waste companies to develop
technology and production facilities for
sustainable aviation fuels and with Air
Traffic Control authorities and Airport
Operators to achieve more fuel-efficient
flight operations. We are also working
with aircraft manufacturers to improve
fuel efficiency.
We engaged our top five corporate
customers who contract with British
Airways and Iberia on large business
travel accounts in our materiality study
and engage with other customers
though CDP supply chain disclosures
and customer sustainability surveys.
Finally, we engage with communities
around our main hubs such as by
participating in airport community
forums to manage noise performance
and engaging local schools in sports,
charity and learning events.
Disclosures
Since 2011, IAG’s sustainability reporting
has been based on our assessment of
which metrics are material to our
business with GRI G4 Sustainability
Reporting Guidelines as a secondary
reference point. We review emerging
disclosure standards to ensure we
disclose relevant and meaningful data
www.iairgroup.com
www.iairgroup.com
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SUSTAINABILITY CONTINUED
about our sustainability performance.
This includes compliance with our
obligations under Directive 2014/95/EU
on non-financial reporting and its
transposition in the UK and Spain.
In October 2016, the UN Global
Sustainability Standards Board
introduced new GRI Sustainability
Reporting Standards to replace the
previous G4 version by July 2018. Our
sustainability performance indicators are
based on the GRI standards and are
selected to reflect performance against
our material issues.
In addition to the disclosures made in
our Annual Report and Accounts and
Management Report, we disclose
non-financial information in several
frameworks including CDP (previously
the Carbon Disclosure Project) and the
Workforce Disclosure Initiative (WDI).
Carbon disclosures
IAG achieved B Management level
status in the 2018 CDP Climate global
disclosure system. The new transport
services scoring methodology
introduced in 2018 proved challenging
for airline responders, particularly in
relation to thresholds in scope 1 and 2
renewable energy consumption and
target setting which puts leadership in
these categories out of reach for airlines.
We will be working with CDP during
2019 to propose a more relevant and
progressive assessment on these topics
for airline responders. We also achieved
A- Leadership level in the 2018 CDP
ratings for Supplier Engagement.
Taskforce on climate related
financial disclosure
In addition, we are pleased to have been
one of the early signatories to the Task
Force on Climate Related Financial
Disclosure (TCFD), an initiative led by
the Financial Stability Board which
complements the CDP framework and
introduces further steps to promote
the integration of climate-related
aspects into our strategy. Further
details are included in the section
on sustainability challenges.
Sustainability challenges
and opportunities
Sustainability challenges and
opportunities including those related
to climate are assessed in line with IAG
Enterprise Risk Management (ERM)
methodology for likelihood (remote,
possible, probable and likely) and
impact (manageable, moderate, serious
and critical).
Risks relating to people and employee
relations and safety and security are
identified as principal risks and are
described within the business and
operational risks of our ERM framework.
We have identified and assessed longer
term climate-related challenges and
opportunities for IAG through our ERM
process, materiality review and the
application of scenario analysis in line
with the TCFD process.
We are allocating significant resource
to environmental risk management
including investment of over 1 million
euros over five years in our new fuel
efficiency software and over 400 million
dollars over the next 20 years in
sustainable aviation fuels infrastructure
development and offtake agreements.
The IAG Sustainability team is
responsible for identifying and
monitoring sustainability and climate-
related challenges. These are reviewed
by the ERM team and reported at least
annually to the IAG Management
Committee and the Audit and
Compliance Committee of the
IAG Board.
Climate related scenario analysis
In line with our commitment to TCFD
we have undertaken climate-related
scenario analysis to review the resilience
of our business strategies in the context
of climate change. We regard this as
an iterative process and will be
continuing to consider further climate
scenarios and develop more
quantitative conclusions.
In 2018 we followed the TCFD six
step process to consider two
contrasting scenarios:
• 2⁰C scenario, consistent with meeting
the Paris Agreement Goal
(Representative Concentration
Pathway ‘RCP 2.6’)
• 4⁰C scenario as an alternative high
emission scenario (RCP 8.5)
We considered the implications of these
two climate scenarios on our business
in 2030, assuming we have the same
business activities as we do today.
2030 was selected as a nearer term
consideration en-route to 2050, which
is the target year for our 50% net CO2
reduction target.
The analysis included an initial
qualitative assessment of potential IAG
response in terms of changes to
business model, portfolio mix,
investments in transition capabilities and
technologies and the potential impact
on strategic and financial plans.
Broadly, the 2 degrees scenario
demonstrated that IAG would incur
additional operating costs, mainly as a
result of the increased cost of carbon or
other policy interventions. The 4
degrees scenario also demonstrated
that IAG would incur additional
operating costs, but in this case, these
would more likely arise from increased
cost of operational disruption due to
increased frequency of extreme
weather events.
Initial outcomes of the exercise have
resulted in IAG establishing new
partnerships through our accelerator
programme ‘Hangar51’, to deliver
innovations in fuel efficiency and low
carbon technologies. Other initiatives
are also being developed. The process
has also meant that we have identified
and disclosed several new climate-
related challenges this year.
In 2019 we will consider a 1.5 degree
scenario and potential IAG pathways
towards achieving net zero emissions
by 2050.
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Annual Report and Accounts 2018
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Summary of sustainability challenges and opportunities
Type
Description and potential impact
How we manage it
Climate Transition Challenges and Opportunities
Emergence of global patchwork of uncoordinated
national and regional climate policies – regulation
Use of inappropriate tax instruments may lead to
competitive distortion including potential carbon
leakage and result in increased compliance costs while
failing to effectively address aviation emissions.
• Managed by allocating resource to engage with
Governments, IATA and ICAO to lobby for and help
deliver a single effective global carbon pricing
solution for aviation, CORSIA. Regular updates on
progress are provided to the IAG Management
Committee and IAG Board.
Climate regulation – regional application
• Supporting implementation of CORSIA through IATA
CORSIA has been agreed internationally however the
risk remains of regional regulatory duplication and/or
inconsistent application of agreed Monitoring
Reporting and Verification (MRV) requirements and
eligible offsets which could create inequitable costs
and competitive distortion.
Sustainable aviation fuels – regulation
IAG believes fuel mandates, if applied, should only be
applied at Global level. EU and Spanish proposals to
mandate proportion of sustainable aviation fuels would
drive production but could force airlines to purchase
SAF at a price premium compared to conventional
fuels creating competitive distortion.
and ICAO and mentoring other airlines to ensure
CORSIA is adopted successfully.
• Supporting development of robust rules for CORSIA
on Monitoring Reporting and Verification and
Emissions Unit Criteria.
• Lobbying for single tier adoption of CORSIA.
• Lobbying to prevent mandates that create
competitive distortion, both directly and through
industry organisations at EU and UK levels.
• Supporting policy incentives that help deliver SAF at
prices competitive with conventional fuels through
new technologies reaching scale and becoming cost
competitive.
Consumer behaviour challenge and opportunity
• Set vision to be the world’s leading airline group
Trends in ethical and sustainability concerns being a
factor in consumer choices may mean some consumers
choose to fly less frequently.
Opportunity to differentiate our brands by showing
leadership, innovation and action to mitigate
climate impacts.
on sustainability with ambitious goals on
carbon efficiency.
• Using all the tools at our disposal: modern aircraft,
efficient technology, best operational practice and
sustainable fuels, as well as influencing global policy
and driving industry-wide action, to minimise our
carbon footprint.
• Effective communication of our practices to
customers and suppliers.
Sustainable aviation fuels production opportunity
• Ongoing lobbying for sustainable aviation fuel
Commercial and environmental opportunity to
source cost effective sustainable fuel and reduce our
CO2 emissions thereby reducing compliance costs
for CORSIA.
Higher carbon price and strong policy incentives
challenge and opportunity
Challenge from higher cost of carbon adding to our
operating cost and corresponding opportunity with
stronger business case for investment in low carbon
technologies which would accelerate progress in
decarbonisation pathway.
inclusion and prioritisation in renewable fuel policies
at the Global, EU, and UK levels.
• British Airways investing with partners in waste-to-
jet fuel production projects and launched Future of
Fuels challenge to UK universities to accelerate
SAF development.
• IAG supports ambitious climate targets and effective
global regulation and strong policies to meet global
climate goals.
• Continued investment in modern fleet and
innovations to ensure continual improvement in
operational fuel efficiency.
• Forward purchase of carbon credits to protect
against price volatility.
• Innovation and collaboration on future fuels and
carbon technologies through our Hangar 51
accelerator programme.
www.iairgroup.com
www.iairgroup.com
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Summary of sustainability challenges and opportunities continued
Type
Description and potential impact
How we manage it
Climate physical challenges and opportunities
Extreme weather impact on operating costs
• IAG climate strategy (all the measures above) and
For example, increased frequency of high winds, fog
events, storms, turbulence, sustained extreme heat
events or stronger jet stream would increase
operating costs by increasing delays, fuel burn and
requiring additional cooling and maintenance costs.
Drought-induced water scarcity at outstations
could increase fuel cost with increased potable
water carriage.
Destinations becoming unattractive for visitors
For example, extreme weather events and physical
impacts of climate change such as flooding, drought,
forest fires, heat waves, algae blooms, coral bleaching,
rising sea levels and reduced snow cover in ski
destinations could make certain destinations less
desirable and impact customer demand.
Climate change could also make certain destinations
more attractive or accessible to visitors, for example a
longer summer season.
our support for strong global action to tackle
climate change.
• Partnerships to find solutions to mitigate
operational disruption. Example is project with
partners in NATS and Heathrow Airport to
implement innovative technology, the ‘Time Based
Spacing’ system, enabling landing rates at
Heathrow to be maintained in the event of strong
winds. This has reduced delays, fuel burn and
emissions and avoided extra costs due to disrupted
operations.
• Ongoing lobbying and engagement in projects and
initiatives designed to reduce the industry’s impact
on climate change.
• Teams dedicated to assessing and understanding
changes in customer demand and managing
network developments to respond to such changes.
• Strategy to ensure aircraft and crew flexibility
means we are prepared and able to respond to
shifting demand profiles.
Other sustainability challenges and opportunities
Operational noise restrictions and charges
Airport operators and regulators apply operational
noise restrictions and charging regimes which may
restrict our ability to operate especially in the night
period and/or may introduce additional cost.
Supply chain CSR compliance
Potential breach of sustainability, corporate social
responsibility or anti-bribery compliance by an IAG
supplier or third party resulting in financial, legal,
environmental, social and/or reputational impacts.
• Investing in new quieter aircraft.
• Continually improving operational practices
including continuous descents, slightly steeper
approaches, low power low drag approaches and
optimised departures.
• Internal governance and training and
external advocacy in UK, Ireland and Spain
to manage challenges.
• Integrity, sanctions and CSR screenings for new
suppliers, Know Your Counterparty due diligence
for higher risk third parties, Supplier Code of
Conduct, supplier compliance audits.
• Internal governance including training and
workshops to identify challenges and mitigation.
• Management IT systems for suppliers and higher
risk third parties.
Environment regulation compliance
• Adopting group-wide Environmental Management
An inadvertent breach of compliance requirements
with associated reputational damage and fines.
System, the IATA IEnvA programme.
• Internal governance, training and
assigning ownership for environmental
compliance obligations.
• Engaging with carbon market advisors to
understand and mitigate compliance challenges
and identify future opportunities.
Potential target for direct action protests
• Close liaison with government agencies, airport
Direct action and civil disobedience protests could
disrupt flight operations and/or restrict staff and
passenger access.
operators and commercial organisations to
assess challenges.
• Contingency planning.
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UN Sustainable Development Goals
The United Nations has adopted a plan to “end poverty, fight inequality and injustice, and tackle climate change by 2030.” At
the heart of this Agenda 2030 are 17 Sustainable Development Goals (SDGs). Fulfilling these goals will take significant effort by
all sectors in society and it is widely recognised business has an important role to play.
Aligning with IATA and Sustainable Aviation, we draw links to 9 relevant SDGs to our business, as shown in the table below. We
reflect the links to these in our sustainability performance data on the following pages and regard SDGs number 5, 7, 8 and 13
as priority measures, most relevant to IAG.
Goal 3:
Good health and wellbeing
Goal 4:
Quality education
Goal 5:
Gender equality
Goal 7:
Affordable
and clean energy
Goal 8:
Decent work and
economic growth
Goal 9:
Industry, innovation and
infrastructure
Goal 11:
Sustainable cities and
communities
Goal 12:
Responsible consumption
and production
Goal 13:
Climate action
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Future focus – progress with priorities set for 2018 and new priorities for 2019
Relevant material
issue:
Progress against priorities set for 2018
Our priority actions for 2019
Environment
• Beginning the first action to
• Calling for government and industry support for a net zero
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Future
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• Investors
• Customers
implement CORSIA in preparation for
emissions monitoring from January
2019 – see case study.
• Using our new fuel efficiency software
to identify more opportunities for fuel
efficiency – see case study.
• Driving continual improvement of our
sustainability disclosures. In 2018 we
achieved B in CDP and extended our
disclosures to WDI.
• Improving our external
communications regarding
sustainability initiatives:
• New IAG website including
sustainability page
• Airlines updated websites
sustainability content
• Collaborated with Sustainable
Aviation on social media
communications
• Airlines featuring regular articles
in their in-flight magazines relating
to sustainability.
emissions pathway.
• Developing options for IAG on a net zero emissions pathway.
• CORSIA implementation from January, beginning baseline
monitoring and preparing our carbon offsetting strategy.
• Continuing to invest in innovative sustainable aviation fuels
projects and seek ongoing opportunities following the Future of
Fuels Challenge to UK universities.
• Extending our work through Hangar 51 on innovations in fuel
efficiency and low carbon technologies.
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Corporate
Governance
• Compliance
• Continuing the roll-out of our
• Developing proposals for aligning management performance
environmental management system
IEnvA. We continued implementation
with Vueling and British Airways
expected to achieve Phase 1
certification early in 2019.
incentives to carbon targets.
www.iairgroup.com
www.iairgroup.com
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SUSTAINABILITY CONTINUED
Data Governance
The scope of our sustainability
performance data includes all our airline
and air cargo operations except for
some specific data for LEVEL Austria
and LEVEL France which started
operations in summer 2018. LEVEL
Spain operations (three A330 aircraft)
are included in scope of all our
environment data. LEVEL Austria (four
A321 aircraft) and LEVEL France (two
A330 aircraft) are only reported in
relation to ICAO CAEP Noise and NOx
measures. The data for the 6 aircraft
represents 1.1% of our total fleet in
2018 (573) and less than 1% of our
Scope 1 emissions.
Avios and GBS functions, are currently
included in scope of our workforce
metrics but are not in scope of our
environmental metrics (where they
form less than 1% of material
environmental aspects).
Our sustainability performance
indicators are based on the GRI
standards.
From 1st January 2019, our airlines have
started monitoring, reporting and
verifying CO2 emissions data for
international flights in compliance with
CORSIA, the ICAO Carbon Offsetting
and Reduction Scheme for
International Aviation.
Our emissions data is calculated
using UK and Spanish Government
Greenhouse Gas conversion factors
for company reporting.
Sustainability performance
This performance summary should be considered along with measures reported across the Strategic Report and Management
Report to collectively understand our performance against our most material sustainability matters including environment,
customers, workforce, social, supply chain and business integrity aspects.
In the charts below, the 2018 bar is colour coded: green for in-line with desired direction and red for against desired direction.
Indicator improved
Indicator not improved
Aspect and link
to SDG
Performance
indicator
Description
Climate
Jet fuel1
(Million tonnes)
As commercial aircraft remain reliant
on liquid kerosene for the foreseeable
future, IAG’s climate change focus is on
purchasing newer more fuel efficient
aircraft, developing sustainable jet fuel,
pursuing operational fuel efficiency and
supporting CORSIA global carbon
offsetting scheme.
2018 highlights
• Jet fuel use has increased by 4.26%
2018
Million tonnes fuel
compared to 2017 while our business
growth has grown faster – RPK up
7.1%. This shows an increase in fuel
efficiency per unit output.
3
9
7
.
8
2
8
.
6
8
8
.
2
0
9
.
1
4
9
.
%
3
4
+
.
Average age of
aircraft fleet
(years)
Average age of all aircraft in our fleet
calculated at the end of the reporting
year and based on aircraft age from
date of manufacture.
This is a measure of the rate of new
aircraft entry into our fleet.
Flights only CO2
emissions
intensity
(gCO2/pkm)
Target: 10% improvement by 2020
compared to 2014. Grammes of CO2
per passenger kilometre is a standard
industry measure of flight efficiency.
Individual airline performance is
reported on the relevant pages in
this report.
2014
2015
2016
2017
2018
• There has been a slight decrease in
our average fleet age in 2018. This
has been mainly driven by
retirements of aircraft and deliveries
of new generation aircraft.
Years
.
5
0
1
• 42 aircraft introduced.
• 21 aircraft retired.
• Total aircraft fleet at end of
December 2018: 573.
.
8
0
1
.
8
0
1
4
.
1
1
3
.
1
1
%
9
0
-
.
2014
2015
2016
2017
2018
• The 0.4% improvement in average
carbon efficiency in 2018, gives a
rolling five-year average of 1.33% per
year, just less than the industry
target of 1.5%.
• The slightly slower rate of
improvement in 2018 is due to the
rate of fleet renewal as well as
challenging operating conditions
including disruption caused by
European ATC strikes.
gCO2/pkm
6
5
9
5
7
9
.
.
.
8
4
9
.
3
2
9
2020 target: 87.3 gCO2/pkm
9
.
1
9
%
4
0
-
.
2014
2015
2016
2017
2018
1 2018 Climate data provisional subject to further verification for compliance with EU ETS which is completed after publication of this report. As we file
this report within two months of year-end, our EU ETS and Scope 1 (direct) emissions data is provisional and will be subject to further verification (to
reasonable assurance) after publication of this report. Based on past trends, the difference between provisional and verified data is not material,
typically less than 0.05%, but may result in some minor rounding of our 2018 scope 1 emissions data in subsequent reports.
2 New measure in 2018
3 2017 location based figure is restated from previously reported figure (86,390 tonnes CO2e) following revised calculations using new Spanish
Government conversion factors.
4 Emissions data for years 2017 and earlier have been third party verified to reasonable assurance for compliance with the EU ETS (covering flights within
the European Economic Area). Furthermore, all of British Airways’ Scope 1, 2 and 3 emissions data for years 2017 and earlier have also been third party
verified (to reasonable assurance) and complies with ISO14064-3 international reporting standard.
5 Scope 3 data reported 2018 was prepared for CDP report based on 2017 activity.
6 Based on headcount as at December 31, 2018.
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INTERNATIONAL AIRLINES GROUP
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Annual Report and Accounts 2018
Annual Report and Accounts 2018
Aspect and link
to SDG
Performance
indicator
Description
Climate
Scope 11
Direct GHG
emissions
(Million tonnes
CO2e)
Direct emissions associated with
our flying.
In line with industry commitments
which we were instrumental in securing
in 2009, we have two targets over
different timescales:
1 To achieve carbon neutral growth
for our international aviation flights
from 2020.
2 50% net reduction in CO2 emissions
by 2050 versus 2005 baseline (23.24
million tonnes).
2018 highlights
• Scope 1 CO2e emissions have
increased but at a lower rate than
activity of the airlines.
• IAG contributed approximately 3
million tonnes of carbon reductions
through our compliance with the EU
ETS, bringing our net CO2 emissions
to c. 27 million tonnes CO2e
(provisional pending EU
ETS verification).
Scope 1
Other
Greenhouse Gas
Emissions2
We are reporting these measures for
the first time in 2018.
Previously we have reported all our
greenhouse gas (GHG) emissions using
the carbon dioxide equivalent metric
(CO2e) but have expanded this to
reflect stakeholders interest in
understanding the composition of
the total.
• The majority of our GHG emissions
comprise carbon dioxide emitted
from aircraft fuel burn.
• Emissions of other GHG’s such as
methane and nitrogen oxide also
arise from aircraft fuel burn as
well as the operation of ground
vehicle fleets.
2018
Million tonnes CO2e
.
2
2
5
2
0
4
6
2
.
6
2
8
2
.
.
6
7
8
2
9
9
9
2
.
%
3
4
+
.
2050 net target: 11.62
2014
2015
2016
2017
2018
Targets:
Carbon Neutral Growth by 2020
1
-50% net CO2 by 2050 v’s 2005 baseline
(23,237,182)
Tonnes GHG emissions
(% of total Scope1 CO2e)
0.95% 0.05%
99%
S
t
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a
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g
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C
o
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p
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G
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a
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c
a
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S
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m
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s
A
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i
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f
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a
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Reduction in
GHG emissions
from initiatives2
(tonnes CO2e)
Scope 2
Indirect GHG
emissions3
(Thousand
tonnes CO2e)
Carbon dioxide (CO2) 29,694,133
Nitrogen Oxide (N2O) 283,360
Methane (CH4) 15,974
Thousand of tonnes CO2e
(First year reporting this)
Avoided emissions due to initiatives
within any of the three scopes of
emissions reporting. For example,
enhanced fuel efficiency techniques
yield scope 1 emissions reductions,
switching from incandescent to LED
lighting affects scope 2, and
encouraging employees to car-share or
utilise public transport affects scope 3.
• Efficiency initiatives have resulted in
savings of 65,665 tonnes CO2e,
equivalent to 0.2% of our
scope 1 emissions.
• Key initiatives have included changes
in operating procedures and
on-board weight savings.
2018
65.66
Buildings electricity.
Scope 2 emissions reported here reflect
national (location and market based)
grid mix for UK, Spain and Ireland. Aer
Lingus included from acquisition in
August 2015.
• Fluctuations in trend are influenced
by airline acquisitions as well as
the trend towards less carbon
intensive electricity across Spain,
UK and Ireland.
• Our market-based emissions are
The location-based method considers
emissions generated by the local
power grid to which our facilities
are connected.
The market-based method considers
emissions generated by the power
companies that supply our energy and
therefore includes factors such as
renewables tariffs.
significantly less than our location
based emissions reflecting the
portion of the Group’s electricity
supply being purchased from lower
carbon sources. 3
Thousand tonnes CO2e
(location based)
7
6
7
1
1
.
7
0
7
1
1
.
2
1
.
3
0
1
3
4
6
2
9
.
2015
2014
Thousand tonnes CO2e
(market based)
2016
2017
6
8
2
9
.
2
9
.
1
6
.
5
2
6
8
%
9
6
-
.
2018
4
4
9
5
.
%
0
4
-
.
2016
2017
2018
www.iairgroup.com
www.iairgroup.com
59
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SUSTAINABILITY CONTINUED
Aspect and link
to SDG
Performance
indicator
Description
Climate
Electricity Used
(million kWh)2
Consumption of electricity across main
facilities in millions of kilowatt hours.
Includes usage in main offices, hub
airports and maintenance facilities.
2018 highlights
• Iberia energy efficiency initiatives
2018
Million kWh electricity
included replacement of light bulbs
that delivered the following savings
in electricity usage:
• Engine workshop: 2,679,979 KWh
• Cargo terminal: 665,180 kWh
.
*
2
3
5
2
.
4
8
6
2
%
0
6
+
.
2017
2018
Percentage
renewable
electricity2 (%)
Percentage of electricity consumed as
above that is generated by renewable
sources. The primary source of IAG’s
renewable energy is wind.
IAG aims to increase our overall
percentage of renewable electricity
used as part of our longer-term
emissions reduction targets.
• 2018 renewable electricity use
* 2017 figure not previously reported
% Renewable electricity
by airline:
• Aer Lingus 52%
• British Airways 61%,
• Iberia 0% and
• Vueling 0%
%
4
5
%
2
4
.
%
2
2
2
-
2017
2018
Energy intensity
per passenger
kilometre
(gCO2/pkm)
This metric is designed to monitor our
energy efficiency (Scope 2, location
based) as a function of our business
activity (passenger kilometres). It
complements our flight only emissions
intensity metric.
• Group wide electricity usage has
increased in 2018 but has been
slightly outpaced by growth in
flying activity.
• Our energy efficiency shows no
change on last year. This is primarily
due to completion of major energy
efficiency projects in 2017 with
minimal changes made in 2018.
6
4
0
.
Energy intensity per passenger
kilometre (gCO2e/pkm)
3
4
0
.
5
3
0
.
8
2
0
.
7
2
0
.
%
6
3
-
.
Scope 3
Other indirect
GHG emissions5
(Million tonnes
CO2e)
Other indirect emissions includes
emissions associated with fuel
production, transportation and
distribution; aircraft manufacturing and
disposal; waste processing; business
travel and employee commuting;
franchises and water consumption.
More categories are now captured.
• The Scope 3 emissions increased by
Million tonnes CO2e
7.1% in 2018 compared to 2017
partly due to business growth
from expanding the scope of
data captured.
• We actively engage with suppliers to
manage and reduce our scope 3 CO2
emissions - see stakeholder
engagement section.
4
6
7
.
8
8
7
.
8
1
.
5
2
4
5
.
4
4
8
.
%
1
.
7
+
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Economic
return versus
climate
impact
Revenue per
tonne CO2e
(€/tonne CO2e
for scope 1 and 2
emissions
combined)
This metric is a long-term measure to
track the connection between
economic growth and climate impact
of our operations.
• Revenue per tonne of CO2 has
improved slightly versus last year
driven by the increased load factors
and the value of cargo carried.
Revenue per tonne CO2e
€/t CO2e (0%)
6
9
7
2
6
8
6
9
7
6
9
7
1
1
8
%
9
.
1
+
2014
2015
2016
2017
2018
Noise
Average noise
(Based on Quota
Count and
number of
Landing and
Take Off cycles
per year)
This metric measures average noise per
flight considering arrival and departure
noise for each aircraft type (using UK
Government Quota Count values which
are a relative categorisation based on
certified noise levels) and the number
of flights operated in a year. Note: for a
single flight a Boeing 747 score would
be 6.0 whereas an Airbus A320
(current engine option) would be 1.0.
• We are in the process of retiring
some of our noisiest aircraft and
replacing them with the next
generation of quiet aircraft however
our performance in 2018 declined
slightly due to the increase in
longhaul operations driving
increased weight and therefore QC
rating for some of our fleet.
Average noise QC/LTO cycle
1
1
.
1
8
0
.
1
6
0
.
1
2020 versus 2015
Target: 1.0 (-10%)
7
0
.
1
%
9
0
+
.
2015
2016
2017
2018
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Annual Report and Accounts 2018
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Aspect and link
to SDG
Performance
indicator
Description
Noise
Aircraft fleet
noise
certification
(ICAO Chapter
4 and 14)
ICAO Chapter 4 noise certification
comprises limits of a combination
of lateral, approach, and flyover
noise levels.
The ICAO Chapter 4 technology
standard for aircraft noise applies to
new aircraft certified from January 1,
2006 and Chapter 14 applies to new
aircraft certified from January 1, 2017.
2018 highlights
• Our entire fleet meet ICAO Chapter
4 noise certification.
• During 2018 we have seen an
increase in Chapter 14 certified
aircraft and expect this to increase
further during 2019 as new
generation aircraft such as the
Airbus A350 and A320neo join
our fleet.
2018
% ICAO noise standard
%
7
8
9
%
9
9
%
9
9
%
9
9
.
8
4
%
6
4
%
6
4
%
0
0
1
%
0
.
1
+
%
0
5
%
7
8
+
.
Continuous
descent
operations2
(%)
Waste
Average aircraft
cabin waste
(kg/passenger)
Continuous descent operations (CDO)
employ a smooth approach angle
allowing aircraft to fly higher for longer
compared to stepped approaches. This
can help reduce fuel consumption as
well as noise for those living under
approach flightpaths.
• Our aim is to have all our airlines
achieve over 80% average across
UK airports.
• Prior to 2016 Iberia and Vueling had
not been engaged in CDO initiatives
but since then both airlines have
made significant progress and are
continuing their upward trend.
• Data does not include Level as they
are not currently operating in the UK.
Vueling
61.8
76.1
Cabin waste generated per passenger
and split between shorthaul and
longhaul operations.
We are working on being able to report
this measure as a Group average.
• In 2018 Vueling average waste per
passenger, including both catering
and cabin waste was 0.19kg
(shorthaul).
• For Iberia, shorthaul average waste
per passenger was 0.14kg and for
long haul was 1.75kg.
• For BA, shorthaul has improved
slightly and longhaul has increased
due to enhanced product offering.
6
1
.
0
6
1
.
0
8
0
0
.
Air quality
Aircraft fleet
that meet ICAO
CAEP standard
for NOx
emissions
(%)
ICAO CAEP is a standard for NOx
emissions from aircraft engines. The
standards have become increasingly
stringent: the CAEP 8 certified engines
must emit less than half the NOx
emitted by engines certified to the
original CAEP standard.
The CAEP 4 NOx standard applied to
engines manufactured from 1 January
2004, CAEP 6 applied from 2008 and
CAEP 8 applied from 2014.
• As 97% of our aircraft meet CAEP 4
NOx, we now focus on meeting
the more stringent CAEP 6 and
8 standards.
• In 2018, we also measured average
NOx emissions per landing and
take-off cycle for the first time. The
emissions generated during these
phases influence air quality near the
airports that we serve. The figure
was 9.44 kg NOx/LTO for 2018.
We will report trends on this in
future years.
ICAO is also developing a standard for
particulate matter from aircraft engines,
expected to come into force in 2020.
2014
2015
2016
2017
2018
Chapter 4
Chapter 14
% Continuous Descents (UK average)
Airline
2013 2017 2018 %VLY
BA world
94.1
95.7 95.6
-0.1
BA
domestic
87.0
Aer Lingus 86.8
87.3
87.5
Iberia
58.2
84.7
88.8
86.6
85.4
78.9
1.5
-0.9
0.7
2.8
UK
average
86.1
87.2
88.3
1.1
Source: NATS for Sustainable Aviation. 2013 is
baseline year.
Average cabin waste per
passenger
7
5
.
1
9
3
.
1
7
0
.
1
g
k
2
3
.
1
%
3
2
+
g
k
7
0
0
.
%
%
3
1
-
2015
2016
2017
2018
Shorthaul
Longhaul
* Data is British Airways data only
% ICAO NOx standards
%
2
6
%
5
6
%
8
6
%
9
6
%
5
2
%
6
2
%
4
7
%
3
7
+
.
%
9
2
%
5
.
1
1
+
2014
2015
2016
2017
2018
CAEP 6
CAEP 8
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61
SUSTAINABILITY CONTINUED
Aspect and link
to SDG
Performance
indicator
Description
Customers
Customer
satisfaction
(average Net
Promoter Score)
Net Promoter Score (NPS) is
a non-financial metric which
measures the likelihood of a
customer recommending an
IAG operating carrier.
2018 highlights
• We have established consistent
methodology across our Group to
achieve a single blended score.
2018
• The Voice of Customer (VoC) survey
is the main tool of the customer
experience programme and provides
valuable feedback that helps to
identify actionable insights to
improve the customer proposition.
2018
16.3
vly -0.5pts
Customer satisfaction with a company’s
products or services is key to a
company’s success and long-term
competitiveness (see Key performance
indicators section).
Punctuality
(within 15
minutes)
Workforce
Employment
(Average
manpower
equivalent)
Composition2, 6
(Employment
type, contract
and employee
categories)
Punctuality is defined as the
percentage of flights that depart
within 15 minutes of their published
departure time.
The moment of departure is defined as
the moment the aircraft’s brakes are
released in preparation for pushback.
As a major drive of customer
satisfaction, and we strive to
consistently improve our punctuality.
Manpower equivalent is the number of
employees adjusted to include
part-time workers, overtime and
contractors. The average manpower
equivalent is the mean of the
manpower equivalent captured
quarterly to better reflect seasonality.
Headcount is the actual number of
people employed by the Group
(employees).
A part-time employee is one whose
working schedule is less than 30 hours
per week.
A temporary employment contract has
a defined end date.
Our employee categories breakdown
portrays the distribution of the major
groups within our workforce “in the
air” – Pilots and Cabin Crew – and “on
the ground” – Airport, Corporate
and Maintenance.
• Despite improved operational
practices across our airlines
punctuality performance has
declined due to the very challenging
environment caused by ATC strikes
in Europe.
Punctuality %
0
9
0
8
.
.
0
2
0
8
0
2
7
7
.
0
8
.
1
8
0
5
5
7
.
s
t
p
3
6
-
.
• Our average manpower equivalent
grew by 2.1% in a year when our
overall ASKs increased by 6.1%. This
has provided improved employment
opportunities whilst achieving
productivity gains to help maintain
our competitive cost base.
• The Group total headcount as at
December 31, 2018, is 71,134
2014
2015
2016
2017
2018
Average manpower equivalent
4
8
4
9
5
,
2
9
8
0
6
,
7
8
3
3
6
,
2
2
4
3
6
,
4
3
7
4
6
,
%
1
.
2
+
• This is being reported for the first
Employment type and contract
time in 2018.
2014
2015
2016
2017
2018
Employment
type 25%
Part-time
Full-time
Employment
contract
6%
Temporary
Permanent
75%
94%
Employee categories
breakdown %
10%
11%
35%
18%
26%
Cabin Crew
Airport
Corporate
Pilots
Maintenance
Employees by
country2,6
This indicator depicts the distribution
of the Group’s employees according to
the country where they are based.
• As at the end of 2018, IAG had
employees based in 83 countries.
• 95% of the Group’s workforce is
based in the European
Economic Area.
Employees by geographic
location %
4%2% 2%
7%
30%
55%
UK
Spain
Other
countries
India
Republic
of Ireland
USA
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Annual Report and Accounts 2018
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Aspect and link
to SDG
Performance
indicator
Description
Workforce
Gender
diversity6
(% Women at
Board, Senior
Executive, &
Group level)
We are committed to building a
workforce with diverse perspectives,
experiences and backgrounds at all
levels throughout the Group.
In 2018 we have increased the
proportion of women on the Board to
33% which was our published objective
set for 2020.
2018 highlights
• In 2018 we have increased the
number of women on our Board
from 3 to 4.
• The proportion of women in senior
executive positions across the
Group has increased from 24% to
27% in 2018.
• All Group companies have updated
2018
% Women
%
3
4
%
4
4
%
4
4
%
4
4
%
5
4
%
3
2
%
3
2
%
5
2
%
4
2
%
5
2
%
3
2
%
5
2
%
4
2
%
3
3
%
7
2
We also have an objective to reach 33%
women across the Group’s senior
executive levels by 2025.
their diversity and inclusion
strategies to reflect IAG targets.
Age diversity6
An age diverse workforce balances the
need for experienced individuals with
maintaining a plan for succession
through the recruitment of new talent.
• IAG reviews age diversity in the
following ranges: less than 30 years,
30-50 years, over 50 years.
• Further, we have also reported age
diversity for staff in managerial and
non-managerial roles.
2014
2015
2016
2017
2018
Board
Senior Executives
Group
Managerial and
non-managerial staff
27.9%
21.6%
6.6%
35.9%
57.5%
50.5%
Managerial staff
<30
30-50
50+
Non-managerial staff
<30
30-50
50+
• This is being reported for the first
% of employees with disabilities
time in 2018.
Employees with
disabilities2
This measure is based on the total
number of British Airways and Iberia
employees with self-declared
disabilities. The data is not currently
available for our other operating
companies. Between them, British
Airways and Iberia represent over 80%
of the Group’s total headcount.
Workforce
turnover
(% voluntary and
non-voluntary)
IAG recognises the importance of
retaining experience and talent in
relation to the success of the business
and we report turnover as a measure of
the stability of our workforce.
• A total of 8,240 employees left the
Group in 2018, of which 2,435 were
non-voluntary.
Workforce turnover is measured as the
number of leavers as a percentage of
the average number of Group
employees in the year.
Voluntary turnover occurs when
employees choose to leave (e.g.
resignation, retirement, voluntary
redundancy) and non-voluntary
turnover occurs when employees leave
for reasons other than a personal
decision (e.g. compulsory redundancy,
dismissal, etc.).
1.4%*
* British Airways and Iberia employees only
% voluntary and non-voluntary
%
6
%
4
%
8
%
8
%
2
%
3
2017
2016
Voluntary
Non-Voluntary
2018
% gender and age breakdown of
2018 leavers
49%
31%
35%
51%
34%
Age groups
<30
Gender
30-50
50+
Women
Men
www.iairgroup.com
www.iairgroup.com
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SUSTAINABILITY CONTINUED
Aspect and link
to SDG
Performance
indicator
Description
Workforce
Recruitment2
(by age and
gender)
Total number of positions filled
including both replacement hires and
new positions.
2018 highlights
• A total of 8,789 positions were filled
across the Group, of which 52%
were women.
2018
Positions filled by gender
and age %
6%
60%
34%
48%
52%
Gender
Women
Age groups
Men
<30
30-50
50+
Remuneration2
(averages
by gender)
Gender pay gap2
(Median based
on hourly rates)
Social Dialogue
and Trade
Unions6
(% of employees
covered by
collective
bargaining
agreement)
Average remuneration for members of
the board and management committee
broken down by gender.
For 2018, the board had two executive
directors, both men. Their remuneration
is made up of basic salary, taxable
benefits (company car and private
health), employer pension
contributions, annual incentive, and
long-term incentive. Including only
board members who were on the
Board for the whole of 2018, the
board also had nine non-executive
directors, consisting of six men and
three women. Non-executive directors’
remuneration is made up of basic fees
and travel benefits.
The Management Committee excludes
the two executive directors who are
board members. Including only
Management Committee members who
were in employment for the whole of
2018, the Management Committee
consisted of eight men and two
women. Their remuneration is made up
of the same elements as for the
executive directors.
For 2017, only people who were in
service for the whole year are included.
The only difference being that the nine
non-executive directors consisted of
seven men and two women.
Gender pay gap refers to the difference
between men’s and women’s median
earnings (based on hourly rates of pay)
across the organisation, expressed as a
percentage of men’s earnings.
A more in-depth report is available
for each of our UK companies at:
https://gender-pay-gap.service.gov.uk/
Employee Relations are an important
factor in improving and maintaining
workforce engagement.
All Group employees have the right to
representation through a collective
bargaining agreement.
Our operating companies have well
established mechanisms for negotiation
and dialogue with the unions who
represent their employees. This
includes regular review of matters
relating to the health & safety of
the workforce.
Average for
Management
Committee
,
0
2
7
3
9
6
,
1
€
,
6
4
6
6
9
3
,
1
€
Average for
Board
,
3
6
2
3
2
9
€
,
8
8
2
3
8
1
€
,
6
4
5
5
3
8
€
,
4
0
8
4
5
1
€
2017
2018
2017
2018
Women
Men
Overall
average
• The average remuneration for men
on the board is considerably higher
than the average for women because
the remuneration of executive
directors is much greater than that
of non-executive directors and the
fee for the Chairman is much higher
than that of other non-executive
directors. The posts of executive
directors and the Chairman are all
held by men.
• Comparing 2018 to 2017, the average
remuneration for men and women
has fallen substantially because of
the large fall in both the annual
incentive pay-out and the long-term
incentive. This affects the executive
directors on the board, and all
members of the management
committee.
• As there are only two women on
the Management Committee the
average remuneration by gender
has not been shown for reasons
of confidentiality.
• For the first time, in 2018, UK
companies with over 250 staff were
required to report on their gender
pay gap. This was reported in April
2018 based on data captured at the
snapshot date, April 5, 2017.
• At British Airways the gender pay
gap is largely attributable to the low
proportion of women pilots. When
pilots are excluded from the
calculations, the pay difference
favours women by 1%.
• IAG has a European Works Council
(EWC) which brings together
representatives from the different
European Economic Area (EEA)
countries in which the Group has
operations, covering 95% of the
Group’s total workforce. EWC
representatives are informed and
consulted about matters which may
impact the Group’s employees in
two or more EEA countries. Two
meetings of the EWC were held
in 2018.
Gender pay gap (median %)
British Airways
Avios
British Airways Holidays
British Airways
Maintenance Cardiff
2017
10%
32%
27%
20%
% of employees covered by
collective bargaining agreement
8
8
8
8
6
8
%
3
2
-
.
2016
2017
2018
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INTERNATIONAL AIRLINES GROUP
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
Annual Report and Accounts 2018
Aspect and link
to SDG
Performance
indicator
Description
Calculated by translating training data
for airlines per FTE to show as training
hours per Group Average Manpower
Equivalent (AME).
Workforce
Average hours
of training
(average
employee
training hours
per year, training
hours by
employee
category)
A Lost Time Injury (LTI) is a non-fatal
injury arising out of, or during work
which leads to a loss of productive
work time.
The Lost Time Injury Frequency Rate
(LTIFR) is calculated by multiplying the
number of LTIs by 100,000 and
dividing the result by the total number
of hours worked in the year.
The Lost Time Severity Rate (LTSR)
measures the impact of occupational
accidents as reflected in time off work
by the injured employees. It is
expressed as an average of days lost
per LTI.
This data does not include
occupational diseases.
Profits by country – the Group’s
consolidated accounting profit for
the year split by country in which it
is taxable.
Subsidies have not been reported as
they are not considered material.
Occupational
Health & Safety2
(Lost time injury
frequency rate,
lost time severity
rate and
fatalities)
Tax
Profit / (loss)
€ million
Income tax paid
€ million
2018 highlights
• In 2018 IAG continued to invest
in employee training across
the Group with a focus on the
customer proposition.
2018
Average hours training per
employee per year
.
3
7
3
1
.
6
3
.
9
4
3
.
8
5
4
2015
2014
Training hours
by employee category %
2016
2017
.
5
8
4
%
9
5
+
.
2018
4%
10%
11%
30%
45%
Cabin Crew
Maintenance
Airport
Pilots
Corporate
• British Airways introduced a new
safety and security risk management
system, AIR (Audit, Issue, Risk) that
enables issues to be reported from
a mobile device or web browser 24
hours a day, seven days a week,
anywhere in the world. It provides
rich data, in real time, helping to
maintain the highest levels of
safety and security in a smarter,
intuitive way.
Lost Time Injury
Frequency Rate
Lost Time
Severity Rate
Number of fatalities
• In 2018 the employees of the Group
experienced 1.64 LTIs for every
100,000 hours worked and, on
average, each of the LTIs resulted in
21.12 days off work.
• Regrettably, there was one fatality at
British Airways in 2018 due to a road
traffic accident within the boundaries
of Heathrow airport.
• The increase in profits taxable in our
main countries of operation in 2018
reflects improvements in the
underlying financial performance of
our operating companies. In the UK
the increase is also driven by an
exceptional gain arising in relation to
British Airways pension schemes.
,
5
6
7
0 2
8
9
,
1
Profits by country €m
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
a
i
l
S
t
a
t
e
m
e
n
t
s
A
d
d
i
t
i
o
n
a
l
I
n
f
o
r
m
a
t
i
o
n
2018
1.64
21.12
1
2
1
5
9
8
2
2
5
2
2
7
2
8
2
-
7
6
-
UK
Spain
Ireland
Others
2017
2018
Income tax paid by country
Taxes paid by country – the Group’s
consolidated cash tax payments for the
year split by country in which they
were made.
• Total tax payments of €343m are
lower than the expected tax charge
for the Group of €671m primarily
because tax relief for pensions in
British Airways arises on a cash basis
and is not based on accounting
profits and losses.
1
9
1
9
5
1
• The increase in taxes paid by country
in our main countries of operation in
2018 reflects the increase in profits
in our operating companies. The
increase in tax paid in the UK is
proportionately lower than the
increase in profits because the
exceptional gain in relation to
pensions in British Airways is not a
cash tax item. In Ireland, Aer Lingus
offset its remaining tax losses from
earlier years against taxable profits
in 2017. Its remaining tax liability
from 2017 together with its 2018
liability was paid in 2018.
*
2
8 9
7
1
6
1
-
UK
Spain
Ireland*
Others
2017
2018
2017 was not calculated
www.iairgroup.com
www.iairgroup.com
65
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SUSTAINABILITY CONTINUED
Sustainability in action
Global aviation carbon offsetting scheme
Sustainable aviation fuel
Sustainable Aviation Fuels (SAF) will play an important
part in enabling the aviation industry to meet its
long-term climate goals. IAG remains at the forefront in
influencing domestic, regional and international policy to
support the development of SAF and action on SAF is
gaining momentum.
In 2018, in partnership with Airbus and Total, the delivery
of Iberia’s first Airbus A350 aircraft was powered by a
10 per cent SAF blend.
British Airways’ partnership with Velocys and Shell has
progressed with Velocys receiving a development grant
from the UK Department for Transport. The project, to
build Europe’s first commercial plant to convert
household waste to renewable jet fuel, has concluded
the initial engineering design, feedstock supply feasibility
work and secured a site. IAG continues to work with
several technology developers to establish a range of
supply options for the future.
In anticipation of its centenary celebrations in 2019,
British Airways also launched the Future of Fuels
competition open to academics at UK universities.
Winners will be awarded a £25,000 grant to further their
research along with an opportunity to present their
winning proposal at the industry leading IATA
Alternative Fuels Symposium and ATAG Global
Sustainable Aviation Summit.
The Department for Transport, Sustainable Aviation and
Innovate UK have also sponsored a Special Interest
Group which has provided support to researchers and
small and medium-sized enterprises (SMEs) wishing to
develop new SAF projects.
The global aviation carbon offsetting scheme CORSIA is
vital in enabling aviation to meet its long-term climate
target of reducing net emissions to 50 per cent of 2005
levels by 2050. In 2018 IAG’s representatives working
with IATA and ICAO helped finalise the rules governing
the scheme including those relating to Monitoring,
Reporting and Verification (MRV), the treatment of
Sustainable Aviation Fuels and the rules for airlines
and carbon offsetting programmes relating to eligible
carbon offsets. All IAG airlines prepared their CORSIA
Emissions Monitoring Plans ahead of the deadline of
September 30, 2018 and were ready to begin baseline
monitoring from January 1, 2019.
We continue to comply with the EU Emissions Trading
System and while we had hoped that CORSIA would
replace aviation’s inclusion in the EU ETS, as agreed in
the 2016 ICAO General Assembly resolution, it seems
likely now that both schemes will run in parallel during
the initial years of CORSIA. We are continuing to work
with IATA, our regional and domestic trade associations
and directly with national governments to call for single
tier regulation to avoid market distortion and carbon
leakage. We are also liaising with the UK Government on
options for the treatment of aviation after the UK exits
the EU.
Fleet investment and modernisation
Fleet modernisation is a core part of IAG’s strategy to
reduce our flight only emissions intensity to 87.3 gCO2/
pkm by 2020 and to reduce noise by 10% per flight
achieving an average noise quota count of 1.0 by 2020.
2018 saw the entry of three new aircraft types to the IAG
fleet; the Airbus A320neo, A321neo and A350. In
addition, we received further deliveries of A330 and
Boeing 787 aircraft. The new aircraft are up to 20% more
fuel efficient than the aircraft they replace and up to
50% quieter bringing benefit to communities close to
the airports we serve.
2018 also marked the end of an era for some of IAG’s
fleet as eight of British Airways’ last Boeing 767s and
one Boeing 747 aircraft were retired. British Airways
remaining 747 aircraft will be fully phased out by 2024.
In the meantime, efficiency projects are in progress,
including engine upgrades and weight savings to get the
best operational performance from these aircraft while
they remain in the fleet.
Fleet modernisation will continue in coming years with
further deliveries of 92 A320neo series aircraft, 41 A350s
and 12 Boeing 787s. These new aircraft will help our
airlines to continue to improve passenger experience
while minimising both climate and noise impacts.
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INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
Annual Report and Accounts 2018
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Carbon fund
Noise
Customer donations to the British Airway’s Carbon Fund
have helped us to support many community projects
around the world focussed on renewable energy, energy
efficiency, and carbon reduction. The fund supported 12
projects in 2018, investing in solar panels, high efficiency
lighting, insulation and energy storage in schools,
community and sports centres in the UK and in Africa.
This brings the total number of projects funded to date
to 39, providing benefits to over 200,000 people.
The second phase of a project with the Ol Pejeta
Conservancy was completed with a £70,000 grant from
the Carbon Fund enabling the replacement of two diesel
powered borehole pumps with solar pumps. These
provide clean water as well as improving air quality and
providing free Wi-Fi for schoolchildren within 15km of
the pumps.
Closer to home, a British Airways Carbon Fund grant
supported the conversion of a derelict building on the
grounds of a primary school in Renfrewshire, Scotland to
a low carbon community hub.
Fuel efficiency
In 2018 our Honeywell GoDirect Fuel efficiency software
went live in Iberia, British Airways and Aer Lingus in
November 2018 with Vueling and the Group Portal due
to follow in first quarter 2019. This new tool will help
identify further fuel efficiency opportunities and enable
group-wide benchmarking and reporting on aircraft fuel
efficiency performance.
Vueling and Iberia began working under the Eurocontrol
Collaborative Environmental Management framework
with the Spanish air traffic control authority AENA to
collectively develop more sustainable Spanish airspace
targeting noise and CO2 emissions reductions.
Other examples of the fuel efficiency initiatives delivered
by our airlines in 2018 include; landing lights retraction,
single engine taxi without APU, Boeing Winds, departure
altitude release, weight reduction and optimised engine
wash programmes. Collectively these saved over 65,000
tonnes of CO2. We also began an innovative
collaboration with Signol, behavioural economics
experts, as part of IAG’s start-up accelerator programme
Hangar 51.
Minimising the noise impact of our aircraft operations on
quality of life for communities around the airports where
we operate remains an important focus of our
sustainability programme. While we are proud of the
progress that has been made in reducing aircraft noise
over time, we recognise, and are committed to
addressing, the ongoing concerns of communities
regarding aircraft noise.
As well as our investment in new aircraft we have also
been modifying existing aircraft to help reduce noise
impact. For example in 2018 Aer Lingus fitted 28 of their
37 Airbus A320/21 aircraft with airflow deflectors which
help prevent the generation of a whistling sound during
a phase of descent. In addition, all our airlines monitor
operational noise performance to ensure flights are
operated sensitively and to identify improvements
where possible.
We continued to engage with stakeholders including
community groups, regulators and industry partners at
our hub airports to share operational insights and
participate in research and operational trials. For
example, British Airways participates in the Heathrow
Community Noise Forum and worked with the group in
2018 to improve adherence to departure routings that
are designed to minimise noise from the airport as well
as a trial testing the impact of climb gradients on noise.
British Airways also contributed to a UK Government
study on departure noise mitigation, which found that
the two main departure procedures used by airlines
distribute community noise in slightly different ways, but
that overall the total noise exposure is similar.
In 2018 we also worked with UK Sustainable Aviation
(SA) partners including other airlines, airport operators,
aircraft manufacturers and the UK air traffic control
authority NATS to review our joint action on noise. SA
reports have demonstrated the industry has made good
progress in reducing its noise footprint in recent years
while future programmes in SA will focus on supporting
further operational improvements and better
understanding the non-acoustic quality of life options
for managing the impacts of aircraft noise.
www.iairgroup.com
www.iairgroup.com
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SUSTAINABILITY CONTINUED
Waste
Our airlines are working with suppliers to reduce
unnecessary waste and where possible avoid the use of
single use plastics. For example, Vueling removed plastic
tea cups from their shorthaul catering services, replacing
them with biodegradable alternatives.
Iberia have also made changes to their service on board
aircraft and in their Dalí Premium Lounge in Madrid
Airport including:
• replaced plastic wrap for Business class earphones
with paper saving 436,000 plastic bags per year (1.5
tonnes less plastic waste)
• canned drinks replaced with returnable glass,
saving 1 million cans per year (23.5 tonnes less
aluminium waste)
• individual plastic salad pots replaced with buffet
salads, saving almost 200,000 containers (6 tonnes
less plastic waste)
• wines in plastic bottles replaced with glass which is
recycled, saving 25,000 plastic bottles (575 kg less
plastic waste).
In 2018 Iberia’s work on the EU LIFE+ Zero Cabin Waste
project also progressed with the design of a new
on-board waste trolley to facilitate separation of waste
for cabin crew and a series of trial flights between
Madrid and Barcelona, London and Geneva to test the
new product. Initial data shows an average of an
additional 13kg waste per flight being diverted from
disposal to recycling.
British Airways appointed over 120 cabin crew as ‘War
on Waste champions’ to help tackle waste. Successes
from their first few months in action included:
• reduced the use of plastic swizzle sticks for drinks
by 30 per cent
• changed the packing of Club Kitchen products saving
over 100,000 products a year from disposal
• collecting bottle corks, now sending c. 10kg of corks
each month to Re-Corked UK for recycling
• adding waste reduction and recycling training to the
Cabin Crew New Entrant Training course.
IAG and British Airways are also tackling waste at our
London headquarters. In April we introduced a levy on
disposable coffee cups, plastic stirrers were removed,
plastic take away containers and cutlery in the canteen
was replaced with reusable alternatives and plastic
water cups were removed from water dispensers. In
total, over 1 million individual single-use plastic items
were saved in the first 8 months from launch.
Inspire work experience
programme
British Airways award-winning Inspire work experience
programme allows young people to experience the
excitement of the aviation industry. In 2018 over 24,000
young people were engaged through staff volunteering
opportunities. 600 students were also hosted on work
experience weeks across 25 departments and British
Airways was re-awarded the work experience Gold
Standard. Teacher Take Off Days also gave teachers
a one-day work experience course and Your Flying
Future campaign was launched to encourage young
people from a variety of backgrounds to consider a
flying career.
Air quality
Ground Service Equipment across the Group’s main
hubs of operation is being replaced where possible with
electric vehicles, helping reduce our carbon footprint
and improve air quality for local residents. 38% of Iberia
Airport Services vehicles are now electric, up from 29%
last year.
Aer Lingus purchased 61 electric baggage tractors, belt
loaders, passenger stairs and pushback tugs. Electric
vehicles currently comprise 38% of Aer Lingus Ground
Service Equipment fleet.
Mototok, the electric remote-control pushback tug
commercialised by British Airways is in use across all
shorthaul operations at Heathrow Terminal 5. In addition
to improving punctuality performance, the new tugs are
powered by Heathrow’s 100% renewable electricity
supply saving 7,400 tonnes of CO2 and 28 tonnes of
NOx every year compared to the previous diesel-
powered tugs. British Airways continues to work with
Mototok, collaborating on development of a model for
widebody aircraft.
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INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
Annual Report and Accounts 2018
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Health and safety
Workforce diversity
The progression of women into leadership roles is
vitally important and we have set a target to reach 33%
women across our senior executive levels (top 200)
by 2025. We will monitor and report on our progress,
including the management pipeline across the Group.
We have put in place an extensive programme of
action to help deliver this, some of these achievements
in 2018 included:
• A series of roadshows across the Group to engage
leadership teams and raise awareness.
• A diagnostic questionnaire for approximately 2000
managers across the Group in June, which identified
their experiences around gender inclusion. Key actions
are being developed in the individual Operating
Company diversity plans.
• British Airway & Avios reported their Gender Pay Gap
figures in April.
• International Women’s Day was marked with British
Airways and Aer Lingus flights crewed and operated
by women colleagues in March.
• IAG partnered with Rocking Ur Teens, a social
enterprise, hosting a teen STEM conference in
November for 250 school girls aged 13 to 15. This was
to help motivate and inspire the next generation of
young women into the airline industry.
• Established mentoring and sponsorship programmes
across the Group for senior managers.
Health and safety is fundamental to our business,
whether in the air or on the ground. It is our highest
priority. We are committed to operating in a healthy,
safe and secure way in compliance with all applicable
laws, regulations, company policies and industry
standards. This commitment applies equally to our
employees, customers and all others affected by
our activities.
We have robust governance in place led by the safety
committees in each of our operating companies. The
IAG Safety Committee, chaired by the Group CEO,
monitors all matters relating to the operational safety of
IAG’s airlines as well as to the systems and resources
dedicated to safety activities across the Group.
Our customers travel on aircraft and through buildings
and environments that are subject to regulations
applicable to health and safety in each country.
Procedures, systems and technology used in our
operations are designed to protect employees and
customers alike.
Beyond accessibility
British Airways has committed to ensuring that the
journey process is made simpler and easier for
customers with disabilities. An internal communication
campaign and a video featuring British Airways
customers, called Beyond Accessibility, has been
incorporated into colleague learning to help them to
understand the challenges that customers with
disabilities can face when they travel. They are also
working with airport operators and handling agents to
provide more consistent customer service including
prioritisation during disruption, dedicated check in areas
and more effective priority boarding. In addition, British
Airways has partnered with the National Autistic Society
to understand what can be done to help and support
customers who have hidden and non-visible
disabilities too.
Across the Group we comply with relevant legislation
regarding accessibility for disabled employees and
customers in our buildings and our operations.
www.iairgroup.com
www.iairgroup.com
69
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SUSTAINABILITY CONTINUED
Supply chain
Modern slavery
Human Trafficking is of real concern in the airline
industry and it is a topic we have focused on more
acutely since 2015 with the reform of the Spanish
Criminal Code and the introduction of the UK Modern
Slavery Act.
Transporting over 100 million passengers per year and
with tens of thousands of suppliers, Group Slavery and
Human Trafficking is relevant for IAG. We have no
known cases of human rights violations within our
organisation and we are increasing our screening of our
suppliers to ensure that this is also the case in their
organisations. We work closely with governments and
the airports in which we operate to ensure that any
suspected trafficking on our flights are reported and
dealt with appropriately. We train our staff to recognise
the signs of potential human trafficking situations and
provide procedures for reporting where any cases
are suspected.
In June 2018 we published our second Group Slavery
and Human Trafficking Statement as set out under the
UK Modern Slavery Act 2015. Modern Slavery clauses
now feature in all new supplier contracts as well as those
coming up for renewal. IAG representatives attended an
IATA seminar on Modern Slavery to share knowledge,
learnings and best practice. The seminar culminated in a
resolution denouncing human trafficking and reaffirms
commitments to tackling human trafficking including
sharing of best practices, staff training and reporting.
This resolution was passed by IATA at its 2018 Annual
General Meeting.
Aer Lingus has had human trafficking training for pilots
and cabin crew since 2016 and run recurrent human
trafficking training on a 3-year basis. Guidance and
procedures for flight crew and cabin crew is also
included in their Operations Manual. British Airways is
also ensuring all cabin crew are trained to recognise the
signs of human trafficking with an awareness training
session now included in annual mandatory training.
IAG’s Supplier Code of Conduct is the main framework
setting out the standards to which suppliers engaging
with IAG and its operating companies must comply. The
Supplier Code of Conduct covers Labour, Health and
Safety, Environment and Business Integrity standards.
In 2018, IAG established a more robust risk management
process to facilitate due diligence and monitoring of our
suppliers throughout the supplier lifecycle. IAG Global
Business Services (GBS) has enlisted Bureau van Dijk,
a major business intelligence provider, to enrich
understanding of our suppliers’ legal, social,
environmental and financial compliance. To date,
5,500 suppliers have been screened during the first
phase of deployment.
We monitor suppliers by the number of risks as well as
the severity of each risk type. IAG reserves the right to
conduct on-site audits, issue reviews and corrective
action plans, and terminate contracts in serious
instances. IAG aims to work collaboratively with poorly
performing suppliers to improve their standards. Audits
are carried out by trusted third-party auditors with track
records in driving improvements in responsible business
practices in global supply chains.
In 2019, we will continue to screen suppliers during initial
set-up and on a quarterly basis to grow the number of
suppliers covered. Results will be reviewed with
appropriate risk owners on an ongoing basis.
Community giving
Aer Lingus celebrated the 21st anniversary of its
partnership with UNICEF’s Change for Good appeal,
raising $1 million through on-board customer donations.
Aer Lingus also continued its support of Special
Olympics Ireland collecting over €8,000 and
donating flights.
British Airways’ charity partnership with Comic Relief,
Flying Start reached a major milestone in 2018, hitting its
2020 target of raising £20 million two years early.
Following a tsunami in Indonesia in September, British
Airways customers raised £188,576 for the Disasters
Emergency Committee appeal. A joint event with
Aerobility saw 99 wheelchair users pull a Boeing 787-9
aircraft 100 metres, raising £16,000 and achieving a
Guinness World Record.
Iberia’s partnership with Amadeus to support UNICEF’s
immunisation programme has been extended to 2020.
Since 2013, the collaboration has raised €935,000 and
has resulted in the vaccination of over 1 million children
in Chad, Angola and Cuba.
Vueling’s collaboration with Save the Children generated
€235,000 in customer donations in 2018. Vueling
donated 120 tickets to the Make-A-Wish foundation,
helping children with serious illnesses to have life-
changing experiences. Vueling has also teamed up with
Nutrition Without Borders, donating unused bottles of
water from flights in an initiative which also reduces
on-board waste.
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Ethics and integrity
IAG and its operating companies have policies in
place setting out the general guidelines that govern
the conduct of directors and employees of the Group
when carrying out their duties in their business and
professional relationships. All directors and employees
are expected to act with integrity and in accordance
with the laws of the countries they operate in. IAG also
maintains a Supplier Code of Conduct which outlines the
standards of behaviour we expect from our suppliers. In
2019, IAG will be implementing a new Group-wide Code
of Conduct that will apply to all directors, managers and
employees of IAG, as well as its third parties.
Various training and communications activities are
carried out for directors, employees and third parties to
support awareness of the principles that govern the
conduct of the Group and its employees. A new
e-learning to support the new Code of Conduct will be
rolled out in 2019 and this will be applicable to all Group
employees and directors.
Resources are available across the Group for
employees to get advice or to report grievances or any
alleged or actual wrongdoing. There are whistle-blowing
channels provided by Safecall and Ethicspoint available
throughout the Group, where concerns can be raised
on a confidential basis. The IAG Audit and Compliance
Committee reviews the effectiveness of whistle-
blowing channels on an annual basis. This annual
review considers the volume of reports by category;
timeliness of follow-up; responsibility for follow-up;
and, any issues raised of significance to the financial
statements. The annual review is coordinated by the
Head of Group Audit. In 2018 a total of 201 reports were
received through the confidential reporting channels.
This is compared to 205 reports received in 2017. All
reports were followed up and investigated where
appropriate and reported to the Audit and
Compliance Committee.
Anti-bribery and corruption policy and programme
IAG and its operating companies do not tolerate any
form of bribery or corruption. This is made clear in our
company policies which are available to all directors and
employees. Each Group operating company has a
Compliance Department responsible for managing the
anti-bribery programme in their business. These
compliance teams meet regularly through Working
Groups and Steering Groups and annually they conduct
a review of bribery risks across the Group. The main
risks identified during the 2018 review relate to the use
of third parties, operational and commercial decisions
involving government agencies, and the inappropriate
use of gifts and hospitality.
Anti-bribery training courses include e-learning and
classroom sessions. Individual training requirements are
set by each operating company and are determined by
factors such as the level and responsibilities of an
employee. An updated e-learning course is being rolled
out in 2019 across the Group.
The programme’s risk-based third-party due diligence
includes screenings, external reports, interviews and site
visits depending on the level of risk that a particular
third-party presents. In 2018 the Group implemented
integrity-based screenings into its new Group-wide
vendor management system and in 2019 a new third-
party management tool for higher risk third parties will
be implemented, together with updated procedures.
The Audit and Compliance Committee of the IAG Board
receives an annual update on the programme.
Anti-money Laundering
IAG has various processes and procedures in place
across the Group, such as supplier vetting and
management, Know Your Counterparty procedures and
a Group Finance Instruction which help to combat
money laundering in the business.
www.iairgroup.com
www.iairgroup.com
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71
CHAIRMAN’S INTRODUCTION TO CORPORATE GOVERNANCE
Maintaining the very highest
standards of Corporate Governance
“Continuing to adapt
to new and demanding
standards of corporate
governance will
sustain our long-term
performance and
remains a commitment
of the Board.”
Antonio Vázquez
Chairman
On behalf of the Board, I am very
pleased to introduce the report on
Corporate Governance for 2018, a year
of continued strong performance for the
Group in an unsettled political and
economic environment.
A number of key internal and external
challenges shaped the Board’s
discussions in 2018. These included
Brexit, risk management, the malicious
theft of data at British Airways, oil price
volatility and political uncertainty in
some of our key markets. We also
continued to scrutinise the overall
Group strategy and the development of
our brands and our offer to customers.
It was, by any standards, a busy agenda.
Throughout our eight-year history we
have always aimed to achieve the very
highest standards of governance and,
as a Board, that remains our
firm commitment.
We want to continue developing an
approach that will allow us to support
and challenge the IAG management
team as they steer the future
development of the Group and all its
operating airlines. Corporate
governance in that sense is vital in
sustaining the success of IAG,
irrespective of the market conditions
that confront us in any one year.
Adapting to new standards
As a company listed in both Madrid and
London, we have to meet two very
demanding governance codes. That can
be challenging, but it’s a challenge we
have always welcomed.
Against this backdrop, the introduction
of the new UK Corporate Governance
Code in July 2018 was and remains an
obvious focus for the Board. We fully
embrace the new code and I personally
very much agree with its guiding
principle – that companies do not live in
isolation, but are deeply connected to
the wider world in which they operate.
Society is demanding more and more of
its companies, and that’s as it should be.
We are committed to making sure that
IAG meets those demands, even though,
as a young parent company overseeing
a portfolio of well-established and
independent airlines and brands, the
task of meeting some of the Code’s
objectives will be more difficult for us
than other organisations with a more
straightforward structure. On the plus
side, our relative youth means we
have flexibility and can continue to
be innovative.
Solid foundations
The UK Code demands that we take
proper account of the views of all our
stakeholders – investors, our
communities, regulators, environmental
campaigners, our suppliers and our
employees. This is something we want
to get right, rather than take an
approach that is too generic or
simplistic. It will require some deep
thought and will be a major priority for
the Board in 2019.
Fortunately, we start from a strong base
in this important work.
For instance, at our January meeting the
Board approved a new code of conduct
for the Group following in-depth
discussions with the management team.
It is designed to set out in an easy-to-
understand way the ethical standards
that have been part of our overall
approach for some while. It recognises
that IAG is made up of diverse
businesses, people and cultures and that
this rich diversity is fundamental to what
we are as a Group. Equally, it makes
clear our commitment to acting with
integrity at all times.
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The Board will play an active role in
embedding these common standards of
conduct, setting the right tone for the
business from the top and supporting
the management team as it launches the
code in the coming months. In addition,
we will be seeing what more we can do
as a Board to oversee, shape and
monitor our corporate culture.
It’s important to be clear that our
stakeholder relationships are at different
levels of maturity in different parts of
the business. But, again, I believe we can
build on solid foundations here. We do
already have strong engagement with
our main stakeholders, starting with our
shareholders as you can read on pages
83 and 84 of this report. The same is
true with our customers, with our
regulators and with different
industry bodies.
We are particularly proud of our
investor relations programme and I was
delighted once again this year to meet
with many of our major shareholders to
talk about governance, strategy, our
succession plans and the business
challenges we face. Our Senior
Independent Director and the Chairman
of the Remuneration Committee also
met key investors to discuss specific
issues. Such meetings are very valuable
to us and, I know, are greatly welcomed
by investors.
The regulatory agenda for IAG as a
whole and each of our operating
businesses is intense, requiring constant
attention and dialogue. Communication
channels with customers and suppliers
are well developed and, through our
sustainability programme, we have a
clear understanding of what matters
most to stakeholders thanks to a
materiality exercise we conducted
in 2017.
We will keep all these engagement
programmes under close review in the
current year, making sure that the right
information is reported to the Board and
that stakeholders are receiving clear and
useful feedback.
The Board will also look closely at how
we communicate with our employees.
We want to strengthen our approach
here but in a way that takes account of
the diversity of nationalities and cultures
within the Group that we are so happy
and proud to embrace.
Board effectiveness
We continue to evaluate the
effectiveness of the Board. Each year
we carry out an internal review, opening
ourselves up to external review in the
third year to make sure our own
assessments are robust.
The internal review gives me the
opportunity to talk to each of my fellow
directors, individually, to hear how we
can improve our approach, to check
that we are focusing on the right issues
and, above all, to make sure that the
work we do as directors is adding real
value to the Group, for the benefit of our
shareholders.
You can read more about the latest
evaluation on pages 91 and 93.
Remuneration
Following detailed engagement with
principal investors to test our ideas, we
presented an updated remuneration
policy to shareholders at the 2018
Shareholders’ Meeting. I’m glad to say
the new policy received solid backing
from our shareholders.
This work was led, with great skill, by
Dame Marjorie Scardino. She decided to
step down as chair of the Remuneration
Committee in February, after three
years in that post. On behalf of the
Board, I would like to thank her for all
her excellent work.
Marc Bolland, already an experienced
member of the Committee, has
succeeded Dame Marjorie in the role.
Continuing to refresh the Board
As announced in May 2018, Jim
Lawrence stepped down from the
Board at our Shareholders’ Meeting in
June having made a significant
contribution to the Board and its Audit
and Compliance Committee. I would like
to thank him for his dedicated work.
On June 14, 2018 we were delighted to
welcome Deborah Kerr as a new
non-executive director and as a member
of the Audit and Compliance
Committee. We are very pleased to
have her skills and business experience,
not least her deep knowledge of
technology, at our disposal.
The process of selecting new Board
members is rigorous, as the report from
our Nominations Committee on page 92
demonstrates. We can only provide
useful and value-enhancing oversight of
the Company if we attract directors with
the depth and breadth of experience to
really understand the complexities of
running a business like IAG.
In my opinion we have a superb group
of people on our Board from a broad
range of professional backgrounds
offering a rich and diverse array of skills
and perspectives. The work they do to
ensure the continued success of IAG is
extremely important. I thank them all for
the tremendous contribution they make.
Antonio Vázquez
Chairman
www.iairgroup.com
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BOARD OF DIRECTORS
1 Antonio Vázquez
N
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2 Willie Walsh
S
3 Patrick Cescau
A
N
Chairman
Key areas of experience:
Consumer, sales/marketing,
finance, governance
Current external appointments:
Member, Advisory Board of the Franklin
Institute. Member, Cooperation Board of
Loyola University. Trustee, Nantik Lum
Foundation.
Previous relevant experience:
Chairman, Iberia 2012-2013. Chairman and
CEO, Iberia 2009-2011. Chairman and CEO,
Altadis Group 2005-2008. Chairman, Logista
2005-2008. Director, Iberia 2005-2007. Chief
Operating Officer and other various positions,
Cigar Division of Altadis Group 1993-2005.
Various positions at Osborne 1978-1983
and Domecq 1983-1993. Began his
professional career in consultancy at
Arthur Andersen & Co.
Chief Executive Officer
Key areas of experience:
Airline industry
Other Group appointments:
Chairman, Aer Lingus Board of Directors.
Current external appointments:
Chairman, Airlines for Europe (A4E)
Previous relevant experience:
Chairman, National Treasury Management
Agency of Ireland, 2013-2018. Chairman, IATA
Board of Governors 2016-2017. Chief Executive
Officer, British Airways 2005-2011. Chief
Executive Officer, Aer Lingus 2001-2005. Chief
Operating Officer, Aer Lingus 2000-2001.
Chief Executive Officer, Futura (Aer Lingus’
Spanish Charter airline) 1998-2000. Joined Aer
Lingus as cadet pilot in 1979.
Senior Independent Director
Key areas of experience:
Consumer, finance, sales/
marketing, governance
Current external appointments:
Chairman, InterContinental Hotel Group.
Trustee, LeverHulme Trust. Member, Temasek
European Advisory Panel. Patron, St Jude India
Children’s Charity.
Previous relevant experience:
Senior Independent and Director, Tesco
2009-2015. Director, INSEAD 2009-2013.
Senior Independent Director, Pearson
2002-2012. Group Chief Executive, Unilever
2005-2008. Chairman, Unilever UK. Deputy
Chairman, Unilever The Netherlands, Food
Director. Prior to being appointed to the Board
of Unilever in 1999 as Group Finance Director,
he was Chairman of a number of the
company’s major operating companies and
divisions including the USA.
4 Marc Bolland
5 Enrique Dupuy de Lôme
6 María Fernanda Mejía
SR
RA
Non-Executive Director
Key areas of experience:
General management, commercial
management/marketing, retail,
hospitality industry
Current external appointments:
Head of European Porftolio Operations, The
Blackstone Group. Director, Coca-Cola
Company. Non-Executive Director, Exor S.p.A.
Vice President, UNICEF UK.
Previous relevant experience:
Chief Executive, Marks & Spencer 2010-2016.
Chief Executive, WM Morrison Supermarkets
PLC 2006-2010. Director, Manpower USA
2005-2015. Chief Operating Officer 2005-
2006, Director 2001-2005 and other executive
and non-executive positions, Heineken
1986-2001.
Chief Financial Officer
Key areas of experience:
Finance, airline industry
Other Group appointments:
Director, AERL Holding Limited
Current external appointments:
Chairman, Iberia Cards. Non-Executive
Director, Grupo Lar.
Previous relevant experience:
CFO, Iberia 1990-2011. Head of finance and
deputy director of financial resources, Instituto
Nacional de Industria (INI) and Teneo financial
group 1985-1989. Head of subsidiaries
Enadimsa (INI Group) 1982-1985. Chairman,
IATA finance committee 2003-2005.
Non-Executive Director
Key areas of experience:
General management, marketing and
sales, supply chain, strategic planning,
corporate transactions
Current external appointments:
Senior Vice President, The Kellogg Company.
President, Kellogg Latin America. Corporate
Officer and member of The Kellogg Company
Executive Leadership Team. Board Member of
the Council of the Americas.
Previous relevant experience:
Vice-President and General Manager
Global Personal Care and Corporate
Fragrance Development, Colgate-Palmolive
2010-2011. Vice-President Marketing and
Innovation Europe/South Pacific Division,
Colgate-Palmolive 2005-2010. President
and CEO Spain and Spain Holding Company
2003-2005, General Manager Hong Kong
and Director, Greater China Management
team 2002-2003, Marketing Director
Venezuela 2000-2002, Marketing Director
Ecuador 1998-2000.
Committee Chair
A
Audit and Compliance Committee
S
N
Safety Committee
Nominations Committee
R
Remuneration Committee
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7 Deborah Kerr
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8 Kieran Poynter
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9 Emilio Saracho
N
Non-Executive Director
Key areas of experience:
Technology, digital, marketing, operations,
software and services, general management
Current external appointments:
Director, NetApp Inc. Director, Chico’s FAS.
Inc. Director, ExlService Holdings, Inc.
Managing Director, Warburg Pincus.
Previous relevant experience:
Executive Vice President, Chief Product and
Technology Officer, SABRE Corporation
2013-2017. Director, DH Corporation 2013-2017.
Director, Mitchell International, Inc. 2009-2013.
Executive Vice President, Chief Product and
Technology Officer, FICO, 2009-2012. Vice
President and Chief Technology Officer, HP
Enterprise Services 2007-2009. Vice President
Business Technology Optimization, Hewlett-
Packard Software 2005-2007. Senior Vice
President Product Delivery, Peregrine Systems
1998-2005. Prior senior leadership roles with
NASA’s Jet Propulsion Laboratory, including
Mission Operations Manager, US Space VLBI,
Nasa Jet Propulsion Laboratory 1988-1998.
Non-Executive Director
Key areas of experience:
Professional services, finance services,
corporate governance, corporate transactions
Current external appointments:
Chairman, BMO Asset Management (Holdings)
PLC. Senior Independent Director, British
American Tobacco.
Previous relevant experience:
Chairman, Nomura International 2009-2015.
Member, Advisory Committee for the
Chancellor of the Exchequer on the
competitiveness of the UK financial services
sector 2009-2010. Member, President’s
committee of the Confederation of British
Industry 2000-2008. UK Chairman and Senior
Partner, PricewaterhouseCoopers 2000-2008.
UK Managing Partner and other executive
positions, PricewaterhouseCoopers 1982-
2000.
Non-Executive Director
Key areas of experience:
Corporate finance, investment banking,
corporate transactions
Current external appointments:
Director, Altamar Capital Partners.
Director, Inditex.
Previous relevant experience:
Chairman, Banco Popular Español 2017. Vice
Chairman and Member Investment Banking
Management Committee, JPMorgan 2015-
2016. Deputy CEO 2012-2015, CEO Investment
Banking for EMEA 2012-2014 and member
Executive Committee 2009-2013, JP Morgan.
CEO, JP Morgan Private Banking for EMEA
2006-2012. Director, Cintra 2008. Director,
ONO 2008. Chairman, JP Morgan Spain &
Portugal 1998-2006. Global Investment
Banking Head, Santander Investment (UK)
1995-1998. Spanish Market Manager,
Goldman Sachs International 1990-1995.
10 Dame Marjorie Scardino
11 Nicola Shaw
R
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12 Alberto Terol
A
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Non-Executive Director
Key areas of experience:
Commercial management, government
affairs, communications, digital and media,
legal services
Current external appointments:
Senior Independent Director, Twitter, Senior
Independent Director, Pure Tech Health Inc.
Member, charitable boards including The
MacArthur Foundation (Chairman), London
School of Hygiene and Tropical Medicine
(Chairman), and The Carter Center. Member,
Board of the Royal College of Art. Member of
the Visiting Committee for the MIT Media Lab.
Member, Board of Bridge International
Academies (HQ – Kenya).
Previous relevant experience:
Chief Executive Officer, Pearson 1997-2012.
Chief Executive Officer, The Economist Group
from 1993-1996. President, The Economist
Group US 1985-1993. Lawyer practising in
the US 1975-1985.
Non-Executive Director
Key areas of experience:
Transport sector, public policy and regulatory
affairs, consumer, general management
Current external appointments:
Executive Director, National Grid plc. Member
of the Audit and Risk Committee, English
Heritage. Director for Major Projects
Association.
Previous relevant experience:
Non-Executive Director, Ellevio AB 2015-2017.
CEO, HS1 Ltd 2011-2016. Member of the
Department for Transport’s Rail Franchising
Advisory Panel 2013-2016. Non-Executive
Director, Aer Lingus Plc 2010-2015. Charity
Trustee, Transaid 2011-2013. Director and
previously Managing Director, Bus Division at
FirstGroup plc 2005-2010. Director of
Operations and other management positions
at the Strategic Rail Authority 2002-2005.
Deputy Director and Deputy Chief Economist,
Office of the Rail Regulator (ORR) 1999-2002.
Associate, Halcrow Fox 1997-1999. Transport
specialist, The World Bank 1995-1997.
Corporate planner, London Transport
1990-1993.
Non-Executive Director
Key areas of experience:
Finance, professional services, information
technology, hospitality industry
Current external appointments:
Vice Chairman, Leading Independent Director
and Chairman of the Appointments,
Remuneration and Corporate Governance
Committee, Indra Sistemas. Chairman of the
Supervisory Board, Senvion GmbH. Chairman
of the Audit Committee, Senvion S.A. Director,
Broseta Abogados. International Senior
Advisor, Centerbridge. Independent Director,
Schindler España. Patron of Fundación
Telefonica. Executive Chairman of various
family owned companies.
Previous relevant experience:
Director, OHL 2010-2016. Director, Aktua
2013-2016. Director, N+1 2014-2015.
International Senior Advisor, BNP Paribas
2011-2014. Member, Global Executive
Committee Deloitte 2007-2009. Managing
Partner: EMEA Deloitte 2007-2009, Managing
Partner Global Tax & Legal Deloitte 2007-
2009. Member, Global Management
Committee Deloitte 2003-2007. Managing
Partner: Latin America Deloitte 2003-2007,
Integration Andersen Deloitte 2002–2003,
Europe Arthur Andersen 2001-2002, Global
Tax & Legal Arthur Andersen 1997-2001,
Garrigues-Andersen 1997-2000.
www.iairgroup.com
75
CORPORATE GOVERNANCE
IAG as a Group
IAG is responsible for the Group’s strategy and business plan.
It centralises the Group’s corporate functions, including the
development of its global platform.
Board*
Comprises ten non-executive directors and two executive directors (IAG CEO and CFO) and is responsible for:
• the supervision of the management of the Company
• approval of any significant contractual commitment, asset acquisition or
• the approval of the strategy and general policies of the Company and
the Group
disposal or equity investment or divestment
• the definition of the Group structure
• the determination of the policy on shareholders’ remuneration
• the approval of major alliances
• ensuring the effectiveness of the Company’s corporate
• the definition of the shareholders disclosure policy
governance system
• approval of the risk management and control policy, including the
Group’s risk appetite
Chairman
Antonio Vázquez
• chairs the shareholders’ meetings
• leads the Board’s work
• sets the Board’s agenda and directs its
discussions and deliberations
• ensures that directors receive accurate,
timely and clear information, including
the Company’s performance, its strategy,
challenges and opportunities
CEO
Willie Walsh
• is responsible and accountable to the
Board for the management and profitable
operation of the Company
Senior Independent Director
Patrick Cescau
• provides a sounding board for the
Chairman
• serves as intermediary for the other
• leads the Company’s management team
directors when necessary
• oversees the preparation of operational
and commercial plans
• develops an effective management
strategy
• is available to shareholders, should they
have any concerns they cannot resolve
through the normal channels
• leads the evaluation of the Chairman’s
performance annually
• ensures that there is an effective
• puts in place effective controls
communication with shareholders and that
directors and executives understand and
address the concerns of investors
• offers support and advice to the
Chief Executive
• promotes the highest standards of
corporate governance
• coordinates the activities of the Group
Audit and Compliance
Committee
• reviews the activity and
performance of the external
auditor, preserving their
independence
• supervises the effectiveness
of the internal control
of the Company, the
internal audit and the risk
management systems
• supervises the process for
the preparation of the Group’s
financial results, reviewing the
Company’s accounts and the
correct application of the
accounting principles
• assesses and oversees the
Company’s compliance system
• reviews the Company’s CSR
and sustainability policy
Nominations Committee
• evaluates and makes
recommendations regarding
the Board and committee
composition
• submits to the Board the
proposed appointment of
independent directors
• puts in place plans for the
succession of directors,
for the Chairman and the
Chief Executive
• oversees and establishes
guidelines relating to the
appointment, recruitment,
career, promotion and dismissal
of senior executives
• reports on the proposed
appointment of senior
executives
• monitors compliance with the
company’s director selection
and diversity policy
Remuneration Committee
• reviews and recommends
to the Board the directors
and senior executive
remuneration policy
• reports to the Board
on incentive plans and
pension arrangements
• monitors compliance with the
Safety Committee
• receives material safety
information about any
subsidiary or franchise,
codeshare or wet
lease provider
• exercises a high level
overview of the safety activities
and resources
Company’s remuneration policy
• follows up on any safety related
• ensures compliance with
disclosure requirements
regarding directors’
remuneration matters
measures as determined by
the Board
* List of Board’s reserved matters can be found in Article 3 of the Board Regulations, available on the Company’s website.
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The Group operating companies
Each operating company is responsible for the management of
their respective businesses and accountable for the
implementation of the joint business and synergy plan.
Each company has its own board of directors and its own
executive committee, led by the top executive of each company.
Enrique Dupuy de Lôme
Group Chief Financial Officer
Stephen Kavanagh1
Chief Executive Officer
Robert Boyle
Director of Strategy
Alex Cruz
Chairman and CEO
Luis Gallego
Chairman and CEO
Javier Sanchez Prieto
Chairman and CEO
Julia Simpson
Chief of Staff
Chris Haynes
General Counsel
IAG Management
Committee
Headed by the Group CEO:
• day-to-day management of the
Group
• capturing cost and revenue
synergies
• development of Group long-
term strategy
Steve Gunning
Director of Global Services
British Airways Chief Financial Officer
IAG GBS
Lynne Embleton
Chief Executive Officer
Andrew Crawley
Chief Executive Officer
1 On January 1, 2019 Sean Doyle was appointed as Chief Executive Officer of Aer Lingus.
Stephen Kavanagh will continue as non-executive director on the Board of Aer Lingus.
www.iairgroup.com
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Application of governance codes
As a company incorporated and listed
in Spain, IAG is subject to applicable
Spanish legislation and to the Spanish
corporate governance framework.
According to Spanish legal
requirements, this Corporate
Governance Report report includes
information regarding compliance with
the Spanish Good Governance Code of
Listed Companies as well as other
information related to IAG's corporate
governance. This report is part of the
IAG Management Report.
At the same time, as IAG has a listing
on the London Stock Exchange, it
is also subject to the UK Listing Rules,
including the requirement to explain
whether it complies with the UK
Corporate Governance Code published
by the UK Financial Reporting Council
(“FRC”) as amended from time to time.
A copy of the version of the
UK Corporate Governance Code
applicable to this reporting period
(updated and published in April 2016)
is available at the website of the FRC
(www.frc.org.uk). This Corporate
Governance Report includes an
explanation regarding the Company’s
application of the main principles of the
UK Corporate Governance Code.
In accordance with the new Spanish
Comisión del Mercado de Valores
(CNMV) regulation, IAG presents this
year a consolidated Corporate
Governance Report responding to
Spanish and UK reporting requirements.
This consolidated Corporate
Governance Report is available
on the Company’s website
(www.iairgroup.com), and it is also
available on the CNMV website
(www.cnmv.es), this consolidated
Corporate Governance Report is
accompanied by a duly completed form
which is required by the CNMV covering
some relevant data.
In 2018, IAG complied with all the
recommendations of the Spanish
Corporate Governance Code, with the
sole exception of the rules on the
composition and operation of non
mandatory Board committees, which is
partially non complied with as far as
IAG's Safety Committee is chaired by an
executive director, the Group Chief
Executive, and not by an independent
director as recommended by the Code.
The Board believes this is appropriate,
taking into consideration that IAG is not
an airline but the Group parent
company, and its Safety Committee
exercises a high-level supervisory role
within the Group. Consistent with legal
requirements, responsibility for safety
matters remains with each Group airline,
and the technical nature of the safety
issues and the fact that each Group
airline has its own particular
characteristics makes it advisible that
the Group's top executive leads this
committee and coordinates the
reporting of the different airlines.
As far as the 2016 UK Corporate
Governance Code is concerned, the
Company considers that during the year
it has complied with all its provisions but
for the following matter: the service
contract for Antonio Vázquez does not
comply with the recommendation that
notice periods should be set at one year
or less so as to limit any payment on
exit. The terms of Antonio Vázquez’s
service contract as Executive Chairman
of Iberia were considered at the time of
the merger between British Airways and
Iberia, and it was determined that an
entitlement to lump-sum retirement
benefits in excess of one year’s salary
should be carried over into his IAG
service contract. It was thought
necessary to continue the Iberia benefits
in order to retain this key director and,
as such, complying with the UK
Corporate Governance Code’s principle
of only offering a remuneration package
sufficient to retain this director. Details
can be found in the Directors’
Remuneration report.
The Board believes that, notwithstanding
the above exceptions, the company has
a robust governance structure.
Governance framework: structure and
responsibilities
IAG, as the Group’s parent company, is
responsible for the Group’s strategy and
business plan. It centralises the Group’s
corporate functions, including the
development of its global platform.
Each operating company is responsible
for the management of their respective
businesses and accountable for the
implementation of the joint business and
synergy plans. Each company has its
own board of directors and its own
executive committee, led by the top
executive of each company.
There is a clear separation of the roles of
the Chairman and the Chief Executive.
The Chairman is responsible for the
operation of the Board and is
responsible for its overall effectiveness
in directing the company.
The Chief Executive is responsible for
the day-to-day management and
performance of the Group and for the
implementation of the strategy
approved by the Board. All of the
powers of the Board have been
permanently delegated to the IAG
Chief Executive save for those which
cannot be delegated pursuant to the
Bylaws, the Board Regulations or the
applicable legislation.
Board composition
As set out in the Company’s Bylaws the Board shall comprise a minimum of nine and a maximum of 14 members. As of
December 31, 2018 the Board composition was:
Name of Board Member
Antonio Vázquez
Willie Walsh
Patrick Cescau
Marc Bolland
Enrique Dupuy de Lôme
Deborah Kerr
María Fernanda Mejía
Nicola Shaw
Kieran Poynter
Emilio Saracho
Dame Marjorie Scardino
Alberto Terol
Position/Category
Chairman
Chief Executive Officer
Senior Independent Director
Director (independent)
Chief Financial Officer
Director (independent)
Director (independent)
Director (independent)
Director (independent)
Director (independent)
Director (independent)
Director (independent)
First appointed
May 25, 2010
May 25, 2010
September 27, 2010
June 16, 2016
September 26, 2013
June 14, 2018
February 27, 2014
January 1, 20181
September 27, 2010
June 16, 2016
December 19, 2013
June 20, 2013
1 The appointment of Nicola Shaw as a non executive director was approved by the Shareholders’ Meeting on 15 June 2017.
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The IAG Board currently comprises
ten non-executive directors and two
executive directors, IAG’s Chief
Executive Officer and Chief Financial
Officer. The biographies of each
member of the Board are set out on
pages 74 and 75.
At the Annual Shareholders’ Meeting
on 14 June 2018, Deborah Kerr was
appointed as a non-executive director,
following the retirement of James
Lawrence. Further details of Deborah
Kerr’s appointment are set out in the
Nominations Committee report on
pages 91 to 93.
The Company is attentive to the need
for progressive refreshing of the Board
and committee membership. The IAG
Board continues to have a strong mix
of highly qualified individuals, from a
wide range of backgrounds, countries
and industries, with appropriate
experience of complex organisations
with global reach. For further details see
the Nominations Committee report on
pages 91 to 93.
The Board Secretary is Álvaro López-
Jorrín, partner of the Spanish law firm
J&A Garrigues, S.L.P, and the Deputy
Secretary is Lucila Rodríguez.
Appointment, re-election and
resignation of directors
The selection and appointment process
is described in detail in the Nominations
Committee report on pages 92 and 93.
IAG directors are appointed for a period
of one year, as set out in the Company's
Bylaws. At the end of their mandate,
directors may be re-elected one or more
times for periods of equal duration to
that established in the Bylaws. In this
way, the Company complies with the UK
Code recommendation that directors
should be subject to annual re-election.
Re-election proposals are subject to a
formal process, based on the
Nominations Committee proposal in the
case of non executive directors, or its
recommendation report for executive
directors. This proposal or report is
prepared having due regard to the
performance, commitment, capacity,
ability and availability of the director to
continue to contribute to the Board
with the knowledge, skills and
experience required.
Directors cease to hold office when the
term of office for which they were
appointed expires.
Notwithstanding the above, a director
must resign in the cases established in
article 16.2 of the Board Regulations,
a copy of which is available on the
Company's website (www.iairgroup.com),
and the Spanish Comisión Nacional
del Mercado de Valores website
(wwww.cnmv.es).
Board diversity
Nationality
Spain
Ireland
UK
France
US
Colombia
Netherlands
Gender
33%
4 females
Tenure
33%
0–3 years
Core areas of expertise
41.6%
Industry
41.6%
Consumer
Brands
B2C
58.3%
Current/recent
CEO/Chair
experience
25%
Accounting/
Audit
67%
8 males
33%
4–6 years
33%
7–9 years
83.3%
General
management
41.6%
Corporate
transactions
50%
International
8.3%
Technology
www.iairgroup.com
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CORPORATE GOVERNANCE CONTINUED
Under article 23.2 of the Board Regulations, directors have a number of disclosure obligations, including the duty to inform the
Company of circumstances that might harm the Group's name or reputation. In particular, if they become subject to any
judicial, administrative or other proceedings. In such case, the Board would consider the case as soon as practicable and adopt
the decisions it deems fit, taking into account the corporate interest. If remaining on the Board would affect the Company’s
reputation, or otherwise jeopardise its interest, a director must place their position at the disposal of the Board of Directors and,
at its request, formally resign.
A director who stands down before the end of their term of office must state his or her reasons in a letter to be sent to all the
directors. In addition, these explanations need to be included in the Company’s Annual Corporate Governance Report.
The Board of Directors may only propose the removal of a non executive director before the end of the mandate when it
considers there is just cause, following a report by the Nominations Committee. For these purposes, just cause is deemed
to exist when the director takes up new positions or enters into new obligations that prevent him from dedicating the
necessary time to the performance of his or her duties as a director, otherwise breaches his or her duties as a director or
unexpectedly becomes subject to any of the circumstances provided for in article 16.2 of the Board Regulations. The removal
may also be proposed as a result of takeover bids, mergers or other similar corporate transactions that determine a material
change of control.
Board and committee meetings
The Board met 10 times during the reporting period. The Board also held its annual two-day strategy meeting in September
2018. During the reporting period, the Chairman and the non–executive directors met on two occasions without the
executives present.
As stated in the Board Regulations, directors shall make their best efforts to attend Board meetings. If this is not possible, they
may grant a proxy to another director, although non executive directors may only grant their proxy to another non executive
director. These proxies need to be in writing and specifically granted for each meeting. No director may hold more than three
proxies, with the exception of the Chairman, who cannot represent more than half of the Board members. As far as possible,
proxies should be granted including voting instructions.
Meetings attended by each director of the Board and the different committees during the reporting period are shown in the
table below:
Director
Total in the period
Antonio Vázquez
Willie Walsh1
Marc Bolland1
Patrick Cescau
Enrique Dupuy de Lôme
Deborah Kerr2
James Lawrence3
María Fernanda Mejía1
Nicola Shaw4
Kieran Poynter
Emilio Saracho
Dame Marjorie Scardino
Alberto Terol
Audit
and Compliance
Committee
Board
Nominations
Committee
Remuneration
Committee
Safety
Committee
10
10
9
8
10
10
3/4
6/6
8
9
10
10
9
10
8
–
–
–
8
–
3/4
–
8
–
8
–
–
8
6
6
–
–
6
–
–
–
–
–
–
6
5
–
5
–
–
4
–
–
–
–
5
2/2
–
–
4
5
2
2
2
2
–
–
–
–
–
1
2
–
–
–
1 Marc Bolland, María Fernanda Mejía and Willie Walsh could not attend the extraordinary Board meeting held on 24 April 2018 called at short notice by
the Board Secretary at the request from the Chairman.
2 Deborah Kerr was appointed as a non executive director, and member of the Audit and Compliance Committee, on June 14, 2018.
3 James Lawrence retired from the Board on June 14, 2018.
4 Nicola Shaw was appointed as a member of the Remuneration Committee and of the Safety Committee on June 14, 2018.
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The Board maintains a rolling 12-month agenda schedule for Board meetings that sets out regular operational matters as well
as specific upcoming issues to be considered. This schedule is updated and distributed to directors before each Board meeting,
giving them the opportunity to suggest or recommend any specific topics to be considered. This schedule is also reviewed and
approved, as a separate agenda item, at the May and December Board meetings.
Each Board meeting starts with a report from each of the committee’s chairs on the key discussions and decisions considered
by the respective committees, providing an opportunity to directors to comment or ask questions on the matters dealt by
each committee. This is followed by a general update from the Group Chief Executive and subsequently, from the Chief
Financial Officer.
The key areas of Board activity during 2018 are outlined below:
Board activities
Area Focus
Strategy and
planning
Performance and
monitoring
Significant
transactions,
investments and
expenditures
Risk management
and Internal
controls
Corporate
Governance
• Joint Board/ Management Committee two-day strategy session, including:
competitive landscape, customer focus, strategic positioning and
performance of each Group business
• Introductory session to the 2023 Business Plan
• 2019-2023 Group Business Plan and 2019 Financial Plan
• Group brand portfolio review
• Updates on corporate strategy and transactions
• Reports from each of the operating companies
• Quarterly and full year financial reporting
• Monthly financial report (reviewed at the relevant meeting or distributed to
all Board members)
• Customer metrics
• Review of different joint business agreements
• British Airways pensions update
• Dividends distribution and 2018 share buy-back programme
• Launch of new products and fleet reconfigurations
• Significant aircraft acquisitions, lease-backs and aircraft-related
financing arrangements
• Significant maintenance, supply and inventory and engine agreements
• Financing arrangement for the acquisition or lease of aircrafts
• British Airways litigation review
• Significant IT investments both at Group or operating company level
• IAG Investment rating update
• Group Loyalty Programme (Avios)
• British Airways and Iberia catering agreements
• Review risk map and risk appetite statements
• Group cyber security office
• British Airways data breach
• Approve going concern and viability statements
• Effectiveness review of the internal control and risk management systems
• Updates and review of the uncertainties arising from the Brexit process
• Review and update of the Group Treasury Key Strategic principles
• External auditor yearly report to the Board
• MC remuneration scheme and individual performance (Salary review 2018
short and long-term plans, 2017 outcome of variable remuneration plans)
• Board and management succession planning
• Changes to Group company boards
• AGM call notice and proposed resolutions
• Review of the Board committee’s composition
• Board and committees effectiveness evaluation, and agreed
improvement priorities
• Review feedback from institutional shareholders, roadshows as well a
analyst reports
• New UK Corporate Governance Code
Link to Strategic Objectives
1
2
3
2
1
1
2
3
2
3
1
2
3
Link to strategy
1
Strengthening a portfolio
of world-class brands
and operations
Growing global
leadership positions
Enhancing IAG’s common
integrated platform
2
3
www.iairgroup.com
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CORPORATE GOVERNANCE CONTINUED
As discussed within the Board
evaluation exercise, the Board priorities
for 2019 include, in no particular order:
customer experience across brands,
enterprise risk management (with
particular focus on cyber security risk),
corporate culture and stakeholders’
interests, future business developments
and opportunities within the Group
strategy and long term priorities,
including specifically IT/Digital strategy.
Board information and training
All Board and committee meeting
documents are available to all directors,
including minutes of all Board and
committees’ meetings. All directors have
access to the advice of the Board
Secretary and the Group General
Counsel. Directors may take
independent legal, accounting, technical,
financial, commercial or other expert
advice at the Company’s expense when
it is judged necessary in order to
discharge their responsibilities
effectively. No such independent advice
was sought in the 2018 financial year.
In 2018 the Board received specific
briefings on key developments, such as
the ongoing negotiations regarding the
UK’s exit from the EU and the new UK
Corporate Governance Code. In July, a
specific training session was also held
on blockchain technology.
In addition, an on-site session was
organised at Iberia to help non-
executive directors deepen their
knowledge of Iberia’s operations and in
particular of its maintenance business,
including a visit to Iberia’s engine
workshop. In December, a number of
non-executive directors participated in a
specific briefing session with British
Airways team focused on its commercial
programmes and customer experience,
including the main aspects of the
passenger journey at Heathrow airport.
Directors are offered the possibility to
update and refresh their knowledge of
the business and any technical related
matter on an ongoing basis to enable
them to continue fulfilling their
responsibilities effectively. Directors are
consulted about their training and
development needs and given the
opportunity to discuss training and
development matters as part of their
annual individual performance
evaluation. The Board programme
includes regular presentations from
management and informal meetings to
build their understanding of the
business and sector.
Board induction
According to the induction guidelines
approved by the Nominations
Committee, on joining the Board,
every newly appointed director is
offered a comprehensive induction,
tailored to the directors’ needs. The
programme includes one-to-one
meetings with management of IAG
and of the main operating companies,
offering directors a complete overview
of the Group's businesses.
The purpose of the programme is to
provide new directors with sufficient
information to enable him or her to fulfil
directors’ duties and to become as
effective as possible, as quickly as
possible, in the new role. According to
this, the programme is designed to
provide a wide overview of the industry
and sector, including the business model
and particulars of the Group. In addition
to individual relevant topics as
applicable, the basic content of the
programme is:
IAG businesses
Business basics and introduction to the IAG Group
IAG strategy
Legal, regulation and compliance
Spanish and UK Corporate governance
Other/external
IAG Communication strategy
Sustainability and Climate Change
IAG brands portfolio review
Operating companies
introductory meetings:
IAG corporate governance structure
Aviation regulation. IAG regulatory and
government affairs
IAG compliance programme
The Group GBS model
Shareholders and investors update
• business model
• competitive landscape
• strategy
• current position
IAG finance particulars, financial targets,
fleet acquisition model, hedging policy
Risk map and risk management model
Corporate transactions: M&A, competitive landscape, antitrust law
and industry regulation
Group litigation update
Legal briefing
In a second phase of the induction programme, directors have the opportunity to visit the Group’s key sites and to meet with
each operating company leadership team, as a deep dive in each of the Group businesses. Finally, and as far as the committees
are concerned, newly appointed members are also provided with introductory sessions specific for each committee and
designed in accordance with the directors’ interests and needs.
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Board and committee evaluation
The annual Board review is taken as an opportunity to reflect on the effectiveness of the Board’s work and that of its
committees. Following the external evaluation carried out in 2016, this year the review was internally facilitated by the Board
Secretary under the supervision of the Chairman, completing the two-year cycle before another externally facilitated evaluation
is completed in 2019. The internal process was undertaken by way of a questionnaire, complemented with individual
discussions with the Chairman. Building on the initiatives already embedded in the Board’s agenda, this year the evaluation
exercise focused on the identification of areas for improvement while ensuring that there are no areas of concern regarding the
performance of the Board. The topics considered in the evaluation included Board composition, focus and activities,
organisation and use of Board’s time, agenda planning and quality of the information, relationship with management, as well as
training needs.
The Board Secretary shared the findings with the Chairman ahead of a full discussion at the January 2019 Nominations
Committee and Board meetings. Following the Board discussion, an action plan was then agreed for the year ahead. The
conclusions of this year’s review have been positive and confirmed that the Board and its committees operate effectively, while
a number of initiatives and areas for improvement were identified.
Outcomes and main improvement initiatives for 2019
2019 Board priorities and activities
Board and management
succession planning
Stakeholder engagement
Culture
Board meetings and discussions
The Board agreed on the priorities for the year as well as on additional specific
topics of interest to be added to those already identified in its 12-month rolling plan
of activities.
This remains a continued focus both at Board and management level. Composition
priorities have been discussed and agreed in accordance with the Board
refreshment cycle.
Particular emphasis will be placed on the Group succession planning and talent
development programmes to ensure that there is a structured plan consistent with the
Group's values and strategy to identify and develop internal talent.
Review the mapping of the Group’s main stakeholders as well as current engagement
mechanisms, with particular focus on engagement with the workforce. Formalise and
enhance reporting to the Board in this area.
Review and agree on relevant culture indicators that would be used to monitor and
assess corporate culture throughout the Group.
A number of changes and initiatives were agreed to improve the effectiveness of
Board meetings.
As part of the Board effectiveness review, each committee undertook its own review supported by the Board Secretary and
coordinated with the relevant chair. Each committee considered the feedback from the evaluation and agreed improvement
priorities as appropriate. Additionally, the Chairman met with each director individually to discuss their contribution to the
Board, the functioning of the Board as a whole, as well as an assessment of performance against the objectives agreed for 2018.
Finally, the Senior Independent Director discussed the performance of the Chairman with all the directors.
Relations with shareholders
The Board is committed to maintaining an open dialogue with shareholders and recognises the importance of that relationship
in the governance process. The Chairman is responsible for ensuring that effective communication with shareholders takes
place and that directors and executives understand and address investors’ concerns. The Board is briefed on a regular basis by
the Group Head of Investor Relations and analysts’ reports are circulated to all directors.
The Board has a Shareholder Communication Policy regarding communication and contacts with shareholders, institutional
investors and proxy advisors, following the 2015 Spanish Good Governance Code recommendation. This policy is available on
the Company’s website www.iairgroup.com.
IAG has a comprehensive investor relations programme which aims to help existing and potential investors understand the
Group and its businesses.
Regular shareholder meetings were held with executive directors, and the investor relations team during 2018. The Chairman,
the Chair of the Remuneration Committee, the Senior Independent Director accompanied by the Group Head of Investor
Relations, met with many of IAG’s largest shareholders to discuss, amongst other matters, strategy, governance
and remuneration.
The Group’s medium to long-term plans and targets were discussed in detail in a full day of presentations given by the senior
management teams of the Group at the annual Capital Markets day that took place in London on November 2, 2018. Non-
executive directors are invited to this meeting, giving major shareholders and investors the opportunity to discuss corporate
governance matters with members of the Board. The event was broadcast live via webcast. The presentations are available in
full on the Company’s website (www.iairgroup.com), along with the accompanying transcript.
Both institutional and private shareholders may contact the Company through a dedicated website, via email and directly
by telephone.
www.iairgroup.com
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Key investor relations activities during the year included:
Month
Event
April
March
January
February
Davy Equity Conference, New York and Boston
Spain Investor Day, Madrid
Full Year Results Event, London
Remuneration Interaction, London
Barclays Travel and Leisure conference, London
JPM Transport, Aviation Conference, New York
Full Year Results Roadshow, London and Edinburgh
DB Access European Corporate Days, Scandinavia
European Roadshow, Dublin
Enhanced Equipment Trust Certificate (EETC) Roadshow, US
European Roadshow, Milan
Governance Roadshow, London and Edinburgh
European Roadshow, Bilbao
Full Year Results Roadshow, Madrid
European Roadshow, Frankfurt
JPM Amsterdam Investor Forum, Amsterdam
European Roadshow, Paris
Annual General Meeting, Madrid
European Roadshows, Madrid
CEO Investor Dinner, London
Davy Transport Conference, London
US Roadshow, New York, Denver and West Coast
European Roadshow, Vienna
Farnborough Air Show, London
Half Year Results Event, London
Mainfirst Transport Conference, Frankfurt
September Half Year Results Roadshow, London and Edinburgh
July
August
June
May
Citi Growth Conference, London
Deutsche Bank Airlines Day, New York
Half Year Results Roadshow, New York and Boston
Half Year Results Roadshow, Madrid
UBS Transport Conference, London
November Capital Markets Day, London
Goodbody European Equity Conference, Dublin
BME Spain All Caps Conference, Madrid
US Roadshow, Mid-West &West Coast
Far East Roadshow, Asia & Australia
Other statutory
information
Directors’ disclosure duties,
conflicts of interests, and related
party transactions
Directors must inform the Company of
any participation or interest they may
hold or acquire in any company that is
a competitor of the Group, or any
activities that could place them in
conflict with the corporate interest.
Directors have an obligation under the
Board Regulations to adopt the
measures necessary to avoid conflict of
interest situations. These include any
situation where the interest of the
director, either directly or through third
parties, may conflict with the corporate
interest or with his duties to the
company. Directors must disclose to the
Board any situation of direct or indirect
conflict that they may have with the
interests of the Company. In the event
of conflict, the affected director must
abstain from participating in the
transaction referred to by the conflict.
For the purposes of calculating the
quorum and voting majorities, the
affected director would be
excluded from the number of
members in attendance.
In accordance with article 3.4 of the
Board Regulations, the Board of
Directors has the exclusive authority
to approve transactions with the
directors, with shareholders that have
a significant holding or with any persons
related to them.
The execution of these type of
transactions or any transaction which
may entail a conflict of interest need
to be reported to the Audit and
Compliance Committee to ensure that
they are carried out at arm’s length and
with due observance of the principle of
equal treatment of shareholders.
In the case of transactions that fall
within the ordinary course of business
and are customary or recurring in
nature, and following a report by the
Audit and Compliance Committee, the
Board may grant a general authorisation
as long as they are executed under
certain terms and conditions.
This authorisation needs to be
endorsed by the Shareholders’ Meeting
in those cases established in the Spanish
companies’ legislation and, in particular,
in any transaction with a director
valued at more than 10 per cent
of corporate assets.
In addition to this, and prior to the
Audit and Compliance Committee
consideration, shareholder related party
transactions are also reviewed by the
IAG Management Committee and are
reported to the IAG Head of Group
Audit and Risk Management.
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INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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(c) the maximum price which may
be paid for an ordinary share is
the highest of:
(i) an amount equal to five per
cent above the average of
the middle market
quotations for the shares as
taken from the relevant
stock exchange for the five
business days immediately
preceding the day on which
that ordinary share is
contracted to be
purchased; and
(ii) the higher of the price of
the last independent trade
and the highest current
independent bid on the
trading venues where the
transaction is carried out at
the relevant time; in each
case, exclusive of expenses.
(v) reduce the share capital by
means of cancelling up to
185,000,000 shares (nine per
cent of the share capital).
The shares acquired pursuant to this
authorisation may be delivered directly
to the employees or directors of the
Company or its subsidiaries or as a
result of the exercise of option rights
held thereby. For further details see
note 27 to the Group
financial statements.
The IAG Securities Code of Conduct
regulates the Company’s dealings in
its treasury shares. This can be
accessed on the Company’s website
(www.iairgroup.com).
Under the above mentioned authority,
the Company purchased 65,956,660
shares which were cancelled on
November 7, 2018 reducing the
share capital in the amount of
32,978,330 euros.
IAG maintains commercial relationships
with Qatar Airways, including cargo
capacity agreements, passenger
codeshares, wet leases and interline
agreements. As a signifiant shareholder,
these transactions have been reviewed
by the Audit and Compliance
Committee and approved by the Board
of Directors.
Directors’ and Officers’
liability insurance
The Company has purchased
insurance against Directors’ and
Officers’ liability for the benefit of the
directors and officers of the Company
and its subsidiaries.
Share issues, buy-backs and
treasury shares
The Annual General Meeting held on
June 14, 2018 authorised the Board, with
the express power of substitution, for a
term ending at the 2019 Annual General
Meeting (or, if earlier, 15 months from
June 14, 2018), to:
(i)
increase the share capital pursuant
to the provisions of Article 297.1.b)
of the Spanish Companies Law, by:
(a) up to one-third of the
aggregate nominal amount of
the Company’s issued share
capital as at the date of passing
such resolution (such amount to
be reduced by the amount that
the share capital has been
increased by and the maximum
amount that the share capital
may need to be increased by on
the conversion or exchange of
any securities issued by the
Board under the relevant
authorisation); and
(b) up to a further one-sixth of the
aggregate nominal amount of
the Company’s issued share
capital as at the date of passing
such resolution in connection
with an offer by way of rights
issue (such amount to be
reduced by the amount that the
share capital has been increased
by and the maximum amount
that the share capital may
need to be increased by on
the conversion or exchange
of any securities issued by
the Board under the
relevant authorisation).
(ii) issue securities (including warrants)
convertible into and/or
exchangeable for shares of the
Company, up to a maximum limit
of 1,500,000,000 euros or the
equivalent thereof in another
currency, provided that the
aggregate share capital that may
need to be increased on the
conversion or exchange of all such
securities may not be higher than:
(a) one-third of the aggregate
nominal amount of the
Company’s issued share capital
as at the date of passing such
resolution (such amount to be
reduced by the amount that the
share capital has been increased
by the Board under the relevant
authorisation); and
(b) a further one-sixth of the
aggregate nominal amount of
the Company’s issued share
capital as at the date of passing
such resolution in connection
with an offer by way of rights
issue (such amount to be
reduced by the amount that
the share capital has been
increased by the Board under
the relevant authorisation).
(iii) exclude pre-emptive rights in
connection with the capital
increases and the issuance of
convertible or exchangeable
securities that the Board may
approve under the previous
authorities for the purposes of
allotting shares or convertible or
exchangeable securities in
connection with a rights issue or
in any other circumstances subject
to an aggregate maximum nominal
amount of the shares so allotted
or that may be allotted on
conversion or exchange of such
securities of five per cent of the
aggregate nominal amount of the
Company’s issued share capital as
at June 14, 2018.
(iv) carry out the acquisition of its own
shares directly by the Company or
indirectly through its subsidiaries,
subject to the following conditions:
(a) the maximum aggregate
number of shares which is
authorised to be purchased
shall be the lower of the
maximum amount permitted by
the law and such number as
represents 10 per cent of the
aggregate nominal amount of
the Company’s issued share
capital on June 14, 2018, the
date of passing the resolution;
(b) the minimum price which may
be paid for an ordinary share
is zero;
www.iairgroup.com
85
CORPORATE GOVERNANCE CONTINUED
Capital structure and shareholder rights
As of December 31, 2018, the share capital of the Company amounted to 996,016,317 euros (2017: 1,028,994,647 euros), divided
into 1,992,032,634 shares (2017: 2,057,989,294 shares) of the same class and series and with a nominal value of 0.50 euros
each, fully subscribed and paid.
As of December 31, 2018 the Company owned 8,721,835 shares as treasury shares.
During 2018, the Company filed four treasury shares reporting statements with the CNMV, as required by Spanish
regulations, communicating:
(i) the net acquisition of a total of 22,397,653 shares (1.088%) as of June 28, 2018;
(ii) the net acquisition of a total of 20,751,635 shares (1.008%) as of August 10,2018;
(iii) the net acquisition of a total of 21,499,109 shares (1.045%) as of October 1, 2018; and
(iv) the net acquisition of a total of 6,309,669 shares (0.317%) as of November 7, 2018.
Company’s share capital
November 7, 2018
Share capital (euros)
Number of shares/voting rights
996,016,317
1,992,032,634
Each share in the Company confers on its legitimate holder the status of shareholder and the rights recognised by applicable
law and the Company’s Bylaws which can be accessed on the Company’s website (www.iairgroup.com).
The Company has a Sponsored Level 1 American Depositary Receipt (ADR) facility that trades on the over-the-counter market
in the US. Each ADR is equivalent to two ordinary shares and each ADR holder is entitled to the financial rights attaching to
such shares, although the ADR depositary, Deutsche Bank, is the registered holder. As at December 31, 2018 the equivalent of
21,741,675 shares was held in ADR form (2017: 8.0 million IAG shares).
The significant shareholders of the Company at December 31, 2018, calculated according to the Company’s share capital as at
the date of this report and excluding positions in financial instruments, were:
Qatar Airways (Q.C.S.C)
Capital Research and Management Company
Europacific Growth Fund
BlackRock Inc
Lansdowne Partners International Limited
Other shareholders
Name of
shareholder
Qatar Airways (Q.C.S.C)
Capital Research and
Management Company
Number of
Number of
direct shares
indirect shares
Name of
direct holder
426,811,047
–
–
213,580,659 Collective investment institutions
Europacific Growth Fund
BlackRock Inc
107,329,400
–
managed by Capital Research
and Management Company
–
62,311,368 Funds and accounts managed by
investors controlled by
BlackRock Inc.
Total shares
426,811,047
213,580,659
Percentage
of capital
21.426%
10.722%
107,329,400
62,311,368
5.388%
3.128%
Lansdowne Partners
International Limited
–
34,102,087 Funds and accounts managed by
34,102,087
1.712%
Lansdowne Partners (UK) LLP
86
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Annual Report and Accounts 2018
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represent at least 0.25 per cent of the
Company’s share capital in nominal
value, the Board may also direct that
no transfer of any such shares shall
be registered.
Limitations on ownership of shares
In the event that the Board deems
it necessary or appropriate to adopt
measures to protect an operating
right of the Company or of its
subsidiaries, in light of the nationality of
its shareholders or any persons with an
interest in the Company’s shares, it may
adopt any of the measures provided
for such purpose in article 11 of the
Bylaws, including the determination of a
maximum number of shares that may be
held by non-EU shareholders provided
that such maximum may not be lower
than 40 per cent of the Company’s
share capital.
The Board may also (i) agree on the
suspension of voting and other political
rights of the holder of the relevant
shares, and (ii) request that the holders
dispose of the corresponding shares so
that no non-EU person may directly or
indirectly own such shares or have an
interest in the same. If such transfer is
not performed on the terms provided
for in the Bylaws, the Company may
acquire the corresponding shares (for
their subsequent redemption) pursuant
to applicable legislation. This acquisition
must be performed at the lower of the
following prices: (a) the book value of
the corresponding shares according to
the latest published audited balance
sheet of the Company; and (b) the
middle market quotation for an ordinary
share of the Company as derived from
the London Stock Exchange’s Daily
Official List for the business day on
which they were acquired by the
relevant non-EU person.
On 11th February 2019, IAG notified the
stock market that, due to the level of
share ownership by non-EU
shareholders, the Board established the
maximum number of shares that may be
held by non-EU shareholders at 47.5% of
the Company’s issued share capital. As a
consequence and in accordance with
IAG’s Bylaws, IAG prohibited further
acquisitions of IAG shares by non-EU
persons until further notice.
Shareholder’s Meeting
The quorum required for the
constitution of the shareholder’s
meeting, the system of adopting
corporate resolutions, the procedure for
amending the Bylaws and the applicable
rules for protecting shareholders’
rights when changing the Bylaws are
governed by the provisions established
in the Spanish Companies Law.
The Company corporate
governance information is available
on the Company’s website
(www.iairgroup.com) in the
“Corporate Governance” section
under "Shareholders' Meeting".
Disclosure obligations
The Company’s Bylaws establish a series
of special obligations concerning
disclosure of share ownership as well as
certain limits on shareholdings, taking
into account the ownership and control
restrictions provided for in applicable
legislation and bilateral air transport
treaties signed by Spain and the UK.
In accordance with article 7.2 b) of the
Bylaws, shareholders must notify the
Company of any acquisition or disposal
of shares or of any interest in the shares
of the Company that directly or
indirectly entails the acquisition or
disposal of a stake of over 0.25 per cent
of the Company’s share capital, or of the
voting rights corresponding thereto,
expressly indicating the nationality of
the transferor and/or the transferee
obliged to notify, as well as the creation
of any charges on shares (or interests in
shares) or other encumbrances
whatsoever, for the purposes of the
exercise of the rights conferred by them.
In addition, pursuant to article 10 of the
Bylaws, the Company may require any
shareholder or any other person with a
confirmed or apparent interest in shares
of the Company to disclose to the
Company in writing such information
as the Company shall require relating
to the beneficial ownership of or any
interest in the shares in question, as
lies within the knowledge of such
shareholder or other person, including
any information that the Company
deems necessary or desirable in order
to determine the nationality of the
holders of said shares or other person
with an interest in the Company’s shares
or whether it is necessary to take steps
in order to protect the operating rights
of the Company or its subsidiaries.
In the event of a breach of these
obligations by a shareholder or any
other person with a confirmed or
apparent interest in the Company’s
shares, the Board may suspend the
voting or other political rights of the
relevant person. If the shares with
respect to which the aforementioned
obligations have been breached
Impact of change of control
The following significant agreements
contain provisions entitling the
counterparties to exercise termination
in the event of a change of control of
the Company:
• the brand alliance agreement in
respect of British Airways and Iberia’s
membership of oneworld, the
globally-branded airline alliance, could
be terminated by a majority vote of
the parties in the event of a change of
control of the Company;
• the joint business agreement between
British Airways, Iberia, American
Airlines and Finnair and the joint
business agreement between British
Airways, Japan Airlines and Finnair
can be terminated by the other parties
to those agreements in the event of a
change of control of the Company by
either a third-party airline, or the
parent of a third-party airline; and
• certain IAG, Aer Lingus, British
Airways, Iberia and Vueling
exchange and interest rate hedging
contracts allow for early termination
if, after a change of control of the
Company, their credit worthiness was
materially weaker.
In addition, the Company’s share plans
contain provisions as a result of which
options and awards may vest and
become exercisable on a change of
control of the Company in accordance
with the rules of the plans.
www.iairgroup.com
87
Report of the Audit
and Compliance Committee
TBU
Committee members
Meetings attended
Kieran Poynter (Chair)
27 September 2010
Patrick Cescau
27 September 2010
Deborah Kerr
14 June 2018
María Fernanda Mejía
16 June 2016
Alberto Terol
02 August 2013
8/8
8/8
3/4
8/8
8/8
The Committee’s responsibilities
The Committee’s principal responsibility was to oversee and give reassurance
to the Board with regards to the integrity of financial reporting, audit
arrangements and internal controls. The Committee’s activities include:
• reviewing the financial statements and announcements of the Group;
• reviewing significant accounting estimates and judgements made in the
representation of financial statements of the Group;
• reviewing the effectiveness of the internal control system, provision of
assurance on the risk management process and reviewing the principal
risks facing the Group;
• reviewing and agreeing the internal audit programme, resourcing,
effectiveness and resolution of issues raised;
• monitoring the internal controls manuals and procedures adopted by the
Company, to verify compliance with them and review the designation and
replacement of the persons responsible for them;
• discussing with the external auditors any significant weaknesses in the
internal control environment detected in the course of the audit; and
• recommending the appointment of external auditors where appropriate and
reviewing their effectiveness, fees, terms of reference and independence.
During the year, the Committee performed an evaluation of its performance
and concluded it is operating effectively. An external evaluation process was
carried out in 2016.
Kieran Poynter
Audit and Compliance Committee Chairman
Dear Shareholder
The Audit and Compliance
Committee continues to play a key
role in advocating strong internal
control, risk management and
compliance practices across the Group
and ensure these practices keep pace
with the changes in the business. We
have also continued to “deep dive” into
key issues such as the British Airways
data breach and the impact of
significant accounting changes
including IFRS 16.
I am pleased to welcome Deborah Kerr,
who joined the Committee in June 2018.
Through her wide technology, digital
and commercial knowledge she is
contributing to our high level of
challenge and support to the
management team.
As I look forward to 2019, I believe we
are in a good position to comply with
the 2018 UK Corporate Governance
Code and we will be working closely
with the management team and the
rest of the Board to meet the
new requirements.
Kieran Poynter
Audit and Compliance Committee
Chairman
88
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
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Whistleblowing
The Committee reviewed procedures
whereby staff across the Group can
raise confidential concerns regarding
accounting, internal control, auditing
and other matters. There are whistle-
blowing channels provided by third-
party providers, Safecall and
Ethicspoint, where all staff across the
Group can report concerns to senior
management in their company. The
Committee also reviewed the volume
of reports by category and nature;
timeliness of follow-up; responsibility for
follow-up, and noted that there were no
significant financial or compliance issues
raised. The annual review is coordinated
by the Head of Group Audit.
Financial reporting
Internal Control over Financial
Reporting (ICFR)
As part of the Group’s internal control
framework it complies with the Spanish
corporate governance requirement
(ICFR), which is an analysis of risks in
financial reporting, the documentation
of accounting processes, and audit of
internal controls. In 2018 the Committee
reviewed the results of the audits and
no material weaknesses were identified.
The Committee also tracked the
progress of Internal Audit
recommendations.
Enterprise risk management
The Committee was updated on
the principal risks of the Group. The
Committee reviewed the process by
which risk strategy and appetite had
been assessed to confirm that the
statements were still relevant and
appropriate. They also reviewed the
performance of the Group against each
of its risk appetite statements and the
Committee agreed with management’s
assessment that the Group has operated
within its risk appetite framework.
The Committee will continue to engage
with management and take steps to
protect the interests of IAG in a
no-deal scenario.
British Airways data breach
In September, British Airways
reported the theft of data from its
customers as a result of a criminal
attack on its website. Management
have reviewed cyber security to further
increase resilience and the Committee
received regular updates during the
year following the event.
Compliance and regulatory
Anti-bribery, sanctions and competition
law compliance
The Committee reviewed the Group’s
anti-bribery, sanctions and competition
compliance programmes including
updates for organisational changes,
latest risk maps, the key focus areas of
2018 and programme priorities for 2019,
which include enhancements to the
Group compliance training framework
and a new Group third-party
management platform. The Committee
also received an update on the draft IAG
Code of Conduct including planned
Group-wide implementation activities
in 2019.
General Data Protection Regulation
(GDPR)
The Committee received regular
updates on the Group’s implementation
of the new EU Data Privacy Regulation.
The updates focused on key decisions
made prior to implementation, the
progress against the implementation
plan and ongoing compliance. GDPR
became enforcable in May 2018.
Sustainability
The Committee reviewed the
progress made in the implementation
of the sustainability strategy and the
performance against targets in key
areas such as carbon footprint and noise
performance including the 2050 carbon
emissions reduction goal. This also
included a review of progress relating
to sustainable alternative fuels, fuel
efficiency and improvements in carbon
disclosure including work with the
Carbon Disclosure Project and the
Task Force on Climate Related
Financial Disclosure.
The Audit and Compliance Committee
The composition, competencies and
operating rules of the Audit and
Compliance Committee are regulated
by Article 29 of the Board Regulations.
A copy of these Regulations can be
found on IAG’s website.
The Committee’s activities during
the year
The Committee met eight times
during 2018 and continues to refine its
approach to management attendance
at Committee meetings including a
review of the agenda in advance of each
meeting to ensure the attendees of each
item are appropriate, the inclusion of
private sessions of the Committee
members and with both the external
and internal auditors as appropriate.
In addition to the Secretary and
Deputy Secretary, regular attendees
at Committee meetings included the
Chairman, the Head of Group Audit
and representatives from the external
auditors. The Head of Group Audit
reports functionally to the Chairman
of the Committee.
Members of the management team
including the Chief Executive Officer,
the Chief Financial Officer and the
Group Financial Controller were invited
to attend specific agenda items as
required and when relevant.
Other items reviewed
Business, operational and financial risks
Treasury risk management
The Committee continued to review the
Group’s fuel, foreign exchange hedging
positions and financial counterparty
exposure on a quarterly basis, including
that the approved hedging profile was
being adhered to and continued to be
appropriate to manage these risks in
line with the Group risk appetite.
UK referendum vote to leave the
European Union
The Committee considered
management’s evaluation and risk
assessment of the arrangements around
the UK’s exit from the European Union
as part of the review of the principal
risks and uncertainties of the Group.
This included the regular review of fuel
price sensitivity and foreign exchange
rate fluctuations as well as reviewing
issues and vulnerabilities in the case of a
no deal outcome. In the case of treasury
operations, the Committee reviewed
management’s contingency plans to
ensure business continuity. While there
will continue to be uncertainty until
agreements are reached, the Committee
agrees with management’s current
assessment that, even in the event of
no-deal, Brexit will have no significant
long-term impact on the Group.
www.iairgroup.com
89
The Group audit was last tendered on
the incorporation of IAG in 2010. The
Company intends to comply with the
Spanish Act 22/2015, on the Auditing
requirement to tender the external audit
at least every ten years and the
transition arrangements that would
require the audit to be tendered for the
year 2021 at the latest. The Board of
Directors refrain from engaging any
audit firm entitled to be paid by the
Company for all services rendered fees
in excess of 10 percent of such firm’s
total revenue for the previous year. The
current EY partner is Hildur Eir
Jónsdóttir who has held her role since
2016.
Non-audit services provided by the
external auditors are subject to a Board
approved policy that prohibits certain
categories of work and controls the
overall level of expenditure. The
Committee reviews the nature and
volume of projects undertaken by the
external auditors on a quarterly basis
and all projects are either pre-approved
or approved by the Committee
Chairman for projects over €100,000 or
of an unusual nature. The overall volume
of work is addressed by a target annual
maximum of €1.6 million with an
additional allowance of up to €1.2 million
for large projects where EY are uniquely
placed to carry out the work.
Spend in 2018 was below the target
maximum at €893,000 with an
additional €325,000 relating to two
other advisory engagements. 52 per
cent of the €893,000 spend related to
recurring work on the audit of accounts
required by our Joint Business
arrangements. Details of the fees paid to
the external auditors during the year
can be found in note 6 to the Group
financial statements.
REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE CONTINUED
Viability statement
In February 2019, the Committee
reviewed the Group’s viability
assessment which covered a five-year
time horizon in line with the Group’s
Business Plan period. The analysis
focused on a combination of risks that
could together generate severe but
plausible downturn scenarios. The
Committee considered how solvency
and headroom were determined and
confirmed the period over which
viability is considered. The Committee
has a reasonable expectation that the
Group will be able to continue in
operation and meet its liabilities as
they fall due over the period to 2023.
Litigation
The Committee received regular
litigation status reports from the General
Counsel including one about the status
of the remaining civil claims against
British Airways following the 2010
European Commission decision on
alleged cartel activity with respect to air
cargo charges.
A number of the civil claims have been
concluded during 2018. The Committee
agreed with management’s view that,
given the status of proceedings, it is not
possible at this stage to predict the final
outcome and no financial provision
should be made for the remaining open
civil claims. More detailed information
relating to the cargo litigation is
available in note 31 to the Group
financial statements.
Accounting matters
Company accounting policies are
maintained by the Group Finance
Department, which updates and issues
the Group Accounting Policy manual.
Throughout the year, the Committee
considers the implications of new
accounting standards, reviews complex
accounting transactions, and considers
the key estimates and judgements used
in the preparation of the Group financial
statements. In 2018, these included the
exceptional items associated with
pensions and provisions for
restructuring costs at British Airways. In
addition the Committee considered the
implementation of the new accounting
standard IFRS 15 ‘Revenue from
contracts with customers’, preparation
for the implementation of IFRS 16
‘Leases’ in 2019, and judgements and
estimates surrounding income tax
provisions, pension transactions, and
changes to the estimated useful lives
and residual values of certain aircraft.
The exceptional items arose from the
closure of the New Airways Pension
Scheme to future contributions, the
recognition of additional pension
obligations following the Guaranteed
Minimum Pension equalisation ruling,
and the continuing structural
transformation proposals at British
Airways. The Committee has reviewed
and agreed with management’s
rationale for recognising these costs and
disclosing them as exceptional items by
virtue of their size and incidence.
The Committee considers whether the
Annual Report and Accounts are fair,
balanced and understandable. The
Committee also reviews disclosure
during the year through a half-yearly
report from the IAG Disclosure
Committee outlining all the matters
they discuss. The Committee is satisfied
that the Annual Report and Accounts
are fair, balanced and understandable
and has recommended their adoption
by the Board.
External audit
The Committee continues to work
closely with EY, with the engagement
partners attending seven meetings
during the year. The Committee
reviewed the engagement letter, fees
and the audit plan which included EY’s
assessment of risk areas within the
financial statements. Audit results were
reviewed during the meetings; for the
half year, for the findings from interim
audits, early warning report for year end
matters, and for the final report for year
end matters. No significant control
weaknesses were identified or reported
to the Committee by the external
auditors in 2018. In assessing the
effectiveness and independence of the
external auditors, the Committee
considered relevant professional and
regulatory requirements and the
relationship with the auditors as a whole.
The Committee monitored the auditors’
compliance with relevant regulatory,
ethical and professional guidance on the
rotation of partners, and assessed their
qualifications, expertise, resources and
the effectiveness of the audit process,
including a report from the external
auditor on its own internal quality
procedures. The assessment included a
detailed questionnaire completed by
key directors, managers and a sample of
accounting staff throughout the Group.
The questionnaire results demonstrated
that EY’s overall performance was good.
Having reviewed EY’s performance
during 2018, the Committee concluded
that EY were independent and that it
was in the Group’s and shareholders’
interests not to tender the audit in 2019
and recommends their re-appointment.
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Report of the Nominations
Committee
TBU
Committee members
Meetings attended
Antonio Vázquez (Chair)
December 19, 2013
Patrick Cescau
June 16, 2016
Emilio Saracho
June 16, 2016
Dame Marjorie Scardino
June 16, 2016
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main operating companies, which has
proved to be a very useful development
tool. This year we had to say goodbye
to Stephen Kavanagh, who handed over
his leadership of Aer Lingus to Sean
Doyle, British Airways director of
network, fleet and alliances, proving
once again the privilege of having a
strong and committed internal pipeline.
The Nominations Committee
The Nominations Committee has overall
responsibility for leading the process for
appointments to the Board and to
ensure that these appointments bring
the necessary skills, experience and
competencies to the Board, aligning its
composition to the business strategy
and needs.
Management succession planning and
development, together with diversity
initiatives, have been identified as the
principal areas for the Committee’s
focus in 2019.
Antonio Vázquez
Nominations Committee Chairman
The composition, competencies and
operating rules of the Nominations
Committee are regulated by article 30
of the Board Regulations. A copy of
these Regulations can be found on the
Company’s website.
These Regulations state that the
Nominations Committee shall be made
up of no less than three and no more
than five non-executive directors
appointed by the Board, with the
dedication, capacity and experience
necessary to carry out its function.
A majority of the members of the
Nominations Committee must be
independant directors.
The Committee’s activities in 2018
The Committee met six times during
2018. Directors’ attendance at these
meetings is shown above and further
detailed on page 80. IAG Chief
Executive was invited to attend
the Committee's meetings as and
when necessary.
www.iairgroup.com
91
Antonio Vázquez
Nominations Committee Chairman
Dear Shareholder
In my role as Committee Chairman, I am
pleased to present the Nominations
Committee’s Report, which summarises
our work over the past year.
Being one of its prime responsibilities,
the Committee has considered the skills
and experience required to support
the Board’s work in the context of the
strategy, challenges and opportunities
that the Group faces. This analysis
concluded last year with the decision to
look for a new director to reinforce the
Board’s expertise and knowledge of
technology matters, bringing the
appointment of Deborah Kerr as a
non-executive director and member of
the Audit and Compliance Committee.
As far as the Board succession planning
is concerned, the Committee has
particularly focused its attention on the
sequencing of future Board changes.
The nine-year tenure principle set by
the UK Corporate Governance Code
has always been present in our Board
succession scheduling and in the initial
eight years of our Board being
established, we have balanced the need
for regular board refreshment with that
of preserving the experience and
knowledge gained on our Board.
We have also reviewed and discussed
management succession planning and
talent development arrangements,
including board appointments in our
REPORT OF THE NOMINATIONS COMMITTEE CONTINUED
The Committee’s responsibilities
The Nominations Committee’s
responsibilities are contained in the
Board Regulations. These can be
summarised as:
• evaluating the competencies,
knowledge and experience
necessary on the Board and
reviewing the criteria for the
Board composition and the
selection of candidates
• submitting the appointment of
directors to the Board for
approval, and reporting on the
proposed designations of the
members of the Board
committees and their chairmen
• succession planning for Board
members making proposals
to the Board so that such
succession occurs in a planned
and orderly manner
• establishing guidelines for the
appointment, recruitment,
career, promotion and dismissal
of senior executives
• reporting to the Board on the
appointment and removal of
senior executives
• ensuring that non-executive
directors receive appropriate
induction programmes
• establishing a target for female
representation on the Board
which should adhere to the
Company’s Directors Selection
and Diversity Policy
• submitting to the Board a report
on the annual evaluation of the
Board’s performance
In accordance with its responsibilities,
the Committee focused on the following
activities during the year:
• the composition of the Board and the
combined capabilities and experience
of the non executive directors
• formulating a refreshment and
succession plan for the Board,
covering key positions
• non-executive director search and
final appointment of Deborah Kerr
• reviewing the Board committees’
membership
• Chairman and Group Chief Executive
annual appraisals
• talent management, pipeline and
mangement succession plans
• review of the Board annual evaluation
process and conclusions, as well as
that of the Nominations Committee
• Board and committees’ changes
In 2018, as part of the Board regular
refreshment process, the Nominations
Committee initiated a non executive
director search. The Committee
reviewed the Board skills matrix, which
identifies the core competencies, skills,
diversity and experience present at the
Board, and discussed priorities
regarding the profile needed to
strengthen the Board’s composition.
It was then agreed that the search’s
main focus would be an individual with
strong experience of information
technology, including digital
transformation in companies focused on
customers and brands. Spencer Stuart
was engaged to support the recruitment
process. They have no other connection
with the Company other than providing
recruitment services. Spencer Stuart is
an accredited firm under the Enhanced
UK Code of Conduct for Executive
Search Firms.
This process led to the appointment
of Deborah Kerr as a non-executive
director on 14 June 2018, filling the
vacancy left by James Lawrence, who
did not stand for re-election at the 2018
Shareholders’ Meeting.
The Nominations Committee reviewed
the composition of the committees
and proposed to the Board the
appointment of Nicola Shaw as a
member of the Remuneration and of
the Safety Committee, and that of
Deborah Kerr as a member of the
Audit and Compliance Committee.
Diversity and Board appointment
process
The Board places serious importance
on ensuring that its membership reflects
diversity in its broadest sense, because
it believes that this reinforces the
Board’s functioning and ultimately
enhances Board discussions and
leads to better decision making.
A combination of opinions, skills,
experiences, backgrounds and
orientations on the Board is important
in providing the range of perspectives,
insights and challenge needed to
facilitate the Board’s role.
When considering directors
appointments, the Committee follows
a formal, rigorous and transparent
procedure, designed to preserve this
diversity value while ensuring that any
appointment is made on merit, and
taking into account the specific skills
and experience needed at any point in
time to ensure continuing Board balance
and relevant knowledge. This procedure
follows the principles established in the
Company’s Director Selection and
Diversity Policy, approved by the Board
in 2016.
As recommended by the Spanish Good
Governance Code, the Nominations
Committee reviews compliance with
this policy on a yearly basis.
The basic principles and steps followed
in every appointment process are:
• Each search is based on a prior
analysis of the needs of the Board.
This evaluation is made alongside
succession plans for directors and
taking into consideration the
conclusions from the annual review
of Board performance.
• Searches are conducted by selected
executive search firms, only engaging
with those who are signatories to the
UK Voluntary Code of Conduct for
Executive Search Firms.
• The long-list of potential candidates
needs to include adequate
representation of female candidates,
and candidates, as far as possible,
from the widest possible pool.
• This long-list of candidates is reviewed
and discussed by the Nominations
Committee to produce a short list
which is then circulated to the whole
Board for relevant comments or
possible objections.
• The short listed candidatures are
analysed to ensure compliance with
the applicable independence tests
• Following this, interviews are
conducted with those preselected
with the participation of different
Committee members.
• Availability and commitment
expectations are discussed with each
of the candidates, and a rigorous
assessment of each potential
candidate is completed before the
Committee reaches a final decision.
The process led by the Committee to
identify, select and make the Board
recommendation in relation to the
appointment of Deborah Kerr is set
out below.
Gender diversity principles are followed
throughout the process, while
preserving the general diversity and
merit based appointment principles
established in the policy.
Furthermore, when reviewing board
appointments, the Board’s policy is to
consider candidates from a wide variety
of backgrounds, without discrimination
based on gender, race, colour, age,
social class, beliefs, religion, sexual
orientation, disability or other factors.
IAG’s Board aspiration to have a 33 per
cent female representation on the Board
by the end of 2020 is formally reflected
in the Directors Selection and Diversity
Policy. This target was met in 2018
following the appointment of Deborah
Kerr as a non-executive director.
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Annual Report and Accounts 2018
The appointment of Deborah Kerr
1
2
Search initiated in
accordance with
Board succession
plans and
specifications
discussed and agreed
Executive Search
Firm engaged to
assist with the search
3
Longlist of potential
candidates
considered
4 Shortlist agreed
and shared with
the Board
5
Interviews completed
and feedback
discussed (other
directors invited to
meet short-listed
candidates)
6 Nominations
Committee
considered final
candidate and made
recommendation to
the Board
7 Appointment
8 Appointment
announced by the
Board, and published
report for submission
to the Shareholders’
Meeting
approved by the
Shareholders’
Meeting
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This policy also sets out IAG’s
commitment to strengthen the gender
balance on IAG’s leadership and senior
management teams. IAG’s Management
Committee is responsible for improving
diversity within management and
generally across the Group. The
Nominations Committee is committed
to improving diversity, and gender
diversity in particular, within the Group,
and encourages and supports Group
initiatives in this respect. Relevant
details on diversity can be found page
63 of the Sustainability section.
Directors independence, performance
and availability
The Nominations Committee, having
considered the matter carefully, is
of the opinion that all of the current
non-executive directors remain
independent, both in line with the
definition set out by the Spanish
Companies Act and with that of the
UK Corporate Governance Code,
and are free from any relationship
or circumstances that could
affect, or appear to affect, their
independent judgement.
Having served on the Board for more
than six years, the Committee undertook
a particularly rigorous review in respect
of Patrick Cescau and Kieran Poynter,
including their independence. The Board
remains satisfied that they both remain
independent and will continue to make a
valuable contribution.
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All proposals for the appointment or
re-election of directors presented to
the 2018 Shareholders’ Meeting were
accompanied by an explanatory report
issued by the Board of Directors with
the support of the Nominations
Committee assessing the competence,
experience and merits of each
candidate. Following this review, the
Committee was of the opinion that
each non executive director submitting
him or herself for re-election continued
to demonstrate commitment to the
role as a member of the Board and its
committees, discharged his or her duties
effectively and that each was making a
valuable contribution to the
leadership of the Company for
the benefit of all shareholders.
According to article 17.5 of the Board
Regulations, unless otherwise authorised
by the Nominations Committee, a
non-executive director cannot hold
more than six other directorships,
including only four in a listed company.
Executive directors can only hold one
directorship in another public listed
companies. In any event, prior consent
from the Nominations Committee is
required before an executive director
can accept any external directorship
appointment.
Induction of directors
A comprehensive induction programme
was initiated for Deborah Kerr in July
2018 and has been arranged following
IAG’s induction guidelines as approved
by the Nominations Committee. This is
described in more detail on pages 92
and 93.
Succession planning
The Committee regularly reviews the
formal succession plan for the Board,
including analysis of director’s length of
tenure, skills and experience. IAG follows
both the Spanish and the UK corporate
governance standards, adapting to
the most stringent requirements.
The Board’s refreshment cycle is
determined in accordance with UK
principles, whereby non-executive
directors' tenure should not exceed
nine years.
Succession planning for the top 50
leadership positions in the Group was
presented and discussed at the
September Nominations Committee
meeting. This succession planning
schedule is reviewed and updated
by the IAG Management Committee
on a quarterly basis.
The Committee annual evaluation
The annual performance evaluation
was conducted internally by the Board
Secretary under the supervision of the
Committee Chairman. The results of
this exercise were discussed at the
Nominations Committee meeting
held in January 2019. The evaluation
concluded that the Committee operated
effectively during 2018.
The Committee has agreed to prioritise
its focus on the review of the Group's
framework for management succession
and talent development, as well as on
the initiatives to improve gender
diversity within the Group.
www.iairgroup.com
93
Report of the Safety Committee
Committee members
Date appointed
Meetings attended
Willie Walsh (Chair)
October 19, 2010
Antonio Vázquez
October, 19 2010
Marc Bolland
June 16, 2016
Kieran Poynter
October 19, 2010
Nicola Shaw
June 14, 2018
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Willie Walsh
Safety Committee Chairman
Dear Shareholder
In 2018, the Safety Committee continued
its routine work monitoring the safety
performance of IAG’s airline companies,
as well as the systems and resources
dedicated to safety activities across the
Group. We were pleased to welcome
Nicola Shaw as a new member to the
Committee in June.
As I do every year, I like to highlight the
role that this committee plays within our
Group, partly to be clear about our remit
as a committee and partly to emphasize
its uniqueness and its value in the Group
context. Safety and security
responsibility lies with each Group airline
in accordance with its applicable
standards, its own culture and the
circumstances and particularities of
each business. IAG’s Safety Committee
exercises a high-level overview of safety
activities to ensure a minimum Group
standard, but more importantly it fosters
the Group homogenisation effort in
safety reporting, the discussion of
common issues and the sharing of
best-practices between Group airlines.
This year the Committee saw the
retirement, of Captain Tim Steeds, after
44 years with British Airways. Tim
played a key role in the development of
British Airways Safety and Security
Management System and of its culture,
but he also made a key contribution to
the setting up and coordination of
safety matters at IAG. I would like to
thank him for his work and dedication to
British Airways and to IAG.
Willie Walsh
Safety Committee Chairman
The Safety Committee
The Committee composition,
competencies and operating rules are
regulated by article 32 of the Board
Regulations. The Committee is made
up of no fewer than three and no more
than five directors appointed by the
Board, with the dedication, capacity
and experience necessary to carry out
their function.
In addition to Committee members,
senior managers with responsibility for
safety matters are invited to attend and
report at Committee meetings as and
when required. During 2018, the British
Airways Director of Safety and Security,
representatives of the Iberia and
Vueling safety teams and the Aer
Lingus Corporate Safety and Risk
Manager attended meetings.
The Committee’s activities
during the year
During 2018, the Committee held two
meetings. Directors’ attendance at these
meetings is shown above and further
detailed on page 80.
Key topics discussed for each airline
under their regular safety review include
information on safety risk management,
safety culture, operational risks,
occupational injury risks, as well as
reported data on aircraft damage.
In addition to this, the Committee
considered the Group annual report on
dangerous goods, as well as specific
reports on British Airways risk models
for critical controls and the Group
coordination on training on emergency
response planning.
The Committee’s responsibilities
Responsibility for safety matters
belongs to the Group’s airlines.
IAG, through its Safety Committee,
has an overall view of each airline’s
safety performance and of any
important issues that may affect
the industry. The Committee also
has visibility of the Group airlines’
resources and procedures.
Responsibility for performing
detailed and technical
assessments remains with each
airline, overseen by their respective
safety committees.
The Committee’s duties include:
• to receive significant safety
information about IAG’s
subsidiaries, franchise, codeshare
or wet-lease providers used by
any member of the Group
• to exercise a high-level overview
of safety activities and resources
• to inform the Board and to follow
up on any safety-related matters
as determined by the Board
• to carry out any other safety-
related functions assigned by
the Board
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Report of the Remuneration
Committee
Committee members
Date appointed
Meetings attended
Marc Bolland (Chair)
June 16, 2016
Dame Marjorie Scardino
(Chair until January 24, 2019)
December 19, 2013
Maria Fernanda Mejia
October 30, 2014
Alberto Terol
December 19, 2013
Nicola Shaw
January 1, 2018
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Dame Marjorie Scardino
Chairman of the Remuneration Committee
From Dame Marjorie Scardino
Dear Shareholder,
This will be my final report to you, as
Marc Bolland has succeeded me as
Chairman of the Committee from
January 24, 2019. Marc will sign this
report on behalf of the Board.
Overall strategy and link to
remuneration
IAG’s aim is to become the world’s
leading international airline group. Its
strategy is to create value and
sustainable returns through leadership
in core markets and the realisation of
cost and revenue synergies across our
airlines and aviation related businesses.
That strategy is executed and sustained
by consistent and strong financial
performance and return on investment
in each part of the Group. We have
transformed programmes through the
use of the IAG Platform at each of our
airlines, while leveraging opportunities
across the Group.
The central focus of the Committee in
the early part of 2018 was completing
the review of the Company’s
Remuneration Policy in readiness for
submission to the annual Shareholders’
Meeting. In reviewing the policy, the
Committee’s main objective has been to
ensure remuneration retains a strong
link to the strategy, because we see that
as the best way to drive performance.
We were delighted that shareholders
gave a solid vote in favour at the
meeting in June 2018.
IAG’s executive remuneration
framework aims to support the business
objectives and the financial targets
attached to them through the following
two schemes:
The Company’s long-term incentive
plan, known as the performance
share plan (PSP), measures our
performance by:
• earnings per share (EPS), adjusted for
exceptional items, which reflects the
profitability of our business and the
core elements of value creation for
our shareholders. Growing earnings
indicates that the Group is on the
right path to create value for our
shareholders;
• total shareholder return (TSR) to
ensure alignment with our
shareholders; and
• Return on Invested Capital (RoIC) to
assess efficient return on the Group’s
asset base.
The annual incentive plan has its main
focus on strong financial performance,
and therefore the primary measure in
the plan is the Group’s operating profit
before exceptional items. A customer
measure, Net Promoter Score, was
introduced for the first time at the
Group level in 2017, and this drives a
stronger focus on improving customer
advocacy as a source of competitive
advantage. Lastly, performance against
role-specific objectives allows us to
focus on key strategic and business
targets which may not be suitably
captured under the financial or
customer elements.
The policy in general is designed to
deliver total remuneration that is
competitive and with a strong emphasis
on “pay for performance”. The
Committee will continue to ensure that
executive remuneration is aligned with
our business strategy and that the
overall reward framework for 2019 and
beyond is in the best interests of our
shareholders.
Summary of performance and
incentive outcomes
The PSP that was awarded in 2016 had
a three-year performance period (2016
to 2018), and had the same performance
measures as current awards.
Performance targets for all
three measures were set at the
beginning of 2016 at a level that the
Committee considered to be
appropriately stretching based on
internal and external expectations for
performance.
The Company has produced strong
financial performance over the last three
years, leading to 2018 adjusted EPS
reaching 117.7 euro cents. As a result, the
2016 PSP has an outcome of 39 per cent
of its maximum for the EPS element.
RoIC in 2018 reached 16.6 per cent,
resulting in an outcome of 100 per cent
of its maximum level for the RoIC
www.iairgroup.com
95
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
element. TSR for the Company has
grown by 15 per cent over the three
years, but has underperformed against
the index that the Company measures
itself against, resulting in a zero payout
for the TSR element. Overall, this has
resulted in the 2016 PSP award having
an outcome of 46 per cent of the
maximum. The PSP award has an
additional two-year holding period. This
applies until the end of 2020.
The financial target for the 2018 annual
incentive plan set at the beginning of
the year was for an IAG operating profit
of €3.15bn. Strong financial performance
during the year has led to IAG operating
profit slightly exceeding this target and
paying out at 66 per cent of the
maximum level for the 60 per cent
weighting linked to financial
performance. The result for Net
Promoter Score was below the
threshold level at which payments begin
– although some airlines in the Group
saw strong customer performance, the
overall Company score is pulled down
by Vueling, who had a very challenging
year, caused partly by external factors
such as air traffic control issues.
Decisions during 2018
Following the approval of the new
Remuneration Policy at the 2018 annual
Shareholders’ Meeting, the Committee
has considered how the policy will be
applied for 2019 and beyond. In
particular, the Committee has reviewed
the new UK Corporate Governance
Code which was published during 2018,
and is committed to embracing the
principles of the revised Code. The
Committee has undertaken an initial
review of our remuneration framework,
and in many areas, the Company is
already compliant with the terms of
the revised Code: for example the
Committee has always reviewed and
approved the remuneration policy for
the first layer of management below
Board level. The Committee is
committed to complying with all the
provisions of the Code in 2019. The
Committee has also reviewed the
UK Government changes to
reporting regulations.
Working with shareholders
We have met with many of the largest
shareholders over the past year, and we
appreciate their constructive comments
about remuneration in general. In our
meetings with them, we reviewed what
was considered best practice. We were
very pleased with their support for our
final Remuneration Policy changes. Our
overall intention throughout has been to
ensure that we have a strong alignment
to our strategy because we think that is
the way to create long-term, sustainable
shareholder value.
Dame Marjorie Scardino
Chairman of the Remuneration
Committee
forward to working with you closely
as Chair, as the Committee and I seek
to ensure that remuneration at IAG
continues to be aligned with, and
drives delivery of, our business and
strategic priorities.
Looking ahead, 2019 promises to be
another busy year. We will continue
to focus on ensuring that there is
alignment between performance and
pay outcomes, ensuring that the
management team receive fair
outcomes under our incentive plans
only where this can be supported by
company and individual performance.
In addition, the Committee will keep
working through the implications for
IAG of the new UK Corporate
Governance Code (the “Code”). We
fully support the principles behind the
new Code, and took steps in 2018 to
address some of the new provisions.
We look forward to reviewing
how the remaining areas can be
implemented in the most
effective manner for IAG and
all our stakeholders.
On behalf of the Committee,
I appreciate your time in reading
our 2018 DRR and I hope that you
find it accessible and informative.
Approved by the Board and signed
on its behalf by
Marc Bolland
Chairman of the Remuneration
Committee
Marc Bolland
Chairman of the Remuneration
Committee
From Marc Bolland
This is my first report to you as
Chairman of the Remuneration
Committee, having succeeded Dame
Marjorie Scardino on January 24,
2019. I would like to take the
opportunity to thank Dame Marjorie
for her excellent work in the role over
the past three years and I am very
much looking forward to serving you
in this new role.
IAG has always recognised the need
to build strong relationships with our
investors through a process of open
and transparent dialogue. It is
pleasing that this has been reflected
in strong shareholder support for our
remuneration policies and practices
in recent years. I very much intend to
continue with this approach and look
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At a Glance
Implementation of Remuneration Policy in 2018
The following two charts show Company performance for the two corporate measures in the 2018 annual incentive plan.
Financial performance and customer performance has resulted in 66 per cent and 0 per cent vesting respectively:
IAG Operating Profit (before exceptional items)
Net Promoter Score
Target Range for
the 2018 Annual
Incentive Plan
Actual 2018
Performance
THRESHOLD
TARGET
MAXIMUM
2.9
3.15
3.4
3.23
Target Range for
the 2018 Annual
Incentive Plan
Actual 2018
Performance
2.6
2.8
3.0
3.2
3.4
3.6
3.8
14
THRESHOLD
TARGET
MAXIMUM
18
20
22
16.3
16
18
20
22
24
€bn
Vesting (%)
66%
Vesting (%)
0%
0
20
40
60
80
100
0
20
40
60
80
100
The following four charts show Company performance for the three performance measures in the 2016 PSP award, and share
price performance:
Total Shareholder Return
Share Price
Target Range
for the 2016
PSP Award
Actual 2016-2018
Performance
THRESHOLD
MAXIMUM
0
8
-6%
-10
-5
0
5
10
15
20
Outperformance of the Index (% p.a.)
Vesting (%)
0%
53%
January 2016
PSP Award Date
(March 2016)
December 2018
541
611
618
0
20
40
60
80
100
0
100
200
300
400
500
600
700
Pence
Strong EPS and return performance in 2018 has resulted in good vesting levels for the following two measures in the 2016
PSP award:
Adjusted Earnings per Share
Return on Invested Capital
Target Range for
the 2016
PSP Award
Actual 2018
Performance
THRESHOLD
105
117.7
MAXIMUM
145
90
100
Euro Cents
110
120
130
140
150
Vesting (%)
39%
Target Range for
the 2016
PSP Award
Actual 2018
Performance
10
%
Vesting (%)
THRESHOLD
MAXIMUM
12
15
11
12
13
14
15
16
17
16.6
100%
0
20
40
60
80
100
0
20
40
60
80
100
www.iairgroup.com
97
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Introduction
The Remuneration Committee takes responsibility for the
preparation of the report, which is approved by the Board.
The Company’s current policy on directors’ remuneration
was approved by shareholders at the annual Shareholders’
Meeting on June 14, 2018. It is intended that this policy will
apply for three years, and therefore there are no changes
to the policy this year.
As a Spanish incorporated company, IAG is subject to
Spanish corporate law. The Spanish legal regime regarding
directors’ remuneration is substantially parallel to that of
the UK as far as directors' remuneration disclosure and
approval requirements are concerned.
The Company welcomes the opportunity provided by
Spanish CNMV allowing companies to prepare free format
reports. Therefore, IAG is presenting a consolidated report
this year responding to Spanish and UK disclosure
requirements. This report will be accompanied by a duly
completed form which is required by the CNMV covering
some relevant data. This is prepared in accordance with
Spanish legislation and is available on the Company’s
website, and the CNMV website.
It is the Company’s intention once again to comply
voluntarily with all reporting aspects of the UK legislation
of 2013 and to follow best practice UK standards, for the
benefit of our UK shareholder base.
In addition to the Remuneration Committee Chairman’s
statement, this Directors’ Remuneration Report contains
two sections:
• The first section covers the segments of the Directors’
Remuneration Policy that require an updating of the data
each year.
• The second section, the Annual Report on Remuneration,
covers the information on directors’ remuneration paid in
the reported year.
Accompanying the Report, the CNMV mandatory form
will be available on the Company's website and the
CNMV website.
Directors’ Remuneration Policy
Key elements of pay
Executive directors
The Company’s remuneration policy aims to provide total
remuneration packages which are linked to the business
strategy, are competitive, and take into account each
individual’s performance of their role in the Company’s work.
The Committee is updated on pay and conditions of the
employees within the Group and takes this into account when
considering executive directors’ remuneration.
The policy as approved by shareholders at the annual
Shareholders’ Meeting on June 14, 2018 was shown in full in
the 2017 Directors’ Remuneration Report and is not repeated
here. The only sections of the policy shown on the following
pages are the sections where we have chosen to update the
data for this year, i.e. the remuneration scenarios charts and
the date of last re-election of the non-executive directors.
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Remuneration scenarios
A significant portion of the Company’s total remuneration package is variable, with emphasis placed on longer-term reward to
align closely executive directors’ and senior managers’ interests with shareholder interests. The charts below show, for 2019 and
for each executive director, the minimum remuneration receivable, the remuneration receivable if the director performs in line
with the Company’s expectations, the maximum remuneration receivable, and the maximum remuneration receivable with 50
per cent share price growth. Apart from the final bar (showing 50 per cent share price growth) on each chart, share price
variation during the performance period is not taken into consideration in these scenarios.
Chief Executive Officer of IAG
Fixed remuneration is basic salary (2019 level of €962,000),
plus taxable benefits (2018 actual of €31,000) plus pension
related benefits (2018 actual of €241,000).
Chief Financial Officer of IAG
Fixed remuneration is basic salary (2019 level of €645,000),
plus taxable benefits (2018 actual of €31,000) plus pension
related benefits (2018 actual of €157,000).
The annual incentive amount is zero at the minimum
remuneration level, €962,000 at the on-target level (100 per
cent of salary), and €1,924,000 at maximum (200 per cent
of salary).
The annual incentive amount is zero at the minimum
remuneration level, €484,000 at the on-target level
(75 per cent of salary), and €968,000 at maximum (150 per
cent of salary).
The long-term incentive amount is zero at the minimum
remuneration level, €962,000 at the on-target level (half of
the face value award of 200 per cent of salary), €1,924,000 at
maximum (200 per cent of salary), and €2,886,000 at the
maximum with 50 per cent share price growth.
The long-term incentive amount is zero at the minimum
remuneration level, €484,000 at the on-target level (half of
the face value award of 150 per cent of salary), €968,000 at
maximum (150 per cent of salary), and €1,452,000 at the
maximum with 50 per cent share price growth.
All amounts are actually paid in sterling, and are shown here in
euro at the €:£ exchange rate of 1.1317.
All amounts are actually paid in sterling, and are shown here in
euro at the €:£ exchange rate of 1.1317.
Maximum,
plus share
price growth
Maximum
On-target
€000
1,234
(20%)
1,234
(24%)
1,924
(32%)
1,924
(38%)
2,886
(48%)
6,044
1,924
(38%)
5,082
1,234
(40%)
962
(30%)
962
(30%)
3,158
Maximum,
plus share
price growth
Maximum
On-target
€000
833
(25%)
833
(30%)
968
(30%)
968
(35%)
1,452
(45%) 3,253
968
(35%) 2,769
833
(46%)
484
(27%)
484
(27%)
1,801
Minimum
1,234
1,234
Minimum
833
833
0
1000
2000
3000
4000
5000
6000
7000
0
1000
2000
3000
4000
5000
6000
7000
Fixed remuneration
Annual Incentive
Long Term Incentive
Fixed remuneration
Annual Incentive
Long Term Incentive
www.iairgroup.com
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REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Service contracts and exit payments policy
Non-executive directors
Non-executive directors (including the Chairman) do not have service contracts. Their appointment is subject to the Board
regulations and the Company’s Bylaws. They do not have the right to any compensation in the event of termination as
directors. Board members shall hold office for a period of one year. The dates of the Chairman’s and current non-executive
directors’ appointments are as follows:
Non-executive director
Antonio Vázquez
Patrick Cescau
Kieran Poynter
Alberto Terol
Dame Marjorie Scardino
María Fernanda Mejía
Marc Bolland
Emilio Saracho
Nicola Shaw
Deborah Kerr
Date of the first
appointment
May 25, 2010
September 27, 2010
September 27, 2010
June 20, 2013
December 19, 2013
February 27, 2014
June 16, 2016
June 16, 2016
January 1, 20181
June 14, 2018
Date of last re-election
June 14, 2018
June 14, 2018
June 14, 2018
June 14, 2018
June 14, 2018
June 14, 2018
June 14, 2018
June 14, 2018
June 14, 2018
–
1 Appointment approved by the annual Shareholders’ Meeting on June 15, 2017 but effective January 1, 2018.
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Annual Remuneration Report
The Remuneration Committee
The Committee’s composition, competencies and operating rules are regulated by article 31 of the IAG Board Regulations.
A copy of these Regulations is available on the Company’s website.
Beyond executive directors, the Committee oversees the general application of the remuneration policy to the IAG
Management Committee (and also occasionally considers remuneration matters of managers generally across the Group).
According to article 31 of the Board Regulations the Remuneration Committee shall be made up of no less than three and
no more than five non-executive directors appointed by the Board, with the dedication, capacity and experience necessary
to carry out their function. A majority of the members of the Remuneration Committee shall be Independent directors. Dame
Marjorie Scardino chaired the Committee until January 24, 2019, being succeeded by Marc Bolland. For the reporting period all
members were considered Independent non-executive directors of the Company and none of the members has any personal
financial interest, other than as a shareholder, in the matters to be decided.
The Committee’s activities during the year
In 2018, the Committee met five times and discussed, amongst others, the following matters:
Meeting
January
February
May
October
December
Agenda items discussed
Review of IAG Management Committee members’
basic salaries
Approval of the 2018 annual incentive plan
Approval of the 2018 Performance Share Plan
2017 annual incentive plan payments to IAG Management
Committee members
Vesting outcome of the Performance Share Plan 2015 award
Final review of 2017 Directors’ Remuneration Report
Preparation for the AGM
Executive remuneration market update
Remuneration strategy for 2019
Review of the new UK Corporate Governance Code
Approval of remuneration for a new Management
Committee member
Advisers to the Committee
The Committee appointed Deloitte as its external adviser in September 2016. Deloitte report directly to the Committee.
The fees paid to Deloitte for advice provided to the Remuneration Committee during 2018 were €43,285, charged on a time
and materials basis. Deloitte is a member of the Remuneration Consultants Group and a signatory to the voluntary UK Code
of Conduct. As well as advising the Remuneration Committee, other Deloitte teams provided advice in relation to remuneration,
pensions, global employment programmes, data governance, internal audit and tax to the Group in 2018. The Committee
has reviewed the remuneration advice provided by Deloitte during the year and is comfortable that it has been objective
and independent.
The Company obtained high level headline remuneration survey data from a variety of sources. During the year, the CEO of IAG
provided regular briefings to the Committee apart from when his own remuneration was being discussed.
www.iairgroup.com
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REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Single total figure of remuneration for each director
Subject to full audit
Non-executive directors
Director
(€’000)
Antonio Vázquez
Patrick Cescau
Marc Bolland
Deborah Kerr1
Baroness Kingsmill2
James Lawrence3
María Fernanda Mejía
Kieran Poynter
Emilio Saracho
Dame Marjorie Scardino
Nicola Shaw4
Alberto Terol
Total (€’000)
Total for
year to
December 31,
2018
Taxable
benefits
2017 fees
Total for
year to
December 31,
2017
Taxable
benefits
2018 fees
645
150
120
65
–
55
120
140
120
140
120
120
4
37
6
4
–
4
10
27
18
68
7
22
649
187
126
69
–
59
130
167
138
208
127
142
645
150
120
–
55
120
120
140
120
140
–
120
35
47
6
–
12
13
17
21
26
89
–
36
680
197
126
–
67
133
137
161
146
229
–
156
1,795
207
2,002
1,730
302
2,032
1 Deborah Kerr joined the Board on June 14, 2018
2 Baroness Kingsmill retired from the Board on June 15, 2017
3 James Lawrence retired from the Board on June 14, 2018
4 Nicola Shaw joined the Board effective January 1, 2018, appointment approved by the annual Shareholders’ Meeting on June 15, 2017
Additional explanations in respect of the single total figure table
Each director has confirmed in writing that they have not received any other items in the nature of remuneration other than
those already disclosed in the table above.
Fees
Fees paid in the year for non-executive directors.
Taxable benefits
Taxable benefits including personal travel.
For the year to December 31, 2018, €:£ exchange rate applied is 1.1317 (2017: 1.1461).
Executive directors
The table below sets out the single total figure and breakdown for each executive director. An explanation of how the figures
are calculated follows the table. The remuneration for each executive director reflects the performance of the Company and
the contribution each individual has made to the ongoing success of the Company.
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Annual Report and Accounts 2018
2018
Director (’000)
Executive directors
Willie Walsh (GBP)1
Willie Walsh (euro)
Enrique Dupuy de Lôme (GBP)1
Enrique Dupuy de Lôme (euro)
Total (€’000)
Base
salary
Taxable
benefits
Pension
related
benefits
Annual
incentive
award
Long-term
incentive
vesting
Total for
year to
December 31,
2018
850
962
557
630
1,592
27
31
27
31
62
213
241
139
157
398
1,051
1,189
498
564
1,753
889
1,006
412
466
1,472
3,030
3,429
1,633
1,848
5,277
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Additional explanations in respect of the single total figure table for 2018
Each director has confirmed in writing that they have not received any other items in the nature of remuneration other than
those already disclosed in the table above.
Base salary
Salary paid in year for executive directors.
Taxable benefits
Taxable benefits including personal travel and, where applicable, a company car, fuel and private health insurance.
Pension related benefits
Employer contribution to pension scheme, and/or cash in lieu of pension contribution.
Annual incentive plan
Annual incentive award for the period ended December 31, 2018 (accrued at December 31, 2018, but cash payments (50 per
cent of the award) not paid until March 2019). The outcomes of the performance conditions which determined the award are
described in the next section. Half of the annual incentive award is deferred into shares for three years (Incentive Award
Deferral Plan (IADP)). For the 2018 annual incentive plan, these will vest in March 2022.
Long-term incentive vesting
This relates to the IAG PSP 2016 award based on performance measured to December 31, 2018, although the shares vested will
not be delivered until January 1, 2021, i.e. after the two-year holding period. For the purposes of this table, the award has been
valued using the average share price in the three months to December 31, 2018 of 612.2 pence. The outcomes of the
performance conditions which determined vesting are described below.
For the year to December 31, 2018, €:£ exchange rate applied is 1.1317 (2017: 1.1461).
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Director (’000)
Executive directors
Willie Walsh (GBP)1
Willie Walsh (euro)
Enrique Dupuy de Lôme (GBP)1
Enrique Dupuy de Lôme (euro)
Total (€’000)
Base
salary
Taxable
benefits
Pension
related
benefits
Annual
incentive
award
Long-term
incentive
vesting
Total for
year to
December 31,
2017
850
974
547
627
1,601
25
29
20
23
52
213
244
137
157
401
1,580
1,810
732
839
2,649
1,286
1,474
467
535
2,009
3,954
4,531
1,903
2,181
6,712
1 Willie Walsh and Enrique Dupuy de Lôme remuneration is paid in sterling and expressed in euro for information purposes only.
Life insurance
The Company provides life insurance for all executive directors. For the year to December 31, 2018 the Company paid
contributions of €22,987 (2017: €16,839).
www.iairgroup.com 103
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Variable pay outcomes
Subject to audit
2018 Annual Incentive Plan
At the beginning of 2018, the Board, upon a recommendation by the Committee, set IAG operating profit (before exceptional
items) as the financial target in the annual incentive plan for that year, with a 60 per cent weighting. Operating profit was
considered to be the most appropriate financial measure in aligning shareholder interests with the Company. For the customer
measure, there was a weighting of 15 per cent. Outcomes were calculated based on Net Promoter Score (NPS). NPS is used to
gauge the loyalty of the Group’s customer relationships. It is calculated based on survey responses, by subtracting the
percentage of customers who are ‘Detractors’ from the percentage of customers who are ‘Promoters’. The final 25 per cent
weighting is based on personal performance against objectives. The Remuneration Committee, on the proposal of the
Chairman, considered the Chief Executive Officer’s performance against his objectives; and on the proposal of the Chief
Executive Officer, considered the Chief Financial Officer’s performance against his objectives. Both performance evaluations
were submitted to the Board for final approval on February 27, 2019.
The maximum award for the Chief Executive Officer of IAG was 200 per cent of salary (100 per cent of salary for on-target
performance), and for the Chief Financial Officer of IAG 150 per cent of salary (75 per cent of salary for on-target performance).
The outcomes of the performance conditions were as follows:
Measure
IAG operating profit
(before exceptional items)
(60 per cent)
Payout
per cent of
maximum awarded
Group Net Promoter Score
(15 per cent)
Outcomes versus targets
per cent of
maximum awarded
Outcomes versus targets
per cent of
maximum awarded
Personal performance
against objectives
(25 per cent)
Details of any
discretion exercised
Overall outcome
Chief Executive Officer of IAG
Chief Financial Officer of IAG
€761,860
£673,200
66 per cent
€374,432
£330,858
66 per cent
Please see below for details of
the performance target ranges
€0
Please see below for details of
the performance target ranges
€0
£0
£0
Please see below for details of
the performance target ranges
0 per cent
Please see below for details of
the performance target ranges
0 per cent
€428,066
£378,250
€189,107
£167,100
Please see below for details of
the extent of the achievement
of objectives.
89 per cent
Please see below for details of
the extent of the achievement
of objectives.
80 per cent
€1,189,926
£1,051,450
€563,539
£497,958
Half of the overall outcome of the annual incentive detailed above is payable in deferred shares in the Company vesting after
three years (under the Incentive Award Deferral Plan). IAG operating profit (before exceptional items) for 2018 (60 per cent of
the annual incentive) was between the on-target level and the stretch target level and has resulted in 66 per cent of the
maximum paying out for this element of the incentive (2017: 100 per cent). The target range for 2018 was as follows: the
threshold level at which payments would begin was €2,900 million, the on-target level at which 50 per cent of the maximum
would pay out was €3,150 million, and the stretch target level at which the maximum would pay out was €3,400 million. There
was a straight line sliding scale between the threshold level and the on-target level, and between the on-target level and the
stretch target level. Net Promoter Score for 2018 (15 per cent of the annual incentive) achieved 16.3, which is below the
threshold level at which payments begin for this element (2017: 60 per cent of the maximum). The target range for 2018 was as
follows: the threshold level at which payments would begin was 18.0, the on-target level at which 50 per cent of the maximum
would pay out was 20.0, and the stretch target level at which the maximum would pay out was 22.0. There was a straight line
sliding scale between the threshold level and the on-target level, and between the on-target level and the stretch target level.
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Personal Performance
In assessing personal performance, the Committee considers a range of factors to ensure there is a holistic and detailed
assessment of the executive directors’ contribution to the overall strategic priorities of the Group. This is summarised below for
executive directors:
Chief Executive Officer of IAG
Unrivalled customer proposition
Chief Financial Officer of IAG
Unrivalled customer proposition
• Supported the significant focussed investment at each
airline to strengthen customer focus and improve the
customer experience
• Continued focus on reducing costs and improving
efficiency by leveraging Group scale and synergy
opportunities. This has ensured customer and
shareholder value creation
Value accretive and sustainable growth
• Supporting the CEO as the Group delivered a strong
performance in 2018 with operating profit, earnings per
share and Return on Invested Capital all increasing
• Careful management of financial risk, maintaining
adequate cash balances and substantial committed
financing facilities
• Development of an internal framework to assess the
value to shareholders which would potentially be created
by organic and inorganic growth opportunities
Efficiency and innovation
• Proactive leadership to continue the focus on disciplined
capital allocation, active portfolio management, and
flexible and rapid decision making
• Driving the CASK ex-fuel cost reduction – 11.1 per cent
reduction at constant currency since IAG’s founding
in 2011
• Leading the Group’s commitment to strengthening
its customer focus, ensuring that each of the
airlines invested significantly in improving their
customer experience
• This included British Airways delivering catering
improvements, opening new lounges, investing in
technology, and extending the use of biometric boarding
gates; and Iberia delivering an improved customer
experience in its premium economy product
• Overseeing the launch of shorthaul operations under the
LEVEL brand, and the further launch of longhaul
LEVEL services
Value accretive and sustainable growth
• The CEO of IAG is respected across the global airline
industry, and during 2018 became Chairman of Airlines
For Europe, the largest airline association in Europe
• Reinforcing the Group’s leadership positions in its home
markets with the addition of 48 new routes
• Continuing to optimise the Group’s longhaul network
and customer proposition together with its joint
business partners
• Overseeing the activity to be a leading airline group with
regard to sustainability, including the option to acquire a
site to develop the UK’s first commercial scale waste to
jet fuel project
Efficiency and innovation
• Continuing the focus on efficiency and cost reduction
programmes to ensure customer and shareholder
value creation
• Ensuring that digital innovation has remained a core part
of the Group’s focus, continuing the Hangar 51
accelerator programmes to attract global talent, and
making strategic investments to automate the business
above and below the wing
• Continuing to develop capabilities to support data
customisation and data analytics, allowing Avios
members a smoother online experience
• Continuation of the roll out of Wi-Fi connection on the
Group’s fleet
www.iairgroup.com 105
TSR performance
compared to the TSR
performance of the
MSCI European
Transportation (large
and mid-cap)
index (one-third)
Adjusted earnings per
share (EPS)
(one-third)
Return on Invested
Capital (RoIC)
(one-third)
Details of any
discretion exercised
Overall outcome
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
IAG PSP award 2016
The IAG PSP award granted on March 7, 2016 was tested at the end of the performance period which began on January 1, 2016
and ended on December 31, 2018. The awards were equivalent to 200 per cent of salary for the Chief Executive Officer of IAG
and 150 per cent of salary for the Chief Financial Officer of IAG.
One-third of the award was subject to a TSR performance condition measured against an index, one-third subject to
achievement of the Company’s adjusted EPS targets (diluted EPS, adjusted for exceptional items), and one-third subject to a
RoIC performance condition. The vesting of any award was subject to the Board being satisfied that the Group’s underlying
financial performance was satisfactory in the circumstances prevailing over the three-year period.
The outcome of the performance condition was as follows:
Measure
Threshold
Maximum
Outcome
IAG’s TSR
performance equal to
the index (25 per cent
of award vests)
IAG’s TSR
performance exceeds
index by 8 per cent
p.a. (100 per cent of
award vests)
IAG underperformed
the index by 6 per
cent p.a.
Vesting
(as per cent award granted in 2016)
0 per cent
2018 EPS of 105
€cents (10 per cent of
award vests)
2018 RoIC of 12 per
cent (10 per cent of
award vests)
2018 EPS of 145
€cents (100 per cent
of award vests)
2018 RoIC of 15 per
cent (100 per cent of
award vests)
117.7 €cents
39 per cent
16.6 per cent
100 per cent
46.19 per cent
IAG PSP award 2015
The IAG PSP award granted on May 28, 2015 was tested at the end of the performance period which began on January 1, 2015
and ended on December 31, 2017. The awards were equivalent to 200 per cent of salary for the Chief Executive Officer of IAG
and 120 per cent of salary for the Chief Financial Officer of IAG.
One-third of the award was subject to a TSR performance condition measured against an index, one-third subject to
achievement of the Company’s adjusted EPS targets (as defined above in the 2016 award), and one-third subject to a RoIC
performance condition. The vesting of any award was subject to the Board being satisfied that the Group’s underlying financial
performance was satisfactory in the circumstances prevailing over the three-year period.
The outcome of the performance condition was as follows:
Vesting (as per cent award
granted in 2015)
0 per cent
IAG underperformed
the index by 4 per
cent p.a.
Measure
Threshold
Maximum
Outcome
TSR performance compared to the
TSR performance of the MSCI
European Transportation (large
and mid-cap)
index (one-third)
IAG’s TSR
performance equal
to the index (25 per
cent of award vests)
Adjusted earnings per share (EPS)
(one-third)
Return on Invested Capital (RoIC)
(one-third)
2017 EPS of 70
€cents (10 per cent
of award vests)
2017 RoIC of 12 per
cent (10 per cent of
award vests)
Details of any discretion exercised
Overall outcome
IAG’s TSR
performance
exceeds index by 8
per cent p.a. (100
per cent of award
vests)
2017 EPS of 100
€cents (100 per cent
of award vests)
2017 RoIC of 15 per
cent (100 per cent of
award vests)
102.8 €cents
100 per cent
16.0 per cent
100 per cent
66.67 per cent
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Scheme interests awarded during the financial year
Subject to audit
The IAG PSP is a discretionary plan targeted at key senior Group executives and managers who directly influence shareholder
value. The Company granted an award under the PSP on May 10, 2018. The table in this section sets out the key details of
the award.
The Committee believes that comparing the Company’s TSR to that of European transportation companies, including airlines,
is appropriate, given that these companies are subject to external influences impacting share price performance similar to those
of the Group. This comparison therefore provides a good reference point for management outperformance and value creation.
Earnings per share reflect the profitability of our business and the core elements of value creation for our shareholders.
Growing earnings indicates that the Group is on the right path to create value for our shareholders.
The Company uses rolling Return on Invested Capital (RoIC) as a profitability indicator to assess efficient return on the Group’s
asset base. It quantifies how well the airlines generate cash flow in relation to the capital invested in their businesses together
with their ability to fund growth and to pay dividends.
PSP 2018 – eligibility, metrics and targets
Type of award
Shares
Basis of determination of the
size of award
Face value awarded
(per cent of salary)
Grant price
Performance period
Performance conditions
Weighting
Threshold
Target
Maximum
Awards only made to those executives who are consistently high-performing, and/or are in
key roles, and/or whom the Company wishes to retain in the long term.
Other executive directors – 150 per cent
CEO of IAG – 200 per cent
£6.91
January 1, 2018 to December 31, 2020
Adjusted EPS performance
targets
RoIC performance targets
One-third
2020 EPS of 130 €cents
10 per cent vests
One-third
2020 RoIC of 13 per cent
10 per cent vests
2020 EPS between 130 €cents
and 170 €cents
(straight line vesting between
threshold and maximum)
2020 RoIC between 13 per
cent and 16 per cent
(straight line vesting between
threshold and maximum)
2020 EPS of 170 €cents
100 per cent vests
2020 RoIC of 16 per cent
100 per cent vests
TSR performance compared
to the TSR performance of the
MSCI European Transportation
(large and mid-cap) index
One-third
IAG’s TSR performance equal
to the index
25 per cent vests
IAG’s TSR performance
between index return and 8
per cent p.a. outperformance
(straight line vesting between
threshold and maximum)
IAG’s TSR performance
exceeds index
by 8 per cent p.a.
100 per cent vests
Holding period
Additional period of two years after the performance period
Adjusted EPS measure is as defined for the 2016 PSP award earlier in the report. The Board, after considering the
recommendation of the Remuneration Committee, retains the discretion to review and, if appropriate, revise the EPS targets
and/or definition in the context of any corporate transactions, provided that, in its view, any revised targets are no more or less
challenging than the original targets. To the extent that any such adjustments are made, the Committee will disclose the basis
for any adjustments and the rationale in subsequent reports.
www.iairgroup.com 107
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Total pension entitlements
Subject to audit
Willie Walsh is not a member of the Company’s pension scheme, and the Company therefore did not pay any contributions
during the reporting period (2017: zero). He received cash in lieu of contributions of £212,500 (2017: £212,500).
Enrique Dupuy de Lôme is not a member of the Company’s pension scheme, and the Company therefore did not pay any
contributions during the reporting period (2017: zero). He received cash in lieu of contributions of £139,250 (2017: £136,750).
Payments for loss of office
No executive directors have left office during 2018. There were no payments made to non-executive directors after they left
office during 2018.
Payments to past directors
José Pedro Pérez-Llorca received travel benefits worth €6,920 during 2018 after he had left the Company. Baroness Kingsmill
received travel benefits worth €15,001 during 2018 after she had left the Company. James Lawrence received travel benefits
worth €10,536 during 2018 after he had left the Company.
Statement of voting
The table below shows the consultative vote on the 2017 annual Directors’ Remuneration Report at the 2018 annual
Shareholders’ Meeting, and the binding vote on the Directors’ Remuneration Policy at the 2018 annual Shareholders’ Meeting:
2017 Annual Directors’
Remuneration Report
Directors’
Remuneration Policy
Number of votes cast
1,463,865,426
1,463,865,426
For
Against
Abstentions/Blank
1,391,707,784
(95.070 per cent)
1,396,029,011
(95.366 per cent)
8,644,928
(0.591 per cent)
13,091,180
(0.894 per cent)
63,512,714
(4.339 per cent)
54,745,235
(3.740 per cent)
Statement of directors’ shareholding and share interests
Subject to audit
In order that their interests are aligned with those of shareholders, each executive director is required to build up and maintain
a minimum personal shareholding in the Company.
Under the Group’s shareholding guidelines, the CEO of IAG is required to build up and maintain a shareholding of 350 per cent
of salary. Other executive directors are required to build up and maintain shareholdings of 200 per cent of salary. In addition,
they are required to retain the entire 100 per cent of shares (net of tax) which vest from share plans until their respective
shareholding requirement is attained. The Committee has reviewed executive directors’ progress against the requirements and
notes that both executive directors are well above the shareholding requirement. There has been a significant improvement in
shareholding for the executive directors over the past five years, as a result of PSP awards vesting, and deferred shares awards
from annual incentive plans.
Interests in share awards following departure can enable departing directors to remain aligned with the interests of
shareholders for an extended period after leaving the Company. For good leavers, share awards will not vest early on departure
except in certain circumstances (for example on death). Deferred annual incentive awards and PSP awards will normally vest
(and be released from their holding periods) at the normal time. This means that directors may retain a significant interest in
shares for up to 5 years following departure from the Company.
Shares which count towards the guideline include shares already held by the executive, vested and exercised shares, vested
and unexercised shares including those in the performance share plan holding period, and unvested deferred annual incentive
shares. The table below summarises current executive directors’ interests as of December 31, 2018:
Shareholding
requirement
Shares owned
Shares already
vested, or in the
holding period, from
performance
share plans
Shares already
vested from
deferred annual
incentive plans
Unvested shares
from deferred
annual
incentive plans
350 per cent of
salary
200 per cent of
salary
72,000
1,671,971
296,226
154,697
100
492,007
109,760
63,432
Total qualifying
shareholding
2,194,894
(1,257 per cent of salary)
665,299
(644 per cent of salary)
Executive director
Willie Walsh
Enrique Dupuy
de Lôme
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External non-executive directorship
The Nominations Committee's consent is required before an executive director can accept an external non-executive
appointment. During the reporting period in question no executive director held a directorship from which they retained a fee.
Until December 31, 2018, Willie Walsh was a non-executive director of the Irish National Treasury Management Agency, for
which he has declined a fee. Enrique Dupuy de Lôme is Chairman of Iberia Cards.
Non-executive directors
Non-executive directors are paid a flat fee each year. The Non-Executive Chairman’s fee is €645,000. Other non-executive
directors have a fee of €120,000. The additional fee for holding a Committee chairmanship is €20,000, and the additional fee
for discharging the functions of Senior Independent Director is €30,000.
In relation to the Chairman, as set out in the British Airways and Iberia merger documentation, the conditions of the service
contract with Iberia were taken into account at the time of the merger. This means that he will therefore continue to be entitled
to a lump-sum retirement benefit in an amount of €2,800,000. The fund balance under the policy (including accrued interest)
will be paid upon exit from the Company for any reason.
Directors’ interests in shares
Subject to audit
Antonio Vázquez
Willie Walsh
Marc Bolland
Patrick Cescau
Enrique Dupuy de Lôme
Deborah Kerr
María Fernanda Mejía
Kieran Poynter
Emilio Saracho
Dame Marjorie Scardino
Nicola Shaw
Alberto Terol
Total
Total shares
and voting rights
Percentage
of capital
512,291
1,930,985
0
0
562,165
0
100
15,000
0
100
1,517
26,537
3,048,695
0.026
0.097
0.000
0.000
0.028
0.000
0.000
0.001
0.000
0.000
0.000
0.001
0.153
There have been no changes to the shareholdings set out above between December 31, 2018 and the date of this report.
Share scheme dilution limits
The Investment Association sets guidelines that restrict the issue of new shares under all the Company’s share schemes
in any ten-year period to 10 per cent of the issued ordinary share capital and restrict the issues under the Company’s
discretionary schemes to 5 per cent in any ten-year period. At the annual Shareholders’ Meeting on June 18, 2015 the
Company was given authority to allocate up to 67,500,000 shares (3.31 per cent of the share capital) in 2015, 2016, 2017 and
2018. Of this a maximum of 7,650,000 shares could be allocated to executive directors under all IAG share plans for awards
made during 2015, 2016, 2017 and 2018. At December 31, 2018, 3.17 per cent of the share capital had been allocated under the
IAG share plans.
The highest and lowest closing prices of the Company’s shares during the period and the share price at December 31,
2018 were:
At December 31 2018
Highest in the period
Lowest in the period
618p
727p
557p
www.iairgroup.com 109
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Company performance graph and Chief Executive Officer of IAG ‘single figure’ table
The chart shows the value by December 31, 2018 of a hypothetical £100 invested in IAG shares on listing compared with the
same amount invested in the FTSE 100 index over the same period. A spot share price has been taken on the date of listing,
and a three-month average has been taken prior to the year ends.
The FTSE 100 was selected because it is a broad equity index of which the Company is a constituent, and the index is
widely recognised.
IAG’s total shareholder return (TSR) performance compared to the FTSE 100
300
250
200
150
100
50
0
Jan 2011
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
IAG
FTSE 100
The table below shows the CEO ‘single total figure’ of remuneration for each year since the creation of IAG in January 2011:
CEO of IAG – ‘total single
figure’ of remuneration
Annual incentive
2011
£1,550,000
Includes annual incentive payment of
£302,000 (18 per cent of maximum).
2012
2013
£1,083,000
£4,971,000
No annual incentive payment.
Includes annual incentive payment of
£1,299,375 (78.75 per cent of maximum).
2014
£6,390,000
Includes annual incentive payment of
£1,662,222 (97.78 per cent of maximum).
2015
£6,455,000
Includes annual incentive payment of
£1,360,000 (80 per cent of maximum).
2016
£2,462,000
Includes annual incentive payment of
£566,667 (33.33 per cent of maximum).
2017
£3,954,000
Includes annual incentive payment of
£1,579,583 (92.92 per cent of maximum).
2018
£3,030,000
Includes annual incentive payment of
£1,051,450 (61.85 per cent of maximum).
Long-term incentive
Includes £251,594 value of long-term
incentives vesting (35 per cent
of maximum).
Zero vesting of long-term incentives.
Includes £2,593,569 value of long-term
incentives vesting (100 per cent
of maximum).
Includes £3,640,135 value of long-term
incentives vesting (85 per cent
of maximum).
Includes £4,405,185 value of long-term
incentives vesting (100 per cent
of maximum).
Includes £807,741 value of long-term
incentives vesting (50 per cent
of maximum).
Includes £1,285,819 value of long-term
incentives vesting (66.67 per cent
of maximum).
Includes £888,605 value of long-term
incentives vesting (46.19 per cent
of maximum).
Single total figure of remuneration includes basic salary, taxable benefits, pension related benefits, annual incentive award and
long-term incentive vesting.
2011 figure includes 20 days of remuneration in January 2011 paid by British Airways.
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Percentage change in remuneration of the Chief Executive Officer of IAG compared to employees
The table below shows how the remuneration of the Chief Executive Officer of IAG has changed for 2018 compared to 2017.
This is then compared to a group of appropriate employees. It has been determined that the most appropriate group of
employees is all UK employees in the Group, comprising around 40,000 employees in total. To make the comparison between
the CEO of IAG and employees as meaningful as possible, it was determined that as large a group as possible of employees
should be chosen.
The selection of all UK employees in the Group (roughly two-thirds of the entire Group’s employees) meets these criteria. The
majority of the 40,000 UK employees in the Group are employed by British Airways, but there are also a number of employees
from all other companies in the Group based in the UK. It was determined that employees outside the UK would not be
considered for the comparison, as very different employment market conditions exist in other countries.
Chief Executive Officer of IAG
UK employees
Basic salary No basic salary increase for 2018.
Annual
incentive
Decrease from £1,579,583 in March 2018 (covering the
2017 performance period) to £1,051,450 in March 2019
(covering the 2018 performance period). This
represents a 33 per cent decrease.
Taxable
benefits
No change in benefits policy.
Actual payments increased to £27,000 in 2018 from
£25,000 in 2017.
Basic salary awards in 2018 at UK companies in the
Group varied from around 2 per cent to 4.1 per cent.
Changes in overall annual incentive payments for 2018
versus 2017 varied considerably around the Group,
depending on the incentive design, financial
performance, and non-financial performance at each
individual company.
No change in benefits policy.
Overall costs 2018 versus 2017 increased very slightly in
line with inflation.
Relative importance of spend on pay
The table below shows, for 2018 and 2017, total remuneration costs, operating profit and dividends for the Company.
Total employee costs, IAG
Total remuneration, directors
(including non-executive directors)
IAG operating profit
(before exceptional items)
Dividend declared
Dividend proposed
2018
€4,812,000,000
€7,279,000
€3,230,000,000
€288,000,000
€1,027,000,000
2017
€4,740,000,000
€8,744,000
€3,015,000,000
€550,000,000
–
Total employee costs are before exceptional items.
CEO pay ratio
Following UK Government changes to reporting regulations, IAG has voluntarily chosen to disclose the median pay ratio a year
early. The table below shows the ratio of pay between the CEO of IAG and IAG’s UK employees. The CEO of IAG remuneration
is the 2018 ‘single figure’ total remuneration, and this is compared to the median 2018 total remuneration of full-time equivalent
UK employees in IAG. The Government’s methodology “A” has been used to calculate the remuneration. The data for the UK
employees is from the payroll records of 35,559 UK employees who were in the Group for the whole of 2018, approximately 98
per cent of the UK employee total. It is recognised that this is not aligned with the new regulations for this first year of
voluntary disclosure, but from when the regulations formally start on January 1, 2019 we will be in a position to be able to fully
report this from next year's report onwards.
Percentile
50th (Median)
CEO of IAG pay ratio
60:1
www.iairgroup.com
111
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Implementation of remuneration policy for 2019
Basic salary
Basic salaries for executive directors are reviewed from January 1 each year. After careful consideration of Company
affordability, the worth of each executive, retention risks and the size of pay increases generally across the Group for 2019
(which varied across the Group from 2.0 per cent to 3.0 per cent), the Board, following the recommendation of the
Remuneration Committee, approved the following:
Executive director
Basic salary review
Chief Executive Officer of IAG
Chief Financial Officer of IAG
£850,000 (€962,000) (no increase from 2018).
£570,000 (€645,000) (in UK sterling terms, an increase of 2.3% from 2018).
The Remuneration Committee recommended the Board to offer the Chief Executive a salary increase in line with that applied
to other executives, however it was respectfully declined by him.
2019 annual incentive plan
For 2019, the maximum award for the Chief Executive Officer of IAG will be 200 per cent of salary and for the Chief Financial
Officer of IAG 150 per cent of salary. The weighting for the IAG operating profit (before exceptional items) measure will be 60
per cent, and for role-specific objectives will be 25 per cent. The remaining 15 per cent weighting will be for the Net Promoter
Score (NPS) measure. The Board, after considering the recommendation of the Committee, has approved a stretching target
range for IAG operating profit and NPS for 2019 at the threshold, on-target and maximum levels. At threshold, there will be a
zero pay-out, 50 per cent of the maximum will pay out at the on-target level, and 100 per cent of the maximum will pay out at
the stretch target level. There will be a straight line sliding scale between threshold and on-target, and on-target and the
stretch target. For commercial reasons, the target range for IAG operating profit will not be disclosed until after the end of the
performance year. It will be disclosed in next year’s Remuneration Report.
2019 Performance Share Plan award
The Board, on the Committee’s recommendation, has approved a PSP award for 2019, with a performance period of January 1,
2019 to December 31, 2021.
For 2019, the face value of awards for the Chief Executive Officer will be 200 per cent of salary and for the Chief Financial
Officer 150 per cent of salary.
The Board has approved the use of three performance conditions, each with a one-third weighting. These are the same three
performance conditions and weightings that have been used since 2015. The reasons for the Board considering these measures
to be appropriate are the same reasons as those mentioned for the 2018 PSP award earlier in the report.
The first is based on IAG TSR performance relative to the MSCI European Transportation Index. The target range is identical to
2018, and is outlined earlier in this report.
The second performance condition is based on adjusted EPS (as defined in the 2016 award). The Board and the Committee
have agreed that the adjusted earnings per share (EPS) target range for the 2019 PSP award will be increased compared to the
2018 PSP award. The adjusted EPS measure will be as follows:
Weighting
Threshold
2021 adjusted EPS of 150 €cents
One-third
10 per cent vests
Target range (straight line vesting between threshold and maximum) 2021 adjusted EPS between 150 €cents and 190 €cents
2021 adjusted EPS of 190 €cents
Maximum
100 per cent vests
The third performance condition is RoIC. The target range has been increased at the bottom end. The measure will be as
follows:
Weighting
Threshold
Target range (straight line vesting between threshold and maximum)
Maximum
One-third
2021 RoIC of 14 per cent
10 per cent vests
2021 RoIC between 14 per cent and 16 per cent
2021 RoIC of 16 per cent
100 per cent vests
There will be an additional holding period of two years. This means that executives will be required to retain the shares for a
minimum of two years following the end of the performance period. This is to strengthen the alignment between executives
and shareholders.
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Taxable benefits and pension related benefits
Taxable benefits remain unchanged for 2019. Pension related benefits as a percentage of basic salary will decrease for new
externally recruited executive directors as stated in the Remuneration Policy.
Non-executive director fees
Non-executive director fees were last reviewed in 2017 and remain unchanged for 2019. The fees have remained unchanged
since 2011.
Supplementary information
Directors’ share options
The following directors held nil-cost options over ordinary shares of the Company granted under the IAG PSP.
Director
Executive directors
Willie Walsh
Total
Enrique Dupuy de Lôme
Total
Number of
options at
January 1,
2018
Options
exercised
during the
year
Options
lapsed during
the year
Options
granted
during the
year
Exercise
price
Date
of grant
Exercisable
from Expiry date
Number of
options at
December 31,
2018
May 28,
2015
March 7,
2016
March 6,
2017
May 10,
2018
May 28,
2015
March 7,
2016
March 6,
2017
May 10,
2018
309,091
314,233
311,355
–
934,679
112,364
145,647
147,198
–
405,209
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
103,031
–
–
–
–
–
January 1,
2020
January 1,
2021
January 1,
2022
246,020 January 1,
2023
–
December
31, 2024
December
31, 2025
December
31, 2026
December
31, 2027
103,031 246,020
–
37,455
–
–
–
–
–
118,741
37,455
118,741
January 1,
2020
January 1,
2021
January 1,
2022
January 1,
2023
December
31, 2024
December
31, 2025
December
31, 2026
December
31, 2027
206,060
314,233
311,355
246,020
1,077,668
74,909
145,647
147,198
118,741
486,495
The award granted on May 28, 2015 was tested at the end of the performance period, and as a result 66.67 per cent of the
award vested, as detailed earlier in this report in the section on Variable pay outcomes.
The performance conditions for each of the other PSP awards listed above will be tested to determine the level of vesting. For
each of these awards, one-third of the award is subject to TSR performance measured against an index, one-third is subject to
adjusted EPS performance, and one-third is subject to RoIC performance. The performance conditions will be measured over a
single three-year performance period. For each of these awards, following the performance period there is an additional
holding period of two years.
The value attributed to the Company’s ordinary shares in accordance with the plan rules on the dates of the PSP awards were
as follows: 2018: 691 pence; 2017: 546 pence; 2016: 541 pence; and 2015: 550 pence.
www.iairgroup.com
113
REPORT OF THE REMUNERATION COMMITTEE CONTINUED
Incentive Award Deferral Plan
The following directors held conditional awards over ordinary shares of the Company granted under the IAG IADP (awarded as
a result of IAG performance for the periods that ended December 31, 2014, December 31, 2015, December 31, 2016, and
December 31, 2017).
Relates to
incentive award
earned in
respect of
performance
Date of
award
Number of
awards at
January 1, 2018
Awards
released during
the year
Date of vesting
Awards
lapsing
during the
year
Awards
made
during the
year
Number of
awards at
December 31,
2018
2014 May 28, 2015
2015 March 7, 2016
2016 March 6, 2017
2017 May 10, 2018
2014 May 28, 2015
2015 March 7, 2016
2016 March 6, 2017
2017 May 10, 2018
151,111
125,693
51,893
–
328,697
50,252
44,665
22,080
–
116,997
151,111 March 8, 2018
– March 7, 2019
– March 6, 2020
– March 8, 2021
151,111
50,252 March 8, 2018
– March 7, 2019
– March 6, 2020
– March 8, 2021
50,252
–
–
–
–
–
–
–
–
–
–
–
–
–
114,297
114,297
–
–
–
52,939
52,939
–
125,693
51,893
114,297
291,883
–
44,665
22,080
52,939
119,684
Director
Executive
directors
Willie Walsh
Total
Enrique Dupuy
de Lôme
Total
There are no performance conditions to be tested before vesting for the IADP, except that the director must still be employed
by the Company at the time of vesting, or have left as a Good Leaver.
The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the 2018 IADP award
was 691 pence (2017: 546 pence; 2016: 541 pence; and 2015: 550 pence).
The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the 2015 IADP award
was 550 pence. The share price on the date of the vesting of this award (March 8, 2018) was 629 pence. The money value of
the shares received was the share price on the date of the vesting multiplied by the number of shares in respect of the award
vested, as shown in the table above.
114
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
FINANCIAL STATEMENTS
Financial Statements
116 Consolidated income statement
117 Consolidated statement of other comprehensive income
118 Consolidated balance sheet
119 Consolidated cash flow statement
120 Consolidated statement of changes in equity
122 Notes to the consolidated financial statements
172 Group investments
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The Group’s consolidated statements
which follow have been prepared in
accordance with the International
Financial Reporting Standards as
endorsed by the European Union.
www.iairgroup.com
115
CONSOLIDATED INCOME STATEMENT
€ million
Passenger revenue
Cargo revenue
Other revenue
Total revenue
Employee costs
Fuel, oil costs and emissions charges
Handling, catering and other operating
costs
Landing fees and en-route charges
Engineering and other aircraft costs
Property, IT and other costs
Selling costs
Depreciation, amortisation and
impairment
Aircraft operating lease costs
Currency differences
Total expenditure on operations
Operating profit
Finance costs
Finance income
Net financing credit/(charge) relating
to pensions
Net currency retranslation
(charges)/credits
Other non-operating charges
Total net non-operating costs
Profit before tax
Tax
Profit after tax for the year
Attributable to:
Equity holders of the parent
Non-controlling interest
Exceptional
items
(460)
12
(448)
448
448
(32)
416
Before
exceptional
items
2018
21,549
1,173
1,684
24,406
4,812
5,283
Note
3
4, 7
4
4
4
5
5
3
8
8
8
8
9
2,888
2,184
1,828
918
1,046
1,254
890
73
21,176
3,230
(231)
41
27
(19)
(9)
(191)
3,039
(558)
2,481
2,469
12
2,481
Year to December 31
Before
exceptional
items
2017
(restated)1
20,285
1,132
1,463
22,880
4,740
4,610
2,673
2,151
1,773
915
982
1,184
888
14
19,930
2,950
Total
2018
21,549
1,173
1,684
24,406
4,352
5,283
2,888
2,184
1,828
930
1,046
1,254
890
73
20,728
3,678
(231)
41
(225)
45
27
(28)
(19)
(9)
(191)
3,487
(590)
2,897
2,885
12
2,897
38
(11)
(181)
2,769
(538)
2,231
2,211
20
2,231
Exceptional
items
248
14
19
7
288
(288)
(288)
66
(222)
Basic earnings per share (€ cents)
Diluted earnings per share (€ cents)
10
10
122.1
117.7
142.7
137.4
105.9
102.2
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.
Total
2017
(restated)1
20,285
1,132
1,463
22,880
4,988
4,610
2,687
2,151
1,792
922
982
1,184
888
14
20,218
2,662
(225)
45
(28)
38
(11)
(181)
2,481
(472)
2,009
1,989
20
2,009
95.2
92.0
116
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
116
CONSOLIDATED INCOME STATEMENT
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
€ million
Passenger revenue
Cargo revenue
Other revenue
Total revenue
Employee costs
Fuel, oil costs and emissions charges
Handling, catering and other operating
costs
Landing fees and en-route charges
Engineering and other aircraft costs
Property, IT and other costs
Selling costs
impairment
Depreciation, amortisation and
Aircraft operating lease costs
Currency differences
Total expenditure on operations
Operating profit
Finance costs
Finance income
to pensions
Net financing credit/(charge) relating
Net currency retranslation
(charges)/credits
Other non-operating charges
Total net non-operating costs
Profit before tax
Tax
Profit after tax for the year
Attributable to:
Equity holders of the parent
Non-controlling interest
Note
items
2018
Exceptional
items
Exceptional
(restated)1
items
(restated)1
Year to December 31
Before
exceptional
items
2017
24,406
22,880
Total
2018
21,549
1,173
1,684
4,352
5,283
2,888
2,184
1,828
930
1,046
1,254
890
73
20,728
3,678
(231)
41
27
(19)
(9)
(191)
3,487
(590)
2,897
2,885
12
2,897
20,285
1,132
1,463
4,740
4,610
2,673
2,151
1,773
915
982
1,184
888
14
19,930
2,950
(225)
45
(28)
38
(11)
(181)
2,769
(538)
2,231
2,211
20
2,231
(460)
12
(448)
448
448
(32)
416
248
14
19
7
288
(288)
(288)
66
(222)
Total
2017
20,285
1,132
1,463
22,880
4,988
4,610
2,687
2,151
1,792
922
982
1,184
888
14
20,218
2,662
(225)
45
(28)
38
(11)
(181)
2,481
(472)
2,009
1,989
20
2,009
95.2
92.0
Before
exceptional
21,549
1,173
1,684
24,406
4,812
5,283
3
4, 7
4
4
4
5
5
3
8
8
8
8
9
2,888
2,184
1,828
918
1,046
1,254
890
73
21,176
3,230
(231)
41
27
(19)
(9)
(191)
3,039
(558)
2,481
2,469
12
2,481
116
Basic earnings per share (€ cents)
Diluted earnings per share (€ cents)
10
10
122.1
117.7
142.7
137.4
105.9
102.2
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.
€ million
Items that may be reclassified subsequently to net profit
Cash flow hedges:
Fair value movements in equity
Reclassified and reported in net profit
Fair value movements on cost of hedging
Currency translation differences
Items that will not be reclassified to net profit
Fair value movements on other equity investments
Fair value movements on cash flow hedges
Remeasurements of post-employment benefit obligations
Total other comprehensive (loss)/income for the year, net of tax
Profit after tax for the year
Total comprehensive income for the year
Total comprehensive income is attributable to:
Equity holders of the parent
Non-controlling interest
Year to December 31
Note
2018
2017
(restated)1
29
29
(517)
(480)
13
101
28
(41)
29
(80)
(127)
29
29
(5)
26
(696)
(1,739)
2,897
9
–
739
709
2,009
1,158
2,718
1,146
12
1,158
2,698
20
2,718
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.
Items in the consolidated Statement of other comprehensive income above are disclosed net of tax.
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117
www.iairgroup.com
117
CONSOLIDATED BALANCE SHEET
€ million
Non-current assets
Property, plant and equipment
Intangible assets
Investments accounted for using the equity method
Other equity investments
Employee benefit assets
Derivative financial instruments
Deferred tax assets
Other non-current assets
Current assets
Non-current assets held for sale
Inventories
Trade receivables
Other current assets
Current tax receivable
Derivative financial instruments
Other current interest-bearing deposits
Cash and cash equivalents
Total assets
Shareholders’ equity
Issued share capital
Share premium
Treasury shares
Other reserves
Total shareholders’ equity
Non-controlling interest
Total equity
Non-current liabilities
Interest-bearing long-term borrowings
Employee benefit obligations
Deferred tax liability
Provisions for liabilities and charges
Derivative financial instruments
Other long-term liabilities
Current liabilities
Current portion of long-term borrowings
Trade and other payables
Deferred revenue on ticket sales
Derivative financial instruments
Current tax payable
Provisions for liabilities and charges
Total liabilities
Total equity and liabilities
Note
December 31,
2018
December 31,
2017
(restated)1
January 1,
2017
(restated)1
12
14
15
16
30
26
9
17
17
17
9
26
18
18
27
27
27
29
29
22
30
9
24
26
21
22
19
20
26
9
24
12,437
3,198
31
80
1,129
221
536
309
17,941
–
509
1,597
1,175
383
155
2,437
3,837
10,093
28,034
996
6,022
(68)
(236)
6,714
6
6,720
6,633
289
453
2,268
423
198
10,264
876
3,959
4,835
656
165
559
11,050
21,314
28,034
11,846
3,018
30
79
1,023
145
523
376
17,040
–
432
1,463
958
258
405
3,384
3,292
10,192
27,232
1,029
6,022
(77)
(348)
6,626
307
6,933
6,401
792
526
2,113
114
222
10,168
930
3,723
4,742
111
78
547
10,131
20,299
27,232
12,227
3,037
29
73
1,028
169
561
499
17,623
38
458
1,370
899
228
329
3,091
3,337
9,750
27,373
1,066
6,105
(96)
(2,149)
4,926
308
5,234
7,589
2,363
110
1,987
20
238
12,307
926
3,266
4,680
88
101
771
9,832
22,139
27,373
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.
118
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
118
CONSOLIDATED BALANCE SHEET
CONSOLIDATED CASH FLOW STATEMENT
Investments accounted for using the equity method
€ million
Non-current assets
Property, plant and equipment
Intangible assets
Other equity investments
Employee benefit assets
Derivative financial instruments
Deferred tax assets
Other non-current assets
Current assets
Non-current assets held for sale
Inventories
Trade receivables
Other current assets
Current tax receivable
Derivative financial instruments
Other current interest-bearing deposits
Cash and cash equivalents
Total assets
Shareholders’ equity
Issued share capital
Share premium
Treasury shares
Other reserves
Total shareholders’ equity
Non-controlling interest
Total equity
Non-current liabilities
Interest-bearing long-term borrowings
Employee benefit obligations
Deferred tax liability
Provisions for liabilities and charges
Derivative financial instruments
Other long-term liabilities
Current liabilities
Current portion of long-term borrowings
Trade and other payables
Deferred revenue on ticket sales
Derivative financial instruments
Current tax payable
Provisions for liabilities and charges
Total liabilities
Total equity and liabilities
December 31,
December 31,
January 1,
2017
2017
Note
2018
(restated)1
(restated)1
27,232
27,373
17,941
17,040
17,623
12
14
15
16
30
26
9
17
17
17
9
26
18
18
27
27
27
29
29
22
30
9
24
26
21
22
19
20
26
9
24
12,437
3,198
31
80
1,129
221
536
309
–
509
1,597
1,175
383
155
2,437
3,837
10,093
28,034
996
6,022
(68)
(236)
6,714
6
6,720
6,633
289
453
2,268
423
198
876
3,959
4,835
656
165
559
11,050
21,314
28,034
11,846
3,018
30
79
1,023
145
523
376
–
432
1,463
958
258
405
3,384
3,292
10,192
1,029
6,022
(77)
(348)
6,626
307
6,933
6,401
792
526
2,113
114
222
930
3,723
4,742
111
78
547
10,131
20,299
27,232
12,227
3,037
29
73
1,028
169
561
499
38
458
1,370
899
228
329
3,091
3,337
9,750
1,066
6,105
(96)
(2,149)
4,926
308
5,234
7,589
2,363
110
1,987
20
238
926
3,266
4,680
88
101
771
9,832
22,139
27,373
10,264
10,168
12,307
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.
€ million
Cash flows from operating activities
Operating profit after exceptional items
Depreciation, amortisation and impairment
Movement in working capital
Increase in trade receivables, prepayments, inventories and other current assets
Increase in trade and other payables, deferred revenue on ticket sales and current
liabilities
Payments related to restructuring
Employer contributions to pension schemes2
Pension scheme service costs
Provision and other non-cash movements
Interest paid
Interest received
Tax paid
Net cash flows from operating activities
Cash flows from investing activities
Acquisition of property, plant and equipment and intangible assets
Sale of property, plant and equipment and intangible assets
Proceeds from sale of investments
Decrease/(increase) in other current interest-bearing deposits
Other investing movements
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from long-term borrowings
Repayment of borrowings
Repayment of finance leases
Acquisition of treasury shares
Distributions made to holders of perpetual securities
Dividend paid
Net cash flows from financing activities
Net increase in cash and cash equivalents
Net foreign exchange differences
Cash and cash equivalents at 1 January
Cash and cash equivalents at year end
Interest-bearing deposits maturing after more than three months
Cash, cash equivalents and other interest-bearing deposits
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Year to December 31
Note
2018
2017
(restated)1
3,678
1,254
(64)
(650)
586
(220)
(898)
55
(114)
(149)
37
(343)
3,236
(2,802)
574
–
924
61
(1,243)
1,078
(275)
(824)
(500)
(312)
(577)
(1,410)
583
(38)
3,292
3,837
2,662
1,184
647
(287)
934
(248)
(899)
233
264
(122)
29
(237)
3,513
(1,490)
306
17
(432)
55
(1,544)
178
(148)
(825)
(500)
(21)
(512)
(1,828)
141
(186)
3,337
3,292
2,437
3,384
6,274
6,676
5
24
30
30
18
18
18
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.
2
Includes transitional arrangement cash costs associated with changes to the British Airways pension schemes; refer to note 4.
118
119
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119
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year to December 31, 2018
€ million
January 1, 2018 (restated)
Issued
share
capital
(note 27)
1,029
Share
premium
(note 27)
6,022
Treasury
shares
(note 27)
(77)
Other
reserves
(note 29)
(2,626)
Retained
earnings
2,278
Total
shareholders’
equity
6,626
Non-
controlling
interest
(note 29)
307
Total
equity
6,933
Profit for the year
–
–
–
–
2,885
2,885
12
2,897
Other comprehensive income for the
year
Cash flow hedges reclassified and
reported in net profit:
Passenger revenue
Fuel and oil costs
Currency differences
Finance costs
Net change in fair value of cash flow
hedges
Net change in fair value of equity
investments
Net change in fair value of cost of
hedging
Currency translation differences
Remeasurements of post-
employment benefit obligations
Total comprehensive income for
the year
Hedges reclassified and reported in
property, plant and equipment
Cost of share-based payments
Vesting of share-based payment
schemes
Acquisition of treasury shares
Dividend
Cancellation of share capital
Dividend of a subsidiary
Transfer between reserves
Distributions made to holders of
perpetual securities
December 31, 2018
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(33)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9
(500)
–
500
–
–
77
(565)
4
4
(491)
(5)
13
(80)
–
–
–
–
–
–
–
–
77
(565)
4
4
(491)
(5)
13
(80)
–
(696)
(696)
–
–
–
–
–
–
–
–
–
77
(565)
4
4
(491)
(5)
13
(80)
(696)
(1,043)
2,189
1,146
12
1,158
(1)
–
–
–
–
33
–
77
–
31
(15)
–
(582)
(500)
–
(77)
(1)
31
(6)
(500)
(582)
–
–
–
–
6,714
–
–
–
–
–
–
(1)
–
(1)
31
(6)
(500)
(582)
–
(1)
–
(312)
6
(312)
6,720
–
996
–
6,022
–
(68)
–
(3,560)
–
3,324
120
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
120
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year to December 31, 2018
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year to December 31, 2017
€ million
January 1, 2017
Restatement for adoption of new
standards
Issued
share
capital
(note 27)
1,066
Share
premium
(note 27)
6,105
Treasury
shares
(note 27)
(96)
Other
reserves
(note 29)
(2,671)
Retained
earnings
952
Total
shareholders’
equity
5,356
Non-
controlling
interest
(note 29)
308
Total
equity
5,664
–
–
–
38
(468)
(430)
–
(430)
January 1, 2017 (restated)
Profit for the year
1,066
–
6,105
–
(96)
–
(2,633)
–
484
1,989
4,926
1,989
308
20
5,234
2,009
Other comprehensive income for
the year
Cash flow hedges reclassified and
reported in net profit:
Passenger revenue
Fuel and oil costs
Currency differences
Net change in fair value of cash flow
hedges
Net change in fair value of equity
investments
Net change in fair value of cost of
hedging
Currency translation differences
Remeasurements of post-
employment benefit obligations
Total comprehensive income for
the year
Cost of share-based payments
Vesting of share-based payment
schemes
Acquisition of treasury shares
Dividend
Cancellation of share capital
Dividend of a subsidiary
Transfer between reserves
Distributions made to holders of
perpetual securities
December 31, 2017
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(37)
–
–
–
–
–
–
–
(83)
19
(500)
–
500
–
–
84
(38)
(18)
101
9
(41)
(127)
–
–
–
–
–
–
–
–
739
84
(38)
(18)
101
9
(41)
(127)
739
–
–
–
–
–
–
–
–
84
(38)
(18)
101
9
(41)
(127)
739
(30)
2,728
2,698
20
2,718
–
–
–
–
37
–
–
34
34
(33)
–
(518)
(500)
–
83
–
2,278
(14)
(500)
(518)
–
–
–
–
6,626
–
–
–
–
–
(1)
–
34
(14)
(500)
(518)
–
(1)
–
(20)
307
(20)
6,933
–
1,029
–
6,022
–
(77)
–
(2,626)
January 1, 2018 (restated)
1,029
6,022
(77)
(2,626)
2,278
Issued
share
capital
(note 27)
Share
Treasury
premium
(note 27)
shares
(note 27)
Other
reserves
(note 29)
Retained
earnings
Non-
Total
controlling
shareholders’
equity
6,626
interest
(note 29)
307
Total
equity
6,933
€ million
Profit for the year
–
–
–
–
2,885
2,885
12
2,897
Other comprehensive income for the
year
Cash flow hedges reclassified and
reported in net profit:
Passenger revenue
Fuel and oil costs
Currency differences
Finance costs
Net change in fair value of cash flow
hedges
investments
hedging
Net change in fair value of equity
Net change in fair value of cost of
Currency translation differences
Remeasurements of post-
employment benefit obligations
Total comprehensive income for
the year
Hedges reclassified and reported in
property, plant and equipment
Cost of share-based payments
Vesting of share-based payment
schemes
Dividend
Acquisition of treasury shares
Cancellation of share capital
Dividend of a subsidiary
Transfer between reserves
Distributions made to holders of
perpetual securities
December 31, 2018
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(696)
(696)
(1,043)
2,189
1,146
12
1,158
–
–
–
–
–
–
–
–
–
–
–
–
9
–
–
–
–
77
(565)
4
4
(491)
(5)
13
(80)
–
–
–
–
–
–
–
–
(1)
–
–
–
–
33
–
77
–
–
31
(15)
–
(582)
(500)
–
(77)
–
77
(565)
4
4
(491)
(5)
13
(80)
(1)
31
(6)
(500)
(582)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
77
(565)
4
4
(491)
(5)
13
(80)
(696)
(1)
31
(6)
(500)
(582)
–
(1)
–
(33)
(500)
500
996
6,022
(68)
(3,560)
3,324
6,714
6
6,720
(312)
(312)
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120
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121
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year to December 31, 2018
1 Background and general information
International Consolidated Airlines Group S.A. (hereinafter ‘International Airlines Group’, ‘IAG’ or the ‘Group’) is a leading European
airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and
was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora
(hereinafter ‘British Airways’ and ‘Iberia’ respectively) completed a merger transaction becoming the first two airlines of the Group.
Vueling Airlines S.A. (‘Vueling’) was acquired on April 26, 2013, and Aer Lingus Group Plc (‘Aer Lingus’) on August 18, 2015. A list of
the subsidiaries of the Group is included in the Group investments section.
IAG shares are traded on the London Stock Exchange’s main market for listed securities and also on the stock exchanges of
Madrid, Barcelona, Bilbao and Valencia (the ‘Spanish Stock Exchanges’), through the Spanish Stock Exchanges Interconnection
System (Mercado Continuo Español).
2 Significant accounting policies
Basis of preparation
The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting
Standards as endorsed by the European Union (IFRSs as endorsed by the EU). The consolidated financial statements are rounded
to the nearest million unless otherwise stated. These financial statements have been prepared on a historical cost convention
except for certain financial assets and liabilities, including derivative financial instruments and other equity investments 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. In order to improve the presentation of the Income
statement, certain non-operating items have been aggregated into a new line, ‘Other non-operating (charges)/credits’, with further
analysis provided in note 8 to the accounts.
The Group’s financial statements for the year to December 31, 2018 were authorised for issue, and approved by the Board of
Directors on February 27, 2019.
The Directors have considered the business activities, the Group’s principal risks and uncertainties, and the Group’s financial
position, including cash flows, liquidity position and available committed facilities. The Directors consider that the Group has
adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern
basis in preparing the financial statements.
Consolidation
The Group financial statements include the financial statements of the Company and its subsidiaries, each made up to December
31, together with the attributable share of results and reserves of associates and joint ventures, adjusted where appropriate to
conform to the Group’s accounting policies.
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. Control exists when the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
The Group applies the acquisition method to account for business combinations. The consideration paid is the fair value of the
assets transferred, the liabilities incurred and the equity interests issued by the Group. Identifiable assets acquired and liabilities
assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling 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. Acquisition-related costs are expensed as incurred.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in
the acquiree is remeasured to fair value at the acquisition date through the Income statement.
Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling
interest over the net identifiable assets acquired and liabilities assumed.
All intra-group account balances, including intra-group profits, are eliminated in preparing the consolidated financial statements.
Segmental reporting
Operating segments are reported in a manner consistent with how resource allocation decisions are made by the chief operating
decision-maker. The chief operating decision-maker, who is responsible for resource allocation and assessing performance of the
operating segments, has been identified as the IAG Management Committee.
Foreign currency translation
a Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the functional currency, being the
currency of the primary economic environment in which the entity operates. In particular, British Airways and Avios have a
functional currency of pound sterling. The Group’s consolidated financial statements are presented in euros, which is the Group’s
presentation currency.
122
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
122
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year to December 31, 2018
1 Background and general information
International Consolidated Airlines Group S.A. (hereinafter ‘International Airlines Group’, ‘IAG’ or the ‘Group’) is a leading European
airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and
was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora
(hereinafter ‘British Airways’ and ‘Iberia’ respectively) completed a merger transaction becoming the first two airlines of the Group.
Vueling Airlines S.A. (‘Vueling’) was acquired on April 26, 2013, and Aer Lingus Group Plc (‘Aer Lingus’) on August 18, 2015. A list of
the subsidiaries of the Group is included in the Group investments section.
IAG shares are traded on the London Stock Exchange’s main market for listed securities and also on the stock exchanges of
Madrid, Barcelona, Bilbao and Valencia (the ‘Spanish Stock Exchanges’), through the Spanish Stock Exchanges Interconnection
System (Mercado Continuo Español).
2 Significant accounting policies
Basis of preparation
The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting
Standards as endorsed by the European Union (IFRSs as endorsed by the EU). The consolidated financial statements are rounded
to the nearest million unless otherwise stated. These financial statements have been prepared on a historical cost convention
except for certain financial assets and liabilities, including derivative financial instruments and other equity investments 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. In order to improve the presentation of the Income
statement, certain non-operating items have been aggregated into a new line, ‘Other non-operating (charges)/credits’, with further
The Group’s financial statements for the year to December 31, 2018 were authorised for issue, and approved by the Board of
The Directors have considered the business activities, the Group’s principal risks and uncertainties, and the Group’s financial
position, including cash flows, liquidity position and available committed facilities. The Directors consider that the Group has
adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern
analysis provided in note 8 to the accounts.
Directors on February 27, 2019.
basis in preparing the financial statements.
Consolidation
The Group financial statements include the financial statements of the Company and its subsidiaries, each made up to December
31, together with the attributable share of results and reserves of associates and joint ventures, adjusted where appropriate to
conform to the Group’s accounting policies.
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. Control exists when the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
The Group applies the acquisition method to account for business combinations. The consideration paid is the fair value of the
assets transferred, the liabilities incurred and the equity interests issued by the Group. Identifiable assets acquired and liabilities
assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling 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. Acquisition-related costs are expensed as incurred.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in
the acquiree is remeasured to fair value at the acquisition date through the Income statement.
Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling
interest over the net identifiable assets acquired and liabilities assumed.
All intra-group account balances, including intra-group profits, are eliminated in preparing the consolidated financial statements.
Segmental reporting
Operating segments are reported in a manner consistent with how resource allocation decisions are made by the chief operating
decision-maker. The chief operating decision-maker, who is responsible for resource allocation and assessing performance of the
operating segments, has been identified as the IAG Management Committee.
Foreign currency translation
a Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the functional currency, being the
currency of the primary economic environment in which the entity operates. In particular, British Airways and Avios have a
functional currency of pound sterling. The Group’s consolidated financial statements are presented in euros, which is the Group’s
presentation currency.
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b Transactions and balances
Transactions in foreign currencies are initially recorded in the functional currency using the rate of exchange prevailing on the date
of the transaction. Monetary foreign currency balances are translated into the functional currency at the rates ruling at the balance
sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at
balance sheet exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income
statement, except where hedge accounting is applied. Foreign exchange gains and losses arising on the retranslation of monetary
assets and liabilities classified as non-current on the Balance sheet are recognised within ‘Net currency retranslation (charges)/
credits’ in the Income statement. All other gains and losses arising on the retranslation of monetary assets and liabilities are
recognised in operating profit.
c Group companies
The net assets of foreign operations are translated into euros at the rate of exchange ruling at the balance sheet date. Profits
and losses of such operations are translated into euros at average rates of exchange during the year. The resulting exchange
differences are taken directly to a separate component of equity (Currency translation reserve) until all or part of the interest
is sold, when the relevant portion of the cumulative exchange difference is recognised in the Income statement.
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 the estimated residual value on a straight-line basis, over the economic 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.
a Capitalisation of interest on progress payments
Interest attributed to progress payments made on account of aircraft and other qualifying assets under construction are
capitalised and added to the cost of the asset concerned. All other borrowing costs are recognised in the Income statement in the
year in which they are incurred.
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 leases are disaggregated into separate components and depreciated at rates calculated to write down the cost
of each component to the estimated residual value at the end of their planned operational lives (which is the shorter of their useful
life or lease term) on a straight-line basis. Depreciation rates are specific to aircraft type, based on the Group’s fleet plans, within
overall parameters of 23 years and 5 per cent residual value for shorthaul aircraft and 25 years and 5 per cent residual value for
longhaul aircraft.
Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of five
years and the remaining economic 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 ‘pay-as-you-go’ contracts) are charged to the Income statement on consumption
or as incurred respectively.
c Other property, plant and equipment
Provision is made for the depreciation of all property, plant and equipment. Property, with the exception of freehold land, is
depreciated over its expected useful life over periods not exceeding 50 years, or in the case of leasehold properties, over the
duration of the lease if shorter, on a straight-line basis. Equipment is depreciated over periods ranging from 4 to 20 years.
d Leased assets
Where assets are financed through finance leases, 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 term. The corresponding obligation, reduced
by the appropriate proportion of lease 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 on fleet and the interest element of lease payments made is included as an interest expense 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, without further material financial obligations.
In certain cases the Group is entitled to extend the initial lease period on predetermined terms; such leases are described as
extendable operating leases.
In determining the appropriate lease classification, the substance of the transaction rather than the form is considered. Factors
considered include but are not limited to the following: whether the lease transfers ownership of the asset to the lessee by the
end of the lease term; the lessee has the option to purchase the asset at the price that is sufficiently lower than the fair value on
exercise date; the lease term is for the major part of the economic life of the asset; and the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the leased asset.
122
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123
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
Intangible assets
a Goodwill
Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration
paid over the net fair value of the identifiable assets and liabilities of the acquiree. Where the net fair value of the identifiable assets
and liabilities of the acquiree is in excess of the consideration paid, a gain on bargain purchase is recognised immediately in the
Income statement.
For the purpose of assessing impairment, goodwill is grouped at the lowest levels for which there are separately identifiable cash
flows (cash generating units). Goodwill is tested for impairment annually and whenever indicators exist that the carrying value may
not be recoverable.
b Brands
Brands arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. Long established brands
that are expected to be used indefinitely are not amortised but assessed annually for impairment.
c Customer loyalty programmes
Customer loyalty programmes arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date.
A customer loyalty programme with an expected useful life is amortised over the expected remaining useful life. Established
customer loyalty programmes that are expected to be used indefinitely are not amortised but assessed annually for impairment.
d Landing rights
Landing rights acquired in a business combination are recognised at fair value at the acquisition date. Landing rights acquired from
other airlines are capitalised at cost.
Capitalised landing rights based outside the EU are amortised on a straight-line basis over a period not exceeding 20 years.
Capitalised landing rights based within the EU are not amortised, as regulations provide that these landing rights are perpetual.
e Contract based intangibles
Contract based intangibles acquired in a business combination are recognised initially at fair value at the acquisition date and
amortised over the remaining life of the contract.
Software
f
The cost to purchase or develop computer software that is separable from an item of related hardware is capitalised separately
and amortised on a straight-line basis generally over a period not exceeding five years, with certain specific software
developments amortised over a period of up to 10 years.
g Emissions allowances
Purchased emissions allowances are recognised at cost. Emissions allowances are not revalued or amortised but are tested for
impairment whenever indicators exist that the carrying value may not be recoverable.
Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are
subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised for the value by which the asset’s carrying value exceeds its
recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value-in-use. Non-financial
assets other than goodwill that were subject to an impairment are reviewed for possible reversal of the impairment at each
reporting date.
a Property, plant and equipment
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.
Intangible assets
b
Intangible assets are held at cost and are either amortised on a straight-line basis over their economic life, or they are deemed to
have an indefinite economic life and are not amortised. Indefinite life intangible assets are tested annually for impairment or more
frequently if events or changes in circumstances indicate the carrying value may not be recoverable.
Investments in associates and joint ventures
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. Where the Group cannot exercise control over an entity in which it has a shareholding greater than 51 per
cent, the equity interest is treated as an associated undertaking.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in
determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.
Investments in associates and joint ventures are accounted for using the equity method, and initially recognised at cost. The
Group’s interest in the net assets of associates and joint ventures is included in Investments accounted for using the equity method
in the Balance sheet and its interest in their results is included in the Income statement, below operating result. The attributable
results of those companies acquired or disposed of during the year are included for the periods of ownership.
124
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
124
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
Intangible assets
a Goodwill
Income statement.
not be recoverable.
b Brands
Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration
paid over the net fair value of the identifiable assets and liabilities of the acquiree. Where the net fair value of the identifiable assets
and liabilities of the acquiree is in excess of the consideration paid, a gain on bargain purchase is recognised immediately in the
For the purpose of assessing impairment, goodwill is grouped at the lowest levels for which there are separately identifiable cash
flows (cash generating units). Goodwill is tested for impairment annually and whenever indicators exist that the carrying value may
Brands arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. Long established brands
that are expected to be used indefinitely are not amortised but assessed annually for impairment.
c Customer loyalty programmes
Customer loyalty programmes arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date.
A customer loyalty programme with an expected useful life is amortised over the expected remaining useful life. Established
customer loyalty programmes that are expected to be used indefinitely are not amortised but assessed annually for impairment.
d Landing rights
other airlines are capitalised at cost.
Landing rights acquired in a business combination are recognised at fair value at the acquisition date. Landing rights acquired from
Capitalised landing rights based outside the EU are amortised on a straight-line basis over a period not exceeding 20 years.
Capitalised landing rights based within the EU are not amortised, as regulations provide that these landing rights are perpetual.
Contract based intangibles acquired in a business combination are recognised initially at fair value at the acquisition date and
The cost to purchase or develop computer software that is separable from an item of related hardware is capitalised separately
and amortised on a straight-line basis generally over a period not exceeding five years, with certain specific software
e Contract based intangibles
amortised over the remaining life of the contract.
f
Software
developments amortised over a period of up to 10 years.
g Emissions allowances
Purchased emissions allowances are recognised at cost. Emissions allowances are not revalued or amortised but are tested for
impairment whenever indicators exist that the carrying value may not be recoverable.
Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are
subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised for the value by which the asset’s carrying value exceeds its
recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value-in-use. Non-financial
assets other than goodwill that were subject to an impairment are reviewed for possible reversal of the impairment at each
reporting date.
a Property, plant and equipment
b
Intangible assets
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.
Intangible assets are held at cost and are either amortised on a straight-line basis over their economic life, or they are deemed to
have an indefinite economic life and are not amortised. Indefinite life intangible assets are tested annually for impairment or more
frequently if events or changes in circumstances indicate the carrying value may not be recoverable.
Investments in associates and joint ventures
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. Where the Group cannot exercise control over an entity in which it has a shareholding greater than 51 per
cent, the equity interest is treated as an associated undertaking.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in
determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.
Investments in associates and joint ventures are accounted for using the equity method, and initially recognised at cost. The
Group’s interest in the net assets of associates and joint ventures is included in Investments accounted for using the equity method
in the Balance sheet and its interest in their results is included in the Income statement, below operating result. The attributable
results of those companies acquired or disposed of during the year are included for the periods of ownership.
Financial instruments
a Other equity investments
Other equity investments are non-derivative financial assets including listed and unlisted investments, excluding interests in
associates and joint ventures. On initial recognition, these equity investments are irrevocably designated as measured at fair value
through Other comprehensive income. They are subsequently measured at fair value, with changes in fair value recognised in
Other comprehensive income with no recycling of these gains and losses to the Income statement when the investment is sold.
Dividends received on other equity investments are recognised in the Income statement.
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.
b Other interest-bearing deposits
Other interest-bearing deposits, principally comprising funds held with banks and other financial institutions with contractual
cash flows that are solely payments of principal and interest, are carried at amortised cost using the effective interest method.
c Derivative financial instruments and hedging activities
Derivative financial instruments, comprising interest rate swap agreements, foreign exchange derivatives and fuel hedging
derivatives (including options, swaps and futures) are initially recognised at fair value on the date a derivative contract is entered
into and are subsequently remeasured at their fair value. They are classified as financial instruments through profit and loss. The
method of recognising the resulting gain or loss arising from remeasurement depends on whether the derivative is designated as a
hedging instrument, and if so, the nature of the item being hedged (as detailed below under cash flow hedges). The time value of
options is excluded from the designated hedging instrument and accounted for as a cost of hedging. Movements in the time value
of options are recognised in Other comprehensive income until the underlying transaction affects the income statement.
Exchange gains and losses on monetary investments are taken to the Income statement unless the item has been designated and
is assessed as an effective hedging instrument. Exchange gains and losses on non-monetary investments are reflected in equity.
Long-term borrowings are recorded at amortised cost, including leases which contain interest rate swaps that are closely related
to the underlying financing and as such are not accounted for as an embedded derivative.
d Cash flow hedges
Changes in the fair value of derivative financial instruments designated as a hedge of a highly probable expected future cash flow
and assessed as effective are recorded in equity. Gains and losses on derivative instruments not designated as a cash flow hedge
are reported in the Income statement. Gains and losses recorded in equity are reflected in the Income statement when either the
hedged cash flow impacts the Income statement or the hedged item is no longer expected to occur.
Certain loan repayment instalments denominated in US dollars, euros, Japanese yen and Chinese yuan 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 recorded in equity and subsequently reflected in the Income statement when either the future revenue
impacts income or its occurrence is no longer expected to occur.
e Convertible debt
Convertible bonds are classified as compound instruments, consisting of a liability and an equity component. At the date of issue,
the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt, and
is subsequently recorded at an amortised cost basis using the effective interest method until extinguished on conversion or
maturity of the bonds, and is recognised within Interest-bearing borrowings. The difference between the proceeds of issue of the
convertible bond and the fair value assigned to the liability component, representing the embedded option to convert the liability
into equity of the Group, is included in Equity portion of convertible bond in Other reserves and is not subsequently remeasured.
Issue costs are apportioned between the liability and equity components of the convertible bonds where appropriate based on
their relative carrying values at the date of issue. The portion relating to the equity component is charged directly against equity.
The interest expense on the liability component is calculated by applying the effective interest rate for similar non-convertible
debt to the liability component of the instrument. The difference between this value and the interest paid is added to the carrying
amount of the liability.
Impairment of financial assets
f
At each balance sheet date, the Group recognises provisions for expected credit losses on financial assets measured at amortised
cost, based on 12-month or lifetime losses depending on whether there has been a significant increase in credit risk since initial
recognition. The simplified approach, based on the calculation and recognition of lifetime expected credit losses, is applied to
contracts that have a maturity of one year or less, including trade receivables.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
Employee benefit plans
a Pension obligations
The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which
the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further
contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the
current and prior years.
Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent
on one or more factors such as age, years of service and compensation.
The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the
amount of future benefit that employees have earned in return for their service in the current and prior years. The benefit is
discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate is the yield at the
balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations approximating those of the
Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the net
obligation calculation results in an asset for the Group, the recognition of an asset is limited to the present value of any future
refunds from the plan or reductions in future contributions to the plan (‘the asset ceiling’). The fair value of the plan assets is based
on market price information and, in the case of quoted securities, is the published bid price. The fair value of insurance policies
which exactly match the amount and timing of some or all benefits payable under the scheme are deemed to be the present value
of the related obligations. Longevity swaps are measured at their fair value.
Current service costs are recognised within employee costs in the year in which they arise. Past service costs are recognised in
the event of a plan amendment or curtailment, or when the Group recognises related restructuring costs or severance obligations.
The net interest is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the
period to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during
the period as a result of contributions and benefit payments. Net interest and other expenses related to the defined benefit plans
are recognised in the Income statement. Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling
(excluding interest) and the return on plan assets (excluding interest), are recognised immediately in Other comprehensive income.
Remeasurements are not reclassified to the Income statement in subsequent periods.
b Severance obligations
Severance obligations are recognised when employment is terminated by the Group before the normal retirement date, or
whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises a provision for
severance payments when it is demonstrably committed to either terminating the employment of current employees according
to a detailed formal plan without realistic possibility of withdrawal, or providing severance payments as a result of an offer made
to encourage voluntary redundancy.
Other employee benefits are recognised when there is deemed to be a present obligation.
Taxation
Current income 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.
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Annual Report and Accounts 2018
126
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
Employee benefit plans
a Pension obligations
current and prior years.
The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which
the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further
contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the
Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent
on one or more factors such as age, years of service and compensation.
The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the
amount of future benefit that employees have earned in return for their service in the current and prior years. The benefit is
discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate is the yield at the
balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations approximating those of the
Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the net
obligation calculation results in an asset for the Group, the recognition of an asset is limited to the present value of any future
refunds from the plan or reductions in future contributions to the plan (‘the asset ceiling’). The fair value of the plan assets is based
on market price information and, in the case of quoted securities, is the published bid price. The fair value of insurance policies
which exactly match the amount and timing of some or all benefits payable under the scheme are deemed to be the present value
of the related obligations. Longevity swaps are measured at their fair value.
Current service costs are recognised within employee costs in the year in which they arise. Past service costs are recognised in
the event of a plan amendment or curtailment, or when the Group recognises related restructuring costs or severance obligations.
The net interest is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the
period to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during
the period as a result of contributions and benefit payments. Net interest and other expenses related to the defined benefit plans
are recognised in the Income statement. Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling
(excluding interest) and the return on plan assets (excluding interest), are recognised immediately in Other comprehensive income.
Remeasurements are not reclassified to the Income statement in subsequent periods.
b Severance obligations
Severance obligations are recognised when employment is terminated by the Group before the normal retirement date, or
whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises a provision for
severance payments when it is demonstrably committed to either terminating the employment of current employees according
to a detailed formal plan without realistic possibility of withdrawal, or providing severance payments as a result of an offer made
to encourage voluntary redundancy.
Other employee benefits are recognised when there is deemed to be a present obligation.
Taxation
Current income 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.
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Inventories
Inventories are valued at the lower of cost and net realisable value. Such cost is determined by the weighted average cost method.
Inventories include mainly aircraft spare parts, repairable aircraft engine parts and fuel.
Cash and cash equivalents
Cash and cash equivalents include 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.
Share-based payments
The Group operates a number of equity-settled, share-based payment plans, under which the Group awards equity instruments of
the Group for services rendered by employees. The fair value of the share-based payment plans is measured at the date of grant
using a valuation model provided by external specialists. The resulting cost, as adjusted for the expected and actual level of vesting
of the plan, is charged to the Income statement 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, and accordingly the number of equity instruments that
will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the Income
statement with a corresponding entry in equity.
Provisions
Provisions are made when an obligation exists for a present liability in respect of a past event and where the amount of the
obligation can be reliably estimated.
Employee leaving indemnities and other employee provisions are recorded for flight crew who, meeting certain conditions,
have the option of being placed on reserve or of taking early retirement. The Group is obligated to remunerate these employees
until they reach the statutory retirement age. The calculation is performed by independent actuaries using the projected unit
credit method.
Other employee related provisions are recognised for direct expenditures of business reorganisation such as severance payments
(restructuring provisions) where 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 rate that reflects, where appropriate, the risks specific
to the provision. Where discounting is used, the increase in the provision due to unwinding the discount is recognised as a
finance cost.
Revenue recognition
The Group’s revenue primarily derives from transportation services for both passengers and cargo. Revenue is recognised when
the transportation service has been provided. Passenger tickets are generally paid for in advance of transportation and are
recognised, net of discounts, as deferred revenue on ticket sales in current liabilities until the customer has flown. Unused tickets
are recognised as revenue after the contracted date of departure using estimates regarding the timing of recognition based on
the terms and conditions of the ticket and statistical analysis of historical trends.
The Group considers whether it is an agent or a principal in relation to transportation services by considering whether it has a
performance obligation to provide services to the customer or whether the obligation is to arrange for the services to be provided
by a third party.
Other revenue including maintenance; handling; hotel and holiday and commissions is recognised as the related performance
obligation is satisfied (over time) using an appropriate methodology which reflects the activity that has been undertaken to satisfy
the related obligation.
Customer loyalty programmes
The Group’s main loyalty programmes are Executive Club, Iberia Plus, Avios, Vueling Club and Aer Club. The customer loyalty
programmes award travellers Avios points to redeem for various rewards, primarily redemption travel, including flights, hotels and
car hire. Avios points are also sold to commercial partners to use in loyalty activity.
The Group has identified several performance obligations associated with the sale of Avios points. Revenue associated with brand
and marketing services and revenue associated with Avios points has been determined based on the relative stand-alone selling
price of each of the performance obligations. Revenue associated with brand and marketing services is recognised as the points
are issued. Revenue allocated to the Avios points is deferred on the balance sheet as a current liability, and recognised when the
points are redeemed. When the points are redeemed for products provided by suppliers outside the Group, revenue is recognised
in the Income statement net of related costs, as the Group is considered to be an agent in these redemption transactions.
The Group estimates the stand-alone selling price of the brand and marketing performance obligations by reference to the amount
that a third party would be prepared to pay in an arm’s length transaction for access to comparable brands for the period over
which they have access. The stand-alone selling price of Avios points is based on the value of the awards for which the points
could be redeemed. The Group also recognises revenue associated with the proportion of award credits which are not expected
to be redeemed, based on the results of statistical modelling.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
Exceptional items
Exceptional items are those that in management’s view need to be separately disclosed by virtue of their size or incidence.
The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of business
combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale, disposal or
impairment of an investment in a business.
Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash items
such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step
acquisition losses.
Critical accounting judgements, estimates and assumptions
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 judgements, estimates
and associated assumptions are based on historical experience and various other factors believed to be reasonable under the
circumstances. Actual results in the future may differ from judgements and estimates upon which financial information has
been prepared. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised prospectively.
Estimates
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 as follows.
a Employee benefit obligations, employee leaving indemnities, other employee related restructuring provisions
At December 31, 2018 the Group recognised €1,129 million in respect of employee benefit assets (2017: €1,023 million) and
€289 million in respect of employee benefit obligations (2017: €792 million). Further information on employee benefit obligations
is disclosed in note 30.
The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined
using actuarial valuations. Actuarial valuations involve 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
assumptions are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in notes 24 and 30.
The Group determines the assumptions to be adopted in discussion with qualified actuaries. In respect of future pension increases
in the Airways Pension Scheme, on July 5, 2018 the Court of Appeal released its judgement, upholding British Airways’ appeal,
concluding the Trustee did not have the power to introduce a discretionary increase rule. Further information on these
proceedings is disclosed in note 31. The sensitivity to changes in pension increase assumptions is disclosed in note 30.
On October 26, 2018 the High Court of Justice of England and Wales issued a judgment in a claim between Lloyds Banking Group
Pension Trustees Limited as claimant and Lloyds Bank plc and others as defendants regarding the rights of female members of
certain pension schemes to equality of treatment in relation to pension benefits. The judgment affects some of the occupational
pension schemes of the Group as set out in note 30.
Whilst the Lloyds judgement has brought some clarity to the issue, there remains some uncertainty over how the calculation of
the obligation for Guaranteed Minimum Pension (GMP) equalisation should be performed. The UK Government may also produce
guidance on the application of GMP equalisation. In determining the obligation for these consolidated financial statements, the
Group has assumed that the Trustees will adopt Method C2 which was identified in the Lloyds judgement as the ‘minimum
interference’ method which could be implemented without sponsor agreement. The final cost of GMP equalisation will be
determined when further guidance is available and may be higher or lower than the current estimate.
Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected direct
expenditures of reorganisation based on plans which are sufficiently detailed and advanced.
b Revenue recognition
At December 31, 2018 the Group recognised €4,835 million in respect of deferred revenue on ticket sales (2017: €4,742 million)
of which €1,769 million (2017: €1,752 million) related to customer loyalty programmes.
Passenger revenue is recognised when the transportation is provided. At the time of transportation, revenue is also recognised in
respect of tickets that are not expected to be used (‘unused tickets’). Revenue associated with unused tickets is estimated based
on the terms and conditions of the tickets and historical trends.
Revenue associated with the issuance of points under customer loyalty programmes is based on the relative stand-alone selling
prices of the related performance obligations (brand, marketing and points), determined using estimation techniques. The
transaction price of brand and marketing services is determined using specific brand valuation methodologies. The transaction
price of the points is based on the value of the awards for which the points can be redeemed and is reduced to take account of
the proportion of the award credits that are not expected to be redeemed by customers. The Group estimates the number of
points not expected to be redeemed (using statistical modelling and historical trends) and the mix and fair value of the award
credits. A one percentage point change in the assumption of points not expected to be redeemed will result in an adjustment
to deferred revenue of €100 million, with an offsetting adjustment to revenue and operating profit recognised in the year.
The following three accounting estimates involve a higher degree of judgement or complexity, or are areas where assumptions
are significant to the financial statements however these accounting estimates are not major sources of estimation uncertainty
that have a significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities within the next year.
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Annual Report and Accounts 2018
128
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
Exceptional items
Exceptional items are those that in management’s view need to be separately disclosed by virtue of their size or incidence.
The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of business
combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale, disposal or
impairment of an investment in a business.
Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash items
such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step
acquisition losses.
Critical accounting judgements, estimates and assumptions
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 judgements, estimates
and associated assumptions are based on historical experience and various other factors believed to be reasonable under the
circumstances. Actual results in the future may differ from judgements and estimates upon which financial information has
been prepared. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised prospectively.
Estimates
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 as follows.
a Employee benefit obligations, employee leaving indemnities, other employee related restructuring provisions
At December 31, 2018 the Group recognised €1,129 million in respect of employee benefit assets (2017: €1,023 million) and
€289 million in respect of employee benefit obligations (2017: €792 million). Further information on employee benefit obligations
is disclosed in note 30.
The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined
using actuarial valuations. Actuarial valuations involve 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
assumptions are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in notes 24 and 30.
The Group determines the assumptions to be adopted in discussion with qualified actuaries. In respect of future pension increases
in the Airways Pension Scheme, on July 5, 2018 the Court of Appeal released its judgement, upholding British Airways’ appeal,
concluding the Trustee did not have the power to introduce a discretionary increase rule. Further information on these
proceedings is disclosed in note 31. The sensitivity to changes in pension increase assumptions is disclosed in note 30.
On October 26, 2018 the High Court of Justice of England and Wales issued a judgment in a claim between Lloyds Banking Group
Pension Trustees Limited as claimant and Lloyds Bank plc and others as defendants regarding the rights of female members of
certain pension schemes to equality of treatment in relation to pension benefits. The judgment affects some of the occupational
pension schemes of the Group as set out in note 30.
Whilst the Lloyds judgement has brought some clarity to the issue, there remains some uncertainty over how the calculation of
the obligation for Guaranteed Minimum Pension (GMP) equalisation should be performed. The UK Government may also produce
guidance on the application of GMP equalisation. In determining the obligation for these consolidated financial statements, the
Group has assumed that the Trustees will adopt Method C2 which was identified in the Lloyds judgement as the ‘minimum
interference’ method which could be implemented without sponsor agreement. The final cost of GMP equalisation will be
determined when further guidance is available and may be higher or lower than the current estimate.
Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected direct
expenditures of reorganisation based on plans which are sufficiently detailed and advanced.
b Revenue recognition
At December 31, 2018 the Group recognised €4,835 million in respect of deferred revenue on ticket sales (2017: €4,742 million)
of which €1,769 million (2017: €1,752 million) related to customer loyalty programmes.
Passenger revenue is recognised when the transportation is provided. At the time of transportation, revenue is also recognised in
respect of tickets that are not expected to be used (‘unused tickets’). Revenue associated with unused tickets is estimated based
on the terms and conditions of the tickets and historical trends.
Revenue associated with the issuance of points under customer loyalty programmes is based on the relative stand-alone selling
prices of the related performance obligations (brand, marketing and points), determined using estimation techniques. The
transaction price of brand and marketing services is determined using specific brand valuation methodologies. The transaction
price of the points is based on the value of the awards for which the points can be redeemed and is reduced to take account of
the proportion of the award credits that are not expected to be redeemed by customers. The Group estimates the number of
points not expected to be redeemed (using statistical modelling and historical trends) and the mix and fair value of the award
credits. A one percentage point change in the assumption of points not expected to be redeemed will result in an adjustment
to deferred revenue of €100 million, with an offsetting adjustment to revenue and operating profit recognised in the year.
The following three accounting estimates involve a higher degree of judgement or complexity, or are areas where assumptions
are significant to the financial statements however these accounting estimates are not major sources of estimation uncertainty
that have a significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities within the next year.
Income taxes
c
At December 31, 2018 the Group recognised €536 million in respect of deferred tax assets (2017: €523 million). Further information
on current and deferred tax liabilities is disclosed in note 9.
The Group is subject to income taxes in numerous jurisdictions. Estimates are required in determining the worldwide provision for
income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain because it may
be unclear how tax law applies to a particular transaction or circumstance. The Group recognises liabilities for anticipated tax
audit assessments. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such
differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.
The Group recognises deferred income tax assets only to the extent that it is probable that the taxable profit will be available
against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Management consider
the operating performance in the current year and the future projections of performance laid out in the approved Business plan in
order to assess the probability of recoverability. The Business plan relies on the use of assumptions, estimates and judgements in
respect of future performance and economics.
Impairment of non-financial assets
d
At December 31, 2018 the Group recognised €2,403 million in respect of intangible assets with an indefinite life, including goodwill
(2017: €2,363 million). Further information on these assets is included in note 14.
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and
intangible assets with indefinite economic lives are 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 and assumptions as disclosed in note 14.
Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.
e Residual values and useful lives of assets
At December 31, 2018 the Group recognised €12,437 million in respect of property, plant and equipment (2017: €11,846 million).
Further information on these assets is included in note 12.
The Group estimates useful lives and residual values of property, plant and equipment, including fleet assets based on network
plans and recoverable values. Useful lives and residual values are reassessed annually, taking into consideration the latest fleet
plans and other business plan information.
Judgement
Engineering and other aircraft costs
At December 31, 2018, the Group recognised €1,359 million in respect of maintenance, restoration and handback provisions
(2017: €1,125 million). Information on movements on the provision is disclosed in note 24.
The Group has a number of contracts with service providers to replace or repair engine parts and for other maintenance checks.
These agreements are complex and generally cover a number of years. The Group exercises judgement in determining the
assumptions used to match the consumption of replacement spares and other costs associated with fleet maintenance with the
appropriate income statement charge. Aircraft maintenance obligations are based on aircraft utilisation, expected maintenance
intervals, future maintenance costs and the aircraft’s condition.
Changes in accounting policy and disclosures
a New and amended standards adopted by the Group
The Group has applied IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’ for the first time for the
year to December 31, 2018. Further details on the impact of these standards on the Group accounting policies and financial position
and performance are provided in note 33.
Other amendments to accounting standards, adopted for the first time in the year to December 31, 2018 have not resulted
in a significant change to the financial position or performance of the Group, or to presentation and disclosures in the Group
financial statements.
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129
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
b New standards, amendments and interpretations not yet effective
The IASB issued IFRS 16 ‘Leases’ with an effective date after the year end of these financial statements. This standard will impact
the Group from January 1, 2019. Further information on the requirements of the standard is provided in note 33.
In addition the IASB’s Interpretations Committee has issued IFRIC Interpretation 23 ‘Uncertainty over tax treatments’; effective for
periods beginning on or after January 1, 2019. The interpretation clarifies application of recognition and measurement requirements
in IAS 12 ‘Income Taxes’ when there is uncertainty over income tax treatments. The Group has assessed the impact of the
interpretation and it is not expected to have a material effect on the reported income or net assets of the Group.
There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will have
a material effect on the reported income or net assets of the Group.
The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.
3 Segment information
a Business segments
The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments,
and has been identified as the IAG Management Committee (IAG MC).
The Group has a number of entities which are managed as individual operating companies including airline and platform functions.
Each airline operates its network operations as a single business unit and the IAG MC assesses performance based on measures
including operating profit, and makes resource allocation decisions for the airlines based on network profitability, primarily by
reference to the passenger markets in which the companies operate. The objective in making resource allocation decisions is to
optimise consolidated financial results.
The Group has determined its operating segments based on the way that it treats its businesses and the manner in which resource
allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes
as reportable operating segments. Avios and LEVEL are also operating segments but do not exceed the quantitative thresholds to
be reportable and management has concluded that there are currently no other reasons why they should be separately disclosed.
The platform functions of the business primarily support the airline operations. These activities are not considered to be
reportable operating segments as they either earn revenues incidental to the activities of the Group and resource allocation
decisions are made based on the passenger business, or are not reviewed regularly by the IAG MC and are included within
Other Group companies.
For the year to December 31, 2018
€ million
Revenue
Passenger revenue
Cargo revenue
Other revenue
External revenue
Inter-segment revenue
Segment revenue
2018
British
Airways
12,972
867
682
14,521
508
15,029
Iberia
Vueling
3,765
251
749
4,765
417
5,182
2,377
–
20
2,397
1
2,398
Aer
Lingus
1,952
54
9
2,015
5
2,020
Other
Group
companies1
483
1
224
708
538
1,246
Total
21,549
1,173
1,684
24,406
1,469
25,875
Depreciation, amortisation and impairment
(890)
(207)
(25)
(83)
(49)
(1,254)
Operating profit before exceptional items
Exceptional items (note 4)
Operating profit after exceptional items
Net non-operating costs
Profit before tax
2,207
448
2,655
437
–
437
200
–
200
305
–
305
81
–
81
3,230
448
3,678
(191)
3,487
Total assets
Total liabilities
18,531
(12,235)
6,829
(5,051)
1,882
(1,495)
1,915
(1,072)
(1,123)
(1,461)
28,034
(21,314)
1
Includes eliminations on total assets of €13,681 million and total liabilities of €3,667 million.
130
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Annual Report and Accounts 2018
130
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
2 Significant accounting policies continued
b New standards, amendments and interpretations not yet effective
The IASB issued IFRS 16 ‘Leases’ with an effective date after the year end of these financial statements. This standard will impact
the Group from January 1, 2019. Further information on the requirements of the standard is provided in note 33.
In addition the IASB’s Interpretations Committee has issued IFRIC Interpretation 23 ‘Uncertainty over tax treatments’; effective for
periods beginning on or after January 1, 2019. The interpretation clarifies application of recognition and measurement requirements
in IAS 12 ‘Income Taxes’ when there is uncertainty over income tax treatments. The Group has assessed the impact of the
interpretation and it is not expected to have a material effect on the reported income or net assets of the Group.
There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will have
a material effect on the reported income or net assets of the Group.
The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.
3 Segment information
a Business segments
The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments,
and has been identified as the IAG Management Committee (IAG MC).
The Group has a number of entities which are managed as individual operating companies including airline and platform functions.
Each airline operates its network operations as a single business unit and the IAG MC assesses performance based on measures
including operating profit, and makes resource allocation decisions for the airlines based on network profitability, primarily by
reference to the passenger markets in which the companies operate. The objective in making resource allocation decisions is to
optimise consolidated financial results.
The Group has determined its operating segments based on the way that it treats its businesses and the manner in which resource
allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes
as reportable operating segments. Avios and LEVEL are also operating segments but do not exceed the quantitative thresholds to
be reportable and management has concluded that there are currently no other reasons why they should be separately disclosed.
The platform functions of the business primarily support the airline operations. These activities are not considered to be
reportable operating segments as they either earn revenues incidental to the activities of the Group and resource allocation
decisions are made based on the passenger business, or are not reviewed regularly by the IAG MC and are included within
Other Group companies.
For the year to December 31, 2018
€ million
Revenue
Passenger revenue
Cargo revenue
Other revenue
External revenue
Inter-segment revenue
Segment revenue
British
Airways
12,972
867
682
14,521
508
15,029
2018
Aer
Other
Group
Iberia
Vueling
Lingus
companies1
Total
3,765
251
749
4,765
417
5,182
2,377
1,952
–
20
2,397
1
2,398
54
9
2,015
5
2,020
483
1
224
708
538
1,246
21,549
1,173
1,684
24,406
1,469
25,875
Depreciation, amortisation and impairment
(890)
(207)
(25)
(83)
(49)
(1,254)
Operating profit before exceptional items
Exceptional items (note 4)
Operating profit after exceptional items
Net non-operating costs
Profit before tax
2,207
448
2,655
437
–
437
200
–
200
305
–
305
81
–
81
3,230
448
3,678
(191)
3,487
Total assets
Total liabilities
18,531
(12,235)
6,829
(5,051)
1,882
(1,495)
1,915
(1,072)
(1,123)
(1,461)
28,034
(21,314)
1
Includes eliminations on total assets of €13,681 million and total liabilities of €3,667 million.
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For the year to December 31, 2017 (restated)
€ million
Revenue
Passenger revenue
Cargo revenue
Other revenue
External revenue
Inter-segment revenue
Segment revenue
2017
Iberia
Vueling
Aer Lingus
Other
Group
companies1
3,554
242
644
4,440
420
4,860
2,104
–
23
2,127
–
2,127
1,797
47
11
1,855
2
1,857
360
–
196
556
459
1,015
Total
20,285
1,132
1,463
22,880
1,363
24,243
British
Airways
12,470
843
589
13,902
482
14,384
Depreciation, amortisation and impairment
(860)
(182)
(20)
(77)
(45)
(1,184)
Operating profit before exceptional items
Exceptional items (note 4)
Operating profit after exceptional items
Net non-operating costs
Profit before tax
1,992
(108)
1,884
376
(180)
196
188
–
188
268
–
268
126
–
126
2,950
(288)
2,662
(181)
2,481
Total assets
Total liabilities
18,872
(12,117)
6,079
(4,358)
1,515
(1,253)
1,976
(1,055)
(1,210)
(1,516)
27,232
(20,299)
1
Includes eliminations on total assets of €13,031 million and total liabilities of €2,744 million.
b Geographical analysis
Revenue by area of original sale
€ million
UK
Spain
USA
Rest of world
Assets by area
December 31, 2018
€ million
UK
Spain
USA
Rest of world
December 31, 2017
€ million
UK
Spain
USA
Rest of world
Year to December 31
2018
7,982
4,064
4,093
8,267
24,406
2017
(restated)
7,574
3,551
3,694
8,061
22,880
Property,
plant and
equipment
9,017
2,512
29
879
12,437
Property,
plant and
equipment
9,013
2,050
18
765
11,846
Intangible
assets
1,285
1,291
4
618
3,198
Intangible
assets
1,171
1,241
6
600
3,018
130
131
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131
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
4 Exceptional items
€ million
Restructuring costs1
Employee benefit obligations2
Recognised in expenditure on operations
Total exceptional (credit)/charge before tax
Tax on exceptional items
Total exceptional (credit)/charge after tax
Year to December 31
2018
136
(584)
(448)
(448)
32
(416)
2017
288
–
288
288
(66)
222
1 Restructuring costs
During 2018 British Airways continued to implement the restructuring programme that started in July 2016, to develop a more
efficient and cost effective structure. The overall costs of the programme principally comprise employee severance costs and
include other directly associated costs such as onerous lease provisions and asset write down costs. Costs incurred in the year to
December 31, 2018 in respect of this programme amount to €136 million (2017: €108 million), with a related tax credit of €26 million
(2017: €21 million).
In the year to December 31, 2017, €180 million of restructuring costs were recognised at Iberia, related to the announcement of a
new Transformation Plan. A related tax credit of €45 million was also recognised.
2 Employee benefit obligations
British Airways closed its New Airways Pension Scheme (NAPS) to future accrual and British Airways Retirement Plan (BARP)
to future contributions from March 31, 2018. The schemes have been replaced by a flexible defined contribution scheme, the
British Airways Pension Plan (BAPP). The changes resulted in a one-off reduction of the NAPS IAS 19 defined benefit liability
of €872 million and associated transitional arrangement cash costs of €192 million through employee costs. These items are
presented net, together with BARP closure costs, as an exceptional credit within the Income Statement of €678 million, with
a related tax charge of €58 million.
On 26 October 2018, the High Court of Justice of England and Wales issued a judgement in a claim by Lloyds Banking Group
Pension Trustees Limited as claimant to Lloyds Bank plc and others as defendants regarding the rights of female members of
certain pension schemes to equality of treatment in relation to pension benefits. The judgement concluded that the claimant
is under a duty to amend the schemes in order to equalise benefits for men and women in relation to Guaranteed Minimum
Pension (GMP) benefits. The judgement affects some of the occupational pension schemes of British Airways as set out in note
30. The estimated increase in IAS 19 liabilities as a result of the High Court judgement has been recorded as an exceptional charge
of €94 million.
5 Expenses by nature
Operating profit is arrived at after charging
Depreciation, amortisation and impairment of non-current assets:
€ million
Owned assets
Finance leased aircraft
Other leasehold interests
Amortisation of intangible assets
Operating leases costs:
€ million
Minimum lease rentals – aircraft
Sub-lease rentals received
– property and equipment
Cost of inventories:
€ million
Cost of inventories recognised as an expense, mainly fuel
2018
711
371
40
132
1,254
2018
890
236
(12)
1,114
2017
641
382
41
120
1,184
2017
888
224
(1)
1,111
2018
3,165
2017
3,176
132
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
132
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
4 Exceptional items
€ million
Restructuring costs1
Employee benefit obligations2
Recognised in expenditure on operations
Total exceptional (credit)/charge before tax
Tax on exceptional items
Total exceptional (credit)/charge after tax
1 Restructuring costs
Year to December 31
2018
136
(584)
(448)
(448)
32
(416)
2017
288
–
288
288
(66)
222
During 2018 British Airways continued to implement the restructuring programme that started in July 2016, to develop a more
efficient and cost effective structure. The overall costs of the programme principally comprise employee severance costs and
include other directly associated costs such as onerous lease provisions and asset write down costs. Costs incurred in the year to
December 31, 2018 in respect of this programme amount to €136 million (2017: €108 million), with a related tax credit of €26 million
(2017: €21 million).
In the year to December 31, 2017, €180 million of restructuring costs were recognised at Iberia, related to the announcement of a
new Transformation Plan. A related tax credit of €45 million was also recognised.
2 Employee benefit obligations
British Airways closed its New Airways Pension Scheme (NAPS) to future accrual and British Airways Retirement Plan (BARP)
to future contributions from March 31, 2018. The schemes have been replaced by a flexible defined contribution scheme, the
British Airways Pension Plan (BAPP). The changes resulted in a one-off reduction of the NAPS IAS 19 defined benefit liability
of €872 million and associated transitional arrangement cash costs of €192 million through employee costs. These items are
presented net, together with BARP closure costs, as an exceptional credit within the Income Statement of €678 million, with
a related tax charge of €58 million.
On 26 October 2018, the High Court of Justice of England and Wales issued a judgement in a claim by Lloyds Banking Group
Pension Trustees Limited as claimant to Lloyds Bank plc and others as defendants regarding the rights of female members of
certain pension schemes to equality of treatment in relation to pension benefits. The judgement concluded that the claimant
is under a duty to amend the schemes in order to equalise benefits for men and women in relation to Guaranteed Minimum
Pension (GMP) benefits. The judgement affects some of the occupational pension schemes of British Airways as set out in note
30. The estimated increase in IAS 19 liabilities as a result of the High Court judgement has been recorded as an exceptional charge
of €94 million.
5 Expenses by nature
Operating profit is arrived at after charging
Depreciation, amortisation and impairment of non-current assets:
€ million
Owned assets
Finance leased aircraft
Other leasehold interests
Amortisation of intangible assets
Operating leases costs:
€ million
Minimum lease rentals – aircraft
Sub-lease rentals received
Cost of inventories:
€ million
– property and equipment
Cost of inventories recognised as an expense, mainly fuel
2018
711
371
40
132
1,254
2018
890
236
(12)
1,114
2017
641
382
41
120
1,184
2017
888
224
(1)
1,111
2018
3,165
2017
3,176
6 Auditors’ remuneration
The fees for audit and non-audit services provided by the auditor of the Group’s consolidated financial statements and of certain
individual financial statements of the consolidated companies, Ernst & Young S.L., and by companies belonging to Ernst & Young’s
network, were as follows:
€’000
Fees payable for the audit of the Group and individual accounts
Fees payable for other services:
Audit of the Group’s subsidiaries pursuant to legislation
Other services pursuant to legislation
Other assurance services
Services relating to corporate finance transactions
All other services
2018
4,328
634
436
506
191
305
6,400
2017
3,648
569
465
467
296
3
5,448
The audit fees payable are approved by the Audit and Compliance Committee and have been reviewed in the context of other
companies for cost effectiveness. A description of the work of the Audit and Compliance Committee is set out in the Report of
the Audit and Compliance Committee and includes an explanation of how objectivity and independence is safeguarded when
non-audit services are provided.
7 Employee costs and numbers
€ million
Wages and salaries
Social security costs
(Credits)/costs related to pension scheme benefits
Other post-retirement benefit costs
Cost of share-based payments
Other employee costs1
Total employee costs
1 Other employee costs include allowances and accommodation for crew.
The number of employees during the year and at December 31 was as follows:
2018
3,240
516
(317)
5
31
877
4,352
2017
3,155
486
370
–
34
943
4,988
Senior executives
Ground employees:
Managerial
Non-managerial
Technical crew:
Managerial
Non-managerial
2018
December 31, 2018
2017
December 31, 2017
Average
number of
employees
196
Number of
employees
208
Percentage
of women
27%
Average
number of
employees
166
Number of
employees
190
Percentage
of women
24%
1,829
33,230
6,673
22,806
64,734
1,906
32,161
6,726
22,530
63,531
41%
35%
17%
66%
2,334
32,572
2,296
32,877
6,644
21,706
63,422
6,595
22,036
63,994
43%
35%
11%
68%
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133
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
8 Finance costs, income and other non-operating (charges)/credits
a Finance costs
€ million
Interest expense on:
Bank borrowings
Finance leases
Provisions unwinding of discount
Other borrowings
Capitalised interest on progress payments
Change in fair value of cross currency swaps
b Finance income
€ million
Interest on other interest-bearing deposits
Other finance income
c Net financing credit/(charge) relating to pensions
€ million
Net financing credit/(charge) relating to pensions
d Other non-operating (charges)/credits
€ million
Loss on sale of property, plant and equipment and investments
Gain related to equity investments (note 16)
Share of profits in investments accounted for using the equity method (note 15)
Realised gain/(losses) on derivatives not qualifying for hedge accounting
Unrealised (losses)/gains on derivatives not qualifying for hedge accounting
9 Tax
a Tax charges
Tax (charge)/credit in the Income statement, Other comprehensive income and Statement of changes in equity:
For the year to December 31, 2018
€ million
Current tax
Movement in respect of prior years
Movement in respect of current year
Total current tax
Deferred tax
Movement in respect of prior years
Movement in respect of current year
Tax rate change
Total deferred tax
Total tax
Income
statement
Other
comprehensive
income
Statement
of changes
in equity
4
(475)
(471)
22
(144)
3
(119)
(590)
–
162
162
–
206
(13)
193
355
–
–
–
–
–
–
–
–
Current tax in Other comprehensive income relates to employee retirement benefit plans, (€136m) and cash flow hedges (€26m).
134
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
134
2018
2017
(17)
(144)
(27)
(56)
13
–
(231)
2018
33
8
41
2018
27
2018
(29)
5
5
20
(10)
(9)
(20)
(116)
(20)
(75)
7
(1)
(225)
2017
28
17
45
2017
(28)
2017
(30)
7
3
(19)
28
(11)
Total
4
(313)
(309)
22
62
(10)
74
(235)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
8 Finance costs, income and other non-operating (charges)/credits
For the year to December 31, 2017 (restated)
2018
2017
€ million
Income
statement
Other
comprehensive
income
Statement
of changes
in equity
Current tax
Movement in respect of prior years
Movement in respect of current year
Total current tax
Deferred tax
Movement in respect of prior years
Movement in respect of current year
Tax rate change
Total deferred tax
12
(319)
(307)
(8)
(155)
(2)
(165)
–
126
126
–
(307)
12
(295)
Total tax
(472)
(169)
–
1
1
–
2
–
2
3
Total
12
(192)
(180)
(8)
(460)
10
(458)
(638)
Current tax in Other comprehensive income relates to employee retirement benefit plans and current tax in the Statement of
changes in equity relates to share-based payment schemes.
Current tax account
€ million
2018
2017
Restated
opening
balance
180
127
Income
statement
(471)
(307)
Other
comprehensive
income
162
126
Statement of
changes in
equity
–
1
Cash
343
237
Exchange
movements
4
(4)
Closing
balance
218
180
Current tax asset is €383 million (2017 restated: €258 million) and current tax liability is €165 million (2017 restated: €78 million).
b Deferred tax
For the year to December 31, 2018
€ million
Property, plant and equipment
Employee leaving indemnities and other
employee related provisions
Tax losses carried forward
Fair value losses recognised on cash flow hedges
Employee benefit plans
Tax assets in relation to tax credits and
deductions
Share-based payment schemes
Foreign exchange
Deferred revenue
Other items
Total deferred tax
Restated
opening
balance
(1,029)
Income
statement
19
Other
comprehensive
income
–
Statement
of changes
in equity
–
Exchange
movements
and other
11
Closing
balance
(999)
374
352
39
140
78
15
2
7
19
(3)
(25)
(15)
–
(96)
(3)
2
(3)
2
–
(119)
–
–
195
(2)
–
–
–
–
–
193
–
–
–
–
–
–
–
–
–
–
(1)
–
–
–
(1)
(1)
–
–
4
12
348
337
234
42
74
16
(1)
9
23
83
The deferred tax asset is €536 million (2017 restated: €523 million) and mainly arises in Spain. A reversal of €87 million on the
deferred tax asset is expected within one year and the remainder beyond one year.
The deferred tax liability is €453 million (2017 restated: €526 million).
Within tax in Other comprehensive income is a tax credit of €222 million (2017: tax charge of €9 million) that may be reclassified
to the Income statement and a tax credit of €133 million (2017 restated: tax charge of €160 million) that may not.
a Finance costs
€ million
Interest expense on:
Bank borrowings
Finance leases
Provisions unwinding of discount
Other borrowings
Capitalised interest on progress payments
Change in fair value of cross currency swaps
b Finance income
€ million
Interest on other interest-bearing deposits
Other finance income
c Net financing credit/(charge) relating to pensions
Net financing credit/(charge) relating to pensions
d Other non-operating (charges)/credits
€ million
€ million
Loss on sale of property, plant and equipment and investments
Gain related to equity investments (note 16)
Share of profits in investments accounted for using the equity method (note 15)
Realised gain/(losses) on derivatives not qualifying for hedge accounting
Unrealised (losses)/gains on derivatives not qualifying for hedge accounting
9 Tax
a Tax charges
For the year to December 31, 2018
€ million
Current tax
Movement in respect of prior years
Movement in respect of current year
Movement in respect of prior years
Movement in respect of current year
Total current tax
Deferred tax
Tax rate change
Total deferred tax
Total tax
(17)
(144)
(27)
(56)
13
–
(231)
2018
33
8
41
2018
27
2018
(29)
5
5
20
(10)
(9)
–
–
–
–
–
–
–
–
(20)
(116)
(20)
(75)
7
(1)
(225)
2017
28
17
45
2017
(28)
2017
(30)
7
3
(19)
28
(11)
Total
4
(313)
(309)
22
62
(10)
74
(235)
Income
statement
comprehensive
income
Other
Statement
of changes
in equity
4
(475)
(471)
22
(144)
3
(119)
(590)
–
162
162
–
206
(13)
193
355
Tax (charge)/credit in the Income statement, Other comprehensive income and Statement of changes in equity:
Current tax in Other comprehensive income relates to employee retirement benefit plans, (€136m) and cash flow hedges (€26m).
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134
135
www.iairgroup.com
135
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
9 Tax continued
For the year to December 31, 2017
€ million
Property, plant and equipment
Employee leaving indemnities and other
employee related provisions
Tax losses carried forward
Fair value losses recognised on cash flow hedges
Employee benefit plans
Tax assets in relation to tax credits and
deductions
Share-based payment schemes
Foreign exchange
Deferred revenue
Other items
Total deferred tax
Restated
opening
balance
(1,065)
Income
statement
4
Other
comprehensive
income
–
Statement
of changes
in equity
–
Exchange
movements
and other
32
Restated
closing
balance
(1,029)
372
407
68
441
78
13
9
101
27
451
3
(59)
–
(14)
–
1
(6)
(94)
–
(165)
–
–
(21)
(274)
–
–
–
–
–
(295)
–
–
–
–
–
2
–
–
–
2
(1)
4
(8)
(13)
–
(1)
(1)
–
(8)
4
374
352
39
140
78
15
2
7
19
(3)
c Reconciliation of the total tax charge in the Income statement
The tax charge is calculated at the domestic rates applicable to profits or losses in the Group's main countries of operation. The tax
charge on the profit for the year to December 31, 2018 is lower than the notional tax charge.
The differences are explained below:
€ million
Accounting profit before tax
Tax calculated at 25 per cent in Spain (2017: 25 per cent), 19.00 per cent in the UK (2017: 19.25 per cent)
and 12.5 per cent in Ireland (2017: 12.5 per cent)1
Effects of:
Tax rate changes
Employee benefit plans accounted for net of withholding tax- recurring
Employee benefit plans accounted for net of withholding tax - non-recurring
Euro preferred securities accounted for as non-controlling interests
Investment credit
Movement in respect of prior years
Current year tax assets not recognised
Disposal and write down of investments
Non-deductible expenses - recurring items
Other items
Tax charge in the income statement
2018
3,487
2017
(restated)
2,481
671
480
(3)
(1)
(53)
(2)
(10)
(26)
9
(1)
7
(1)
590
2
(4)
–
(4)
(7)
(4)
4
–
6
(1)
472
1 The expected tax charge is arrived at by aggregating the expected tax charges arising in each company in the Group. It changes each year as tax rates and
profit mix change.
d Other taxes
The Group was also subject to other taxes and charges paid during the year which are as follows:
€ million
Payroll related taxes
UK Air Passenger Duty
Other ticket taxes and charges
2018
509
885
1,758
3,152
2017
478
838
1,694
3,010
136
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
136
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
9 Tax continued
For the year to December 31, 2017
€ million
Property, plant and equipment
Employee leaving indemnities and other
employee related provisions
Tax losses carried forward
Fair value losses recognised on cash flow hedges
Employee benefit plans
Tax assets in relation to tax credits and
deductions
Share-based payment schemes
Foreign exchange
Deferred revenue
Other items
Total deferred tax
Restated
opening
balance
(1,065)
372
407
68
441
78
13
9
101
27
451
4
3
(59)
–
(14)
–
1
(6)
(94)
–
(165)
(21)
(274)
–
–
–
–
–
–
–
–
(295)
–
–
–
–
–
–
2
–
–
–
2
Income
comprehensive
statement
income
Other
Statement
of changes
in equity
Exchange
movements
and other
Restated
closing
balance
32
(1,029)
c Reconciliation of the total tax charge in the Income statement
The tax charge is calculated at the domestic rates applicable to profits or losses in the Group's main countries of operation. The tax
charge on the profit for the year to December 31, 2018 is lower than the notional tax charge.
The differences are explained below:
€ million
Accounting profit before tax
Tax calculated at 25 per cent in Spain (2017: 25 per cent), 19.00 per cent in the UK (2017: 19.25 per cent)
and 12.5 per cent in Ireland (2017: 12.5 per cent)1
Effects of:
Tax rate changes
Employee benefit plans accounted for net of withholding tax- recurring
Employee benefit plans accounted for net of withholding tax - non-recurring
Euro preferred securities accounted for as non-controlling interests
Investment credit
Movement in respect of prior years
Current year tax assets not recognised
Disposal and write down of investments
Non-deductible expenses - recurring items
Other items
Tax charge in the income statement
profit mix change.
d Other taxes
€ million
Payroll related taxes
UK Air Passenger Duty
Other ticket taxes and charges
1 The expected tax charge is arrived at by aggregating the expected tax charges arising in each company in the Group. It changes each year as tax rates and
The Group was also subject to other taxes and charges paid during the year which are as follows:
(1)
4
(8)
(13)
–
(1)
(1)
–
(8)
4
671
(3)
(1)
(53)
(2)
(10)
(26)
9
(1)
7
(1)
374
352
39
140
78
15
2
7
19
(3)
480
2
(4)
–
(4)
(7)
(4)
4
–
6
(1)
2017
2018
(restated)
3,487
2,481
590
472
2018
509
885
1,758
3,152
2017
478
838
1,694
3,010
e Factors that may affect future tax charges
Unrecognised temporary differences - losses
€ million
Spanish corporate income tax losses and other temporary differences
UK capital losses arising:
Before the change in ownership of the UK Group in 2011
After the change in ownership of the UK Group in 2011
On properties that were eligible for Industrial Buildings Allowances
Irish capital losses
Corporate income tax losses outside of the Group's main countries of operation
None of the unrecognised temporary differences have an expiry date.
2018
47
36
8
272
25
210
2017
47
36
8
283
25
179
Unrecognised temporary differences - investment in subsidiaries and associates
No deferred tax liability has been recognised in respect of €2,826 million (2017 restated: €1,905 million) of temporary differences
relating to subsidiaries and associates. The Group either controls the reversal of these temporary differences and it is probable
that they will not reverse in the foreseeable future or no tax consequences would arise from their reversal.
Tax rate changes
Reductions in the UK corporation tax rate to 19% (effective from April 1, 2017) and to 18% (effective April 1, 2020) were
substantively enacted on October 26, 2015, and an additional reduction to 17% (effective April 1, 2020) was substantively enacted
on September 6, 2016. This will reduce the Group's future current tax charge accordingly. The deferred tax on temporary
differences and tax losses at December 31, 2018 has been calculated at the rate applicable to the year in which the temporary
differences and tax losses are expected to reverse.
Tax audits
The Group files income tax returns in many jurisdictions throughout the world. Tax returns contain matters that are subject
to potentially differing interpretations of tax laws and regulations, which may give rise to queries from and disputes with tax
authorities. The resolution of these queries and disputes can take several years but the Group does not currently expect any
material impact on the Group’s financial position or results of operations to arise from such resolution. The extent to which there
are open queries and disputes depends upon the jurisdiction and the issue.
10 Earnings per share
€ million
Earnings attributable to equity holders of the parent for basic earnings
Interest expense on convertible bonds
Diluted earnings attributable to equity holders of the parent and diluted earnings per share
2018
2,885
18
2,903
2017
(restated)
1,989
17
2,006
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A
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Weighted average number of ordinary shares in issue1
Assumed conversion on convertible bonds
Dilutive employee share schemes outstanding
Weighted average number for diluted earnings per share
€ cents
Basic earnings per share
Diluted earnings per share
2018
Number
‘000
2017
Number
‘000
2,021,622 2,088,489
72,418
18,446
2,179,353
72,944
18,515
2,113,081
2018
142.7
137.4
2017
(restated)
95.2
92.0
1
Includes 27 million as the weighted average impact for 65,956,660 treasury shares purchased in the share buyback programme (note 27).
The calculation of basic and diluted earnings per share before exceptional items is included in the Alternative performance
measures section.
136
137
www.iairgroup.com
137
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
11 Dividends
€ million
Cash dividend declared
Interim dividend for 2018 of 14.5 € cents per share (2017: 12.5 € cents per share)
Final dividend for 2017 of 14.5 € cents per share (2016: 12.5 € cents per share)
Proposed cash dividends
Final dividend for 2018 of 16.5 € cents per share
Special dividend of 35.0 € cents per share
2018
2017
256
262
288
294
327
700
The proposed final dividend for 2018 would be distributed from net profit for the year to December 31, 2018.
Proposed dividends on ordinary shares are subject to approval at the annual general meeting and subject to approval are
recognised as a liability on that date.
12 Property, plant and equipment
€ million
Cost
Balance at January 1, 2017
Additions
Disposals
Exchange movements
Balance at December 31, 2017
Additions
Disposals
Exchange movements
December 31, 2018
Depreciation and impairment
Balance at January 1, 2017
Charge for the year
Disposals
Exchange movements
Balance at December 31, 2017
Charge for the year
Disposals
Exchange movements
December 31, 2018
Net book values
December 31, 2018
December 31, 2017
Analysis at December 31, 2018
Owned
Finance leased
Progress payments
Assets not in current use
Property, plant and equipment
Analysis at December 31, 2017
Owned
Finance leased
Progress payments
Assets not in current use
Property, plant and equipment
Fleet
Property
Equipment
Total
19,739
1,290
(532)
(799)
19,698
2,255
(1,130)
(310)
20,513
9,195
924
(242)
(412)
9,465
984
(562)
(164)
9,723
2,210
52
(31)
(88)
2,143
79
–
(34)
2,188
1,053
57
(26)
(44)
1,040
55
–
(18)
1,077
1,533
102
(101)
(50)
1,484
140
(125)
(17)
1,482
1,007
83
(78)
(38)
974
83
(95)
(16)
946
23,482
1,444
(664)
(937)
23,325
2,474
(1,255)
(361)
24,183
11,255
1,064
(346)
(494)
11,479
1,122
(657)
(198)
11,746
10,790
10,233
1,111
1,103
536
510
12,437
11,846
3,935
5,695
1,069
91
10,790
3,875
5,231
958
169
10,233
987
4
118
2
1,111
1,027
4
71
1
1,103
401
68
65
2
536
400
62
47
1
510
5,323
5,767
1,252
95
12,437
5,302
5,297
1,076
171
11,846
138
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
138
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
11 Dividends
€ million
Cash dividend declared
Interim dividend for 2018 of 14.5 € cents per share (2017: 12.5 € cents per share)
Final dividend for 2017 of 14.5 € cents per share (2016: 12.5 € cents per share)
Proposed cash dividends
Final dividend for 2018 of 16.5 € cents per share
Special dividend of 35.0 € cents per share
recognised as a liability on that date.
12 Property, plant and equipment
The proposed final dividend for 2018 would be distributed from net profit for the year to December 31, 2018.
Proposed dividends on ordinary shares are subject to approval at the annual general meeting and subject to approval are
Balance at January 1, 2017
19,739
2,210
1,533
23,482
Fleet
Property
Equipment
Total
2018
2017
256
262
288
294
327
700
102
(101)
(50)
1,484
140
(125)
(17)
1,482
83
(78)
(38)
974
83
(95)
(16)
946
401
68
65
2
536
400
62
47
1
510
1,444
(664)
(937)
23,325
2,474
(1,255)
(361)
24,183
11,255
1,064
(346)
(494)
11,479
1,122
(657)
(198)
11,746
5,323
5,767
1,252
95
12,437
5,302
5,297
1,076
171
11,846
1,053
1,007
1,290
(532)
(799)
19,698
2,255
(1,130)
(310)
20,513
9,195
924
(242)
(412)
9,465
984
(562)
(164)
9,723
3,935
5,695
1,069
91
10,790
3,875
5,231
958
169
10,233
52
(31)
(88)
2,143
79
–
(34)
2,188
57
(26)
(44)
1,040
55
–
(18)
1,077
987
4
118
2
1,111
1,027
4
71
1
1,103
10,790
10,233
1,111
1,103
536
510
12,437
11,846
€ million
Cost
Additions
Disposals
Additions
Disposals
Exchange movements
Balance at December 31, 2017
Exchange movements
December 31, 2018
Depreciation and impairment
Balance at January 1, 2017
Charge for the year
Disposals
Exchange movements
Balance at December 31, 2017
Charge for the year
Disposals
Exchange movements
December 31, 2018
Net book values
December 31, 2018
December 31, 2017
Analysis at December 31, 2018
Owned
Finance leased
Progress payments
Assets not in current use
Property, plant and equipment
Analysis at December 31, 2017
Owned
Finance leased
Progress payments
Assets not in current use
Property, plant and equipment
The net book value of property comprises:
€ million
Freehold
Long leasehold improvements > 50 years
Short leasehold improvements < 50 years
Property
2018
448
330
333
1,111
2017
464
315
324
1,103
At December 31, 2018, bank and other loans of the Group are secured on fleet assets with a cost of €467 million (2017: €938
million) and letters of credit of €256 million in favour of the British Airways Pension Trustees are secured on certain aircraft
(2017: €260 million).
13 Capital expenditure commitments
Capital expenditure authorised and contracted for but not provided for in the accounts amounts to €10,831 million (December 31,
2017: €12,137 million). The majority of capital expenditure commitments are denominated in US dollars, and as such are subject to
changes in exchange rates.
The outstanding commitments include €10,716 million for the acquisition of 71 Airbus A320s (from 2019 to 2022), 21 Airbus A321s
(from 2019 to 2020), 4 Airbus A330s (in 2019), 41 Airbus A350s (from 2019 to 2022), 4 Boeing 777-300s (in 2020) and 12 Boeing
787s (from 2020 to 2023).
14 Intangible assets and impairment review
a
Intangible assets
€ million
Cost
Balance at January 1, 2017
Additions
Disposals
Exchange movements
Balance at December 31, 2017
Additions
Disposals
Exchange movements
December 31, 2018
Amortisation and impairment
Balance at January 1, 2017
Charge for the year
Disposals
Exchange movements
Balance at December 31, 2017
Charge for the year
Disposals
Exchange movements
December 31, 2018
Net book values
December 31, 2018
December 31, 2017
Goodwill
Brand
Customer
loyalty
programmes
Landing
rights1
Software
Other
Total
598
–
–
(2)
596
–
–
(1)
595
249
–
–
–
249
–
–
–
249
346
347
451
–
–
–
451
–
–
–
451
–
–
–
–
–
–
–
–
–
253
–
–
–
253
–
–
–
253
–
–
–
–
–
–
–
–
–
1,556
1
–
(38)
1,519
55
–
(15)
1,559
98
6
–
(3)
101
6
–
(1)
106
451
451
253
253
1,453
1,418
861
131
(6)
(38)
948
195
(14)
(13)
1,116
387
110
(5)
(17)
475
123
(13)
(8)
577
539
473
99
43
(18)
4
128
105
(20)
(2)
211
47
4
–
1
52
3
–
–
55
3,818
175
(24)
(74)
3,895
355
(34)
(31)
4,185
781
120
(5)
(19)
877
132
(13)
(9)
987
156
76
3,198
3,018
1 The net book value includes non-EU based landing rights of €100 million (2017: €106 million) that have a definite life. The remaining life of these landing
rights is 17 years.
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a
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i
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t
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m
e
n
t
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A
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d
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a
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f
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m
a
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i
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n
138
139
www.iairgroup.com
139
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
14 Intangible assets and impairment review continued
b
The carrying amounts of intangible assets with indefinite life and goodwill allocated to cash generating units (CGUs) of the
Group are:
Impairment review
€ million
2018
Iberia
January 1 and December 31, 2018
British Airways
January 1, 2018
Additions
Transfer to other Group companies
Exchange movements
December 31, 2018
Vueling
January 1 and December 31, 2018
Aer Lingus
January 1 and December 31, 2018
Avios
January 1 and December 31, 2018
Other Group companies
January 1, 2018
Transfer from British Airways
December 31, 2018
Goodwill
Landing
rights
Customer
loyalty
programmes
Brand
–
423
306
47
–
–
(1)
46
738
55
(12)
(14)
767
–
–
–
–
–
28
89
35
272
62
110
–
–
–
–
–
–
–
–
Total
729
785
55
(12)
(15)
813
152
444
–
–
–
–
–
–
12
12
–
–
–
–
253
253
–
–
–
–
12
12
December 31, 2018
346
1,353
451
253
2,403
€ million
2017
Iberia
January 1 and December 31, 2017
British Airways
January 1, 2017
Additions
Exchange movements
December 31, 2017
Vueling
January 1 and December 31, 2017
Aer Lingus
January 1 and December 31, 2017
Avios
January 1 and December 31, 2017
Goodwill
Landing
rights
Customer
loyalty
programmes
Brand
–
423
306
49
–
(2)
47
771
1
(34)
738
–
–
–
–
28
89
35
272
62
110
–
–
–
–
–
–
–
Total
729
820
1
(36)
785
152
444
–
–
–
253
253
December 31, 2017
347
1,312
451
253
2,363
140
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
140
Group are:
€ million
2018
Iberia
British Airways
January 1, 2018
Additions
Transfer to other Group companies
Exchange movements
December 31, 2018
Vueling
January 1 and December 31, 2018
Aer Lingus
January 1 and December 31, 2018
Avios
January 1 and December 31, 2018
Other Group companies
January 1, 2018
Transfer from British Airways
December 31, 2018
€ million
2017
Iberia
British Airways
January 1, 2017
Additions
Exchange movements
December 31, 2017
Vueling
January 1 and December 31, 2017
Aer Lingus
January 1 and December 31, 2017
Avios
January 1 and December 31, 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
14 Intangible assets and impairment review continued
b
Impairment review
The carrying amounts of intangible assets with indefinite life and goodwill allocated to cash generating units (CGUs) of the
Goodwill
Landing
rights
Customer
loyalty
Brand
programmes
Total
January 1 and December 31, 2018
–
423
306
Basis for calculating recoverable amount
The recoverable amounts of CGUs have been measured based on their value-in-use.
Value-in-use is calculated using a discounted cash flow model. Cash flow projections are based on the Business plan approved
by the Board covering a five year period. Cash flows extrapolated beyond the five year period are projected to increase based on
long-term growth rates. Cash flow projections are discounted using the CGU’s pre-tax discount rate.
Annually the Group prepares and the Board approves five year business plans. Business plans were approved in the fourth quarter
of the year. The business plan cash flows used in the value-in-use calculations reflect all restructuring of the business that has been
approved by the Board and which can be executed by Management under existing agreements.
Key assumptions
For each of the CGUs the key assumptions used in the value-in-use calculations are as follows:
Per cent
Lease adjusted operating margin
Average ASK growth per annum
Long-term growth rate
Pre-tax discount rate
Per cent
Lease adjusted operating margin
Average ASK growth per annum
Long-term growth rate
Pre-tax discount rate
British
Airways
15
3-4
2.3
8.3
British
Airways
15
2
2.3
8.5
2018
Vueling Aer Lingus
15
7-8
1.8
8.3
11-15
9-10
1.9
8.4
2017
Vueling
12-15
10
2.0
10.6
Aer Lingus
15
5
2.0
7.8
Iberia
9-15
5-6
2.0
9.0
Iberia
10-14
8
2.0
9.8
Avios
211
n/a1
1.9
9.3
Avios
211
n/a1
2.0
9.1
253
253
1 Operating margin for the Avios loyalty reward business is not adjusted for aircraft leases. ASK growth rate assumption is not applicable for Avios, which
conducts business with partners both within and outside IAG.
Lease adjusted operating margin is the average annual operating result, adjusted for aircraft operating lease costs, as a percentage
of revenue over the five year Business plan to 2023. It is presented as a percentage point range and is based on past performance,
Management’s expectation of the market development and incorporating risks into the cash flow estimates.
ASK growth is the average annual increase over the Business plan, based on planned network growth and taking into account
Management’s expectation of the market.
The long-term growth rate is calculated for each CGU based on the forecasted weighted average exposure in each primary market
using gross domestic product (GDP) (source: Oxford Economics). The airline’s network plans are reviewed annually as part of the
Business plan and reflect Management’s plans in response to specific market risk or opportunity.
Pre-tax discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the
time value of money and underlying risks of its primary market. The discount rate calculation is based on the circumstances of the
airline industry, the Group and the CGU. It is derived from the weighted average cost of capital (WACC). The WACC takes into
consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by
airline investors and the cost of debt is broadly based on the Group’s interest-bearing borrowings. CGU specific risk is incorporated
by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects
the timing of future tax flows.
Summary of results
In 2018, Management reviewed the recoverable amount of each of its CGUs and concluded the recoverable amounts exceeded
the carrying values. Sensitivities have been considered for each CGU. Reducing long-term growth rates to zero, increasing pre-tax
discount rates by 4 percentage points, and increasing the fuel price by 40 per cent, does not result in any impairment.
i
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f
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a
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–
–
–
–
–
–
–
–
–
–
–
–
–
47
–
–
(1)
46
738
55
(12)
(14)
767
28
89
35
272
62
110
–
–
–
–
–
–
12
12
49
–
(2)
47
771
1
(34)
738
28
89
35
272
62
110
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
729
785
55
(12)
(15)
813
152
444
–
12
12
729
820
1
(36)
785
152
444
December 31, 2018
346
1,353
451
253
2,403
Goodwill
Landing
rights
Brand
programmes
Total
Customer
loyalty
January 1 and December 31, 2017
–
423
306
December 31, 2017
347
1,312
451
253
2,363
–
–
–
253
253
140
141
www.iairgroup.com
141
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
15 Investments
Investments in subsidiaries
a
The Group’s principal subsidiaries at December 31, 2018 are listed in the Group investments section.
All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held
directly do not differ from the proportion of ordinary shares held. There have been no significant changes in ownership interests of
subsidiaries during the year.
On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred securities
which were previously classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million
(2017: €307 million).
British Airways Employee Benefit Trustee (Jersey) Limited, a wholly-owned subsidiary of British Airways, governs the British
Airways Plc Employee Share Ownership Trust (the Trust). The Trust is not a legal subsidiary of IAG; however, it is consolidated
within the Group results.
Investments in associates and joint ventures
b
The share of assets, liabilities, revenue and profit of the Group’s associates and joint ventures, which are included in the Group’s
financial statements, are as follows:
€ million
Total assets
Total liabilities
Revenue
Profit for the year
The detail of the movement in Investment in associates and joint ventures is shown as follows:
€ million
At beginning of year
Share of retained profits
Additions
Disposals
Dividends received
Exchange movements
2018
113
(77)
75
5
2018
30
5
–
–
(2)
(2)
31
2017
96
(68)
86
3
2017
29
3
2
(2)
(3)
1
30
At December 31, 2018 there are no restrictions on the ability of associates or joint ventures to transfer funds to the parent and there
are no related contingent liabilities.
At both December 31, 2018 and December 31, 2017 the investment in Sociedad Conjunta para la Emisión y Gestión de Medios de
Pago EFC, S.A. exceeded 50 per cent ownership by the Group (50.5 per cent). The entity is treated as a joint venture as decisions
regarding its strategy and operations require the unanimous consent of the parties who share control, including IAG.
16 Other equity investments
Other equity investments include the following:
€ million
Listed securities
Comair Limited
Unlisted securities
The gain relating to other equity investments was €5 million (2017: €7 million).
2018
2017
17
63
80
23
56
79
142
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
142
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
15 Investments
a
Investments in subsidiaries
subsidiaries during the year.
(2017: €307 million).
The Group’s principal subsidiaries at December 31, 2018 are listed in the Group investments section.
All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held
directly do not differ from the proportion of ordinary shares held. There have been no significant changes in ownership interests of
On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred securities
which were previously classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million
British Airways Employee Benefit Trustee (Jersey) Limited, a wholly-owned subsidiary of British Airways, governs the British
Airways Plc Employee Share Ownership Trust (the Trust). The Trust is not a legal subsidiary of IAG; however, it is consolidated
within the Group results.
b
Investments in associates and joint ventures
financial statements, are as follows:
The share of assets, liabilities, revenue and profit of the Group’s associates and joint ventures, which are included in the Group’s
The detail of the movement in Investment in associates and joint ventures is shown as follows:
€ million
Total assets
Total liabilities
Revenue
Profit for the year
€ million
At beginning of year
Share of retained profits
Additions
Disposals
Dividends received
Exchange movements
At December 31, 2018 there are no restrictions on the ability of associates or joint ventures to transfer funds to the parent and there
are no related contingent liabilities.
At both December 31, 2018 and December 31, 2017 the investment in Sociedad Conjunta para la Emisión y Gestión de Medios de
Pago EFC, S.A. exceeded 50 per cent ownership by the Group (50.5 per cent). The entity is treated as a joint venture as decisions
regarding its strategy and operations require the unanimous consent of the parties who share control, including IAG.
16 Other equity investments
Other equity investments include the following:
€ million
Listed securities
Comair Limited
Unlisted securities
The gain relating to other equity investments was €5 million (2017: €7 million).
2018
113
(77)
75
5
2018
30
5
–
–
(2)
(2)
31
2017
96
(68)
86
3
2017
29
3
2
(2)
(3)
1
30
2018
2017
17
63
80
23
56
79
17 Trade and other receivables
€ million
Amounts falling due within one year
Trade receivables
Provision for expected credit loss
Net trade receivables
Prepayments and accrued income
Other non-trade debtors
Amounts falling due after one year
Prepayments and accrued income
Other interest-bearing deposits (greater than one year)
Other non-trade debtors
Movements in the provision for expected credit loss were as follows:
€ million
At beginning of year
Provision for expected credit loss
Release of unused amounts
Receivables written off during the year
Exchange movements
2018
2017
(restated)
1,695
(98)
1,597
823
352
2,772
298
–
11
309
2018
63
36
(2)
1
–
98
1,526
(63)
1,463
764
194
2,421
297
66
13
376
2017
64
15
(1)
(13)
(2)
63
Trade receivables are generally non-interest-bearing and on 30 days terms (2017: 30 days).
The credit risk exposure on the Group's trade receivables is set out below:
December 31, 2018
€ million
Trade receivables
Expected credit loss rate
Provision for expected credit loss
December 31, 2017
€ million
Trade receivables
Expected credit loss rate
Provision for expected credit loss
Current
988
0.04%
1
Current
1,159
0.05%
1
<30 days 30-60 days
135
1.60%
2
163
0.29%
–
>60 days
409
23.26%
95
<30 days
119
1.13%
1
30-60 days
135
0.11%
–
>60 days
113
53.92%
61
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143
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
18 Cash, cash equivalents and other current interest-bearing deposits
€ million
Cash at bank and in hand
Short-term deposits maturing within three months
Cash and cash equivalents
Other current interest-bearing deposits maturing after three months
Cash, cash equivalents and other interest-bearing deposits
2018
2,453
1,384
3,837
2,437
6,274
2017
1,963
1,329
3,292
3,384
6,676
Cash at bank is primarily held in AAA money market funds and bank deposits. Short-term deposits are for periods up to three
months and earn interest based on the floating deposit rates.
At December 31, 2018 the Group had no outstanding bank overdrafts (2017: nil).
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 December 31, 2018 Aer Lingus held €42 million of restricted cash (2017: €43 million) within interest-bearing deposits maturing
after more than three months to be used for employee related obligations.
a Net debt
Movements in net debt were as follows:
€ million
Bank and other loans
Finance leases
Interest-bearing borrowings
Cash and cash equivalents
Other current interest-bearing deposits
€ million
Bank and other loans
Finance leases
Interest-bearing borrowings
Cash and cash equivalents
Other current interest-bearing deposits
19 Trade and other payables
€ million
Trade creditors
Other creditors
Other taxation and social security
Accruals and deferred income
Average payment days to suppliers - Spanish Group companies
Days
Average payment days for payment to suppliers
Ratio of transactions paid
Ratio of transactions outstanding for payment
€ million
Total payments made
Total payments outstanding
Balance at
January 1,
2018
(1,824)
(5,507)
(7,331)
3,292
3,384
(655)
Balance at
January 1,
2017
(1,913)
(6,602)
(8,515)
3,337
3,091
(2,087)
Cash flows
275
(254)
21
583
(924)
(320)
Exchange
movements
(4)
(134)
(138)
(38)
(23)
(199)
Cash flows
138
657
795
141
432
1,368
Exchange
movements
26
424
450
(186)
(139)
125
Non-cash
(28)
(33)
(61)
–
–
(61)
Non-cash
(75)
14
(61)
–
–
(61)
Balance at
December
31, 2018
(1,581)
(5,928)
(7,509)
3,837
2,437
(1,235)
Balance at
December
31, 2017
(1,824)
(5,507)
(7,331)
3,292
3,384
(655)
2018
2,079
1,007
332
541
3,959
2018
37
33
119
2018
6,306
317
2017
2,092
926
238
467
3,723
2017
37
38
35
2017
4,879
140
144
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
144
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
€ million
Cash at bank and in hand
Short-term deposits maturing within three months
Cash and cash equivalents
Other current interest-bearing deposits maturing after three months
Cash, cash equivalents and other interest-bearing deposits
Cash at bank is primarily held in AAA money market funds and bank deposits. Short-term deposits are for periods up to three
months and earn interest based on the floating deposit rates.
At December 31, 2018 the Group had no outstanding bank overdrafts (2017: nil).
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 December 31, 2018 Aer Lingus held €42 million of restricted cash (2017: €43 million) within interest-bearing deposits maturing
after more than three months to be used for employee related obligations.
2018
Cash flows
Exchange
movements
Non-cash
Balance at
January 1,
(1,824)
(5,507)
(7,331)
3,292
3,384
(655)
Balance at
January 1,
(1,913)
(6,602)
(8,515)
3,337
3,091
(2,087)
275
(254)
21
583
(924)
(320)
138
657
795
141
432
1,368
(4)
(134)
(138)
(38)
(23)
(199)
26
424
450
(186)
(139)
125
2017
Cash flows
Exchange
movements
Non-cash
a Net debt
Movements in net debt were as follows:
€ million
Bank and other loans
Finance leases
Interest-bearing borrowings
Cash and cash equivalents
Other current interest-bearing deposits
€ million
Bank and other loans
Finance leases
Interest-bearing borrowings
Cash and cash equivalents
Other current interest-bearing deposits
19 Trade and other payables
€ million
Trade creditors
Other creditors
Other taxation and social security
Accruals and deferred income
Average payment days to suppliers - Spanish Group companies
Days
Average payment days for payment to suppliers
Ratio of transactions paid
Ratio of transactions outstanding for payment
€ million
Total payments made
Total payments outstanding
2018
2,453
1,384
3,837
2,437
6,274
2017
1,963
1,329
3,292
3,384
6,676
Balance at
December
31, 2018
(1,581)
(5,928)
(7,509)
3,837
2,437
(1,235)
Balance at
December
31, 2017
(1,824)
(5,507)
(7,331)
3,292
3,384
(655)
(28)
(33)
(61)
–
–
(61)
(75)
14
(61)
–
–
(61)
2018
2,079
1,007
332
541
3,959
2018
37
33
119
2018
6,306
317
2017
2,092
926
238
467
3,723
2017
37
38
35
2017
4,879
140
18 Cash, cash equivalents and other current interest-bearing deposits
20 Deferred revenue on ticket sales
€ million
Balance at January 1, 2018
Changes in estimates
Revenue recognised in the Income statement1
Loyalty points issued to customers
Cash received from customers
Other movements
Balance at December 31, 2018
€ million
Balance at December 31, 2016
Restated for IFRS 15
Balance at January 1, 2017
Changes in estimates
Revenue recognised in the income statement1
Loyalty points issued to customers
Cash received from customers
Other movements
Balance at December 31, 2017
Customer
loyalty
programmes
1,752
–
(733)
781
–
(31)
1,769
Customer
loyalty
programmes
1,300
497
1,797
(2)
(704)
735
–
(74)
1,752
Sales in
advance of
carriage
2,990
(8)
(22,027)
–
22,149
(38)
3,066
Sales in
advance of
carriage
2,845
38
2,883
(43)
(19,803)
–
20,050
(97)
2,990
Total
4,742
(8)
(22,760)
781
22,149
(69)
4,835
Total
4,145
535
4,680
(45)
(20,507)
735
20,050
(171)
4,742
1 Where the Group acts as an agent in the provision of redemption products and services to customers through loyalty programmes, or in the provision of
interline flights to passengers, revenue is recognised in the income statement net of the related costs.
Deferred revenue relating to customer loyalty programmes consists primarily of revenue allocated to performance obligations
associated with Avios points. Avios points are issued by the Group's airlines through their loyalty programmes, or are sold to third
parties such as credit card providers, who issue them as part of their loyalty programme. Active customer accounts do not have an
expiry date and revenue may therefore be recognised at any time in the future. Deferred revenue in respect of sales in advance of
carriage consists of revenue allocated to airline tickets to be used for future travel. Typically these tickets expire within 12 months
after the planned travel date, if they are not used within that time period.
21 Other long-term liabilities
€ million
Non-current trade creditors
Accruals and deferred income
22 Long-term borrowings
a Current
€ million
Bank and other loans
Finance leases
b Non-current
€ million
Bank and other loans
Finance leases
2018
6
192
198
2018
153
723
876
2018
1,428
5,205
6,633
2017
3
219
222
2017
183
747
930
2017
1,641
4,760
6,401
Banks and other loans are repayable up to the year 2027. Bank and other loans of the Group amounting to €354 million
(2017: €539 million) are secured on aircraft. Finance leases are all secured on aircraft or property, plant and equipment.
144
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145
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
22 Long-term borrowings continued
c Bank and other loans
€ million
€500 million fixed rate 0.25 per cent convertible bond 20201
€500 million fixed rate 0.625 per cent convertible bond 20221
Floating rate euro mortgage loans secured on aircraft2
€200 million fixed rate unsecured bonds3
Floating rate euro syndicate loan secured on investments4
Fixed rate Chinese yuan mortgage loans secured on aircraft5
Fixed rate unsecured US dollar mortgage loan6
Fixed rate unsecured euro loans with the Spanish State (Department of Industry)7
Floating rate pound sterling mortgage loans secured on aircraft8
Fixed rate US dollar mortgage loans secured on aircraft9
Less current instalments due on bank and other loans
2018
482
460
252
175
99
53
43
13
4
–
1,581
(153)
1,428
2017
472
450
278
200
148
68
49
15
27
117
1,824
(183)
1,641
1 Two senior unsecured bonds convertible into ordinary shares of IAG were issued by the Group in November 2015; €500 million fixed rate 0.25 per cent
raising net proceeds of €494 million and due in 2020, and €500 million fixed rate 0.625 per cent raising net proceeds of €494 million and due in 2022.
The Group holds an option to redeem each convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the
final maturity date. The bonds contain dividend protection, and a total of 73,455,109 options related to the bonds were outstanding from issuance and at
December 31, 2018.
2 Floating rate euro mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.182 and 1.191 per cent. The loans are
repayable between 2024 and 2027.
3 Total of €200 million fixed rate unsecured bonds between 2.5 to 3.75 per cent coupon repayable between 2019 and 2027.
4 Floating rate euro syndicate loan secured on investments is secured on specific assets of the Group and bears interest of 1.375 per cent plus 3 month
EURIBOR. The loan is repayable in 2020.
5 Fixed rate Chinese yuan mortgage loans are secured on specific aircraft assets of the Group and bears interest of 5.20 per cent. The loans are repayable
in 2022.
6 Fixed rate unsecured US dollar mortgage loan bearing interest between 1.98 and 2.37 per cent. The loan is repayable in 2023.
7 Fixed rate unsecured euro loans with the Spanish State (Department of Industry) bear interest of between nil and 5.68 per cent and are repayable between
2019 and 2026.
8 Floating rate pound sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of 0.81 per cent. The loans are repayable
in 2019.
9 Fixed rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 3.81 and 4.76 per cent. The loans were
repaid in 2018.
d Total loans and finance leases
Million
Loans
Bank:
US dollar
Euro
Pound sterling
Chinese yuan
Fixed rate bonds:
Euro
Finance leases
US dollar
Euro
Japanese yen
Pound sterling
2018
2017
$49
€364
£4
CNY 422
€465
$196
€440
£25
CNY 525
€702
€1,116
€1,116
€1,122
€1,122
$3,259
€2,308
¥77,379
£134
€5,928
$2,882
€2,296
¥63,978
£258
€5,507
€7,509
€7,331
146
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
146
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
22 Long-term borrowings continued
c Bank and other loans
€ million
€500 million fixed rate 0.25 per cent convertible bond 20201
€500 million fixed rate 0.625 per cent convertible bond 20221
Floating rate euro mortgage loans secured on aircraft2
€200 million fixed rate unsecured bonds3
Floating rate euro syndicate loan secured on investments4
Fixed rate Chinese yuan mortgage loans secured on aircraft5
Fixed rate unsecured US dollar mortgage loan6
Fixed rate unsecured euro loans with the Spanish State (Department of Industry)7
Floating rate pound sterling mortgage loans secured on aircraft8
Fixed rate US dollar mortgage loans secured on aircraft9
Less current instalments due on bank and other loans
1 Two senior unsecured bonds convertible into ordinary shares of IAG were issued by the Group in November 2015; €500 million fixed rate 0.25 per cent
raising net proceeds of €494 million and due in 2020, and €500 million fixed rate 0.625 per cent raising net proceeds of €494 million and due in 2022.
The Group holds an option to redeem each convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the
final maturity date. The bonds contain dividend protection, and a total of 73,455,109 options related to the bonds were outstanding from issuance and at
December 31, 2018.
repayable between 2024 and 2027.
2 Floating rate euro mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.182 and 1.191 per cent. The loans are
3 Total of €200 million fixed rate unsecured bonds between 2.5 to 3.75 per cent coupon repayable between 2019 and 2027.
4 Floating rate euro syndicate loan secured on investments is secured on specific assets of the Group and bears interest of 1.375 per cent plus 3 month
EURIBOR. The loan is repayable in 2020.
5 Fixed rate Chinese yuan mortgage loans are secured on specific aircraft assets of the Group and bears interest of 5.20 per cent. The loans are repayable
6 Fixed rate unsecured US dollar mortgage loan bearing interest between 1.98 and 2.37 per cent. The loan is repayable in 2023.
7 Fixed rate unsecured euro loans with the Spanish State (Department of Industry) bear interest of between nil and 5.68 per cent and are repayable between
8 Floating rate pound sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of 0.81 per cent. The loans are repayable
9 Fixed rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 3.81 and 4.76 per cent. The loans were
d Total loans and finance leases
2018
482
460
252
175
99
53
43
13
4
–
1,581
(153)
1,428
2017
472
450
278
200
148
68
49
15
27
117
1,824
(183)
1,641
2018
2017
$49
€364
£4
$196
€440
£25
CNY 422
CNY 525
€465
€702
€1,116
€1,116
€1,122
€1,122
$3,259
€2,308
$2,882
€2,296
¥77,379
¥63,978
£134
€5,928
£258
€5,507
€7,509
€7,331
in 2022.
2019 and 2026.
in 2019.
repaid in 2018.
Million
Loans
Bank:
US dollar
Euro
Pound sterling
Chinese yuan
Fixed rate bonds:
Euro
Finance leases
US dollar
Euro
Japanese yen
Pound sterling
e Obligations under finance leases
The Group uses finance leases principally to acquire aircraft. These leases have both renewal and purchase options, at the option
of the Group. Future minimum finance lease payments under finance leases are as follows:
€ million
Future minimum payments due:
Within one year
Between one and five years
Over five years
Less: finance charges
Present value of minimum lease payments
The present value of minimum lease payments is analysed as follows:
Within one year
Between one and five years
Over five years
2018
2017
876
3,186
2,642
6,704
(776)
5,928
723
2,734
2,471
5,928
875
2,783
2,464
6,122
(615)
5,507
747
2,409
2,351
5,507
23 Operating lease commitments
The Group has entered into commercial leases on certain properties, equipment and aircraft. These leases have durations ranging
from less than one year to 13 years for aircraft and less than one year to five years for property, plant and equipment. One ground
lease has a remaining lease of 127 years. Certain leases contain options for renewal.
The aggregate payments, for which there are commitments under operating leases, fall due as follows:
€ million
Within one year
Between one and five years
Over five years
2018
Property,
plant and
equipment
148
362
1,895
2,405
Fleet
975
3,049
2,235
6,259
Total
1,123
3,411
4,130
8,664
2017
Property,
plant and
equipment
190
340
1,962
2,492
Fleet
802
2,559
1,789
5,150
Total
992
2,899
3,751
7,642
Sub-leasing
The Group entered into subleases for certain surplus rental properties and aircraft assets held under non-cancellable leases
to third parties. These leases have remaining terms of one to six years and the assets are surplus to the Group’s requirements.
Future minimum rentals receivable under non-cancellable operating leases are €13 million (2017: €8 million) with €4 million
(2017: €7 million) falling within one year, €9 million (2017: €1 million) between one and five years and nil (2017: nil) over five years.
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147
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
24 Provision for liabilities and charges
€ million
Net book value January 1, 2018
Provisions recorded during the year
Utilised during the year
Release of unused amounts
Unwinding of discount
Exchange differences
Net book value December 31, 2018
Analysis:
Current
Non-current
Restoration
and
handback
provisions
1,125
378
(150)
(42)
6
42
1,359
Restructuring
provisions
727
192
(220)
(8)
4
(2)
693
Employee
leaving
indemnities
and other
employee
related
provisions
599
223
(202)
(45)
16
–
591
Legal claims
provisions
140
43
(46)
(26)
1
–
112
Other
provisions
69
100
(90)
(5)
–
(2)
72
148
1,211
1,359
237
456
693
60
531
591
78
34
112
36
36
72
Total
2,660
936
(708)
(126)
27
38
2,827
559
2,268
2,827
Restoration and handback provisions
The provision for restoration and handback costs is maintained to meet the contractual maintenance and return conditions on
aircraft held under operating leases. The provision also includes an amount 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 capitalised. The provision is a long-term provision, typically covering the leased asset term which
is up to 13 years.
Restructuring provisions
The restructuring provision includes provisions for voluntary redundancies including the collective redundancy programme for
Iberia's Transformation Plan, which provides for payments to affected employees until they reach the statutory retirement age.
The amount provided for has been determined by an actuarial valuation made by independent actuaries, and was based on the
same assumptions as those made to determine the provisions for obligations to flight crew below, with the exception of the
discount rate, which in this case was 0.39 per cent. The payments related to this provision will continue over next ten years.
During the year the Group recognised a provision of €136 million in relation to the restructuring plans at British Airways (note 4).
The transformation programme has now been completed.
At December 31, 2018, €682 million of this provision related to collective redundancy programmes (2017: €719 million).
Employee leaving indemnities and other employee related provisions
This provision includes employees leaving indemnities relating to staff under various contractual arrangements.
The Group recognises a provision relating to flight crew who having met certain conditions, have the option of being placed
on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement.
The Group is required to remunerate these employees until they reach the statutory retirement age, and an initial provision was
recognised based on an actuarial valuation. The provision was reviewed at December 31, 2018 with the use of independent
actuaries using the projected unit credit method, based on a discount rate consistent with the iBoxx index of 1.59 per cent and
0.39 per cent depending on whether the employees are currently active or not, the PERM/F-2000P mortality tables, and assuming
a 1.50 per cent annual increase in the Consumer Price Index (CPI). This is mainly a long-term provision. The amount relating to this
provision was €523 million at December 31, 2018 (2017: €542 million).
Legal claims provisions
Legal claims provisions includes:
• amounts for multi-party claims from groups or employees on a number of matters related to its operations, including claims
for additional holiday pay and for age discrimination;
• provisions related to tax assessments; and
• amounts related to investigations by a number of competition authorities in connection with alleged anti-competitive activity
concerning the Group’s passenger and cargo businesses.
The final amount required to pay the remaining claims and fines is subject to uncertainty (note 31).
This provision includes the payment of €104 million for the reissued fine in March 2017 against British Airways, related to
investigations by a number of competition authorities in connection with alleged anti-competitive activity concerning the Group's
passenger and cargo businesses (note 31).
148
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
148
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
24 Provision for liabilities and charges
Restructuring
related
Legal claims
Other
provisions
provisions
provisions
provisions
Restoration
and
handback
provisions
1,125
378
(150)
(42)
6
42
1,359
148
1,211
1,359
Employee
leaving
indemnities
and other
employee
599
223
(202)
(45)
16
–
591
60
531
591
727
192
(220)
(8)
4
(2)
693
237
456
693
140
43
(46)
(26)
1
–
112
78
34
112
69
100
(90)
(5)
–
(2)
72
36
36
72
Total
2,660
936
(708)
(126)
27
38
2,827
559
2,268
2,827
€ million
Net book value January 1, 2018
Provisions recorded during the year
Utilised during the year
Release of unused amounts
Unwinding of discount
Exchange differences
Net book value December 31, 2018
Analysis:
Current
Non-current
Restoration and handback provisions
is up to 13 years.
Restructuring provisions
The provision for restoration and handback costs is maintained to meet the contractual maintenance and return conditions on
aircraft held under operating leases. The provision also includes an amount 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 capitalised. The provision is a long-term provision, typically covering the leased asset term which
The restructuring provision includes provisions for voluntary redundancies including the collective redundancy programme for
Iberia's Transformation Plan, which provides for payments to affected employees until they reach the statutory retirement age.
The amount provided for has been determined by an actuarial valuation made by independent actuaries, and was based on the
same assumptions as those made to determine the provisions for obligations to flight crew below, with the exception of the
discount rate, which in this case was 0.39 per cent. The payments related to this provision will continue over next ten years.
During the year the Group recognised a provision of €136 million in relation to the restructuring plans at British Airways (note 4).
The transformation programme has now been completed.
At December 31, 2018, €682 million of this provision related to collective redundancy programmes (2017: €719 million).
Employee leaving indemnities and other employee related provisions
This provision includes employees leaving indemnities relating to staff under various contractual arrangements.
The Group recognises a provision relating to flight crew who having met certain conditions, have the option of being placed
on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement.
The Group is required to remunerate these employees until they reach the statutory retirement age, and an initial provision was
recognised based on an actuarial valuation. The provision was reviewed at December 31, 2018 with the use of independent
actuaries using the projected unit credit method, based on a discount rate consistent with the iBoxx index of 1.59 per cent and
0.39 per cent depending on whether the employees are currently active or not, the PERM/F-2000P mortality tables, and assuming
a 1.50 per cent annual increase in the Consumer Price Index (CPI). This is mainly a long-term provision. The amount relating to this
provision was €523 million at December 31, 2018 (2017: €542 million).
Legal claims provisions
Legal claims provisions includes:
for additional holiday pay and for age discrimination;
• provisions related to tax assessments; and
• amounts for multi-party claims from groups or employees on a number of matters related to its operations, including claims
• amounts related to investigations by a number of competition authorities in connection with alleged anti-competitive activity
concerning the Group’s passenger and cargo businesses.
The final amount required to pay the remaining claims and fines is subject to uncertainty (note 31).
This provision includes the payment of €104 million for the reissued fine in March 2017 against British Airways, related to
investigations by a number of competition authorities in connection with alleged anti-competitive activity concerning the Group's
passenger and cargo businesses (note 31).
Other provisions
Other provisions includes:
• amounts for passengers whose flights were significantly delayed and are entitled to receive compensation. This provision is
largely a current provision and is expected to have amounts both utilised and provided for each year. This provision is reassessed
based on the historic level of claims;
• a provision for the Emissions Trading Scheme that for CO2 emitted on flights within the EU in excess of the EU Emission
Allowances granted; and
• a provision related to unfavourable fleet contracts.
25 Financial risk management objectives and policies
The Group is exposed to a variety of financial risks: market risk (including fuel price risk, foreign currency risk and interest rate risk),
counterparty risk and liquidity risk. Further information on the Group’s financial instruments exposure to these risks is disclosed on
note 26. The Board approves the key strategic principles and the risk appetite, defining the amount of risk that the Group is
prepared to retain. The Group's Financial Risk Management programme focuses on the unpredictability of financial markets and
seeks to minimise the risk of incremental costs arising from adverse financial markets movements.
Financial risks are managed under the oversight of the Group Treasury department. Fuel price fluctuations, euro-US dollar and
sterling-US dollar exchange rate volatility represents the largest financial risks facing the Group. Other currencies as well as interest
rate risk are also the subject of the Financial Risk Management programme. The IAG Management Committee approves the Group
hedging profile and delegates to the operating company Risk Committee to agree on the degree of flexibility in applying the levels
as defined by the IAG Management Committee. Each operating company Risk Committee meets at least once a month to review
and approve a mandate to place hedging cover in the market including the instruments to be used.
The Group Treasury Committee provides a quarterly report on the hedging position to the IAG Management Committee and the
Audit and Compliance Committee. The Board reviews the strategy and risk appetite once a year.
a Fuel price risk
The Group is exposed to fuel price risk. The Group’s fuel price risk management strategy aims to provide protection against
sudden and significant increases in fuel prices while ensuring that the Group is not competitively disadvantaged in the event of a
substantial fall in the price. The Group strategy is to hedge a proportion of fuel consumption for up to three years, within certain
defined limits.
Within the strategy, the Financial Risk Management programme allows for the use of a number of derivatives instruments available
on over the counter (OTC) markets with approved counterparties.
The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in fuel prices, with all
other variables held constant, on result before tax and equity:
Increase/(decrease)
in fuel price
per cent
30
(30)
2018
Effect on result
before tax
€ million
0
(3)
Effect on
equity
€ million
1,613
(1,695)
Increase/(decrease)
in fuel price
per cent
30
(30)
2017
Effect on result
before tax
€ million
41
(48)
Effect on
equity
€ million
1,142
(1,039)
b Foreign currency risk
The Group presents its consolidated financial statements in euros, has subsidiaries with functional currencies in euro and pound
sterling, and conducts business in a number of different countries. Consequently the Group is exposed to currency risk on revenue,
purchases and borrowings that are denominated in a currency other than the functional currency of the entity. The currencies in
which these transactions are denominated are primarily euro, US dollar and pound sterling. The Group generates a surplus in most
currencies in which it does business. The US dollar is an exception as fuel purchases, maintenance expenses and debt repayments
denominated in US dollars typically create a deficit.
The Group has a number of strategies to hedge foreign currency risk. The operational US dollar short position is subject to the
same governance structure as the fuel hedging strategy set out above. The Group strategy, as approved by the IAG Management
Committee, is to hedge a proportion of up to three years, within certain defined limits.
British Airways utilises its US dollar, euro, Japanese yen and Chinese yuan debt repayments as a hedge of future US dollar, euro,
Japanese yen and Chinese yuan revenues. Iberia’s balance sheet assets and liabilities in US dollars are hedged through a rolling
programme of swaps and US dollar financial assets that eliminate the profit and loss volatility arising from revaluation of these
items into euros. Vueling and Aer Lingus manage their net position in US dollars using derivative financial instruments.
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149
www.iairgroup.com 149
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
25 Financial risk management objectives and policies continued
The following table demonstrates the sensitivity of the Group’s foreign exchange exposure to a reasonable possible change in
the US dollar, sterling, Japanese yen and Chinese yuan exchange rates, with all other variables held constant, on result before tax
and equity:
Strengthening
/(weakening)
in US dollar
rate
per cent
Effect on
result
before tax
€ million
Strengthening
/(weakening)
in pound
sterling rate
per cent
Effect on
result
before tax
€ million
Effect on
equity
€ million
2018
2017
10
(10)
10
(10)
(16)
18
(9)
91
(2)
6
253
(72)
10
(10)
10
(10)
Effect on
equity
€ million
262
(273)
(40)
41
(36)
35
232
(233)
Strengthening
/(weakening)
in Japanese
yen rate
per cent
Effect on
result
before tax
€ million
Effect on
equity
€ million
Strengthening
/(weakening)
in Chinese
yuan rate
per cent
Effect on
result
before tax
€ million
Effect on
equity
€ million
10
(10)
10
(10)
(6)
1
(2)
2
(54)
54
(45)
45
10
(10)
10
(10)
–
–
–
–
(6)
6
(7)
7
Interest rate risk
c
The Group is exposed to changes in interest rates on debt and on cash deposits.
Interest rate risk on floating rate debt is managed through interest rate swaps, cross currency swaps and interest rate collars.
After taking into account the impact of these derivatives, 77 per cent of the Group's borrowings were at fixed rates and 23 per
cent were at floating rates.
All cash deposits are generally on tenors less than one year. The interest rate is predominantly fixed for the tenor of the deposit.
The following table demonstrates the sensitivity of the Group’s interest rate exposure to a reasonable possible change in the US
dollar, euro and pound sterling interest rates, on result before tax and equity:
Strengthening/
(weakening) in
US interest
rate
Basis points
Effect on result
before tax
€ million
Effect on equity
€ million
Strengthening/
(weakening) in
euro interest
rate
Basis points
Effect on result
before tax
€ million
Effect on equity
€ million
50
(50)
50
(50)
(1)
1
(1)
1
20
(20)
–
–
50
(50)
50
(50)
2
(2)
(6)
6
16
(25)
–
–
Strengthening/
(weakening) in
pound sterling
interest
rate
Basis points
50
(50)
50
(50)
Effect on result
before tax
€ million
Effect on equity
€ million
2
(2)
3
(3)
–
–
–
–
2018
2017
d Counterparty risk
The Group is exposed to counterparty risk to the extent of non-performance by its counterparties in respect of financial assets
receivable. The Group has policies and procedures in place to minimise the risk by placing credit limits on each counterparty. These
policies and procedures are coordinated through IAG Group Treasury Policies. The Committee also reviews the application of the
policies and procedures by British Airways, Iberia, Vueling and Aer Lingus. The Group monitors counterparty credit limits and
defaults of counterparties, incorporating this information into credit risk controls. Treasury activities include placing money market
deposits, fuel hedging and foreign currency transactions, which could lead to a concentration of different credit risks with the same
counterparty. This risk is managed by allocation of exposure limits for the counterparty to British Airways, Iberia, Vueling and Aer
Lingus. Exposures at the activity level are monitored on a daily basis and the overall exposure limit for the counterparty is reviewed
at least monthly using available market information such as credit ratings. Sovereign risk is also monitored, country concentration
and sovereign credit ratings are reviewed at every Group Treasury Committee meeting.
Operating companies invest cash in interest-bearing accounts, time deposits, and money market funds, choosing instruments with
appropriate maturities or liquidity to retain sufficient headroom. At the reporting date the operating companies held money market
funds and other liquid assets that are expected to readily generate cash inflows for managing liquidity risk.
The financial assets recognised in the financial statements, net of impairment losses, represent the Group’s maximum exposure to
credit risk, without taking account of any guarantees in place or other credit enhancements.
At December 31, 2018 the Group’s credit risk position, allocated by region, in respect of treasury managed cash and derivatives was
as follows:
Region
United Kingdom
Spain
Ireland
Rest of Eurozone
Rest of world
Mark-to-market of treasury
controlled financial
instruments allocated by
geography
2018
42%
–
3%
33%
22%
2017
42%
1%
2%
33%
22%
150
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
150
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
25 Financial risk management objectives and policies continued
The following table demonstrates the sensitivity of the Group’s foreign exchange exposure to a reasonable possible change in
the US dollar, sterling, Japanese yen and Chinese yuan exchange rates, with all other variables held constant, on result before tax
and equity:
2018
2017
Strengthening
Strengthening
/(weakening)
Effect on
/(weakening)
Effect on
in US dollar
result
Effect on
in pound
result
rate
before tax
equity
sterling rate
before tax
per cent
€ million
€ million
per cent
€ million
Effect on
equity
€ million
Strengthening
/(weakening)
Effect on
in Japanese
result
yen rate
per cent
before tax
€ million
Strengthening
/(weakening)
Effect on
Effect on
equity
€ million
in Chinese
result
yuan rate
before tax
per cent
€ million
Effect on
equity
€ million
10
(10)
10
(10)
(16)
18
(9)
91
(2)
6
253
(72)
10
(10)
10
(10)
(40)
262
41
(273)
(36)
35
232
(233)
10
(10)
10
(10)
(6)
1
(2)
2
(54)
54
(45)
45
10
(10)
10
(10)
–
–
–
–
(6)
6
(7)
7
c
Interest rate risk
The Group is exposed to changes in interest rates on debt and on cash deposits.
Interest rate risk on floating rate debt is managed through interest rate swaps, cross currency swaps and interest rate collars.
After taking into account the impact of these derivatives, 77 per cent of the Group's borrowings were at fixed rates and 23 per
cent were at floating rates.
All cash deposits are generally on tenors less than one year. The interest rate is predominantly fixed for the tenor of the deposit.
The following table demonstrates the sensitivity of the Group’s interest rate exposure to a reasonable possible change in the US
dollar, euro and pound sterling interest rates, on result before tax and equity:
Strengthening/
(weakening) in
US interest
Effect on result
rate
Basis points
before tax
€ million
50
(50)
50
(50)
(1)
1
(1)
1
20
(20)
–
–
Strengthening/
(weakening) in
euro interest
rate
50
(50)
50
(50)
2018
2017
d Counterparty risk
Effect on equity
€ million
Basis points
before tax
€ million
Effect on equity
€ million
rate
Basis points
before tax
€ million
Effect on equity
€ million
Effect on result
interest
Effect on result
Strengthening/
(weakening) in
pound sterling
2
(2)
(6)
6
16
(25)
–
–
50
(50)
50
(50)
2
(2)
3
(3)
–
–
–
–
The Group is exposed to counterparty risk to the extent of non-performance by its counterparties in respect of financial assets
receivable. The Group has policies and procedures in place to minimise the risk by placing credit limits on each counterparty. These
policies and procedures are coordinated through IAG Group Treasury Policies. The Committee also reviews the application of the
policies and procedures by British Airways, Iberia, Vueling and Aer Lingus. The Group monitors counterparty credit limits and
defaults of counterparties, incorporating this information into credit risk controls. Treasury activities include placing money market
deposits, fuel hedging and foreign currency transactions, which could lead to a concentration of different credit risks with the same
counterparty. This risk is managed by allocation of exposure limits for the counterparty to British Airways, Iberia, Vueling and Aer
Lingus. Exposures at the activity level are monitored on a daily basis and the overall exposure limit for the counterparty is reviewed
at least monthly using available market information such as credit ratings. Sovereign risk is also monitored, country concentration
and sovereign credit ratings are reviewed at every Group Treasury Committee meeting.
Operating companies invest cash in interest-bearing accounts, time deposits, and money market funds, choosing instruments with
appropriate maturities or liquidity to retain sufficient headroom. At the reporting date the operating companies held money market
funds and other liquid assets that are expected to readily generate cash inflows for managing liquidity risk.
The financial assets recognised in the financial statements, net of impairment losses, represent the Group’s maximum exposure to
credit risk, without taking account of any guarantees in place or other credit enhancements.
At December 31, 2018 the Group’s credit risk position, allocated by region, in respect of treasury managed cash and derivatives was
as follows:
United Kingdom
Region
Spain
Ireland
Rest of Eurozone
Rest of world
Mark-to-market of treasury
controlled financial
instruments allocated by
geography
2018
42%
–
3%
33%
22%
2017
42%
1%
2%
33%
22%
150
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e
g
c
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e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
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e
m
e
n
t
s
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d
d
i
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o
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a
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f
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a
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o
n
e Liquidity risk
Liquidity risk management includes maintaining sufficient cash and interest-bearing deposits, the availability of committed credit
facilities and the ability to close out market positions.
At December 31, 2018 the Group had undrawn overdraft facilities of €11 million (2017: €16 million). The Group held undrawn
uncommitted money market lines of €28 million (2017: €28 million).
The Group held undrawn general and committed aircraft financing facilities:
Million
Euro facilities expiring between January and June 2020
US dollar facility expiring December 2021
US dollar facility expiring June 2022
Million
Euro facilities expiring between January and October 2018
US dollar facility expiring December 2021
US dollar facility expiring June 2022
2018
Currency € equivalent
131
1,024
918
€131
$1,164
$1,044
2017
Currency € equivalent
217
985
891
€217
$1,164
$1,053
The following table categorises the Group’s (outflows) and inflows in respect of financial liabilities and derivative financial
instruments into relevant maturity groupings based on the remaining period at December 31 to the contractual maturity date.
The amounts disclosed in the table are the contractual undiscounted cash flows and include interest.
€ million
Interest-bearing loans and borrowings:
Finance lease obligations
Fixed rate borrowings
Floating rate borrowings
Trade and other payables
Derivative financial instruments (assets):
Interest rate derivatives
Foreign exchange contracts
Fuel derivatives
Derivative financial instruments (liabilities):
Interest rate derivatives
Foreign exchange contracts
Fuel derivatives
December 31, 2018
€ million
Interest-bearing loans and borrowings:
Finance lease obligations
Fixed rate borrowings
Floating rate borrowings
Trade and other payables
Derivative financial instruments (assets):
Interest rate derivatives
Foreign exchange contracts
Fuel derivatives
Derivative financial instruments (liabilities):
Foreign exchange contracts
Fuel derivatives
December 31, 2017
Within 6
months
6-12
months
(509)
(53)
(18)
(3,591)
11
69
23
(18)
(16)
(342)
(4,444)
(367)
(18)
(67)
–
2
58
18
(7)
(8)
(290)
(679)
Within 6
months
6-12
months
(449)
(58)
(76)
–
–
10
141
(58)
–
(490)
(426)
(31)
(29)
(3,411)
–
45
207
(51)
(2)
(3,698)
151
1-2
years
(882)
(533)
(80)
(13)
2
122
15
2-5
years
More than 5
years
Total
2018
(2,304)
(645)
(93)
–
(2,642)
(58)
(118)
–
(6,704)
(1,307)
(376)
(3,604)
6
72
1
4
–
–
25
321
57
(13)
(18)
(270)
(1,670)
(16)
(16)
(110)
(3,105)
(1)
–
–
(2,815)
(55)
(58)
(1,012)
(12,713)
1-2
years
(801)
(99)
(85)
(15)
1
10
112
(78)
–
(955)
2-5
years
More than 5
years
Total
2017
(1,982)
(1,224)
(144)
–
(2,464)
(77)
(150)
–
–
2
22
–
–
–
(36)
–
(3,362)
–
–
(2,691)
(6,122)
(1,489)
(484)
(3,426)
1
67
482
(223)
(2)
(11,196)
www.iairgroup.com
151
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
25 Financial risk management objectives and policies continued
f Offsetting financial assets and liabilities
The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar
agreements.
The Group enters into derivative transactions under ISDA (International Swaps and Derivatives Association) documentation. In
general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding
are aggregated into a single net amount that is payable by one party to the other.
December 31, 2018
€ million
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities
December 31, 2017
€ million
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities
Financial
instruments
that are
offset under
netting
agreements
Net
amounts of
financial
instruments
in the
balance
sheet
Gross value
of financial
instruments
Related
amounts
not offset in
the balance
sheet Net amount
363
13
376
(7)
369
1,092
(13)
1,079
(7)
1,072
Financial
instruments
that are
offset under
netting
agreements
Net
amounts of
financial
instruments
in the
balance
sheet
Gross value
of financial
instruments
Related
amounts
not offset in
the balance
sheet Net amount
551
226
(1)
(1)
550
(5)
545
225
(5)
220
g Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to maintain
an optimal capital structure, to reduce the cost of capital and to provide returns to shareholders.
The Group monitors capital on the basis of the adjusted net debt to EBITDAR ratio. For the year to December 31, 2018, the
adjusted net debt to EBITDAR was 1.6 times (2017: 1.5 times). The definition and calculation for this performance measure is
included in the Alternative performance measures section.
Further detail on liquidity and capital resources and capital risk management is disclosed in the financial review.
152
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
152
agreements.
December 31, 2018
€ million
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities
December 31, 2017
€ million
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities
g Capital risk management
Net
Financial
amounts of
instruments
financial
that are
instruments
Related
amounts
in the
not offset in
balance
the balance
Gross value
offset under
of financial
netting
instruments
agreements
sheet
sheet Net amount
363
13
376
(7)
369
1,092
(13)
1,079
(7)
1,072
Net
Financial
amounts of
instruments
financial
that are
instruments
Related
amounts
in the
not offset in
balance
the balance
Gross value
offset under
of financial
netting
instruments
agreements
sheet
sheet Net amount
551
226
(1)
(1)
550
(5)
545
225
(5)
220
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to maintain
an optimal capital structure, to reduce the cost of capital and to provide returns to shareholders.
The Group monitors capital on the basis of the adjusted net debt to EBITDAR ratio. For the year to December 31, 2018, the
adjusted net debt to EBITDAR was 1.6 times (2017: 1.5 times). The definition and calculation for this performance measure is
included in the Alternative performance measures section.
Further detail on liquidity and capital resources and capital risk management is disclosed in the financial review.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
25 Financial risk management objectives and policies continued
f Offsetting financial assets and liabilities
The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar
26 Financial instruments
a Financial assets and liabilities by category
The detail of the Group’s financial instruments at December 31, 2018 and December 31, 2017 by nature and classification for
measurement purposes is as follows:
The Group enters into derivative transactions under ISDA (International Swaps and Derivatives Association) documentation. In
general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding
are aggregated into a single net amount that is payable by one party to the other.
December 31, 2018
€ million
Non-current assets
Other equity investments
Derivative financial instruments
Other non-current assets
Current assets
Trade receivables
Other current assets
Derivative financial instruments
Other current interest-bearing deposits
Cash and cash equivalents
€ million
Non-current liabilities
Interest-bearing long-term borrowings
Derivative financial instruments
Other long-term liabilities
Current liabilities
Current portion of long-term borrowings
Trade and other payables
Derivative financial instruments
December 31, 2017
€ million
Non-current assets
Other equity investments
Derivative financial instruments
Other non-current assets
Current assets
Trade receivables
Other current assets
Derivative financial instruments
Other current interest-bearing deposits
Cash and cash equivalents
Financial assets
Fair value
through Other
comprehensive
income
Fair value
through
Income
statement
Amortised
cost
Non-
financial
assets
Total
carrying
amount by
balance
sheet item
–
–
154
1,597
444
–
2,437
3,837
80
–
–
–
–
–
–
–
–
221
–
–
–
155
–
–
–
–
155
–
731
–
–
–
Financial liabilities
Fair value
through Other
comprehensive
income
Fair value
through
income
statement
Non-
financial
liabilities
Amortised
cost
6,633
–
13
876
3,591
–
–
–
–
–
–
–
–
423
–
–
–
656
–
–
185
–
368
–
Financial assets
Fair value
through Other
comprehensive
income
Fair value
through
income
statement
Amortised
cost
Non-
financial
assets
–
–
200
1,463
337
–
3,384
3,292
79
–
–
–
–
–
–
–
–
145
–
–
–
405
–
–
–
–
176
–
621
–
–
–
80
221
309
1,597
1,175
155
2,437
3,837
Total
carrying
amount by
balance
sheet item
6,633
423
198
876
3,959
656
Total
carrying
amount by
balance
sheet item
79
145
376
1,463
958
405
3,384
3,292
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
A
d
d
i
t
i
o
n
a
l
I
n
f
o
r
m
a
t
i
o
n
152
153
www.iairgroup.com
153
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
26 Financial instruments continued
€ million
Non-current liabilities
Interest-bearing long-term borrowings
Derivative financial instruments
Other long-term liabilities
Current liabilities
Current portion of long-term borrowings
Trade and other payables
Derivative financial instruments
Financial liabilities
Fair value
through Other
comprehensive
income
Fair value
through
Income
statement
Amortised
cost
Non-
financial
liabilities
Total
carrying
amount by
balance
sheet item
6,401
–
15
930
3,411
–
–
–
–
–
–
–
–
114
–
–
–
111
–
–
207
–
312
–
6,401
114
222
930
3,723
111
b Fair value of financial assets and financial liabilities
The fair values of the Group’s financial instruments are disclosed in hierarchy levels depending on the nature of the inputs used in
determining the fair values and using the following methods and assumptions as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. A market is regarded as active if quoted
prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency,
and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Level 1 methodologies
(market values at the balance sheet date) were used to determine the fair value of listed asset investments classified as equity
investments and listed interest-bearing borrowings.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly. The fair value of financial instruments that are not traded in an active market is determined by valuation techniques.
These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity
specific estimates. Derivative intruments are measured based on the market value of instruments with similar terms and conditions
at the balance sheet date using forward pricing models. Counterparty and own credit risk is deemed to be not significant. The fair
value of the Group’s interest-bearing borrowings including leases is determined by discounting the remaining contractual cash
flows at the relevant market interest rates at the balance sheet date.
Level 3: Inputs for the asset or liability that are not based on observable market data. For unquoted investments, fair value has
been determined based on the most recent arm’s length transaction for an identical instrument. The Group monitors transactions
of these instruments on a regular basis to ensure the fair value is based on the most recent arm’s length price.
The fair value of cash and cash equivalents, other current interest-bearing deposits, trade receivables, other current assets and
trade and other payables approximate their carrying value largely due to the short-term maturities of these instruments.
The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2018 are as follows:
€ million
Financial assets
Other equity investments
Derivative financial assets:
Interest rate derivatives1
Foreign exchange contracts1
Fuel derivatives1
Financial liabilities
Interest-bearing loans and borrowings:
Finance lease obligations
Fixed rate borrowings
Floating rate borrowings
Derivative financial liabilities:
Interest rate derivatives2
Foreign exchange contracts2
Fuel derivatives2
1 Current portion of derivative financial assets is €155 million.
2 Current portion of derivative financial liabilities is €656 million.
Fair value
Level 1
Level 2
Level 3
Total
17
–
–
–
–
1,096
–
–
–
–
–
12
321
43
6,086
113
355
43
54
982
63
–
–
–
–
–
–
–
–
–
80
12
321
43
6,086
1,209
355
43
54
982
Carrying
value
Total
80
12
321
43
5,928
1,226
355
43
54
982
154
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
154
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
26 Financial instruments continued
€ million
Non-current liabilities
Interest-bearing long-term borrowings
Derivative financial instruments
Other long-term liabilities
Current liabilities
Current portion of long-term borrowings
Trade and other payables
Derivative financial instruments
Financial liabilities
Fair value
Fair value
Amortised
comprehensive
through Other
through
Income
cost
income
statement
Non-
financial
liabilities
Total
carrying
amount by
balance
sheet item
6,401
–
15
930
3,411
–
–
–
–
–
–
–
–
114
–
–
–
111
–
–
207
312
–
–
6,401
114
222
930
3,723
111
b Fair value of financial assets and financial liabilities
The fair values of the Group’s financial instruments are disclosed in hierarchy levels depending on the nature of the inputs used in
determining the fair values and using the following methods and assumptions as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. A market is regarded as active if quoted
prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency,
and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Level 1 methodologies
(market values at the balance sheet date) were used to determine the fair value of listed asset investments classified as equity
investments and listed interest-bearing borrowings.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly. The fair value of financial instruments that are not traded in an active market is determined by valuation techniques.
These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity
specific estimates. Derivative intruments are measured based on the market value of instruments with similar terms and conditions
at the balance sheet date using forward pricing models. Counterparty and own credit risk is deemed to be not significant. The fair
value of the Group’s interest-bearing borrowings including leases is determined by discounting the remaining contractual cash
flows at the relevant market interest rates at the balance sheet date.
Level 3: Inputs for the asset or liability that are not based on observable market data. For unquoted investments, fair value has
been determined based on the most recent arm’s length transaction for an identical instrument. The Group monitors transactions
of these instruments on a regular basis to ensure the fair value is based on the most recent arm’s length price.
The fair value of cash and cash equivalents, other current interest-bearing deposits, trade receivables, other current assets and
trade and other payables approximate their carrying value largely due to the short-term maturities of these instruments.
The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2018 are as follows:
€ million
Financial assets
Other equity investments
Derivative financial assets:
Interest rate derivatives1
Foreign exchange contracts1
Fuel derivatives1
Financial liabilities
Interest-bearing loans and borrowings:
Finance lease obligations
Fixed rate borrowings
Floating rate borrowings
Derivative financial liabilities:
Interest rate derivatives2
Foreign exchange contracts2
Fuel derivatives2
1 Current portion of derivative financial assets is €155 million.
2 Current portion of derivative financial liabilities is €656 million.
Fair value
Level 1
Level 2
Level 3
Total
Carrying
value
Total
80
12
321
43
5,928
1,226
355
43
54
982
63
–
–
–
–
–
–
–
–
–
80
12
321
43
6,086
1,209
355
43
54
982
17
–
–
–
–
–
–
–
–
1,096
–
12
321
43
6,086
113
355
43
54
982
The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2017 are set out below:
€ million
Financial assets
Other equity investments
Derivative financial assets:
Interest rate derivatives1
Foreign exchange contracts1
Fuel derivatives1
Financial liabilities
Interest-bearing loans and borrowings:
Finance lease obligations
Fixed rate borrowings
Floating rate borrowings
Derivative financial liabilities:
Foreign exchange contracts2
Fuel derivatives2
Fair value
Level 1
Level 2
Level 3
Total
23
–
–
–
–
1,079
–
–
–
–
56
79
1
67
482
5,639
287
453
223
2
–
–
–
–
–
–
–
–
1
67
482
5,639
1,366
453
223
2
Carrying
value
Total
79
1
67
482
5,507
1,371
453
223
2
1 Current portion of derivative financial assets is €405 million.
2 Current portion of derivative financial liabilities is €111 million.
There have been no transfers between levels of fair value hierarchy during the year.
The financial instruments listed in the previous table are measured at fair value in the consolidated financial statements, with the
exception of interest-bearing borrowings, which are measured at amortised cost.
Level 3 financial assets reconciliation
c
The following table summarises key movements in Level 3 financial assets:
€ million
Opening balance for the year
Additions
Exchange movements
Closing balance for the year
d Hedges
December 31,
2018
56
8
(1)
63
December 31,
2017
58
1
(3)
56
Cash flow hedges
At December 31, 2018 the Group’s principal risk management activities that were hedging future forecast transactions were:
• Future loan repayments in foreign currency (predominantly US dollar loan repayments), hedging foreign exchange fluctuations
on revenue cash inflows. Remeasurement gains and losses on the loans are recognised in equity and transferred to the income
statement within revenue when the loan is repaid (generally in instalments over the life of the loan).
• Foreign exchange contracts, hedging foreign currency exchange risk on revenue cash inflows and certain operational payments.
Remeasurement gains and losses on the derivatives are recognised in equity and transferred to the income statement or balance
sheet to match against the related cash inflow or outflow.
• Forward crude, gas oil and jet kerosene derivative contracts, hedging price risk on fuel expenditure. Remeasurement gains and
losses on the derivatives are recognised in equity and transferred to the income statement within fuel, oil costs and emissions
charges to match against the related fuel cash outflow.
• Interest rate contracts, hedging interest rate risk on floating rate debt and certain operational payments.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
A
d
d
i
t
i
o
n
a
l
I
n
f
o
r
m
a
t
i
o
n
154
155
www.iairgroup.com
155
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
26 Financial instruments continued
The amounts included in equity and the related notional amounts are summarised below, along with the analysis of gains and
losses recognised in the year associated with these instruments:
(Gains)/losses in respect of cash flow hedges included within equity
€ million
Loan repayments to hedge future revenue
Foreign exchange contracts to hedge future revenue and expenditure1
Crude, gas oil and jet kerosene derivative contracts1
Derivatives used to hedge interest rates1
Instruments for which hedge accounting no longer applies1
Related tax credit
Total amount included within equity
December 31,
2018
682
(216)
933
34
22
1,455
(267)
1,188
December 31,
2017
586
163
(474)
–
–
275
(44)
231
1 The carrying value of derivative instruments recognised in assets and liabilities is analysed in parts a and b above.
Notional principal amounts
(€ million)
Foreign exchange contracts to hedge future
revenue and expenditure from US dollars to pound
sterling1
Foreign exchange contracts to hedge future
revenue and expenditure from US dollars to euros1
1 Represents the value of the hedged item.
Hedge range
Within 1
year
1-2 years
2-5 years
Total
December
31, 2018
1.22-1.50
1,982
1,858
1,685
5,525
1.06-1.34
2,299
1,993
2,197
6,489
Crude, gas oil and jet kerosene derivative contracts are used to hedge fuel purchases over a period of up to three years. Notional
quantities associated with these contracts at December 31, 2018 amounted to 14 million tonnes (2017: 8 million tonnes) with a
hedge price range of USD469 – 787 (2017: USD388 – 725).
The Group's loan repayment instalments used to hedge foreign currency risk on future revenue inflows were predominantly in
US dollars and euros. At December 31, 2018 the related borrowings were $2,795 million (2017: $2,511 million); and €1,722 million
(2017: €1,922 million).
For the year to December 31, 2018
(€ million)
Loan repayments to hedge future revenue
Foreign exchange contracts to hedge future
revenue and expenditure
Crude, gas oil and jet kerosene derivative contracts
Derivatives used to hedge interest rates
Instruments for which hedge accounting no longer
applies
(Gains)/losses
recognised in
Other
comprehensive
income1
208
(Gains)/losses
associated with
ineffectiveness
recognised in
the Income
statement2
–
Total
recognised
(gains)/
losses
208
Gains/(losses)
reclassified to
the Income
statement
(82)
Gains/(losses)
reclassified to
the Balance
sheet
–
(387)
732
37
6
596
–
16
–
–
16
(387)
748
37
6
612
10
672
(2)
(2)
596
1
–
–
–
1
1 Gains and losses recognised in Other comprehensive income represent gains and losses on the hedged items.
2
Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge
accounting within other non-operating (charges)/credits.
156
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
156
The amounts included in equity and the related notional amounts are summarised below, along with the analysis of gains and
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
26 Financial instruments continued
losses recognised in the year associated with these instruments:
(Gains)/losses in respect of cash flow hedges included within equity
€ million
Loan repayments to hedge future revenue
Foreign exchange contracts to hedge future revenue and expenditure1
Crude, gas oil and jet kerosene derivative contracts1
Derivatives used to hedge interest rates1
Instruments for which hedge accounting no longer applies1
December 31,
December 31,
2018
682
(216)
933
34
22
1,455
(267)
1,188
2017
586
163
(474)
–
–
275
(44)
231
1 The carrying value of derivative instruments recognised in assets and liabilities is analysed in parts a and b above.
Hedge range
1-2 years
2-5 years
Within 1
year
Total
December
31, 2018
1.22-1.50
1,982
1,858
1,685
5,525
Related tax credit
Total amount included within equity
Notional principal amounts
(€ million)
Foreign exchange contracts to hedge future
revenue and expenditure from US dollars to pound
sterling1
Foreign exchange contracts to hedge future
revenue and expenditure from US dollars to euros1
1 Represents the value of the hedged item.
Crude, gas oil and jet kerosene derivative contracts are used to hedge fuel purchases over a period of up to three years. Notional
quantities associated with these contracts at December 31, 2018 amounted to 14 million tonnes (2017: 8 million tonnes) with a
hedge price range of USD469 – 787 (2017: USD388 – 725).
The Group's loan repayment instalments used to hedge foreign currency risk on future revenue inflows were predominantly in
US dollars and euros. At December 31, 2018 the related borrowings were $2,795 million (2017: $2,511 million); and €1,722 million
(2017: €1,922 million).
For the year to December 31, 2018
(€ million)
Loan repayments to hedge future revenue
Foreign exchange contracts to hedge future
revenue and expenditure
Crude, gas oil and jet kerosene derivative contracts
Derivatives used to hedge interest rates
Instruments for which hedge accounting no longer
applies
(Gains)/losses
(Gains)/losses
associated with
recognised in
ineffectiveness
comprehensive
income1
208
the Income
statement2
Other
recognised in
recognised
Gains/(losses)
reclassified to
the Income
statement
Gains/(losses)
reclassified to
the Balance
sheet
Total
(gains)/
losses
208
(387)
748
37
6
612
–
–
16
–
–
16
(82)
10
672
(2)
(2)
596
–
1
–
–
–
1
1 Gains and losses recognised in Other comprehensive income represent gains and losses on the hedged items.
2
Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge
accounting within other non-operating (charges)/credits.
Notional principal amounts
(€ million)
Foreign exchange contracts to hedge future revenue
and expenditure from US dollars to pound sterling1
Foreign exchange contracts to hedge future revenue
and expenditure from US dollars to euros1
1 Represents the value of the hedged item.
For the year to December 31, 2017
(€ million)
Loan repayments to hedge future revenue
Foreign exchange contracts to hedge future revenue and
expenditure
Crude, gas oil and jet kerosene derivative contracts
Derivatives used to hedge interest rates
Hedge range
Within 1
year
1-2 years
2-5 years
Total
December
31, 2017
1.22-1.53
1,406
1,097
620
3,123
1.04-1.27
1,212
985
582
2,779
(Gains)/losses
recognised in
Other
comprehensive
income1
(111)
(Gains)/losses
associated with
ineffectiveness
recognised in
the Income
statement2
–
Total
recognised
(gains)/
losses
(111)
Gains/(losses)
reclassified to
the Income
statement3
(87)
299
(302)
(1)
(115)
1
(9)
–
(8)
300
(311)
(1)
(123)
44
(4)
2
(45)
1 Gains and losses recognised in Other comprehensive income represent gains and losses on the hedged items.
2
Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge
accounting within other non-operating (charges)/credits.
1.06-1.34
2,299
1,993
2,197
6,489
3 For the year to December 31, 2017, there were no gains or losses reclassified to the Balance Sheet.
There is an economic relationship between the hedged items and the hedging instruments as the terms of the hedging instruments
match the terms of the highly probable forecast transactions. The Group has established a hedge ratio of 1:1 for the hedging
relationships.
The Group has no significant fair value hedges at December 31, 2018 and 2017.
27 Share capital, share premium and treasury shares
Alloted, called up and fully paid
January 1, 2018: Ordinary shares of €0.50 each
Cancellation of ordinary shares of €0.50 each
December 31, 2018
Number of
shares
000s
2,057,990
(65,957)
1,992,033
Ordinary
share
capital
€ million
1,029
(33)
996
Share
premium
€ million
6,022
–
6,022
During the year IAG carried out a €500 million share buyback programme as part of its corporate finance strategy to return cash
to shareholders. The programme was executed between May and October 2018 during which time IAG acquired and subsequently
cancelled 65,956,660 ordinary shares. A total of 1.2 million shares were issued to employees during the year as a result of vesting of
employee share schemes. At December 31, 2018 the Group held 8.7 million shares (2017: 9.9 million) which represented 0.44 per
cent of the issued share capital of the Company.
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157
www.iairgroup.com
157
(387)
732
37
6
596
156
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
28 Share-based payments
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 nil-cost and share award plans whereby shares
are issued to employees at no cost, subject to the achievement by the Group of specified performance targets.
IAG Performance Share Plan
a
The IAG Performance Share Plan (PSP) is granted to senior executives and managers of the Group who are most directly involved
in shaping and delivering business success over the medium to long term. In 2014, a conditional award of shares was subject to the
achievement of a variety of performance conditions, which vest after three years subject to the employee remaining employed by
the Group. From 2015, the awards were made as nil-cost options, and also had a two-year additional holding period after the end
of the performance period, before vesting takes place. The award made in 2014 vests based 50 per cent on achievement of IAG’s
TSR performance targets relative to the MSCI European Transportation Index, and 50 per cent based on achievement of earnings
per share targets. The awards made from 2015 will vest based one-third on achievement of IAG’s TSR performance targets relative
to the MSCI European Transportation Index, one-third based on achievement of earnings per share targets, and one-third based on
achievement of Return on Invested Capital targets.
IAG Incentive Award Deferral Plan
b
The IAG Incentive Award Deferral Plan (IADP) is granted to qualifying employees based on performance and service tests. It will
be awarded when an incentive award is triggered subject to the employee remaining in employment with the Group for three
years after the grant date. The relevant population will receive 50 per cent of their incentive award up front in cash, and the
remaining 50 per cent in shares after three years through the IADP.
c Share-based payment schemes summary
Performance Share Plans
Incentive Award Deferral Plans
Outstanding
at January 1,
2018
‘000s
14,138
4,299
18,437
Granted
number
‘000s
4,615
1,986
6,601
Lapsed
number
‘000s
2,050
144
2,194
Vested
number
‘000s
154
1,903
2,057
Outstanding
at December
31, 2018
‘000s
16,549
4,238
20,787
Vested and
exercisable
December 31,
2018
‘000s
57
17
74
The fair value of equity-settled share-based payment plans determined using the Monte-Carlo valuation model, taking into account
the terms and conditions upon which the plans were granted, used the following assumptions:
Expected share price volatility (per cent)
Expected comparator group volatility (per cent)
Expected comparator correlation (per cent)
Expected life of options (years)
Weighted average share price at date of grant (£)
Weighted average fair value (£)
December 31,
2018
35
20
60
4.6
6.91
4.01
December 31,
2017
35
20
65
4.8
5.46
3.66
Volatility was calculated with reference to the Group’s weekly pound sterling share price volatility. The expected volatility reflects
the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The fair
value of the PSP also takes into account a market condition of TSR as compared to strategic competitors. No other features of
share-based payment plans granted were incorporated into the measurement of fair value.
The Group recognised a share-based payment charge of €31 million for the year to December 31, 2018 (2017: €34 million).
158
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
158
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
28 Share-based payments
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 nil-cost and share award plans whereby shares
are issued to employees at no cost, subject to the achievement by the Group of specified performance targets.
a
IAG Performance Share Plan
The IAG Performance Share Plan (PSP) is granted to senior executives and managers of the Group who are most directly involved
in shaping and delivering business success over the medium to long term. In 2014, a conditional award of shares was subject to the
achievement of a variety of performance conditions, which vest after three years subject to the employee remaining employed by
the Group. From 2015, the awards were made as nil-cost options, and also had a two-year additional holding period after the end
of the performance period, before vesting takes place. The award made in 2014 vests based 50 per cent on achievement of IAG’s
TSR performance targets relative to the MSCI European Transportation Index, and 50 per cent based on achievement of earnings
per share targets. The awards made from 2015 will vest based one-third on achievement of IAG’s TSR performance targets relative
to the MSCI European Transportation Index, one-third based on achievement of earnings per share targets, and one-third based on
achievement of Return on Invested Capital targets.
b
IAG Incentive Award Deferral Plan
The IAG Incentive Award Deferral Plan (IADP) is granted to qualifying employees based on performance and service tests. It will
be awarded when an incentive award is triggered subject to the employee remaining in employment with the Group for three
years after the grant date. The relevant population will receive 50 per cent of their incentive award up front in cash, and the
remaining 50 per cent in shares after three years through the IADP.
c Share-based payment schemes summary
Performance Share Plans
Incentive Award Deferral Plans
Outstanding
at January 1,
2018
‘000s
14,138
4,299
18,437
Granted
number
‘000s
4,615
1,986
6,601
Lapsed
number
‘000s
2,050
144
2,194
Vested
number
‘000s
154
1,903
2,057
31, 2018
‘000s
16,549
4,238
20,787
Outstanding
at December
Vested and
exercisable
December 31,
The fair value of equity-settled share-based payment plans determined using the Monte-Carlo valuation model, taking into account
the terms and conditions upon which the plans were granted, used the following assumptions:
Expected share price volatility (per cent)
Expected comparator group volatility (per cent)
Expected comparator correlation (per cent)
Expected life of options (years)
Weighted average share price at date of grant (£)
Weighted average fair value (£)
Volatility was calculated with reference to the Group’s weekly pound sterling share price volatility. The expected volatility reflects
the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The fair
value of the PSP also takes into account a market condition of TSR as compared to strategic competitors. No other features of
share-based payment plans granted were incorporated into the measurement of fair value.
The Group recognised a share-based payment charge of €31 million for the year to December 31, 2018 (2017: €34 million).
2018
‘000s
57
17
74
2017
35
20
65
4.8
5.46
3.66
December 31,
December 31,
2018
35
20
60
4.6
6.91
4.01
29 Other reserves and non-controlling interest
For the year to December 31, 2018
€ million
January 1, 2018
Other reserves
Retained
earnings
2,278
Unrealised
gains and
losses1
(161)
Time value
of options2
(3)
Currency
translation3
(133)
Equity
portion of
convertible
bond4
101
Merger
reserve5
(2,467)
Redeemed
capital
reserve6
37
Total
other
reserves
(348)
Non-
controlling
interest7
307
Profit for the year
2,885
–
–
–
–
–
–
2,885
12
Other comprehensive
income for the year
Cash flow hedges
reclassified and reported
in net profit:
Passenger revenue
Fuel and oil costs
Currency differences
Finance costs
Net change in fair value
of cash flow hedges
Net change in fair value
of cost of hedging
Net change in fair value
of other equity
investments
Currency translation
differences
Remeasurements of
post-employment benefit
obligations
Hedges reclassified and
reported in property,
plant and equipment
Cost of share-based
payments
Vesting of share-based
payment schemes
Dividend
Cancellation of treasury
shares
Dividend of a subsidiary
Transfer between
reserves
Distributions made to
holders of perpetual
securities
December 31, 2018
–
–
–
–
–
–
–
–
(696)
–
31
(15)
(582)
(500)
–
(77)
77
(565)
4
4
(491)
–
–
–
–
–
–
13
(5)
–
–
(1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,324
–
(1,138)
–
10
–
–
–
–
–
–
–
(80)
–
–
–
–
–
–
–
77
–
(136)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
101
–
(2,467)
–
–
–
–
–
–
–
–
–
–
–
–
–
33
–
–
–
70
77
(565)
4
4
(491)
13
(5)
(80)
(696)
(1)
31
(15)
(582)
(467)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
(236)
(312)
6
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158
159
www.iairgroup.com
159
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
29 Other reserves and non-controlling interests continued
For the year to December 31, 2017
€ million
January 1, 2017
Restatement for adoption
of new standards
January 1, 2017 (restated)
Profit for the year
Other comprehensive
income for the year
Cash flow hedges
reclassified and reported in
net profit:
Passenger revenue
Fuel and oil costs
Currency differences
Net change in fair value of
cash flow hedges
Net change in fair value of
cost of hedging
Net change in fair value of
other equity investments
Currency translation
differences
Remeasurements of post-
employment benefit
obligations
Cost of share-based
payments
Vesting of share-based
payment schemes
Dividend
Cancellation of treasury
shares
Dividend of a subsidiary
Transfer between reserves
Distributions made to
holders of perpetual
securities
December 31, 2017
Other reserves
Retained
earnings
952
Unrealised
gains and
losses1
(299)
Time
value of
options2
–
Currency
translation3
(6)
Equity
portion of
convertible
bond4
101
Merger
reserve5
(2,467)
Redeemed
capital
reserve6
–
Total
other
reserves
(1,719)
Non-
controlling
interest7
308
(468)
484
1,989
–
(299)
–
38
38
–
–
(6)
–
–
101
–
–
(2,467)
–
–
–
–
–
–
–
–
739
34
(33)
(518)
(500)
–
83
84
(38)
(18)
101
–
9
–
–
–
–
–
–
–
–
–
–
–
–
(41)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(127)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,278
–
(161)
–
(3)
–
(133)
–
101
–
(2,467)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
37
–
–
–
37
(430)
(2,149)
1,989
–
308
20
84
(38)
(18)
101
(41)
9
(127)
739
34
(33)
(518)
(463)
–
83
–
(348)
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
(20)
307
1 The unrealised gains and losses reserve records fair value changes on equity 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.
2 The time value of options reserve records fair value changes on the cost of hedging.
3 The currency translation reserve records exchange differences arising from the translation of the financial statements of non-euro functional currency
subsidiaries and investments accounted for under the equity method into the Group’s reporting currency of euros. The movement through this reserve in
2018 is affected by the fluctuations in the pound sterling to euro foreign exchange translation rate.
4 The equity portion of convertible bond reserve represents the equity portion of convertible bonds issued. At December 31, 2018, this related to the €500
million fixed rate 0.25 per cent convertible bond and the €500 million fixed rate 0.625 per cent convertible bond (note 22).
5 The merger reserve originated from the merger transaction between British Airways and Iberia. The balance represents the difference between the fair value
of the Group on the transaction date, and the fair value of Iberia and the book value of British Airways (including its reserves).
6 The redeemed capital reserve represents the nominal value of the decrease in share capital, relating to cancelled shares.
7 On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred security which was previously
classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million. At December 31, 2018, non-controlling interests
represent the shares in British Airways Plc and IB Opco Holding, S.L. held by UK and Spanish entities respectively, established for the purpose of
implementing the British Airways and Iberia nationality structures. The route licences granted by civil aviation authorities in the UK and Spain require that
the majority of the voting rights in British Airways and Iberia are held by UK and Spanish nationals. These entities own the majority of the voting rights in
British Airways Plc and IB Opco Holding, S.L., with IAG holding 99 per cent of the economic rights in these companies.
160
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
160
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
29 Other reserves and non-controlling interests continued
For the year to December 31, 2017
Retained
earnings
Unrealised
gains and
losses1
Time
value of
options2
952
(299)
Currency
convertible
translation3
bond4
Merger
reserve5
Redeemed
capital
reserve6
Total
other
reserves
Non-
controlling
interest7
101
(2,467)
(1,719)
308
Other reserves
Equity
portion of
(468)
484
1,989
(299)
–
–
–
38
38
–
(6)
–
(6)
–
101
(2,467)
(430)
(2,149)
1,989
–
308
20
€ million
January 1, 2017
Restatement for adoption
of new standards
January 1, 2017 (restated)
Profit for the year
Other comprehensive
income for the year
Cash flow hedges
reclassified and reported in
net profit:
Passenger revenue
Fuel and oil costs
Currency differences
Net change in fair value of
cash flow hedges
Net change in fair value of
cost of hedging
Net change in fair value of
other equity investments
Currency translation
differences
Remeasurements of post-
employment benefit
obligations
Cost of share-based
payments
Vesting of share-based
payment schemes
Dividend
shares
Cancellation of treasury
Dividend of a subsidiary
Transfer between reserves
Distributions made to
holders of perpetual
securities
–
–
–
–
–
–
–
739
34
(33)
(518)
(500)
–
83
–
84
(38)
(18)
101
–
9
–
–
–
–
–
–
–
–
–
(41)
–
–
–
–
–
–
–
–
–
–
–
–
–
(127)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
84
(38)
(18)
101
(41)
9
(127)
739
34
(33)
(518)
–
83
37
(463)
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
December 31, 2017
2,278
(161)
(133)
(2,467)
–
(3)
–
101
–
37
–
(348)
(20)
307
1 The unrealised gains and losses reserve records fair value changes on equity 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.
2 The time value of options reserve records fair value changes on the cost of hedging.
3 The currency translation reserve records exchange differences arising from the translation of the financial statements of non-euro functional currency
subsidiaries and investments accounted for under the equity method into the Group’s reporting currency of euros. The movement through this reserve in
2018 is affected by the fluctuations in the pound sterling to euro foreign exchange translation rate.
4 The equity portion of convertible bond reserve represents the equity portion of convertible bonds issued. At December 31, 2018, this related to the €500
million fixed rate 0.25 per cent convertible bond and the €500 million fixed rate 0.625 per cent convertible bond (note 22).
5 The merger reserve originated from the merger transaction between British Airways and Iberia. The balance represents the difference between the fair value
of the Group on the transaction date, and the fair value of Iberia and the book value of British Airways (including its reserves).
6 The redeemed capital reserve represents the nominal value of the decrease in share capital, relating to cancelled shares.
7 On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred security which was previously
classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million. At December 31, 2018, non-controlling interests
represent the shares in British Airways Plc and IB Opco Holding, S.L. held by UK and Spanish entities respectively, established for the purpose of
implementing the British Airways and Iberia nationality structures. The route licences granted by civil aviation authorities in the UK and Spain require that
the majority of the voting rights in British Airways and Iberia are held by UK and Spanish nationals. These entities own the majority of the voting rights in
British Airways Plc and IB Opco Holding, S.L., with IAG holding 99 per cent of the economic rights in these companies.
i
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30 Employee benefit obligations
The Group operates a variety of post-employment benefit arrangements, covering both defined contribution and defined benefit
schemes. The Group also has a scheme for flight crew who meet certain conditions and therefore have the option of being placed
on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement
(note 24).
Defined contribution schemes
The Group operates a number of defined contribution schemes for its employees. The defined contribution scheme British Airways
Retirement Plan (BARP) was closed to future contributions on March 31, 2018. The BARP and NAPS schemes (see below) have
been replaced by a flexible benefit scheme, incorporating a new defined contribution scheme that offers a choice of contribution
rates and the ability to opt for cash instead of a pension.
Costs recognised in respect of defined contribution pension plans in Spain, UK and Ireland for the year to December 31, 2018 were
€214 million (2017: €135 million).
Defined benefit schemes
i APS and NAPS
The principal funded defined benefit pension schemes within the Group are the Airways Pension Scheme (APS) and the New
Airways Pension Scheme (NAPS), both of which are in the UK and are closed to new members. NAPS was closed to future accrual
from March 31, 2018, resulting in a reduction of the defined benefit obligation. Following closure members’ deferred pensions will
now be increased annually by inflation up to five per cent per annum (measured using CPI), which is generally lower than the
previous assumption for pay growth which included pay rises and promotions. NAPS members were offered a choice of transition
arrangements, including non-cash options to increase their NAPS pensions prior to closure. The financial effect of the closure and
the non-cash transition arrangements was a past service gain of €872 million which has been presented as an exceptional item
net of transition costs of €192 million which were paid either directly to members or into their pension accounts. British Airways
currently makes deficit contributions to NAPS of €333 million per annum until September 2027 plus additional contributions
of up to €167 million per year depending on the cash balance at the end of March each year. As part of the closure of NAPS,
British Airways agreed to make certain additional transition payments to NAPS members if the deficit had reduced more than
expected at either the 2018 or 2021 valuations. No allowance for such payments has been made in the valuation of the defined
benefit obligation.
APS has been closed to new members since 1984. The benefits provided under APS are based on final average pensionable pay
and, for the majority of members, are subject to inflationary increases in payment in line with the Government's Pension Increase
(Review) Orders (PIRO), which are based on CPI.
The Trustee of APS has proposed an additional discretionary increase above CPI inflation for pensions in payment for the year
to March 31, 2014. British Airways challenged the decision and initiated legal proceedings to determine the legitimacy of the
discretionary increase. The High Court issued a judgement in May 2017, which determined that the Trustee had the power to
grant discretionary increases, whilst reiterating the Trustee must take into consideration all relevant factors, and ignore irrelevant
factors. British Airways appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal released its
judgement, upholding British Airways’ appeal, concluding the Trustee did not have the power to introduce a discretionary increase
rule. Following the judgement, the Trustee was allowed permission to appeal to the Supreme Court; the Trustee has appealed.
The delayed 2015 triennial valuation will be completed once the outcome of the appeal is known. British Airways is committed
to an existing recovery plan, which sees deficit payments of €61 million per annum until March 2023.
APS and NAPS are governed by separate Trustee Boards, although much of the business of the two schemes is common.
Most main Board and committee meetings are held in tandem although each Trustee Board reaches its decisions independently.
There are three sub committees which are separately responsible for the governance, operation and investments of each scheme.
British Airways Pension Trustees Limited holds the assets of both schemes on behalf of their respective Trustees.
Deficit payment plans are agreed with the Trustees of each scheme every three years based on the actuarial valuation (triennial
valuation) rather than the IAS 19 accounting valuation. The latest deficit recovery plan was agreed on the March 31, 2012 position
with respect to APS and March 31, 2015 with respect to NAPS (note 30i). The actuarial valuations performed at March 31, 2012 and
March 31, 2015 are different to the valuation performed at December 31, 2018 under IAS 19 ‘Employee benefits’ mainly due to timing
differences of the measurement dates and to the specific scheme assumptions in the actuarial valuation compared with IAS 19
guidance used in the accounting valuation assumptions. For example, IAS 19 requires the discount rate to be based on corporate
bond yields regardless of how the assets are actually invested, which may not result in the calculations in this report being a best
estimate of the cost to the Company of providing benefits under either Scheme. The investment strategy of each Scheme is likely
to change over its life, so the relationship between the discount rate and the expected rate of return on each Scheme’s assets may
also change.
ii Other plans
British Airways provides certain additional post-retirement healthcare benefits to eligible employees in the US through the US
Post-Retirement Medical Benefit plan (US PRMB) which is considered to be a defined benefit scheme. In addition, Aer Lingus
operates certain defined benefit plans, both funded and unfunded.
The defined benefit plans expose the Group to actuarial risks, such as longevity risk, interest rate risk, inflation risk, and market
(investment) risk including currency risk.
160
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161
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
30 Employee benefit obligations continued
iii Cash payments
Cash payments in respect to pension obligations comprise normal employer contributions by the Group; deficit contributions
based on the agreed deficit payment plan with APS and NAPS; and cash sweep payments relating to additional payments made
conditional on the level of cash in British Airways. Total payments for the year to December 31, 2018 net of service costs were
€843 million (2017: €666 million) being the employer contributions of €716 million (2017: €899 million) less the current service cost
of €55 million (2017: €233 million) (note 30b) and including payments made under transitional arrangements on the closure of
NAPS to future accrual of €182 million.
a Employee benefit schemes recognised on the Balance Sheet
€ million
Scheme assets at fair value
Present value of scheme liabilities
Net pension asset/(liability)
Effect of the asset ceiling2
Other employee benefit obligations
December 31, 2018
Represented by:
Employee benefit assets
Employee benefit obligations
€ million
Scheme assets at fair value
Present value of scheme liabilities
Net pension asset/(liability)
Effect of the asset ceiling2
Other employee benefit obligations
December 31, 2017
Represented by:
Employee benefit assets
Employee benefit obligations
APS
8,372
(7,110)
1,262
(469)
–
793
2018
NAPS
18,846
(17,628)
1,218
(896)
–
322
Other1
382
(645)
(263)
–
(12)
(275)
APS
9,185
(7,606)
1,579
(570)
–
1,009
2017
NAPS
19,558
(20,060)
(502)
–
–
(502)
Other1
429
(697)
(268)
–
(8)
(276)
Total
27,600
(25,383)
2,217
(1,365)
(12)
840
1,129
(289)
840
Total
29,172
(28,363)
809
(570)
(8)
231
1,023
(792)
231
1 The present value of scheme liabilities for the US PRMB was €13 million at December 31, 2018 (2017: €15 million).
2 APS and NAPS have an accounting surplus under IAS 19 (2017: APS only), which would be available to the Group as a refund upon wind up of the scheme.
This refund is restricted due to withholding taxes that would be payable by the Trustee.
b Amounts recognised in the Income statement
Pension costs charged to operating result are:
€ million
Defined benefit plans:
Current service cost
Past service (credit)/cost1
Defined contribution plans
Pension (credits)/costs recorded as employee costs
2018
2017
55
(586)
(531)
214
(317)
233
2
235
135
370
1 Past service net credit in 2018 includes a gain arising on the closure of NAPS to future accrual, resulting in a one-off reduction in the defined benefit obligation
of €872 million and associated transitional arrangement cash costs of €192 million. On October 26, 2018 the High Court’s judgement in the Lloyds Bank case
confirmed that pension schemes are required to equalise for the effects of unequal GMPs accrued over the period since May 17, 1990. The estimated cost of
equalising GMPs is €94 million. In determining the cost of equalising for GMPs, the Group has assumed that the Trustees will adopt Method C2 which was
identified in the Lloyds judgement as the 'minimum interference' method which could be implemented without sponsor agreement.
Pension costs (credited)/charged as finance costs are:
€ million
Interest income on scheme assets
Interest expense on scheme liabilities
Interest expense on asset ceiling
Net financing (income)/expense relating to pensions
2018
(731)
690
14
(27)
2017
(730)
743
15
28
162
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
162
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
30 Employee benefit obligations continued
iii Cash payments
Cash payments in respect to pension obligations comprise normal employer contributions by the Group; deficit contributions
based on the agreed deficit payment plan with APS and NAPS; and cash sweep payments relating to additional payments made
conditional on the level of cash in British Airways. Total payments for the year to December 31, 2018 net of service costs were
€843 million (2017: €666 million) being the employer contributions of €716 million (2017: €899 million) less the current service cost
of €55 million (2017: €233 million) (note 30b) and including payments made under transitional arrangements on the closure of
NAPS to future accrual of €182 million.
a Employee benefit schemes recognised on the Balance Sheet
€ million
Scheme assets at fair value
Present value of scheme liabilities
Net pension asset/(liability)
Effect of the asset ceiling2
Other employee benefit obligations
December 31, 2018
Represented by:
Employee benefit assets
Employee benefit obligations
€ million
Scheme assets at fair value
Present value of scheme liabilities
Net pension asset/(liability)
Effect of the asset ceiling2
Other employee benefit obligations
December 31, 2017
Represented by:
Employee benefit assets
Employee benefit obligations
b Amounts recognised in the Income statement
Pension costs charged to operating result are:
€ million
Defined benefit plans:
Current service cost
Past service (credit)/cost1
Defined contribution plans
Pension (credits)/costs recorded as employee costs
Pension costs (credited)/charged as finance costs are:
€ million
Interest income on scheme assets
Interest expense on scheme liabilities
Interest expense on asset ceiling
Net financing (income)/expense relating to pensions
APS
8,372
(7,110)
1,262
(469)
–
793
2018
NAPS
18,846
(17,628)
1,218
(896)
–
322
Other1
382
(645)
(263)
–
(12)
(275)
(7,606)
(20,060)
APS
9,185
1,579
(570)
–
1,009
2017
NAPS
19,558
(502)
–
–
Other1
429
(697)
(268)
–
(8)
(502)
(276)
Total
27,600
(25,383)
2,217
(1,365)
(12)
840
1,129
(289)
840
Total
29,172
(28,363)
809
(570)
(8)
231
1,023
(792)
231
2018
2017
55
(586)
(531)
214
(317)
233
2
235
135
370
2018
(731)
690
14
(27)
2017
(730)
743
15
28
1 The present value of scheme liabilities for the US PRMB was €13 million at December 31, 2018 (2017: €15 million).
2 APS and NAPS have an accounting surplus under IAS 19 (2017: APS only), which would be available to the Group as a refund upon wind up of the scheme.
This refund is restricted due to withholding taxes that would be payable by the Trustee.
1 Past service net credit in 2018 includes a gain arising on the closure of NAPS to future accrual, resulting in a one-off reduction in the defined benefit obligation
of €872 million and associated transitional arrangement cash costs of €192 million. On October 26, 2018 the High Court’s judgement in the Lloyds Bank case
confirmed that pension schemes are required to equalise for the effects of unequal GMPs accrued over the period since May 17, 1990. The estimated cost of
equalising GMPs is €94 million. In determining the cost of equalising for GMPs, the Group has assumed that the Trustees will adopt Method C2 which was
identified in the Lloyds judgement as the 'minimum interference' method which could be implemented without sponsor agreement.
c Remeasurements recognised in the Statement of other comprehensive income
€ million
Return on plan assets excluding interest income
Remeasurement of plan liabilities from changes in financial assumptions
Remeasurement of experience (gains)/losses
Remeasurement of the APS and NAPS asset ceilings
Exchange movements
Pension remeasurements charged/(credited) to Other comprehensive income
d Fair value of scheme assets
A reconciliation of the opening and closing balances of the fair value of scheme assets is set out below:
€ million
January 1
Interest income
Return on plan assets excluding interest income
Employer contributions1
Employee contributions
Benefits paid
Exchange movements
December 31
2018
1,313
(997)
(297)
806
5
830
2018
29,172
731
(1,313)
716
128
(1,340)
(494)
27,600
2017
(1,698)
530
274
2
(7)
(899)
2017
28,448
730
1,698
881
101
(1,324)
(1,362)
29,172
1
Includes employer contributions to APS of €111 million (2017: €109 million) and to NAPS of €582 million (2017: €748 million), of which deficit funding
payments represented €108 million for APS (2017: €104 million) and €509 million for NAPS (2017: €516 million).
For both APS and NAPS, the Trustee has ultimate responsibility for decision making on investments matters, including the asset-
liability matching strategy. The latter is a form of investing designed to match the movement in pension plan assets with the
movement in the projected benefit obligation over time. The Trustees’ investment committee adopts an annual business plan
which sets out investment objectives and work required to support achievement of these objectives. The committee also deals
with the monitoring of performance and activities, including work on developing the strategic benchmark to improve the risk
return profile of the scheme where possible, as well as having a trigger based dynamic governance process to be able to take
advantage of opportunities as they arise. The investment committee reviews the existing investment restrictions, performance
benchmarks and targets, as well as continuing to develop the de-risking and liability hedging portfolio.
Both schemes use derivative instruments for investment purposes and to manage exposures to financial risks, such as interest
rate, foreign exchange and liquidity risks arising in the normal course of business. Exposure to interest rate risk is managed through
the use of Inflation-Linked Swap contracts. Foreign exchange forward contracts are entered into to mitigate the risk of currency
fluctuations. For NAPS, a strategy exists to provide protection against the equity market downside risk by reducing some of the
upside participation.
Scheme assets held by all defined benefit schemes operated by the Group at December 31 comprise:
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
A
d
d
i
t
i
o
n
a
l
I
n
f
o
r
m
a
t
i
o
n
€ million
Return seeking investments – equities
UK
Rest of world
Return seeking investments – other
Private equity
Property
Alternative investments
Liability matching investments
UK fixed bonds
Rest of world fixed bonds
UK index-linked bonds
Rest of world index-linked bonds
Other
Cash and cash equivalents
Derivatives
Insurance contract
Longevity swap
Other
2018
2017
1,737
4,602
6,339
931
1,917
1,183
4,031
4,885
70
5,019
103
10,077
418
57
1,663
4,321
694
27,600
2,646
6,677
9,323
777
1,906
1,023
3,706
4,885
95
7,614
177
12,771
670
178
1,770
(109)
863
29,172
162
163
www.iairgroup.com
163
All equities and bonds have quoted prices in active markets.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
30 Employee benefit obligations continued
For APS and NAPS, the composition of the scheme assets is:
€ million
Return seeking investments
Liability matching investments
Insurance contract and related longevity swap
Other
Fair value of scheme assets
December 31, 2018
December 31, 2017
APS
702
1,538
2,240
5,956
176
8,372
NAPS
9,477
8,457
17,934
–
912
18,846
APS
742
6,428
7,170
1,637
378
9,185
NAPS
12,074
6,240
18,314
–
1,244
19,558
The strategic benchmark for asset allocations differentiate between ‘return seeking assets’ and ‘liability matching assets’. Given
the respective maturity of each scheme, the proportion for APS and NAPS vary. At December 31, 2018, the benchmark for APS was
8 per cent (2017: 9.5 per cent) in return seeking assets and 92 per cent (2017: 90.5 per cent) in liability matching investments; and
for NAPS the benchmark was 49 per cent (2017: 65 per cent) in return seeking assets and 51 per cent (2017: 35 per cent) in liability
matching investments. Bandwidths are set around these strategic benchmarks that allow for tactical asset allocation decisions,
providing parameters for the investment committee and its investment managers to work within.
In addition to this, APS has an insurance contract with Rothesay Life which covers 24 per cent (2017: 24 per cent) of the pensioner
liabilities for an agreed list of members. The insurance contract is based on future increases to pensions in line with inflation and
will match future obligations on that basis for that part of the scheme. The insurance contract can only be used to pay or fund
employee benefits under the scheme. The Trustee of APS also has secured a longevity swap contract with Rothesay Life, which
covers an additional 20 per cent (2017: 20 per cent) of the pensioner liabilities for the same members covered by the insurance
contract above. The value of the contract is based on the difference between the value of the payments expected to be received
under this contract and the pensions payable by the scheme under the contract.
During 2018 the Trustee of APS secured a buy-in contract with Legal & General and at the same time novated the two longevity
swaps established in 2017 one with Canada Life and one with Partner Reinsurance which had covered 13 per cent and 8 per cent
respectively of the pensioner liabilities. The buy-in contract covers all members in receipt of pension from APS at March 31, 2018,
excluding dependent children receiving a pension at that date and members in receipt of equivalent pension (EPB) only benefits,
who are alive on October 1, 2018. Benefits coming into payment for retirements after March 31, 2018 are not covered. The contract
covers benefits payable from October 1, 2018 onwards. The policy covers approximately 60 per cent of all benefits APS expects
to pay out in future. Along with existing insurance products (the asset swap and longevity swaps with Rothesay Life), APS is now
90 per cent protected against all longevity risk and fully protected in relation to all pensions that were already being paid as at
March 31, 2018. It is also more than 90 per cent protected against interest rates and inflation (on a Retail Price Index (RPI) basis).
e Present value of scheme liabilities
A reconciliation of the opening and closing balances of the present value of the defined benefit obligations is set out below:
€ million
January 1
Current service cost
Past service (credit)/cost
Interest expense
Remeasurements - financial assumptions
Remeasurements of experience (gains)/losses
Benefits paid
Employee contributions
Exchange movements
December 31
2018
28,363
55
(778)
690
(997)
(297)
(1,340)
128
(441)
25,383
2017
29,193
233
2
743
530
274
(1,324)
101
(1,389)
28,363
The defined benefit obligation comprises €36 million (2017: €28 million) arising from unfunded plans and €25,347 million
(2017: €28,335 million) from plans that are wholly or partly funded.
f Effect of the asset ceiling
A reconciliation of the effect of the asset ceiling used in calculating the IAS 19 irrecoverable surplus in APS and NAPS is set out
below:
€ million
January 1
Interest expense
Remeasurements1
Exchange movements
December 31
2018
570
14
806
(25)
1,365
2017
580
15
2
(27)
570
1 The increase in remeasurements is mainly due to the closure of NAPS to future accrual in 2018. Following this the scheme is now in an IAS 19 accounting
surplus, which would be available to the company as a refund upon wind up of the scheme. This refund is restricted due to withholding taxes that would be
payable by the Trustee.
164
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
164
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
30 Employee benefit obligations continued
For APS and NAPS, the composition of the scheme assets is:
€ million
Return seeking investments
Liability matching investments
Insurance contract and related longevity swap
Other
Fair value of scheme assets
December 31, 2018
December 31, 2017
APS
702
1,538
2,240
5,956
176
8,372
NAPS
9,477
8,457
17,934
–
912
18,846
APS
742
6,428
7,170
1,637
378
9,185
NAPS
12,074
6,240
18,314
–
1,244
19,558
The strategic benchmark for asset allocations differentiate between ‘return seeking assets’ and ‘liability matching assets’. Given
the respective maturity of each scheme, the proportion for APS and NAPS vary. At December 31, 2018, the benchmark for APS was
8 per cent (2017: 9.5 per cent) in return seeking assets and 92 per cent (2017: 90.5 per cent) in liability matching investments; and
for NAPS the benchmark was 49 per cent (2017: 65 per cent) in return seeking assets and 51 per cent (2017: 35 per cent) in liability
matching investments. Bandwidths are set around these strategic benchmarks that allow for tactical asset allocation decisions,
providing parameters for the investment committee and its investment managers to work within.
In addition to this, APS has an insurance contract with Rothesay Life which covers 24 per cent (2017: 24 per cent) of the pensioner
liabilities for an agreed list of members. The insurance contract is based on future increases to pensions in line with inflation and
will match future obligations on that basis for that part of the scheme. The insurance contract can only be used to pay or fund
employee benefits under the scheme. The Trustee of APS also has secured a longevity swap contract with Rothesay Life, which
covers an additional 20 per cent (2017: 20 per cent) of the pensioner liabilities for the same members covered by the insurance
contract above. The value of the contract is based on the difference between the value of the payments expected to be received
under this contract and the pensions payable by the scheme under the contract.
During 2018 the Trustee of APS secured a buy-in contract with Legal & General and at the same time novated the two longevity
swaps established in 2017 one with Canada Life and one with Partner Reinsurance which had covered 13 per cent and 8 per cent
respectively of the pensioner liabilities. The buy-in contract covers all members in receipt of pension from APS at March 31, 2018,
excluding dependent children receiving a pension at that date and members in receipt of equivalent pension (EPB) only benefits,
who are alive on October 1, 2018. Benefits coming into payment for retirements after March 31, 2018 are not covered. The contract
covers benefits payable from October 1, 2018 onwards. The policy covers approximately 60 per cent of all benefits APS expects
to pay out in future. Along with existing insurance products (the asset swap and longevity swaps with Rothesay Life), APS is now
90 per cent protected against all longevity risk and fully protected in relation to all pensions that were already being paid as at
March 31, 2018. It is also more than 90 per cent protected against interest rates and inflation (on a Retail Price Index (RPI) basis).
e Present value of scheme liabilities
A reconciliation of the opening and closing balances of the present value of the defined benefit obligations is set out below:
€ million
January 1
Current service cost
Past service (credit)/cost
Interest expense
Benefits paid
Employee contributions
Exchange movements
December 31
Remeasurements - financial assumptions
Remeasurements of experience (gains)/losses
below:
€ million
January 1
Interest expense
Remeasurements1
Exchange movements
December 31
payable by the Trustee.
The defined benefit obligation comprises €36 million (2017: €28 million) arising from unfunded plans and €25,347 million
(2017: €28,335 million) from plans that are wholly or partly funded.
f Effect of the asset ceiling
A reconciliation of the effect of the asset ceiling used in calculating the IAS 19 irrecoverable surplus in APS and NAPS is set out
1 The increase in remeasurements is mainly due to the closure of NAPS to future accrual in 2018. Following this the scheme is now in an IAS 19 accounting
surplus, which would be available to the company as a refund upon wind up of the scheme. This refund is restricted due to withholding taxes that would be
2018
28,363
2017
29,193
55
(778)
690
(997)
(297)
(1,340)
128
(441)
25,383
233
2
743
530
274
(1,324)
101
(1,389)
28,363
2018
570
14
806
(25)
1,365
2017
580
15
2
(27)
570
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
A
d
d
i
t
i
o
n
a
l
I
n
f
o
r
m
a
t
i
o
n
g Actuarial assumptions
The principal assumptions used for the purposes of the actuarial valuations were as follows:
Per cent per annum
Discount rate1
Rate of increase in pensionable pay2
Rate of increase of pensions in payment3
RPI rate of inflation
CPI rate of inflation
2018
2017
APS
2.65
3.20
2.10
3.20
2.10
NAPS
2.85
–
2.05
3.15
2.05
Other
schemes
1.6 - 4.4
2.5 - 3.7
1.5 - 3.8
2.5 - 3.2
1.5 - 3.0
APS
2.45
3.15
2.05
3.15
2.05
NAPS
2.55
3.15
2.05
3.15
2.05
Other
schemes
1.6 - 3.6
2.5 - 3.6
0.0 - 3.5
2.5 - 3.1
1.75 - 3.0
1 Discount rate is determined by reference to the yield on high quality corporate bonds of currency and term consistent with the scheme liabilities.
2 Rate of increase in pensionable pay is assumed to be in line with long-term market inflation expectations. The inflation rate assumptions for NAPS and APS
are based on the difference between the yields on index-linked and fixed-interest long-term government bonds.
3
It has been assumed that the rate of increase of pensions in payment will be in line with CPI for APS and NAPS. The Trustee of the Airways Pension Scheme
(APS) had proposed an additional discretionary increase above CPI for pensions in payment for the year ended March 31, 2014. British Airways challenged
the decision and initiated legal proceedings to determine the legitimacy of the discretionary increase. The High Court issued a judgement in May 2017, which
determined that the Trustee had the power to grant discretionary increases, whilst reiterating the Trustee must take into consideration all relevant factors,
and ignore irrelevant factors. British Airways appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal released its judgement,
upholding British Airways’ appeal, concluding the Trustee did not have the power to introduce a discretionary increase rule. Following the July 2018
judgement, the Trustee has appealed to the Supreme Court. The proposed discretionary increase is not included in the assumptions above.
Rate of increase in healthcare costs is based on medical trend rates of 6.25 per cent grading down to 5.0 per cent over five years
(2017: 6.5 per cent to 5.0 per cent over seven years).
In the UK, mortality rates are calculated using the standard SAPS mortality tables produced by the CMI for APS and NAPS. The
standard mortality tables were selected based on the actual recent mortality experience of members and were adjusted to allow
for future mortality changes. The current longevities underlying the values of the scheme liabilities were as follows:
Mortality assumptions
Life expectancy at age 60 for a:
– male currently aged 60
– male currently aged 40
– female currently aged 60
– female currently aged 40
2018
2017
28.5
29.7
30.3
32.9
28.4
29.7
30.2
32.8
At December 31, 2018, the weighted-average duration of the defined benefit obligation was 11 years for APS (2017: 12 years) and
19 years for NAPS (2017: 20 years).
In the US, mortality rates were based on the RP-14 mortality tables.
h Sensitivity analysis
Reasonable possible changes at the reporting date to significant actuarial assumptions, holding other assumptions constant, would
have affected the present value of scheme liabilities by the amounts shown:
€ million
Discount rate (decrease of 10 basis points)
Future salary growth (increase of 10 basis points)
Future pension growth (increase of 10 basis points)
Future mortality rate (one year increase in life expectancy)
Increase/(decrease) in scheme liabilities
APS
11
–
11
(23)
NAPS
322
n/a
322
511
Other
schemes
13
7
1
2
Although the analysis does not take into account the full distribution of cash flows expected under the plan, it does provide an
approximation of the sensitivity of the assumptions shown.
Funding
i
Pension contributions for APS and NAPS were determined by actuarial valuations made at March 31, 2012 and March 31, 2015
respectively, using assumptions and methodologies agreed between the Group and Trustee of each scheme. At the date of the
actuarial valuation, the actuarial deficits of APS and NAPS amounted to €932 million and €3,818 million respectively. In order to
address the deficits in the schemes, the Group has also committed to the following undiscounted deficit payments:
€ million
Within 12 months
2-5 years
5-10 years
Total expected deficit payments for APS and NAPS
APS
61
199
–
260
NAPS
333
1,333
1,250
2,916
The Group has determined that the minimum funding requirements set out above for APS and NAPS will not be restricted. The
present value of the contributions payable is expected to be available as a refund or a reduction in future contributions after they
are paid into the plan. This determination has been made independently for each plan, subject to withholding taxes that would be
payable by the Trustee.
164
165
www.iairgroup.com
165
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
30 Employee benefit obligations continued
Deficit payments in respect of local arrangements outside of the UK have been determined in accordance with local practice.
In total, the Group expects to pay €398 million in employer contributions and deficit payments to the two significant post-
retirement benefit plans in 2019. This is made up of €61 million and €333 million of deficit payments for APS and NAPS respectively
as agreed at the latest triennial valuations. In addition, ongoing employer contributions for 2019 are expected to be €4 million for
APS. This excludes any additional deficit contribution that may become due depending on British Airways' cash balance as at
March 31, 2019. The Group also expects to pay €278 million in 2019, having provided collateral on certain payments to the
Company’s pension scheme, APS and NAPS, which at December 31, 2018 amounted to €278 million (2017: €283 million). This
amount is payable because the pension schemes are not fully funded on a conservative basis, with a gilts-based discount rate
on January 1, 2019 as determined by the scheme actuary.
Until September 2019, if British Airways pays a dividend to IAG higher than 35 per cent of profit after tax it will either provide
the scheme with a guarantee for 100 per cent of the amount above 35 per cent or 50 per cent of that amount as an additional
cash contribution.
31 Contingent liabilities and guarantees
The Group has certain contingent liabilities which at December 31, 2018 amounted to €88 million (December 31, 2017: €93 million).
No material losses are likely to arise from such contingent liabilities. The Group also has the following claims:
Cargo
The European Commission issued a decision in which it found that British Airways, and 10 other airline groups, had engaged in
cartel activity in the air cargo sector (Original Decision). British Airways was fined €104 million. Following an appeal, the decision
was subsequently partially annulled against British Airways (and annulled in full against the other appealing airlines) (General
Counsel Judgement), and the fine was refunded in full. British Airways appealed the partial annulment to the Court of Justice, but
that appeal was rejected.
In parallel, the European Commission chose not to appeal the General Counsel Judgement, and instead adopted a new decision
in March 2017 (New Decision). The New Decision re-issued fines against all the participating carriers, which match those contained
in the Original Decision. British Airways has therefore again been fined €104 million. British Airways has appealed the New Decision
to the GC again (as have other carriers).
A large number of claimants have brought proceedings in the English courts to recover damages from British Airways which,
relying on the findings in the Commission decisions, they claim arise from the alleged cartel activity. British Airways joined the
other airlines alleged to have participated in cartel activity to those proceedings to contribute. A number of those claims were
concluded in 2018.
British Airways is also party to similar litigation in a number of other jurisdictions including Germany, the Netherlands and Canada
together with a number of other airlines. At present, the outcome of the proceedings is unknown. In each case, the precise effect,
if any, of the alleged cartelising activity on the claimants will need to be assessed.
Pensions
The Trustees of the Airways Pension Scheme (APS) had proposed an additional discretionary increase above CPI for pensions
in payment for the year to March 31, 2014. British Airways challenged the decision and initiated legal proceedings to determine
the legitimacy of the discretionary increase. The outcome of the legal proceedings was issued in May 2017, which concluded the
Trustees had the power to grant discretionary increases, whilst reiterating they must take into consideration all relevant factors,
and ignore irrelevant factors. The Group appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal
released its judgement, upholding British Airways' appeal, concluding the Trustee did not have the power to introduce a
discretionary increase rule. British Airways will not have to reflect the increase in liabilities of €13 million that would have applied
had the proposed increase for the 2013/14 scheme year been paid by the Trustee. The Trustee has appealed to the Supreme Court.
Theft of customer data at British Airways
On September 6, 2018 British Airways announced the theft of certain of its customers’ personal data. Following an investigation
into the theft, British Airways announced on October 25, 2018 that further personal data had potentially been compromised.
As at the date of this report, BA was not aware of any confirmed cases of fraud. British Airways continues to cooperate with the
investigations of the UK Information Commissioner’s Office and other relevant regulators. British Airways has received letters
before action from certain UK law firms threatening claims arising from the data breach. Additionally, a putative class action has
been filed in the Eastern District of New York, USA. The outcome of the various investigations and litigation, which British Airways
will vigorously defend, is uncertain. British Airways holds certain insurance policies.
Guarantees
British Airways has provided collateral on certain payments to its pension schemes, APS and NAPS, which at December 31, 2018
amounted to €278 million (December 31, 2017: €283 million). This amount would be payable in the event that the pension schemes
are not fully funded on a conservative basis with a gilts-based discount rate on January 1, 2019 and will be determined by the
scheme actuary.
In addition, a guarantee amounting to €256 million (2017: €260 million) was issued by a third party in favour of APS, triggered in
the event of British Airways’ insolvency.
The Group also has other guarantees and indemnities entered into as part of the normal course of business, which at December 31,
2018 are not expected to result in material losses for the Group.
166
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
166
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
30 Employee benefit obligations continued
Deficit payments in respect of local arrangements outside of the UK have been determined in accordance with local practice.
In total, the Group expects to pay €398 million in employer contributions and deficit payments to the two significant post-
retirement benefit plans in 2019. This is made up of €61 million and €333 million of deficit payments for APS and NAPS respectively
as agreed at the latest triennial valuations. In addition, ongoing employer contributions for 2019 are expected to be €4 million for
APS. This excludes any additional deficit contribution that may become due depending on British Airways' cash balance as at
March 31, 2019. The Group also expects to pay €278 million in 2019, having provided collateral on certain payments to the
Company’s pension scheme, APS and NAPS, which at December 31, 2018 amounted to €278 million (2017: €283 million). This
amount is payable because the pension schemes are not fully funded on a conservative basis, with a gilts-based discount rate
on January 1, 2019 as determined by the scheme actuary.
Until September 2019, if British Airways pays a dividend to IAG higher than 35 per cent of profit after tax it will either provide
the scheme with a guarantee for 100 per cent of the amount above 35 per cent or 50 per cent of that amount as an additional
cash contribution.
31 Contingent liabilities and guarantees
The Group has certain contingent liabilities which at December 31, 2018 amounted to €88 million (December 31, 2017: €93 million).
No material losses are likely to arise from such contingent liabilities. The Group also has the following claims:
Cargo
The European Commission issued a decision in which it found that British Airways, and 10 other airline groups, had engaged in
cartel activity in the air cargo sector (Original Decision). British Airways was fined €104 million. Following an appeal, the decision
was subsequently partially annulled against British Airways (and annulled in full against the other appealing airlines) (General
Counsel Judgement), and the fine was refunded in full. British Airways appealed the partial annulment to the Court of Justice, but
that appeal was rejected.
In parallel, the European Commission chose not to appeal the General Counsel Judgement, and instead adopted a new decision
in March 2017 (New Decision). The New Decision re-issued fines against all the participating carriers, which match those contained
in the Original Decision. British Airways has therefore again been fined €104 million. British Airways has appealed the New Decision
to the GC again (as have other carriers).
A large number of claimants have brought proceedings in the English courts to recover damages from British Airways which,
relying on the findings in the Commission decisions, they claim arise from the alleged cartel activity. British Airways joined the
other airlines alleged to have participated in cartel activity to those proceedings to contribute. A number of those claims were
British Airways is also party to similar litigation in a number of other jurisdictions including Germany, the Netherlands and Canada
together with a number of other airlines. At present, the outcome of the proceedings is unknown. In each case, the precise effect,
if any, of the alleged cartelising activity on the claimants will need to be assessed.
concluded in 2018.
Pensions
The Trustees of the Airways Pension Scheme (APS) had proposed an additional discretionary increase above CPI for pensions
in payment for the year to March 31, 2014. British Airways challenged the decision and initiated legal proceedings to determine
the legitimacy of the discretionary increase. The outcome of the legal proceedings was issued in May 2017, which concluded the
Trustees had the power to grant discretionary increases, whilst reiterating they must take into consideration all relevant factors,
and ignore irrelevant factors. The Group appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal
released its judgement, upholding British Airways' appeal, concluding the Trustee did not have the power to introduce a
discretionary increase rule. British Airways will not have to reflect the increase in liabilities of €13 million that would have applied
had the proposed increase for the 2013/14 scheme year been paid by the Trustee. The Trustee has appealed to the Supreme Court.
Theft of customer data at British Airways
On September 6, 2018 British Airways announced the theft of certain of its customers’ personal data. Following an investigation
into the theft, British Airways announced on October 25, 2018 that further personal data had potentially been compromised.
As at the date of this report, BA was not aware of any confirmed cases of fraud. British Airways continues to cooperate with the
investigations of the UK Information Commissioner’s Office and other relevant regulators. British Airways has received letters
before action from certain UK law firms threatening claims arising from the data breach. Additionally, a putative class action has
been filed in the Eastern District of New York, USA. The outcome of the various investigations and litigation, which British Airways
will vigorously defend, is uncertain. British Airways holds certain insurance policies.
Guarantees
scheme actuary.
British Airways has provided collateral on certain payments to its pension schemes, APS and NAPS, which at December 31, 2018
amounted to €278 million (December 31, 2017: €283 million). This amount would be payable in the event that the pension schemes
are not fully funded on a conservative basis with a gilts-based discount rate on January 1, 2019 and will be determined by the
In addition, a guarantee amounting to €256 million (2017: €260 million) was issued by a third party in favour of APS, triggered in
the event of British Airways’ insolvency.
The Group also has other guarantees and indemnities entered into as part of the normal course of business, which at December 31,
2018 are not expected to result in material losses for the Group.
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32 Related party transactions
The following transactions took place with related parties for the financial years to December 31:
€ million
Sales of goods and services
Sales to associates1
Sales to significant shareholders2
Purchases of goods and services
Purchases from associates3
Purchases from significant shareholders2
Receivables from related parties
Amounts owed by associates4
Amounts owed by significant shareholders5
Payables to related parties
Amounts owed to associates6
Amounts owed to significant shareholders5
2018
2017
7
44
55
121
7
3
3
7
7
48
58
109
2
1
3
3
1 Sales to associates: Consisted primarily of sales for airline related services to Dunwoody Airline Services (Holding) Limited (Dunwoody) of €5 million
(2017: €6 million) and €1 million (2017: less than €1 million) to Iberia Cards (Sociedad Conjunta para la Emisión y Gestión de Medios de Pago E.F.C., S.A.)
and Serpista, S.A.
2 Sales to and purchases from significant shareholders: Related to interline services and wet leases with Qatar Airways.
3 Purchases from associates: Mainly included €35 million of airport auxiliary services purchased from Multiservicios Aeroportuarios, S.A. (2017: €35 million), €6
million of handling services provided by Dunwoody (2017: €13 million) and €13 million of maintenance services received from Serpista, S.L. (2017: €9 million).
4 Amounts owed by associates: For airline related services rendered, that included balances with Dunwoody of €5 million (2017: €1 million) and €2 million of
services provided to Multiservicios Aeroportuarios, S.A., Viajes AME, S.A., Iberia Cards (Sociedad Conjunta para la Emisión y Gestión de Medios de Pago
E.F.C., S.A.) and Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A. (2017: €1m for Multiservicios Aeroportuarios, S.A., Serpista, S.A. and
Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A.).
5 Amounts owed by and to significant shareholders: Related to Qatar Airways.
6 Amounts owed to associates: Consisted primarily of less than €1 million due to Dunwoody (2017: €1 million), €3 million to Serpista, S.A. (2017: €2 million)
and less than €1 million to Multiservicios Aeroportuarios, S.A. (2017: less than €1 million).
During the year to December 31, 2018 British Airways met certain costs of administering its retirement benefit plans, including
the provision of support services to the Trustees. Costs borne on behalf of the retirement benefit plans amounted to €9.5 million
(2017: €7 million) in relation to the costs of the Pension Protection Fund levy.
The Group has transactions with related parties that are conducted in the normal course of the airline business, which include
the provision of airline and related services. All such transactions are carried out on an arm’s length basis.
For the year to December 31, 2018, the Group has not made any provision for doubtful debts arising relating to amounts owed
by related parties (2017: nil).
Significant shareholders
In this instance, significant shareholders are those parties who have the power to participate in the financial and operating policy
decisions of the Group, as a result of their shareholdings in the Group, but who do not have control over these policies.
At December 31, 2018 the Group had cash deposit balances with shareholders holding a participation of between 3 to 5 per cent,
of €98 million (2017: €90 million).
Board of Directors and Management Committee remuneration
Compensation received by the Group’s Board of Directors and Management Committee, in 2018 and 2017 is as follows:
€ million
Base salary, fees and benefits
Board of Directors
Short-term benefits (cash)
Share based payments
Post employment and termination benefits
Management Committee
Short-term benefits (cash)
Share based payments
Post employment and termination benefits
Year to December 31
2018
2017
5
2
–
10
5
–
6
3
–
10
7
–
166
167
www.iairgroup.com
167
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
32 Related party transactions continued
At December 31, 2018 the Board of Directors includes remuneration for two Executive Directors (December 31, 2017: two Executive
Directors). The Management Committee includes remuneration for ten members (December 31, 2017: nine members).
The Company provides life insurance for all executive directors and the Management Committee. For the year to December 31,
2018 the Company's obligation was €58,000 (2017: €38,000).
At December 31, 2018 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating
to the current members of the Management Committee totalled €4 million (2017 : €4 million).
No loan or credit transactions were outstanding with Directors or offices of the Group at December 31, 2018 (2017: nil).
33 Changes to accounting policies
The Group has adopted IFRS 15 ‘Revenue from contracts with customers’ from January 1, 2018. The standard establishes a
five-step model that applies to revenue arising from contracts with customers. Revenue is recognised at an amount that reflects
the consideration to which an entity expects to be entitled in exchange for goods and services and at a point when the
performance obligations associated with these goods and services have been satisfied.
The Group has identified the following changes to revenue recognition on adoption of the standard:
• Loyalty revenue – revenue associated with performance obligations arising on the sale of loyalty points, including revenue
allocated to brand and marketing services and revenue allocated to Avios points, has been determined based on the relative
stand-alone selling price of each performance obligation. Revenue associated with brand and marketing services is recognised
as the points are issued. Revenue allocated to the Avios points is deferred and recognised when the points are redeemed. The
impact of assessing the stand-alone selling prices of the individual performance obligations has resulted in a greater portion of
revenue being deferred on issuance, because the stand-alone selling price of the points was higher than the fair value applied
under IFRIC 13 ‘Customer loyalty programmes’.
On implementation of IFRS 15, the Group assessed all contracts associated with the loyalty programmes at the date of initial
application. This resulted in an increase in the number of points deferred in respect of incomplete contracts and which are
expected to be redeemed in the future.
The Group also changed the way that costs associated with the redemption of Avios points with third parties are presented.
The revenue arising from these transactions is presented net of the related costs as IAG’s obligation is to arrange for goods and
services to be provided by third party suppliers.
• Passenger revenue – revenue associated with ancillary services that was previously recognised when paid, such as administration
fees, is deferred to align with the recognition of revenue associated with the related travel.
• Cargo revenue – interline cargo revenue is presented gross rather than net of related costs as IAG is considered to have a
performance obligation to provide cargo services to its customers, rather than an obligation to arrange cargo services to be
provided by third parties.
• Other revenue – revenue associated with maintenance activities and holiday revenue with performance obligations that are
fulfilled over time, is recognised over the performance obligation period using a methodology that reflects the activity
undertaken in order to satisfy the obligation.
The Group has applied the standard on a fully retrospective basis and restated prior year comparatives on adoption of IFRS 15.
Practical expedients have not been used. The adjustment to opening retained earnings at January 1, 2017 arising from the changes
to loyalty revenue recognition amounted to a charge of €403 million. Deferred revenue on ticket sales increased by €497 million
and the net tax asset increased by €94 million. Other changes to revenue recognition resulted in a charge to retained earnings at
January 1, 2017 of €27 million.
The Group has adopted IFRS 9 ‘Financial Instruments’ from January 1, 2018. The standard amends the classification and
measurement models for financial assets and adds new requirements to address the impairment of financial assets. It also
introduces a new hedge accounting model to more closely align hedge accounting with risk management strategy and objectives.
The Group has identified the following changes to the classification and measurement of financial assets and accounting for
derivative instruments used for hedging.
• Equity investments, previously classified as available-for-sale, are measured at fair value through Other comprehensive income,
with no recycling of gains and losses. In addition, the Group has adopted a new impairment model for trade receivables and
other financial assets, with no material adjustment to existing provisions. The Group will continue to recognise most financial
assets at amortised cost as the contractual cash flows associated with these assets are solely payments of principal and interest.
• The Group continues to undertake hedging activity in line with its financial risk management objectives and policies. Movements
in the time value of options are now classified as cost of hedging and recognised in Other comprehensive income, with prior year
comparatives restated. At January 1, 2017 there was a reclassification of €38 million of post-tax gains from retained earnings to
unrealised net gains in Other reserves to reflect the reclassification of gains and losses associated with the time value of options.
Movements in the time value of options recognised in Other comprehensive income in 2017 are set out in note 29.
168
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
168
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
32 Related party transactions continued
At December 31, 2018 the Board of Directors includes remuneration for two Executive Directors (December 31, 2017: two Executive
Directors). The Management Committee includes remuneration for ten members (December 31, 2017: nine members).
The Company provides life insurance for all executive directors and the Management Committee. For the year to December 31,
2018 the Company's obligation was €58,000 (2017: €38,000).
At December 31, 2018 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating
to the current members of the Management Committee totalled €4 million (2017 : €4 million).
No loan or credit transactions were outstanding with Directors or offices of the Group at December 31, 2018 (2017: nil).
33 Changes to accounting policies
The Group has adopted IFRS 15 ‘Revenue from contracts with customers’ from January 1, 2018. The standard establishes a
five-step model that applies to revenue arising from contracts with customers. Revenue is recognised at an amount that reflects
the consideration to which an entity expects to be entitled in exchange for goods and services and at a point when the
performance obligations associated with these goods and services have been satisfied.
The Group has identified the following changes to revenue recognition on adoption of the standard:
• Loyalty revenue – revenue associated with performance obligations arising on the sale of loyalty points, including revenue
allocated to brand and marketing services and revenue allocated to Avios points, has been determined based on the relative
stand-alone selling price of each performance obligation. Revenue associated with brand and marketing services is recognised
as the points are issued. Revenue allocated to the Avios points is deferred and recognised when the points are redeemed. The
impact of assessing the stand-alone selling prices of the individual performance obligations has resulted in a greater portion of
revenue being deferred on issuance, because the stand-alone selling price of the points was higher than the fair value applied
under IFRIC 13 ‘Customer loyalty programmes’.
On implementation of IFRS 15, the Group assessed all contracts associated with the loyalty programmes at the date of initial
application. This resulted in an increase in the number of points deferred in respect of incomplete contracts and which are
expected to be redeemed in the future.
The Group also changed the way that costs associated with the redemption of Avios points with third parties are presented.
The revenue arising from these transactions is presented net of the related costs as IAG’s obligation is to arrange for goods and
services to be provided by third party suppliers.
• Passenger revenue – revenue associated with ancillary services that was previously recognised when paid, such as administration
fees, is deferred to align with the recognition of revenue associated with the related travel.
• Cargo revenue – interline cargo revenue is presented gross rather than net of related costs as IAG is considered to have a
performance obligation to provide cargo services to its customers, rather than an obligation to arrange cargo services to be
provided by third parties.
• Other revenue – revenue associated with maintenance activities and holiday revenue with performance obligations that are
fulfilled over time, is recognised over the performance obligation period using a methodology that reflects the activity
undertaken in order to satisfy the obligation.
The Group has applied the standard on a fully retrospective basis and restated prior year comparatives on adoption of IFRS 15.
Practical expedients have not been used. The adjustment to opening retained earnings at January 1, 2017 arising from the changes
to loyalty revenue recognition amounted to a charge of €403 million. Deferred revenue on ticket sales increased by €497 million
and the net tax asset increased by €94 million. Other changes to revenue recognition resulted in a charge to retained earnings at
January 1, 2017 of €27 million.
The Group has adopted IFRS 9 ‘Financial Instruments’ from January 1, 2018. The standard amends the classification and
measurement models for financial assets and adds new requirements to address the impairment of financial assets. It also
introduces a new hedge accounting model to more closely align hedge accounting with risk management strategy and objectives.
The Group has identified the following changes to the classification and measurement of financial assets and accounting for
derivative instruments used for hedging.
• Equity investments, previously classified as available-for-sale, are measured at fair value through Other comprehensive income,
with no recycling of gains and losses. In addition, the Group has adopted a new impairment model for trade receivables and
other financial assets, with no material adjustment to existing provisions. The Group will continue to recognise most financial
assets at amortised cost as the contractual cash flows associated with these assets are solely payments of principal and interest.
• The Group continues to undertake hedging activity in line with its financial risk management objectives and policies. Movements
in the time value of options are now classified as cost of hedging and recognised in Other comprehensive income, with prior year
comparatives restated. At January 1, 2017 there was a reclassification of €38 million of post-tax gains from retained earnings to
unrealised net gains in Other reserves to reflect the reclassification of gains and losses associated with the time value of options.
Movements in the time value of options recognised in Other comprehensive income in 2017 are set out in note 29.
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Impact on financial statements
The following tables summarise the impact of adopting IFRS 15 and IFRS 9 on the Consolidated income statement for the
12 months to December 31, 2017 and the Consolidated balance sheet as at December 31, 2017 and January 1, 2017.
Consolidated income statement (extract for the 12 months to December 31, 2017)
€ million
Passenger revenue
Cargo revenue
Other revenue
Total revenue
Handling, catering and other operating costs
Other expenditure on operations
Total expenditure on operations
Operating profit
Unrealised (losses)/gains on derivatives not qualifying for hedge
accounting
Net currency retranslation credits
Other non-operating items
Profit before tax
Tax
Profit after tax for the year
Basic earnings per share (€ cents)
Diluted earnings per share (€ cents)
Consolidated balance sheet (extract as at December 31, 2017)
Previously
reported
20,245
1,084
1,643
22,972
2,714
17,531
20,245
2,727
(14)
27
(247)
2,493
(472)
2,021
95.8
92.6
IFRS 15
Loyalty
revenue
51
–
(181)
(130)
(69)
–
(69)
(61)
–
–
–
(61)
11
(50)
(2.5)
(2.4)
Other
(11)
48
1
38
42
–
42
(4)
IFRS 9
adjustments
–
–
–
–
–
–
–
–
–
–
–
(4)
1
(3)
–
–
42
11
–
53
(12)
41
1.9
1.8
Restated
20,285
1,132
1,463
22,880
2,687
17,531
20,218
2,662
28
38
(247)
2,481
(472)
2,009
95.2
92.0
€ million
Non-current assets
Deferred tax assets
Other non-current assets
Current assets
Trade receivables
Other current assets
Total assets
Total equity
Non-current liabilities
Deferred tax liability
Other non-current liabilities
Current liabilities
Trade and other payables
Deferred revenue on ticket sales
Current tax payable
Other current liabilities
Total liabilities
Total equity and liabilities
IFRS 15
Previously
reported
Loyalty
revenue
Other
Restated
521
16,517
17,038
1,494
8,729
10,223
27,261
–
–
–
–
–
–
–
2
–
2
(31)
–
(31)
(29)
523
16,517
17,040
1,463
8,729
10,192
27,232
7,396
(432)
(31)
6,933
531
9,642
10,173
3,766
4,159
179
1,588
9,692
19,865
27,261
–
–
–
–
533
(101)
–
432
432
–
(5)
–
(5)
(43)
50
–
–
7
2
(29)
526
9,642
10,168
3,723
4,742
78
1,588
10,131
20,299
27,232
168
169
www.iairgroup.com 169
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
33 Changes to accounting policies continued
Consolidated balance sheet (extract as at January 1, 2017)
€ million
Non-current assets
Deferred tax assets
Other non-current assets
Current assets
Trade receivables
Other current assets
Total assets
Total equity
Non-current liabilities
Deferred tax liability
Other non-current liabilities
Current liabilities
Trade and other payables
Deferred revenue on ticket sales
Other current liabilities
Total liabilities
Total equity and liabilities
IFRS 15
Previously
reported
Loyalty
revenue
Other
Restated
526
17,062
17,588
1,405
8,380
9,785
27,373
33
–
33
–
–
–
33
2
–
2
(35)
–
(35)
(33)
561
17,062
17,623
1,370
8,380
9,750
27,373
5,664
(403)
(27)
5,234
176
12,197
12,373
3,305
4,145
1,886
9,336
21,709
27,373
(61)
–
(61)
–
497
–
497
436
33
(5)
–
(5)
(39)
38
–
(1)
(6)
(33)
110
12,197
12,307
3,266
4,680
1,886
9,832
22,139
27,373
The Group has not adopted any other standards, amendments or interpretations in the 12 months to December 31, 2018 that have
had a significant change to its financial performance or position.
IFRS 16 ‘Leases’ will be adopted by the Group from January 1, 2019. The new standard eliminates the classification of leases as
either operating leases or finance leases and introduces a single lessee accounting model. The Group has a number of operating
leases for assets including aircraft, property and other equipment.
The main changes arising on the adoption of IFRS 16 will be as follows:
1. Interest-bearing borrowings and non-current assets will increase on implementation of the standard as obligations to
make future payments under leases currently classified as operating leases will be recognised on the Balance sheet, along
with the related ‘right-of-use’ (ROU) asset. The Group has opted to use the practical expedients in respect of leases of less
than 12 months duration and leases for low value items and excluded them from the scope of IFRS 16. Rental payments
associated with these leases will be recognised in the Income statement on a straight-line basis over the life of the lease.
2. There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are
replaced with depreciation and lease interest expense.
3. The adoption of IFRS 16 will require the Group to make a number of judgements, estimates and assumptions. These
include:
– The approach to be adopted on transition. The Group will use the modified retrospective transition approach. Lease liabilities
will be determined based on the appropriate incremental borrowing rates and rates of exchange at the date of transition
(January 1, 2019). ROU assets in respect of aircraft will be measured at the appropriate incremental borrowing rates at the
date of transition and rates of exchange at the commencement of each lease, and will be depreciated from the lease
commencement date to the date of transition. Other ROU assets will be measured based on the related lease liability.
IFRS 16 does not allow comparative information to be restated if the modified retrospective transition approach is used.
– The estimated lease term. The term of each lease will be based on the original lease term unless management is ‘reasonably
certain’ to exercise options to extend the lease. Further information used to determine the appropriate lease term includes
fleet plans which underpin approved business plans, and historic experience regarding extension options.
– The discount rate used to determine the lease liability. The rates used on transition to discount future lease payments are the
Group’s incremental borrowing rates. These rates have been calculated for each airline, reflecting the underlying lease terms
and based on observable inputs. The risk-free rate component has been based on LIBOR rates available in the same currency
and over the same term as the lease and has been adjusted for credit risk. For future lease obligations, the Group is proposing
to use the interest rate implicit in the lease.
– Terminal arrangements. The Group has reviewed its arrangements at airport terminals to determine whether any agreements
previously considered to be service agreements should be classified as leases. No additional leases have been identified
following this review.
170
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
170
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year to December 31, 2018
33 Changes to accounting policies continued
Consolidated balance sheet (extract as at January 1, 2017)
€ million
Non-current assets
Deferred tax assets
Other non-current assets
Current assets
Trade receivables
Other current assets
Total assets
Total equity
Non-current liabilities
Deferred tax liability
Other non-current liabilities
Current liabilities
Trade and other payables
Deferred revenue on ticket sales
Other current liabilities
Total liabilities
Total equity and liabilities
IFRS 15
Previously
reported
Loyalty
revenue
Other
Restated
5,664
(403)
(27)
5,234
526
17,062
17,588
1,405
8,380
9,785
27,373
176
12,197
12,373
3,305
4,145
1,886
9,336
21,709
27,373
33
–
33
–
–
–
33
(61)
–
(61)
497
–
–
497
436
33
2
–
2
(35)
–
(35)
(33)
(5)
–
(5)
(39)
38
–
(1)
(6)
(33)
561
17,062
17,623
1,370
8,380
9,750
27,373
110
12,197
12,307
3,266
4,680
1,886
9,832
22,139
27,373
The Group has not adopted any other standards, amendments or interpretations in the 12 months to December 31, 2018 that have
had a significant change to its financial performance or position.
IFRS 16 ‘Leases’ will be adopted by the Group from January 1, 2019. The new standard eliminates the classification of leases as
either operating leases or finance leases and introduces a single lessee accounting model. The Group has a number of operating
leases for assets including aircraft, property and other equipment.
The main changes arising on the adoption of IFRS 16 will be as follows:
1. Interest-bearing borrowings and non-current assets will increase on implementation of the standard as obligations to
make future payments under leases currently classified as operating leases will be recognised on the Balance sheet, along
with the related ‘right-of-use’ (ROU) asset. The Group has opted to use the practical expedients in respect of leases of less
than 12 months duration and leases for low value items and excluded them from the scope of IFRS 16. Rental payments
associated with these leases will be recognised in the Income statement on a straight-line basis over the life of the lease.
2. There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are
replaced with depreciation and lease interest expense.
3. The adoption of IFRS 16 will require the Group to make a number of judgements, estimates and assumptions. These
include:
– The approach to be adopted on transition. The Group will use the modified retrospective transition approach. Lease liabilities
will be determined based on the appropriate incremental borrowing rates and rates of exchange at the date of transition
(January 1, 2019). ROU assets in respect of aircraft will be measured at the appropriate incremental borrowing rates at the
date of transition and rates of exchange at the commencement of each lease, and will be depreciated from the lease
commencement date to the date of transition. Other ROU assets will be measured based on the related lease liability.
IFRS 16 does not allow comparative information to be restated if the modified retrospective transition approach is used.
– The estimated lease term. The term of each lease will be based on the original lease term unless management is ‘reasonably
certain’ to exercise options to extend the lease. Further information used to determine the appropriate lease term includes
fleet plans which underpin approved business plans, and historic experience regarding extension options.
– The discount rate used to determine the lease liability. The rates used on transition to discount future lease payments are the
Group’s incremental borrowing rates. These rates have been calculated for each airline, reflecting the underlying lease terms
and based on observable inputs. The risk-free rate component has been based on LIBOR rates available in the same currency
and over the same term as the lease and has been adjusted for credit risk. For future lease obligations, the Group is proposing
to use the interest rate implicit in the lease.
– Terminal arrangements. The Group has reviewed its arrangements at airport terminals to determine whether any agreements
previously considered to be service agreements should be classified as leases. No additional leases have been identified
following this review.
– Restoration obligations. The Group has identified certain obligations associated with the maintenance condition of its aircraft
on redelivery to the lessor, such as the requirement to complete a final airframe check, repaint the aircraft and reconfigure
the cabin. These have been recognised as part of the ROU asset on transition. Judgement has been used to identify the
appropriate obligations and estimation has been used (based observable data) to measure them. Other maintenance
obligations associated with these assets, comprising obligations that arise as the aircraft is utilised, such as engine overhauls
and periodic airframe checks, will continue to be recognised as a maintenance expense over the lease term.
4. For future reporting periods after adoption, foreign exchange movements on lease obligations, which are predominantly
denominated in US dollars, will be remeasured at each balance sheet date, however the ROU asset will be recognised at
the historic exchange rate. This will create volatility in the Income statement. The Group intends to manage this volatility
as part of its risk management strategy.
The Group expects that the following assets and liabilities will be recognised on the Consolidated balance sheet at January 1, 2019
on adoption of IFRS 16 (rounded to the nearest €5 million):
Consolidated balance sheet (extract as at January 1, 2019)
€ Million
Non-current assets
Property, plant and equipment
Fleet
Property and equipment
Deferred tax assets
Other non-current assets
Current assets
Other current assets
Total assets
Total equity
Non-current liabilities
Interest-bearing long-term borrowings
Deferred tax liability
Provisions for liabilities and charges
Other non-current liabilities
Current liabilities
Current portion of long term borrowings
Other current liabilities
Total liabilities
Total equity and liabilities
As
reported
Preliminary
IFRS 16
adjustments
Restated
10,790
1,647
536
4,968
17,941
10,093
10,093
28,034
3,730
755
130
–
4,615
(35)
(35)
4,580
14,520
2,402
666
4,968
22,556
10,058
10,058
32,614
6,720
(550)
6,170
6,633
453
2,268
910
10,264
876
10,174
11,050
21,314
28,034
4,315
(40)
120
(125)
4,270
880
(20)
860
5,130
4,580
10,948
413
2,388
785
14,534
1,756
10,154
11,910
26,444
32,614
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171
GROUP INVESTMENTS
Subsidiaries
British Airways
Name and address
Avios Group (AGL) Limited *
Astral Towers, Betts Way, London Road, Crawley, West Sussex, RH10 9XY
BA and AA Holdings Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
BA Call Centre India Private Limited (callBA)
F-42, East of Kailash, New Delhi, 110065
BA Cityflyer Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
BA European Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
BA Heathcare Trust Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
BA Number One Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
BA Number Two Limited
IFC 5, St Helier, Jersey, JE1 1ST
Bealine Plc
Waterside, PO Box 365, Harmondsworth, UB7 0GB
BritAir Holdings Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways (BA) Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways 777 Leasing Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways Associated Companies Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways Avionic Engineering Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways Capital Limited
Queensway House, Hilgrove Street, St Helier, JE1 1ES
British Airways E-Jets Leasing Limited *
Canon's Court, 22 Victoria Street, Hamilton, HM 12
British Airways Holdings BV
Strawinskylaan 3105, Atrium, Amsterdam, 1077ZX
British Airways Holdings Limited *
IFC 5, St Helier, Jersey, JE1 1ST
British Airways Holidays Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways Interior Engineering Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways Leasing Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways Maintenance Cardiff Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Airways Pension Trustees (No 2) Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Mediterranean Airways Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Midland Airways Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
British Midland Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
Diamond Insurance Company Limited
1st Floor, Rose House, 51-59 Circular Road, Douglas, IM1 1RE
Flyline Tele Sales & Services GmbH
Hermann Koehl-Strasse 3, Bremen, 28199
Gatwick Ground Services Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
Illiad Inc
Suite 1300, 1105 North Market Street, PO Box 8985,
Wilmington, Delaware, 19899
172
INTERNATIONAL AIRLINES GROUP
Principal activity
Country of
Incorporation
Percentage of
equity owned
Airline marketing
England
100%
Holding company
England
100%
India
100%
Airline operations
England
100%
England
100%
England
100%
England
100%
Jersey
100%
England
100%
Holding company
England
100%
England
100%
Aircraft leasing
England
100%
England
100%
Aircraft maintenance
England
100%
Jersey
100%
Aircraft financing
Bermuda
100%
Netherlands
100%
Holding company
Jersey
100%
Package holidays
England
100%
Aircraft maintenance
England
100%
Aircraft financing
England
100%
Aircraft maintenance
England
100%
England
100%
England
99%
England
100%
England
100%
Isle of Man
100%
Germany
100%
England
100%
USA
100%
Annual Report and Accounts 2018
Name and address
Overseas Air Travel Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
Speedbird Insurance Company Limited *
Canon's Court, 22 Victoria Street, Hamilton, HM 12
Teleflight Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
BA Excepted Group Life Scheme Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
Iberia
Name and address
Compañía Operadora de Corto y Medio Radio Iberia Express, S.A.*
Calle Alcañiz 23, Madrid, 28006
Compañía Explotación Aviones Cargueros Cargosur, S.A.
Calle Martínez Villergas 49, Madrid, 28027
Compañía Auxiliar al Cargo Exprés, S.A.*
Centro de Carga Aérea, Parcela 2 P5, Nave 6, Madrid, 28042
Sociedad Auxiliar Logística Aeroportuaria, S.A.*
Centro de Carga Aérea, Parcela 2 P5, Nave 6, Madrid, 28042
Iberia Tecnología, S.A.*
Calle Martínez Villergas 49, Madrid, 28027
Iberia Desarrollo Barcelona, S.L.*
Avinguda Les Garrigues 38-44, Edificio B,
El Prat de Llobregat, Barcelona, 08220
Iberia México, S.A.*
Ejército Nacional 439, Ciudad de México, 11510
Aer Lingus
Name and address
Aer Lingus Group DAC *
Dublin Airport, Dublin
Aer Lingus Limited *
Dublin Airport, Dublin
ALG Trustee Limited
33-37 Athol Street, Douglas, Isle of Man, IM1 1LB
Aer Lingus (Ireland) Limited
Dublin Airport, Dublin
Shinagh Limited
Dublin Airport, Dublin
Santain Developments Limited
Dublin Airport, Dublin
Aer Lingus Beachey Limited
Penthouse Suite, Analyst House, Peel Road,
Douglas, Isle of Man, IM1 4LZ
Aer Lingus Northern Ireland Limited
Aer Lingus Base, Belfast City Airport,
Sydenham Bypass, Belfast, Co. Antrim, BT3 9JH
Aer Lingus 2009 DCS Trustee Limited
Dublin Airport, Dublin
Dirnan Insurance Co. Ltd
Canon's Court, 22 Victoria Street, Hamilton, Bermuda, HM 12
Avios
Name and address
Remotereport Trading Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
Avios South Africa Proprietary Limited
Regus, 33 Ballyclare Drive, Cedarwood House, Gauteng,
Johannesburg, 2191
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Principal activity
Country of
Incorporation
Percentage of
equity owned
England
100%
Insurance
Bermuda
100%
England
100%
England
100%
Principal activity
Country of
Incorporation
Percentage of
equity owned
Airline operations
Spain
100%
Spain
100%
Cargo transport
Airport logistics and cargo
terminal management
Spain
Spain
75%
75%
Holding company
Spain
100%
Airport infrastructure
development
Storage and
Spain
75%
custody services
Mexico
100%
Principal activity
Country of
Incorporation
Percentage of
equity owned
Holding company
Airline operations
Republic of
Ireland
Republic of
Ireland
Isle of Man
Republic of
Ireland
Republic of
Ireland
Republic of
Ireland
100%
100%
100%
100%
100%
100%
Isle of Man
100%
Northern
Ireland
Republic of
Ireland
100%
100%
Bermuda
100%
Principal activity
Country of
Incorporation
Percentage of
equity owned
England
100%
South Africa
100%
www.iairgroup.com
173
GROUP INVESTMENTS CONTINUED
IAG Cargo Limited
Name and address
Zenda Group Limited
Carrus Cargo Centre, PO Box 99, Sealand Road,
London Heathrow Airport, Hounslow, Middlesex, TW6 2JS
Vueling
Name and address
Anilec Holding GmbH
Office Park I Top, Vienna, B041300
Waleria Beteiligungs GmbH
Office Park I Top, Vienna, B041300
Anisec Luftfahrt GmbH
Office Park I Top, Vienna, B041300
Level
Name and address
Openskies SASU
3 rue le Corbusier, Rungis, 94150
FLY LEVEL UK Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
International Consolidated Airlines Group S.A.
Name and address
British Airways Plc *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
IB Opco Holding, S.L.
Calle de Martínez Villergas 49, Madrid, 28027
Iberia Líneas Aéreas de España, S.A. Operadora *
Calle de Martínez Villergas 49, Madrid, 28027
IAG GBS Poland sp. z.o.o. *
Ul. Opolska 114, Krakow, 31-323
IAG GBS Limited *
Waterside, PO Box 365, Harmondsworth, UB7 0GB
IAG Cargo Limited *
Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow
Airport, Hounslow, Middlesex, TW6 2JS
Veloz Holdco, S.L.
Calle de Velázquez 130, Madrid, 28006
Vueling Airlines, S.A. *
Plaça Pla de l'Estany 5, Parque de Negocios Mas Blau II,
El Prat de Llobregat, Barcelona, 08820
Aerl Holding Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
IAG Connect Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB
FLY LEVEL, S.L.
Camino de la Muñoza s/n, El Caserío,
Iberia Zona Industrial 2, Madrid, 28042
Principal activity
Country of
Incorporation
Percentage of
equity owned
England
100%
Principal activity
Country of
Incorporation
Percentage of
equity owned
Austria
100%
Austria
Indirect
Austria
Indirect
Principal activity
Country of
Incorporation
Percentage of
equity owned
Airline operations
France
100%
England
100%
Principal activity
Country of
Incorporation
Percentage of
equity owned
Airline operations
England
100%1
Airline operations and
maintenance
IT, finance, procurement
services
IT, finance, procurement
services
Spain
100%2
Spain
100%2
Poland
100%
England
100%
Air freight operations
England
100%
Spain
100%
Airline operations
Spain
Indirect
England
Republic of
Ireland
100%
100%
Spain
100%
* Principal subsidiaries
1 The Group holds 49.9% of the total number of voting rights and 99.65% of the total nominal share capital in British Airways Plc, such stake having
almost 100% of the economic rights. The remaining nominal share capital and voting rights, representing 0.35% and 50.1% respectively, correspond to a
trust established for the purposes of implementing the British Airways nationality structure.
2 The Group holds 49.9% of both the total nominal share capital and the total number of voting rights in IB Opco Holding, S.L. (and thus, indirectly, in
Iberia Líneas Aéreas de España, S.A. Operadora), such stake having almost 100% of the economic rights in these companies. The remaining shares,
representing 50.1% of the total nominal share capital and the total number of voting rights belong to a Spanish company incorporated for the purposes
of implementing the Iberia nationality structure.
174
INTERNATIONAL AIRLINES GROUP
Annual Report and Accounts 2018
Associates
Name and address
Dunwoody Airline Services Limited
Building 70, Argosy Road, East Midlands Airport, Castle
Donnington, Derby, DE74 2SA
Empresa Logística de Carga Aérea, S.A.
Carretera de Wajay km. 15,
Aeropuerto José Martí, Ciudad de la Habana
Empresa Hispano Cubana de Mantenimiento de Aeronaves,
Ibeca, S.A.
Avenida de Vantroi y Final, Aeropuerto
José Martí, Ciudad de la Habana
Multiservicios Aeroportuarios, S.A.
Avenida de Manoteras 46, 2ª planta, Madrid, 28050
Serpista, S.A.
Calle del Cardenal Marcelo Spínola 10, Madrid, 28016
Grupo Air Miles España, S.A.
Avenida de Bruselas 20, Alcobendas, Madrid, 28108
Viajes Ame, S.A.U.
Avenida de Bruselas 20, Alcobendas, Madrid, 28108
Programa Travel Club Agencia de Seguros Exclusiva, S.L.U.
Avenida de Bruselas 20, Alcobendas, Madrid, 28108
Joint ventures
Name and address
Sociedad Conjunta para la Emisión y Gestión
de Medios de Pago EFC, S.A.
Calle de José Ortega y Gasset 22, Planta 3ª, Madrid, 28006
Other equity investments
The Group’s principal other equity investments are as follows:
Country of
Incorporation
Percentage of
equity owned
England
40%
Cuba
50%
Cuba
Spain
Spain
Spain
Spain
Spain
50%
49%
39%
27%
27%
27%
Country of
Incorporation
Percentage of
equity owned
Spain
50.5%
Name and address
Comair Limited
1 Marignane Drive, Bonaero Park, 1619
The Airline Group Limited
5th Floor, Brettenham House South,
Lancaster Place, London, WC2N 7EN
Adquira España, S.A.
Calle de Julián Camarillo 21A, Planta 4ª, Madrid, 28037
Travel Quinto Centenario, S.A.
Calle Alemanes 3, Sevilla, 41004
Servicios de Instrucción de Vuelo, S.L.
Camino de la Muñoza s/n, El Caserío, Iberia Zona
Industrial 2, Madrid, 28042
DeepAir Solutions Limited
Ground Floor North, 86 Brook Street, London, W1K 5AY
Country of
incorporation
Percentage of
equity owned
Currency
Shareholder’s
funds (million)
Profit/(loss)
before tax
(million)
South Africa
11.5%
ZAR
1,779
471
England
16.7%
Spain
10.0%
Spain
10.0%
Spain
19.9%
England
10.0%
GBP
EUR
EUR
EUR
GBP
287
1
12
–
N/A
N/A
10
N/A
1
N/A
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175
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
LIABILITY STATEMENT OF DIRECTORS FOR THE PURPOSES ENVISAGED UNDER ARTICLE 8.1.b OF SPANISH ROYAL
DECREE 1362/2007 OF 19 OCTOBER (REAL DECRETO 1362/2007).
At a meeting held on February 27, 2019, the Directors of International Consolidated Airlines Group, S.A. (the “Company”) state
that, to the best of their knowledge, the individual and consolidated financial statements for the year to December 31, 2018,
prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole, and
that the individual and consolidated management reports include a fair review of the development and performance of the
business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with
the description of the principal risks and uncertainties that they face.
February 27, 2019
Antonio Vázquez Romero
Chairman
William Matthew Walsh
Chief Executive Officer
Marc Jan Bolland
Patrick Jean Pierre Cescau
Enrique Dupuy de Lôme Chávarri
Deborah Linda Kerr
María Fernanda Mejía Campuzano
Kieran Charles Poynter
Emilio Saracho Rodríguez de Torres
Marjorie Morris Scardino
Lucy Nicola Shaw
Alberto Terol Esteban
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182
INTERNATIONAL AIRLINES GROUP
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ALTERNATIVE PERFORMANCE MEASURES
The performance of the Group is assessed using a number of alternative performance measures (APMs), some of which have
been identified as key performance indicators of the Group. The Group’s results are presented both before and after
exceptional items. Exceptional items are those that in Management’s view need to be separately disclosed by virtue of their size
and incidence. Exceptional items are disclosed in note 4 of the consolidated financial statements. In addition, the Group’s
results are described using certain measures that are not defined under IFRS and are therefore considered to be APMs. These
APMs are used to measure the outcome of the Group’s strategy based on ‘Unrivalled customer proposition’, ‘Value accretive
and sustainable growth’ and ‘Efficiency and innovation’. Further information on why these APMs are used is provided in the Key
performance indicators section. The definition of each APM presented in this report, together with a reconciliation to the
nearest measure prepared in accordance with IFRS is presented below. Adjusted gearing is no longer reported as Management
do not consider it to be a key performance indicator of the Group.
Operating profit and lease adjusted operating margin
Operating profit is the Group operating result before exceptional items.
Lease adjusted operating margin is operating profit adjusted for leases as a percentage of revenue. The lease adjustment
reduces the fleet rental charge to 0.67 of the annual reported charge. This is to reflect the embedded interest expense
component in leases; 0.67 is a commonly used ratio in the airline industry.
€ million
Operating profit before exceptional items
Aircraft operating lease costs
Aircraft operating lease costs multiplied by 0.67
Revenue
2018
3,230
890
(596)
3,524
2017
2016
(restated)1
(restated)1
2,950
888
(595)
3,243
2,444
759
(509)
2,694
24,406
22,880
22,409
Lease adjusted operating margin
14.4%
14.2%
12.0%
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the
restatement is provided in note 33.
Adjusted earnings per share
Earnings are based on results before exceptional items after tax and adjusted for earnings attributable to equity holders and
interest on convertible bonds, divided by the weighted average number of ordinary shares, adjusted for the dilutive impact of
the assumed conversion of the bonds and employee share schemes outstanding.
€ million
Earnings attributable to equity holders of the parent
Exceptional items
Earnings attributable to equity holders of the parent before exceptional items
Interest expense on convertible bonds
Adjusted earnings
2018
2,885
(416)
2,469
18
2,487
2017
2016
(restated)1
(restated)1
1,989
222
2,211
17
2,228
1,889
38
1,927
26
1,953
Weighted average number of shares used for diluted earnings per share
Weighted average number of shares used for basic earnings per share
2,113,081
2,021,622
2,179,353
2,088,489
2,210,990
2,075,568
Adjusted earnings per share (€ cents)
Basic earnings per share before exceptional items (€ cents)
117.7
122.1
102.2
105.9
88.3
92.8
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the
restatement is provided in note 33.
EBITDAR
EBITDAR is calculated as operating profit before exceptional items, depreciation, amortisation and impairment and aircraft
operating lease costs.
€ million
Operating profit before exceptional items
Depreciation, amortisation and impairment
Aircraft operating lease costs
EBITDAR
2018
3,230
1,254
890
5,374
2017
2016
(restated)1
(restated)1
2,950
1,184
888
5,022
2,444
1,287
759
4,490
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the
restatement is provided in note 33.
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ALTERNATIVE PERFORMANCE MEASURES CONTINUED
Return on Invested Capital
Return on Invested Capital (RoIC) is defined as EBITDAR, less adjusted aircraft operating lease costs, fleet depreciation charge
adjusted for inflation, and the depreciation charge for other property, plant and equipment, divided by invested capital. It is
expressed as a percentage.
The lease adjustment reduces aircraft operating lease costs to 0.67 of the annual reported charge. The inflation adjustment is
applied to the fleet depreciation charge and is calculated using a 1.5 per cent inflation rate over the average age of the fleet to
allow for inflation and efficiencies of new fleet.
Invested capital is the fleet net book value at the balance sheet date, excluding progress payments for aircraft not yet delivered
and adjusted for inflation, plus the net book value of the remaining property, plant and equipment plus annual aircraft operating
lease costs multiplied by 8. Intangible assets are excluded from the calculation.
€ million
EBITDAR
Less: Aircraft operating lease costs multiplied by 0.67
Less: Depreciation charge for fleet assets multiplied by inflation adjustment
Less: Depreciation charge for other property, plant and equipment
Invested capital
Fleet book value excluding progress payments
Inflation adjustment2
Net book value of other property, plant and equipment
Aircraft operating lease costs multiplied by 8
Return on Invested Capital
2018
5,374
(596)
(1,205)
(138)
3,435
9,721
1.22
11,902
1,647
7,120
20,669
16.6%
2017
2016
(restated)1
(restated)1
5,022
(595)
(1,133)
(140)
3,154
9,275
1.23
11,374
1,613
7,104
20,091
15.7%
4,490
(509)
(1,231)
(153)
2,597
9,930
1.21
12,048
1,683
6,072
19,803
13.1%
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the
restatement is provided in note 33.
2 Presented to two decimal places and calculated using a 1.5 per cent inflation rate over the weighted average age of the on balance sheet fleet (2018: 13.6
years, 2017: 13.7 years)
Adjusted net debt to EBITDAR
Adjusted net debt is calculated as long-term borrowings, less cash and cash equivalents and other current interest-bearing
deposits, plus annual aircraft operating lease costs multiplied by 8. This is divided by EBITDAR to arrive at adjusted net debt
to EBITDAR.
€ million
Interest-bearing long-term borrowings
Cash and cash equivalents
Other current interest-bearing deposits
Net debt
Aircraft operating lease costs multiplied by 8
Adjusted net debt
EBITDAR
Adjusted net debt to EBITDAR
2018
7,509
(3,837)
(2,437)
1,235
7,120
8,355
2017
2016
(restated)1
(restated)1
7,331
(3,292)
(3,384)
655
7,104
7,759
8,515
(3,337)
(3,091)
2,087
6,072
8,159
5,374
5,022
4,490
1.6
1.5
1.8
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the
restatement is provided in note 33.
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Annual Report and Accounts 2018
Equity free cash flow
Equity free cash flow is EBITDA less cash tax, cash interest paid and received and CAPEX which is cash capital expenditure net
of proceeds from sale of property, plant and equipment and intangible assets. EBITDA is calculated as operating profit before
exceptional items, depreciation, amortisation and impairment.
€ million
Operating profit before exceptional items
Depreciation, amortisation and impairment
EBITDA
Interest paid
Interest received
Tax paid
Acquisition of property plant and equipment and intangible assets
Proceeds from sale of property, plant and equipment and intangible assets
Equity free cash flow
2018
3,230
1,254
4,484
(149)
37
(343)
(2,802)
574
1,801
2017
2016
(restated)1
(restated)1
2,950
1,184
4,134
(122)
29
(237)
(1,490)
306
2,620
2,444
1,287
3,731
(185)
37
(318)
(3,038)
1,737
1,964
1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the
restatement is provided in note 33.
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GLOSSARY
Adjusted aircraft operating leases
Adjusted earnings per share
Adjusted net debt
Available seat kilometres (ASK)
Available tonne kilometres (ATK)
Block hours
Cargo revenue per CTK
Cargo tonne kilometres (CTK)
Dividend cover
EBITDAR
Equity free cash flow
Interest cover
Invested capital
Lease adjusted operating margin
Manpower equivalent
Merger effective date
Net debt
Aircraft operating lease costs multiplied by 0.67
Earnings are based on results before exceptional items, after tax adjusted for earnings
attributable to equity holders and interest on convertible bonds, divided by the
weighted average number of ordinary shares, adjusted for the dilutive impact of the
assumed conversion of the bonds and employee share schemes outstanding
Net debt plus capitalised aircraft operating lease costs
The number of seats available for sale multiplied by the distance flown
The number of tonnes of capacity available for the carriage of load (passenger and
cargo) multiplied by the distance flown
Hours of service for aircraft, measured from the time that the aircraft leaves the gate
at the departure airport to the time that it arrives at the gate at the destination airport
Cargo revenue divided by CTK
The number of tonnes of cargo carried that generate revenue (freight and mail)
multiplied by the distance flown
The number of times profit for the year covers the dividends paid and proposed
Operating profit before depreciation, amortisation and rental charges
EBITDA before exceptional items less cash tax, cash interest paid and received and
cash capital expenditure net of proceeds from sale of property, plant and equipment
and intangible assets
The number of times profit before taxation and net interest expense and interest
income cover the net interest expense and interest income
Fleet net book value at the balance sheet date, excluding progress payments and
adjusted for inflation, plus the net book value of the remaining property, plant and
equipment plus annual aircraft operating lease costs multiplied by 8
Operating result less aircraft operating lease cost plus adjusted aircraft operating
lease costs divided by revenue
Number of employees adjusted for part-time workers, overtime and contractors
January 21, 2011, the date British Airways and Iberia signed a merger agreement to
create International Airlines Group
Current and long-term interest-bearing borrowings less other current interest-bearing
deposits and cash and cash equivalents
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Annual Report and Accounts 2018
Net depreciation rate
Net Promoter Score (NPS)
Operating margin
Overall load factor
Passenger load factor
Punctuality
Regularity
Return on invested capital (RoIC)
Revenue passenger kilometres (RPK)
Gross book value divided by net book value
The Net Promoter Score (NPS) is a metric based on survey responses to the
“likelihood to recommend” question and is calculated by subtracting the percentage
of customers who are ‘Detractors’ (score 0-6, unlikely to recommend) from the
percentage of customers who are ‘Promoters’ (score 9-10, likely to recommend)
Operating profit/(loss) as a percentage of total revenue
RTK expressed as a percentage of ATK
RPK expressed as a percentage of ASK
The industry’s standard, measured as the percentage of flights departing within 15
minutes of schedule
The percentage of flights completed to flights scheduled, excluding flights cancelled
for commercial reasons
EBITDAR less adjusted aircraft operating lease costs, fleet depreciation charge
adjusted for inflation, and the depreciation charge for other property, plant and
equipment, divided by invested capital. It is expressed as a percentage
The number of passengers that generate revenue carried multiplied by the
distance flown
Passenger revenue divided by ASK
Passenger unit revenue per ASK
(PASK)
Passenger revenue per RPK (yield)
Revenue tonne kilometres (RTK)
Sector
Sold cargo tonnes
Total capital
Total Group revenue per ASK (RASK) Total group revenue divided by ASK
Total operating expenditure excluding
fuel per ASK
Total operating expenditure
per ASK (CASK)
Total traffic revenue per ATK
Total operating expenditure divided by ASK
Passenger revenue divided by RPK
The revenue load in tonnes multiplied by the distance flown
A one-way revenue flight
The number of cargo tonnes sold, including freight, courier, mail and interline
Total equity plus net debt
Revenue from total traffic (passenger and cargo) divided by ATK
Total operating expenditure excluding fuel divided by ASK
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OPERATING AND FINANCIAL STATISTICS
Total Group operations
Traffic and capacity
Available seat km (ASK)
Revenue passenger km (RPK)
Cargo tonne km (CTK)
Passengers carried
Sold cargo tonnes
Sectors
Block hours
Operations
Average manpower equivalent
Aircraft in service at year end
Aircraft utilisation – Longhaul
(average hours per aircraft per day)
Aircraft utilisation – Shorthaul
(average hours per aircraft per day)
Punctuality – within 15 minutes
Regularity
Financial
Passenger unit revenue per ASK
(PASK)
Passenger revenue per RPK
Cargo revenue per CTK
Total revenue per ASK (RASK)
Average fuel price
Fuel cost per ASK
Operating profit before depreciation,
amortisation and rentals (EBITDAR)
Total operating expenditure
excluding fuel per ASK
(CASK ex. fuel)
Operating margin
Lease adjusted operating margin
Total operating expenditure per ASK
(CASK)
Dividend cover
Interest cover
Net debt
Equity
Adjusted net debt to EBITDAR
Exchange rates
Translation – weighted average
Transaction
Transaction
Transaction
2018
20171
2016
20152
2014
million
million
million
‘000
‘000
272,702
306,185
221,996
252,819
5,293
5,762
88,333
104,829
661
701
660,438
717,325
hours 2,207,374 2,100,089 2,067,980 1,867,905
324,808
270,657
5,713
112,920
702
754,700
298,431
243,474
5,454
100,675
680
708,615
251,931
202,562
5,453
77,334
677
599,624
1,712,506
hours
hours
%
%
€cents
€cents
€cents
€cents
($cents/metric tonne)
€cents
64,734
573
63,422
546
63,387
548
60,862
529
59,484
459
13.5
9.0
75.5
98.7
6.63
7.96
20.53
7.51
687
1.63
13.5
8.9
81.8
99.1
6.63
8.02
19.65
7.47
519
1.51
13.5
8.8
77.2
99.3
6.68
8.18
18.74
7.56
425
1.63
13.5
9.1
80.2
99.4
7.46
9.16
20.67
8.38
908
2.23
13.5
8.8
80.9
99.5
7.08
8.80
18.19
8.01
990
2.38
€million
5,374
5,022
4,581
4,301
3,137
€cents
%
%
€cents
times
times
€million
€million
times
£:€
£:€
€:$
£:$
4.89
13.2
14.4
6.52
4.0
17.0
1,235
6,720
1.6
1.13
1.13
1.18
1.33
5.00
12.9
14.2
6.51
4.0
16.4
655
6,933
1.5
1.14
1.14
1.14
1.29
5.08
10.91
12.01
6.71
4.0
10.8
2,087
7,741
1.8
1.21
1.21
1.11
1.34
5.30
10.2
11.2
7.53
3.8
8.2
2,774
7,328
1.9
1.39
1.40
1.11
1.55
5.08
6.9
7.8
7.45
n/a
6.4
1,673
3,793
1.9
1.25
1.25
1.34
1.67
1 Figures restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments.
2 Aer Lingus Group plc results have been consolidated from the 18th of August 2015.
n/a: not available
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SHAREHOLDER INFORMATION
Registered office
International Consolidated Airlines Group, S.A
El Caserío, Iberia Zona Industrial nº 2 (La Muñoza)
Camino de La Muñoza, s/n, 28042 Madrid, Spain.
Madrid Commercial Registrar
tomo 27312, folio 11, hoja M-492129
C.I.F. A85845535
UK Branch registered address
International Airlines Group
Waterside (HAA2),
PO Box 365, Speedbird way
Harmondsworth, UB7 0GB
Registered in England & Wales: BR014868
Registrar
Computershare Investor Services PLC
For enquiries relating to shares held through the
Corporate Sponsored Nominee (UK share register):
Tel: +44 370 702 0110
Email: web.queries@computershare.co.uk
Online: www.investorcentre.co.uk/iag
IAG Investor relations team
UK: +44 20 8564 2900; or
Spain: +34 91 312 6440
Institutional investors: investor.relations@iairgroup.com
Private shareholders: shareholder.services@iairgroup.com
American Depositary Receipt program
IAG has a Sponsored Level 1 American Depositary Receipt
(ADR) facility that trades on the OTC market in the US
(see www.otcmarkets.com). Deutsche Bank is the ADR
depositary bank.
For shareholder enquiries, contact:
Deutsche Bank Trust Company Americas c/o American
Stock Transfer & Trust Company Peck Slip Station P.O. Box
2050 New York, NY 10272-2050, USA
Email: DB@amstock.com
Toll free: +1 800 301 3517
International: +1 718 921 8137
Online: www.adr.db.com
Financial calendar
Financial year end: December 31, 2018
Q1 results: May 10, 2019
Half year results: August 2, 2019
Q3 results: October 31, 2019
Other key dates can be found on our website:
www.iairgroup.com
ShareGift
UK shareholders with a small number of shares may like to
consider donating their shares to charity under ShareGift,
administered by Orr Mackintosh Foundation. Details are
available from the UK Registrar.
Certain statements included in this report are forward-looking and involve risks and uncertainties that could cause
actual results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking
statements can typically be identified by the use of forward-looking terminology, such as “expects”, “may”, “will”, “could”,
“should”, “intends”, “plans”, “predicts”, “envisages” or “anticipates” and include, without limitation, any projections relating to
results of operations and financial conditions of International Consolidated Airlines Group S.A. and its subsidiary undertakings
from time to time (the ‘Group’), as well as plans and objectives for future operations, expected future revenues, financing
plans, expected expenditures and divestments relating to the Group and discussions of the Group’s Business plan. All
forward-looking statements in this report are based upon information known to the Group on the date of this report. The
Group undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise. It is not reasonably possible to itemise all of the many factors and specific events
that could cause the forward-looking statements in this report to be incorrect or that could otherwise have a material
adverse effect on the future operations or results of an airline operating in the global economy. Further information on
the primary risks of the business and the risk management process of the Group is set out in the risk management and
risk factors section of the report.
INTERNATIONAL
AIRLINES
GROUP
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Visit us online at
iairgroup.com