INTERNATIONAL AIRLINES GROUP ANNUAL REPORT AND ACCOUNTS 2022 Connected by our purpose Contents Strategic Report Corporate governance Performance highlights 118 Chairman’s introduction to corporate 1 2 6 8 Connected by our purpose Chairman’s letter Chief Executive Officer’s review 12 Management Committee 14 Our business at a glance 16 Our business model 17 Our strategic priorities 21 24 32 34 Key performance indicators Stakeholder engagement Financial overview Financial review 46 Regulatory environment 48 British Airways 50 Iberia 52 Vueling 54 Aer Lingus 56 58 60 61 62 63 IAG Loyalty IAG Cargo LEVEL IAG GBS IAG Tech Sustainability governance 120 Our Board of Directors 124 Corporate governance 140 Report of the Nominations Committee 144 Report of the Safety, Environment and Corporate Responsibility Committee 147 Report of the Audit and Compliance Committee 158 Report of the Remuneration Committee Financial Statements Management Report 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 Group, 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 of the following sections: 186 Consolidated income statement 14 Our business at a glance 187 Consolidated statement of other 16 Our business model comprehensive income 188 Consolidated balance sheet 189 Consolidated cash flow statement 190 Consolidated statement of changes in equity 192 Notes to the consolidated financial statements 259 Alternative performance measures 265 Group investments 17 21 32 34 46 63 96 Our strategic priorities Key performance indicators Financial overview Financial review Regulatory environment Sustainability Risk management and principal risk factors 96 Risk management and principal risk factors Statement of Directors’ responsibilities Independent Auditors’ Report How to navigate this report: Page symbol for links to pages or sections within this report Additional Information 280 Glossary 282 Fleet table 283 Operating and financial statistics 284 Shareholder information The Annual Corporate Governance Report is part of this Management Report but has been presented separately. This report has been filed 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. Performance highlights We are connected by our purpose. Our diversity inspires our resilience and innovation as we return to profit for the first time since aviation’s biggest crisis ever. Financial highlights Capacity (ASKs % of 2019) Operating profit €1,256 million +€4,021 million vly 78.0% 33.5% 36.1% 2020 2021 2022 Operating profit before exceptional items Net debt €1,225 million +€4,195 million vly €10,385 million -€1,282 million vly Total liquidity €13,999 million +€2,013 million vly Non-financial highlights NPS 18.4 -13.8 vly Sustainable Aviation Fuel (SAF) use (tonnes CO2 saved) 2022 30,332 tonnes Emissions intensity 83.5 gCO2/pkm -11.7% vly Females in senior management 34% +1 pt vly Net debt, Total liquidity and Females in senior management are calculated as at December 31; all other measures are for the full year. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 1 Connected by our purpose Our role in the world is to connect people, businesses and countries. We serve customers in many different markets and regions around the world. We celebrate the differences that make us who we are, and our diversity inspires us to innovate. Our goal is to perform in the long-term interests of our people, customers, shareholders and society – knowing that success in each reinforces the others. We are inspired by the good we can do in the world, boosting economies, supporting jobs and our supply chain. And we create social value too. Travel is a window into other cultures; it helps us understand other mindsets, other ways of life, other beliefs. Our approach is underpinned by our ambition to develop a sustainable business – we were the first airline group worldwide to commit to net zero emissions by 2050, and we are committed to using 10 per cent Sustainable Aviation Fuel by 2030. We are IAG. We are connected by our purpose. 2 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report “We always look forward to welcoming our customers and reconnecting them with family and friends.” Namsook Kirwan – Aer Lingus Check-in Agent Bringing happiness to who need it most Dozens of volunteers from across British Airways came together to help send almost 200 seriously ill children on the holiday of a lifetime, working with Dreamflight, a UK-based charity founded by a former British Airways cabin crew member. Investing in the next generation IAG Tech developed 30 young people through our graduate and apprentice programmes this year, shaping the next generation of technology experts and proudly winning the award for Best Graduate Employer at the Women in Tech Employer Awards 2022. Helping to fulfil dreams Twenty years ago, Santiago landed in Madrid from Quito, Ecuador, on an Iberia flight. He travelled with his mother when he was seven years old. Santiago always wanted to work in the aviation industry. Last year he joined Iberia as an aeronautical engineer and, as a thank you to his mother on Mother's Day, the Iberia team showed her the airline’s engineering facilities at Madrid’s airport. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 3 CONNECTED BY OUR PURPOSE CONTINUED “I’m proud to be part of a team ensuring our aircraft are ready to fly for our customers.” Tsungi Maruta – British Airways Certified B Licensed Technician Recovering routes Rebuilding its North American network was a critical milestone in Aer Lingus’ recovery. Restarting popular routes such as Los Angeles, Miami and Seattle, and announcing a new route to Cleveland, Ohio, brought a great sense of excitement to the airline’s employees. Innovating to offset emissions As part of the innovation platform Hangar 51, Iberia partnered with CHOOOSE, to test and launch a new platform that will allow customers to receive information about their business travel emissions and offset them. British Airways is offering customers the chance to compensate their flight emissions by purchasing certified carbon removal credits through the platform CO2llaborate created in partnership with CHOOOSE. 4 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Helping Ukraine Iberia has brought nearly 300 Ukrainian refugees to Spain since the conflict began. The airline operated six charter flights in partnership with NGOs and has carried over 100 tonnes of humanitarian aid for the Red Cross and SEPLA Ayuda. This was an unforgettable experience for everyone in the Iberia team. Strategic Report “I’m excited to be part of the team that achieved a flight with 72% reduced CO2 emissions thanks to a straighter trajectory and the use of SAF”. Jorge Franco – Vueling Air Traffic Operations Manager The Wine Flyer IAG Loyalty launched a completely new wine business venture in just five months including technology platforms, customer services, warehouse and logistics. This new way to reward our customers has been possible using agile working methods and modern delivery approaches. Collaborating with charity Working with several charity partners such as UNICEF, Red Cross and Project Hope, IAG Cargo donated the capacity to transport 159 tonnes of emergency aid for the relief efforts in Ukraine and Pakistan. Iberia’s new uniforms June 1, 2022 was a very special day for Iberia. Iberia launched its new uniforms, a new in-flight service, new routes to Washington and Dallas, restarted flights to San Francisco, and operated all these flights with a blend of SAF. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 5 CHAIRMAN’S LETTER Rebuilding with purpose Javier Ferrán Chairman “The pandemic has taught us that society depends on air travel. It is a vital creator of wealth, jobs and economic growth.” 6 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 The last three years have been a reminder that aviation and its ability to bring people together, from far across the world, is a cause for celebration. Whether through reuniting family members or exploring new countries, enjoying a well-deserved holiday or by connecting businesses and fostering economic growth, we contribute to making people’s lives richer and more joyful. The COVID-19 pandemic has taught us that society depends on air travel. It is a vital creator of wealth, jobs and economic growth. I am pleased to report that IAG has continued to restore capacity to do more of what we are designed to do – to fly and to connect people, businesses and countries around the world. In the second half of the year, pent-up demand drew more people back to the skies which ensured we returned to profitability in 2022 for the first time in three years. Strategic Report We have been working hard to emerge stronger, transforming our business to make it more efficient and sharing best practices so that we are well prepared to face these challenges. Just as we always have, we help fund, support and scale innovations in travel and aviation. We are always listening to and engaging with our stakeholders which include our customers and our people. Our relationships with them, as well as the partnerships we have with governments, start-ups, suppliers, manufacturers and others in the industry ecosystem will be the key to our future success. More than any other industry we will always have to adapt and evolve at pace. As we set out in these pages, we have shown it is possible to do so profitably and sustainably, with the interests of all our stakeholders in mind. Despite the obstacles we’ve faced in the last year, these results give us reasons to feel positive, and we have every confidence that we will only get stronger. Javier Ferrán Chairman On behalf of the Board, I would like to thank all our people for the extraordinary contribution they have made to achieving this result; for their personal sacrifices and resilience and everything that they have done to strengthen IAG over the past year. I would like to thank our shareholders and finance providers too for their support as we continue to rebuild financially with a focus on delivering stronger returns in the future. Aviation is a force for good We believe that our impact on society must go beyond our economic contribution. The success of our Group depends on us playing our role in tackling broader global issues such as climate change, and fostering a diverse and inclusive workplace. On the latter issue, we are pleased that 45 per cent of our Board members are female. But we know there is more to be done to further embed diversity throughout our Group. Last year, we set a new target of having at least 40 per cent of senior leadership roles held by women by 2025, and we are on track to deliver this. Sustainability and contributing to society remained a core focus for IAG in 2022. For our customers, their choice should not be whether to fly or not, but about choosing the most sustainable way of doing so. That is why we have continued to invest in decarbonising, despite the challenges of recent years. As we rebuilt our business in 2022, we did so with the future in mind. We are among the leaders in this industry’s efforts to transition to a low-carbon future and will continue playing our part in tackling climate change. Over the course of 2022, we signed agreements with Airbus and Boeing to acquire 87 new aircraft which will reduce our emissions by up to 20 per cent and we thank our shareholders for their approval. We have also increased our investment in Sustainable Aviation Fuels (SAF) to power our fleet in a way that will reduce its impact on the environment. This is part of our commitment to meet at least 10 per cent of our fuel needs with SAF by 2030. We estimate that this will cut at least two million tonnes of CO2 in 2030 – the equivalent to taking one million petrol or diesel cars off the road, per year. Challenges and transformation In the last few years, we’ve become accustomed to managing unexpected events and the last twelve months have brought new ones both politically and economically. Against a difficult macroeconomic backdrop, we’ve also faced our own difficulties in the form of technology performance, balancing our resources and industrial action. Teams across the Group have shown dedication and commitment in working to resolve these issues and there are learnings they’ve been able to draw on to inform future business resilience plans. Looking to the longer term, we are investing in new technologies that have the potential to radically transform the way we fly in the future – such as hydrogen power and electric aircraft. While a long journey remains for these innovative technologies, we will stay focused on our sustainability agenda. The outlook There are uncertainties in the global economic outlook. Around the world, sharp increases in commodity and energy prices have impacted on household budgets as well as created headwinds for all industries. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 7 CHIEF EXECUTIVE OFFICER’S REVIEW Emerging stronger Luis Gallego Chief Executive Officer “This year we returned to profitability with the ability to be even better- placed to deliver on our purpose.” In 2022, we worked hard to transform our business, ensuring we are emerging stronger from the biggest crisis in modern aviation’s history. I am pleased that the actions we took to strengthen our foundations have stood us in good stead. This year we returned to profitability with the ability to be even better-placed to deliver on our purpose, and much of that is as a result of the resilience and commitment shown by our people. So I’d like to start by thanking all our employees for helping us reach this incredible milestone in our recovery. Fulfilling our purpose What we do matters. Our purpose is to connect people, businesses and countries, maximising sustainable value creation for our shareholders and all our stakeholders. 8 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Accelerating the transition to a net zero carbon economy will require us to invest more in new technologies. We are already one of the largest buyers of SAF in the world which will enable us to cut our emissions in the short-term. We would like to go further, but we are constrained by the lack of supply. As we continue to rebuild capacity, we do so with a focus on ensuring our customers enjoy the best possible experience when flying with us. In 2022, we continued to invest in new aircraft that will enhance our services. We have also launched and extended partnerships, opening up new routes and destinations for our passengers. And we are already delivering on our plans. We achieved a strong performance, returning to profitability from the second quarter of 2022. At a Group level, we reported an operating profit of €1,225 million before exceptional items, an improvement on the €2,970 million operating loss recorded in 2021. Revenue for the Group was approaching pre- pandemic levels despite total capacity being at 78 per cent of 2019, which is the reference year as it was before the COVID-19 pandemic. The improved financial position means we were able to generate significant levels of cash, contributing to strong liquidity of €14 billion and the opportunity to reinvest in our business with the addition of 27 new aircraft in 2022. We have also reached an agreement with the trustees of British Airways’ main pension scheme (NAPS); based on the latest funding position no contributions are currently required from the airline. We are in the process of refreshing our premium and economy cabins’ offerings across our airlines while we continue to invest in the digitalisation of our business, for instance, by introducing facial recognition to speed up services. Our financial framework is designed to deliver strong returns for our shareholders. As we look ahead, we will focus on cash generation and growing our earnings in order to return to strong margins while maintaining disciplined investment. We will achieve this by balancing investing in our people, customers’ experience, and reducing our leverage. So far, we have committed to the equivalent of $865 million in future SAF purchases and investments based on assumed energy prices, including funding five projects in the UK and US. Doing so will not only enhance the industry’s emissions reductions, it will create sustainable jobs and wealth. SAF, low-carbon technologies including hydrogen-powered aircraft and carbon removal are areas in which we can make progress by working together with governments, manufacturers and fuel suppliers. With the right policy support from the EU and UK governments, 30 SAF plants could be built across Europe over the next eight years, saving seven million tonnes of CO2 annually by 2030 and creating thousands of jobs. This is our opportunity. Flying has been an immense force for good in the world and has opened up global travel like no other force in history. Now, the UK and EU have an opportunity to be true leaders on the SAF agenda. Our approach Our business is based on three pillars: our people, our customers and financial performance, underpinned by sustainability. Only by focusing on all three will we succeed in creating a truly sustainable business for all our stakeholders. Our people play a central role in everything we do. That is why we place such a priority on maintaining a diverse and inclusive place to work; one where our employees feel valued, and their contribution is fairly recognised and rewarded. We are cultivating a culture that allows every individual to grow and give the best of themselves. And we are making progress. We ended the year at 34 per cent of women in senior leadership roles, up from 33 per cent in 2021, thanks to a Group-wide effort. During an Extraordinary Shareholders’ Meeting held in October, IAG’s shareholders approved the purchase of 50 Boeing 737 aircraft and 37 Airbus A320neo family aircraft. These latest-generation aircraft are more fuel-efficient than those they will replace and are in line with IAG’s commitment to achieving net zero carbon emissions by 2050. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 9 CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED At an individual airline level, Spanish capacity has been almost completely restored. Vueling reached 98 per cent of its 2019 capacity and Iberia 87 per cent. British Airways focused on restoring capacity throughout the year but faced challenges with multiple disruptions to the operation. Even though Aer Lingus had to face the late lifting of the travel restrictions in Ireland, its capacity was almost fully restored to 2019 levels in the last quarter of the year. All airlines returned to profitability in 2022. Headwinds Scaling up the operation rapidly to meet high levels of pent-up demand was a challenge for the entire industry ecosystem. As a consequence, our customers faced disruption in some of our hubs. However, stability is gradually returning to the sector which should enable a better and more consistent customer experience in 2023. We also faced headwinds in relation to rising fuel costs, the impact of the war in Ukraine, inflation and a rise in the cost of living. More recently, we’ve been responding to the news that China would be reopening its borders. We are also cognisant that any new COVID-19 variants of concern could create significant aftershocks, but we can say with confidence that our experience in dealing with the pandemic, including working closely with regulators and governments around the world, has allowed us to lay the solid foundations needed to react and adapt to any new changes to global travel. Emerging stronger As we build back from the pandemic, we remain in a strong position to deliver on our strategy. The reason is simple: we have a proven business model and investment case. Our unique structure enables us to capture revenue and cost synergies while maximising efficiencies and allocating our capital in a disciplined way. The acquisition of Air Europa, which is agreed subject to regulatory and other approvals which could take around 18 months, will allow us to generate additional value for the Group, while helping Madrid expand as a hub. This acquisition will expand IAG’s “We have a portfolio of leading brands, catering to distinct customers and geographies – and most importantly we have talent.” portfolio of leading airlines, each of which cater to distinct customers and geographies and are accountable for delivering to their stakeholders – and will further add to the talent within our workforce. People choose to work for IAG because of its reputation as a leader and innovator, and that allows us to attract and retain the very best people to our business. Our airlines are leaders in key European hubs, offering connectivity to hundreds of destinations around the world. We can leverage the successful consolidation track record of our global leadership positions in Europe, the North Atlantic and Latin America to take advantage of market opportunities. Transformation is an imperative and we are looking at ways to do things differently. No stone will be left unturned. In particular, we keep our technology, digital estate and capabilities under constant review. Innovation is critical to drive efficiency as demand recovers and competition intensifies coming out of the crisis. This is underpinned by our ambition to develop a truly sustainable business. In 2022, we have continued to innovate and transform our business to take IAG to its full potential by sharing best practices and making decisions in the best interests of the Group. British Airways’ and Vueling’s new operation at Gatwick was launched in 2021 and has proved a success. Aer Lingus’ transatlantic flights from Manchester, which started in late 2021, have also been well received. Vueling’s services at Orly airport in Paris continue to go from strength to strength, while our new maintenance model at Barcelona is providing efficiencies. In adjacent businesses too we have taken the opportunity to rebuild for the benefit of customers. At IAG Loyalty, new customers enrolments were 25 per cent higher in 2022 compared with 2019. A record number of people are collecting Avios – our reward currency – and we continue to expand our partnerships to give customers more of what they want. In 2022, we reached an agreement with Qatar Airways enabling its customers to earn Avios, thereby extending the global reach of Avios as a reward currency. It has been a strong year for IAG Cargo too. Revenues reached €1.6 billion, similar to those of 2021 and 45 per cent higher than in 2019. We know that there are uncertainties and, as we rebuild from the pandemic, other macroeconomic challenges remain. That is why we will continue to transform the Group to become more efficient. Outlook and conclusion As we build back our operational resilience, we are confident in our strengths as a Group: first, a portfolio of leading airline brands; second, leading positions in our key markets and hubs serving distinct customers; and third, the flexibility afforded by IAG to drive operational efficiency and innovation. These will enable us to return to pre- pandemic levels of profit and fulfil the ambitions of our strategy: to create long-term sustainable value for our stakeholders. I want to thank our people for all their hard work and achievements in 2022 and look forward to all we can achieve together in 2023. Luis Gallego Chief Executive Officer 10 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report A revolution in the air In 2022, IAG hosted its first ESG day for investors and analysts in London. Guided by a clear flightpath to net zero 2022 emissions (tonnes CO2e) Scope 2 12,000 0.05% Scope 3 5,481,000 20.57% Total 26,648,000 100% Scope 1 21,155,000 79.38% Scope 1 Scope 2 Scope 3 IAG roadmap to net zero (Scope 1) We remain on track for our 2025 and 2030 emissions targets Million tonnes CO2 (MT) 31 27 8 2015 2020 2025 2030 2035 2040 2045 2050 Demand growth Gross emissions Net emissions New aircraft and operations SAF Carbon removals ETS/CORSIA and offsets 2019 baseline emissions IAG net zero target Focused on growing a diverse and inclusive workforce IAG has a target of 40 per cent women in senior executive positions by 2025, and we end the year at 34 per cent thanks to the efforts of Group airlines implementing a range of initiatives to support diversity and inclusion. These include: • Reviewing our recruitment processes to ensure diverse shortlists and interview panels; • Mentoring and networking opportunities for women and ethnic minority employees; and • Educational programmes to diversify the talent pool of those considering careers in aviation. This in-person and online event provided a comprehensive overview of the Group’s sustainability, diversity and inclusion strategies. This included initiatives on Sustainable Aviation Fuels and new technologies that are helping to decarbonise aviation. The event showcased expert panels and video presentations to explain the Group’s targets and goals, and the progress it is making towards these. IAG demonstrated how it continues to use its scale, influence and track record to not only transform its business but drive the system-wide change required to develop a truly sustainable aviation industry. Highlights: • First airline group to commit to net zero emissions by 2050, and to then extend this commitment to Scope 3 emissions • First European airline group to commit to 10 per cent SAF by 2030 • Three years of Leadership grades (A/A-) in CDP climate rankings and the joint highest-ranked airline group in TPI ratings. Focused on leading the industry towards net zero emissions by 2050 Aircraft modernisation: Replacing around 192 aircraft in the next five years with new aircraft that are up to 20 per cent more fuel efficient. Investment in innovators such as ZeroAvia to accelerate development of hydrogen-powered aircraft. Sustainable Aviation Fuel: 10 per cent SAF by 2030 will save as much carbon as taking one million cars off the road a year. IAG’s SAF commitment, based on assumed energy prices, is equivalent to $865 million in future SAF purchasing and investments. Offsetting: Support for strengthening the global CORSIA scheme to reduce net emissions. Contributions to our independently verified offsetting providers saw a reduction of over 225,000 tonnes of CO2 in 2022. Carbon removal: Publishing our first removals roadmap, building industry support, and research and investment in innovative carbon capture and removal opportunities. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 11 MANAGEMENT COMMITTEE Working together to deliver our purpose Javier Sánchez-Prieto Chairman and Chief Executive Officer of Iberia Sarah Clements General Counsel John Gibbs Chief Information Officer Lynne Embleton Chairman and Chief Executive Officer of Aer Lingus Nicholas Cadbury Chief Financial Officer and Interim Non-Executive Chairman of Cargo Luis Gallego Group Chief Executive Officer The IAG Management Committee, led by Luis Gallego, is responsible for the overall execution and delivery of the strategy of the Group. For further information visit the IAG website 12 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Fernando Candela Chief Transformation Officer and Chief Executive Officer of LEVEL Adam Daniels Chairman and Chief Executive Officer of IAG Loyalty Sean Doyle Chairman and Chief Executive Officer of British Airways Julio Rodrigues Interim Chief Strategy Officer Marco Sansavini Chairman and Chief Executive Officer of Vueling Carolina Martinoli Chief People, Corporate Affairs and Sustainability Officer INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 13 OUR BUSINESS AT A GLANCE We deliver for our stakeholders and society Who we are We are an international airline group, with leading airlines in Spain, the UK and Ireland, and a series of best-in-class non-airline businesses within our central platform that drive efficiency and create additional sources of revenue for IAG. Our purpose in the world is to connect people, businesses and countries, and we hold innovation, commitment, care for people, responsibility, pragmatism, execution, ambition and resilience as key values that enable us to fulfil our purpose. We have a portfolio of world-class brands and operations Airline operating companies Non-airline businesses and central platform For more information see the operating companies’ sections 14 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Our stakeholders IAG has the aim to be a force for good where we operate and, in doing so, create value for all our stakeholders. This starts with fostering a culture that makes our employees feel valued, focusing on diversity and inclusion and providing our employees with options to develop within the Group. Our employees play a critical role in delivering the service our customers expect, which is in turn the main driver of the Group’s ability to create value for all our stakeholders. Our shareholders, lenders and other financial stakeholders, and the broader capital markets are also essential in supporting us in the delivery of our purpose, business plans and strategy. In addition to our employees, customers, lenders and shareholders, collaboration with the broader industry, including our suppliers and regulators, is key to ensuring that we maintain the high standards our customers expect and that policy makers understand the impact of their decisions on our businesses and customers. Customers Employees For more information see the Stakeholder engagement section Suppliers Shareholders, lenders and other financial stakeholders Governments and regulators Where we operate ASKs (% of IAG 2022 network) North America 31.6 Domestic & Europe 36.6 Latin America & Caribbean 19.0 Africa, Middle East & South Asia 11.6 Asia Pacific 1.2 Total fleet 558 Total employees 66,044 We are committed to sustainable aviation Our commitment to sustainability underpins our strategy – it is an important part of how we do business. We remain committed to using 10 per cent SAF by 2030 and to reach the goal of net zero CO2 emissions for our Group and its supply chain by 2050. As a Group, we have clear processes in place to drive decision-making on the most important elements driving our sustainability strategy: use of SAF and fleet modernisation and efficiency. We will also continue to prioritise other key sustainability issues including waste management, stakeholder engagement and employee engagement and welfare. For more information see the Sustainability section INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 15 OUR BUSINESS MODEL Our purpose is fulfilled with a unique model We were formed with a model based around consolidation, synergy capture, leadership in our core markets and financial performance. Our operating model IAG creates value through a unique model that enables our airlines to perform in the long-term interests of our customers, people, shareholders and society – knowing that success in each reinforces the others. Operating companies’ execution and accountability Principles Light structure at the centre for central functions and intra-Group coordination Corporate parent Central execution only where it provides additional value Sets long-term strategy for the Group Defines portfolio, M&A and partnerships Sets targets, coordinates transformation plans across IAG and oversees performance Allocates capital and secures funding Drives ESG agenda for the Group Manages investor relations Facilitates best practice sharing Defines, drives and monitors response to external shocks Airline operating companies Define and execute commercial strategy, network strategy and planning Ensure operational efficiency Define product strategy for target customer segments Deep understanding of customer and competitive environment Standalone profit centres and independent credit identities Individual brands, cultural identities and management teams Central platform Provides common services and allow the Group’s operations to benefit from scale and world-class expertise For more information see the operating companies’ pages The Group has a unique business model within the airline industry, based on a light structure at the centre, agile, empowered and focused airline operating companies accountable for their results, and a central platform providing a competitive advantage to our airlines through scale and world-class expertise. IAG, as the parent company, actively engages and works collaboratively with its portfolio of operating companies, sharing best practices and talent, overseeing intra-Group coordination and managing central functions that drive synergies and value to the Group. Its independence from the operating companies enables IAG to implement a long-term strategy for the Group that is aligned with our purpose and values, as well as set performance targets for the operating companies, track their progress and efficiently allocate capital within the Group. Our model also allows the Group to more effectively take part in industry consolidation, with IAG ensuring inorganic options are aligned with our strategy and providing a central platform to the benefit of new operating companies joining the Group. The operating companies, with their different brand identities and customised business models, are in turn empowered to execute their strategies and are fully accountable for their financial results. The Group’s structure allows our brands to focus their efforts on their addressable markets, customer proposition, cultural identities, commercial strategy and their industrial relations, while its scale supports innovation and investment in new products and services to enhance our operating companies' customer experience. The airline portfolio sits on the Group’s central platform, which drives efficiency and simplicity across the operating companies whilst creating additional sources of revenues for IAG. The IAG central platform allows the Group to be at the forefront of innovation and sustainability in the airline industry, supporting and scaling top emerging technologies in travel and aviation. 16 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Our strategic priorities to create sustainable value Our strategic priorities o w w e create v a l u H e Unrivalled customer proposition 1 Strengthening a portfolio of world-class brands and operations 2 Growing global leadership positions 3 Enhancing IAG’s central platform O ur strategic p r i o r iti e s Value- accretive and sustainable growth Efficiency and innovation Underpinned by sus t a i n a b i y t i l Tracking our performance We use a combination of financial and non-financial metrics to measure the performance and progress of our strategy: Financial KPIs: see the Key performance indicators section Employees: see the Sustainability section Customer NPS: see the Key performance indicators section Environment: see the Sustainability section How we create value Unrivalled customer proposition • Ensure our operating companies collectively deliver an unrivalled proposition able to fulfil customers’ needs across the full spectrum of travel occasions • Lead industry consolidation and develop organic options to differentiate the Group from its competitors and ensure customer demands are met • Deepen customer-centricity to win a disproportionate share in each customer segment Value-accretive and sustainable growth • Pursue value-accretive organic and inorganic growth to reinforce existing or pursue new leadership positions in our priority markets • Attract and develop the best people in the industry • Set the industry standard for environmental and societal stewardship, whilst always prioritising the safety and security of our customers and employees 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 • Promote a culture of high operational efficiency throughout our portfolio of operating companies, and leverage the platform to drive synergies and reduce costs INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 17 OUR STRATEGIC PRIORITIES Strengthening a portfolio of world-class brands and operations Strategic priority 1. Strengthening a portfolio of world-class brands and operations How we create value Unrivalled customer proposition Our performance Our activity in 2022 Following the reopening of many international markets during the second half of 2021, 2022 has been characterised by strong economic volatility, with high inflation levels across western nations fuelled by the war in Ukraine and supply chain disruptions after the pandemic. The Group’s portfolio of brands has continued to support local communities in 2022, with British Airways, Iberia, Vueling and IAG Cargo partnering with Project Hope and other charities to send 125 tonnes of humanitarian aid to Ukraine. IAG Cargo, alongside its sister company British Airways, also offered the free transportation of 34 tonnes of vital emergency aid to Pakistan, in the wake of a devastating flood crisis. Over 2022, air travel has seen a rapid recovery from 2021 levels, which together with supply chain and resource limitations has led to operational issues across many airlines and airports around the world, leading to frequent passenger disruption. Within our airline portfolio, Iberia and Vueling were able to successfully manage recovery, with operational performance returning to close to 2019 levels by the end of the year. British Airways had exposure to some operational challenges during the first half of 2022, due to staff shortages, COVID-19 check requirements and terminal capacity limitations at London Heathrow linked, among other reasons, to an airport- imposed daily passenger cap during the summer. However, progress has been made throughout the year on building operational resilience at British Airways, with accelerated recruitment and a more agile and coordinated approach to capacity planning in collaboration with London Heathrow airport, leading to an improved punctuality. Our other operating companies have also improved their disruption management processes. Iberia, for example, continued to improve its digital capabilities for passengers that have been disrupted by cancellations or delays. Digitalisation plays a key role in how our airlines have improved customer experience in 2022. During the year, Vueling launched facial recognition at self-bag drop and for security access and aircraft boarding, and tested self-service kiosks at London Gatwick airport. Iberia partnered with Trip.com group to implement a shopping engine solution for the New Distribution Capability air ticket sales channel, offering travellers additional fare and ancillary options on Iberia’s long and shorthaul flights. Our brands also continued to improve the customer experience by enhancing our product across all stages of the journey. For example, Iberia enhanced its North and South American lounges while extending the opening times in its North American ones; Aer Lingus introduced the Airbus A320neo into its fleet, providing passengers with an enhanced seat product on shorthaul, whilst British Airways continued to roll-out its Club Suite product into its longhaul fleet and restored the ‘Full Club Suite’ meal service. Catering has also been improved, with Aer Lingus refreshing its longhaul business cabin food offering and British Airways refreshing its catering in all longhaul cabins and Club Europe on shorthaul flights. Additionally, British Airways and Iberia co-located all flights at New York, JFK with American Airlines at Terminal 8 from December, which will considerably enhance the journey for passengers transferring to an American Airlines flight. IAG Loyalty continued to enhance its offering to customers during 2022, for instance, relaunching the British Airways prepaid Mastercard and launching an Avios purchase subscription model in British Airways and a co-branded credit card with Barclays. Our priorities for 2023 The Group will ensure our businesses can deliver an unrivalled customer proposition that adapts to meet changing customer expectations in the context of air travel recovery after the COVID-19 pandemic. IAG will remain competitive in its priority customer demand spaces by continuing to evolve the operating companies’ products and services to best deliver against the needs of their customers. As an example, Iberia expects to start introducing new business cabin suites with sliding doors on its Airbus A350 fleet from December 2023. We will also focus on further improving operational resilience at British Airways and a strong emphasis will continue to be placed on digitalisation across the Group, including further customer-focused improvements to the digital experience. 18 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Strategic priority 2. Growing global leadership positions How we create value Value-accretive and sustainable growth Our performance Our activity in 2022 In 2022, as airlines across the world rapidly ramped up capacity, the Group put a special emphasis on maintaining our existing leadership positions in our home cities of London, Madrid, Barcelona and Dublin, and our priority markets. We will continue exploring value- creating organic growth and consolidation opportunities where they make sense. With a strong demand recovery during the year, Vueling, Aer Lingus and Iberia managed to restore capacity relatively quickly, reaching higher than or close to 2019 capacity levels in the last quarter of the year, whilst British Airways’ recovery was slightly slower in 2022 as a consequence of operational challenges faced by the airline. Despite ongoing restrictions limiting our recovery in regions like Asia, our operating companies managed to also capitalise on a strong yield environment and drive an even faster revenue recovery. In this context, our airlines have been able to capture new strategic growth opportunities organically. For example, British Airways resumed its operations to key global cities, such as Tokyo and Hong Kong, as travel restrictions lifted or softened, whilst Vueling set up a new base at London Gatwick airport where the low-cost airline’s Spanish network doubled in the summer with five additional routes. British Airways also launched its Gatwick-based, low-cost Euroflyer subsidiary in March, with 35 initial destinations on offer that increased with the relaunch of three winter seasonal destinations. Aer Lingus, in turn, announced the launch of new routes to Cleveland and Hartford in the US for summer 2023. IAG’s operating companies have continued to strengthen their relationships with our partners this year. Aer Lingus progressed with its integration into the Atlantic Joint Business, launching a new codeshare agreement with American Airlines at the beginning of the year to give customers more choice between Europe and North America. The Group also continued to expand its relationship with Qatar Airways, with the expansion of the Joint Business with British Airways creating the world’s largest airline joint business in terms of countries covered. The Joint Business now covers a total of 185 destinations across 60 countries, offering more access for customers between destinations in Europe, Africa, Asia, Oceania and the Middle East, and facilitating seamless connection trips via London and Doha. Additionally, IAG Loyalty and Qatar Airways also launched a partnership early in the year, with the Doha-based airline adopting Avios as its new rewards currency for Privilege Club members, increasing Avios’ global reach, further enhancing customer choice and creating the conditions to expand the airlines’ frequent flyer programmes through additional partnerships. In 2019, the Group announced plans to acquire Air Europa, which is owned by Globalia, subject to regulatory approvals. 2022 saw IAG acquire a 20 per cent equity in the airline, with the ambition to acquire the remaining 80 per cent subject to an agreement with Globalia and regulatory approval from competition authorities. Our priorities for 2023 During 2023, the Group will aim to maintain and bolster its leadership positions in its home cities and priority markets, and to create further value from our partnerships. We aim to continue to build back the frequencies and relaunch routes to destinations we stopped serving during the pandemic, including recovery in our Asian flying. One of our key objectives will be to continue advancing the integration of Aer Lingus into the Atlantic Joint Business and the expansion of our Qatar Airways Joint Business and loyalty partnership. In addition, the Group will continue to leverage its other joint businesses, alliances and partnerships and, where appropriate, form new joint businesses or participate in the industry's consolidation by entering into value- accretive merger and acquisition (M&A) deals. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 19 OUR STRATEGIC PRIORITIES CONTINUED Strategic priority 3. Enhancing IAG’s central platform How we create value Efficiency and innovation Our performance Our activity in 2022 This year has been one of volatility across the global economy. Pandemic-related effects, high inflation, increased staff costs and unfavourable exchange rate evolution against the US dollar have all impacted our businesses, increasing fuel prices and putting pressure on supplier costs. In spite of this, our companies have demonstrated resilience, continuing to advance with their transformation plans to ensure we remain efficient for the future, and leveraging our non-flying segments and businesses to generate additional revenue. IAG Loyalty has continued to show a very strong contribution to the Group. Our loyalty business accelerated its customer engagement, with more newly enrolled customers this year than in 2019 and stronger remuneration from our American Express partnership and British Airways co-brand account acquisitions. Apart from the expansion with Qatar Airways to increase Avios’ global reach, IAG Loyalty continued to expand its partnership portfolio, launching its largest Avios promotion ever in October with the Barclaycard Avios Plus Mastercard offer. Other non-air partnerships launched by IAG Loyalty during the year include the ones with Uber and Reward Gateway. Additionally, IAG Loyalty launched its brand new venture ‘The Wine Flyer', an online wine delivery business that will give customers the possibility to collect Avios on their wine buying. IAG Cargo had another strong year in 2022, experiencing ongoing demand for its services. In spite of passenger travel returning and cargo transport progressively shifting back to scheduled airline flights, the business delivered strong revenues and contribution to the Group throughout the year, with transformation efforts positively impacting the business. Performance was also supported by a strong yield environment in 2022, which is however expected to moderate, along with global air cargo volumes, in 2023. Iberia Maintenance, our third-party Maintenance, Repair and Overhaul (MRO) and engine services division has also contributed additional asset-light revenues to the Group. In October, Iberia Maintenance obtained a licence from Pratt & Whitney to provide engineering and maintenance services for the GTF engines, which power the Airbus A320neo aircraft family. This strategic step allows Iberia Maintenance to consolidate its position as a shorthaul engine service provider, with licences covering the main Airbus and Boeing shorthaul platforms. Additionally, the division won strategic contracts during the year such as with Qatar Airways for its V2500 engines, with Volotea for its C-checks and with Vueling for airframes, engines and parts. Our IAG GBS segment has also been key in managing our more than 13,000 suppliers, ensuring a secure, sustainable and efficient supply chain, and delivering efficiencies across the Group that have been key in mitigating sector-wide inflation. Additionally, the segment has played a key role in supporting IAG in its aspiration to achieve Scope 3 net zero emissions by 2050. IAG Tech, in turn, continued its focus on enhancing new technology capabilities across the Group, including improving disruption and self-service management solutions for customers and increasing efficiency through process automation. Another key focus during 2022 has been to drive innovation across the Group. Following our Hangar 51 accelerator programme, British Airways and Iberia started a collaboration with the start-up CHOOOSE, focused on corporate sustainability insights and helping the airlines to provide customers with options to offset their flight emissions. Another example of innovation was the additional investment the Group made in July in ZeroAvia, a company that works in shorthaul hydrogen-electric options for the industry. This investment followed a previous investment from British Airways. Our priorities for 2023 During 2023, IAG will continue to focus on delivering the transformation plans for its different business segments and accelerate our operating companies’ digital transformation plans, which will ensure the Group remains in an efficient shape for the future. Additionally, the Group will ensure our non-airline businesses continue to capture available opportunities and bring additional sources of revenues and cost synergies and efficiencies to our airlines and the Group. Our central functions will continue to support IAG Loyalty in growing organically and inorganically, including through partnerships or the launch of new potential value-accretive ventures. The Group will also collaborate with Iberia Maintenance to establish itself as a best-in-class shorthaul engine service provider and with IAG Cargo to maintain its strong revenues and high contribution to the Group. Crucially, IAG will continue to invest in our IT infrastructure and cyber security to ensure we reduce commercial and operational risk at our operating companies. 20 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Tracking the Group’s performance We use key performance indicators (KPIs) to assess and to monitor the Group’s performance. We evaluate opportunities based on the strategic objectives of the Group and use the KPIs to identify and generate sustainable value for our shareholders. Our financial metrics are before exceptional items to allow comparability between periods. RoIC (%)1 2 A R 2 14.6 2019 2020 2021 4.5 2022 -16.4-16.4 4.64.6 -22.5 -22.5 Operating margin (%)1 2 12.7 2019 2020 2021 5.3 2022 A 2 -35.1 -35.1 XX.XXX.X -55.8 -55.8 Definition and purpose Return on Invested Capital (RoIC) is defined as EBITDA before exceptional items, less adjusted fleet depreciation, other depreciation and software amortisation, divided by average invested capital. We use 12-month 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 by 20.9 points to 4.5 per cent, returning to positive levels reflecting the Group’s significantly improved operating performance, with EBITDA before exceptional items of €3.3 billion. Invested capital was higher by 2.4 per cent, reflecting aircraft deliveries and investment in customer product and IT. The weighted average age of fleet was higher at 11.3 years versus 10.6 years in 2021, reflecting the net impact of the ageing of the existing fleet, aircraft withdrawn from service and 27 new aircraft delivered in 2022. Definition and purpose Operating margin is the operating result before exceptional items as a percentage of revenue. We use this indicator to measure the efficiency and profitability of our business and the financial performance of the individual operating companies within the Group. Performance The Group’s operating margin before exceptional items was 5.3 per cent driven by the Group’s operating profit before exceptional items of €1.2 billion in the period. Total revenue was up €14.6 billion to €23.1 billion, reflecting passenger capacity at 78.0 per cent of 2019, versus 36.1 per cent the previous year, with stronger yields driven by demand recovery. Cargo revenue was flat versus prior year at €1.6 billion, despite the significant reduction in cargo-only flights with the resumption in the passenger schedule. The Group’s non-passenger businesses, such as IAG Loyalty, Iberia Maintenance, Iberia Handling and British Airways Holidays, all produced positive performances. Key A R Alternative performance measure Measure linked to remuneration of Management Committee 1 2 3 Link to our strategic objectives 1 For further detail refer to the Alternative performance measures section of the financial statements. 2 The 2019 and 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 21 KEY PERFORMANCE INDICATORS CONTINUED Capacity (ASKs millions) 338 78.0% 264 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. 2 33.5% 113 36.1% 122 2019 2020 2021 2022 % of 2019 capacity Performance IAG was able to significantly increase capacity during the year, as COVID-19 restrictions were lifted, with a strong pent-up demand for travel. Overall for the year passenger capacity was at 78.0 per cent of 2019, increasing from 65.1 per cent in quarter 1 to 86.6 per cent in quarter 4. Load factors reached 81.8 per cent, again increasing across the year, from 72.2 per cent in quarter 1 to 83.2 per cent in quarter 4. Shorthaul capacity restoration was ahead of longhaul, with most longhaul regions substantially restored by quarter 4, but with the Asia Pacific region lagging others, due to continued COVID-19 restrictions in certain countries. Gross CAPEX (€m)2 3,465 2 1,939 744 2019 2020 2021 2022 Levered free cash flow (€m)1 A 2 1,496 1,822 1,822 1,667 1,667 2020 2019 2021 2022 -3,047 -3,047 3,875 Definition and purpose Gross capex (capital expenditure) is the total investment in fleet, customer product, IT, ETS allowances and infrastructure (including leased right of use assets) before any proceeds from the sale of property, plant and equipment. We track the planned capital expenditure through our business planning cycle to ensure it is in line with achieving our other financial targets. Performance Gross capex for 2022 was €3.9 billion. Fleet and fleet-related capex represented 81 per cent of the total capital expenditure and included final delivery payments related to 25 aircraft, together with pre-delivery payments and maintenance spend. The higher capex reflects prior-year agreements with Boeing and Airbus to defer deliveries and pre-delivery payments from 2020 and 2021 to 2022. Other spend included customer product, property and IT investments, together with ETS allowances. In addition, the Group took delivery of two aircraft on direct leases, which do not result in capital expenditure. Definition and purpose Levered free cash flow is the cash generated in the year including movements in borrowings and before returns to shareholders. It is used, in conjunction with leverage (measured as net debt to EBITDA before exceptional items), to measure the underlying cash generation of the business. Performance The Group’s levered free cash flow for 2022 was €1.7 billion. The reduction versus the prior year is predominately due to lower borrowings in 2022, with no new non-aircraft debt drawn in 2022, versus €4.4 billion in 2021. Gross capex was also higher, although the impact was offset by strong operating cashflows of €4.8 billion, linked to EBITDA and booking intakes for travel in 2023. 22 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Adjusted EPS (€ cents)1 3 A R 3 76.4 2019 Definition and purpose Adjusted Earnings Per Share (EPS) represents the diluted earnings for the year before exceptional items attributable to ordinary shareholders. Performance Adjusted earnings per share turned positive to 5.6 € cents from an adjusted loss per share of 61.2 € cents in 2021, as the result of earnings after tax before exceptional items improving significantly in line with the restoration of capacity and the Group’s trading performance. The effect of the assumed conversion of the IAG €500 million convertible bond 2022 (up until the repayment date), IAG €825 million convertible bond 2028 and outstanding employee share schemes is dilutive for the year, compared to being antidilutive in the prior year and therefore not included in the diluted earnings per share calculation for 2021. 2020 2021 5.6 2022 -61.2 -61.2 -122.9 -122.9 Net debt to EBITDA before exceptional items1 3 A 3 1.4 2019 2020 2021 -4.3-4.3 3.1 2022 Definition and purpose Net debt to EBITDA before exceptional items (leverage) is calculated as long-term borrowings (both current and non-current), less cash, cash equivalents and other current interest-bearing deposits at December 31, which is divided by EBITDA before exceptional items4 for the year. IAG uses this measure to monitor leverage, to assess financial headroom. Performance The Group’s leverage was 3.1 times compared to a negative leverage of 11.5 times in 2021, driven by EBITDA before exceptional items of €3.3 billion on net debt lower by €1.3 billion. Gross debt rose by €0.4 billion, including an adverse currency impact of €0.5 billion due to the strengthening of the US dollar. During the year, the Group repaid its €500 million convertible bond and €100 million of a debt facility from the Ireland Strategic Investment Fund. -11.5-11.5 XX.XXX.X Net Promoter Score (NPS) 36.7 32.2 R 1 Key A R 25.8 18.4 2019 2020 2021 2022 Alternative performance measure Measure linked to remuneration of Management Committee 1 2 3 Link to our strategic objectives Definition and purpose At IAG a transactional NPS is measured: customers respond about their likelihood of recommending an IAG operating carrier no more than seven days after taking a flight. Including NPS targets in the Group’s employee bonus scheme has driven a stronger focus on improving the customer experience which, together with customer advocacy, drives competitive advantage, leading to faster organic growth. Performance In 2022, IAG’s NPS decreased 13.8 points versus 2021. The quick ramp up of air travel demand, a lack of staff to manage these volumes at airports as well as in some of our airlines, and operational issues negatively impacted our NPS. To mitigate this impact our airlines reduced their schedules to increase stability, undertook a vast recruitment process and re-trained colleagues to support where necessary. Positive impacts to the NPS came from enhancements to the customer proposition, particularly those made to the catering and on-board experience. This led to an increase of the Group NPS during the final quarter of the year. 1 For further detail refer to the Alternative performance measures section of the financial statements. 2 Gross CAPEX is defined as Acquisition of property, plant and equipment and intangible assets. 3 The 2019 and 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes. 4 See Section e of the Alternative performance measures. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 23 STAKEHOLDER ENGAGEMENT Connecting with our stakeholders Our key stakeholders We believe that IAG thrives in the long-term when the interests of different stakeholders are appropriately balanced so that they all share in our success. It is therefore important that we fully understand all stakeholders’ priorities, expectations and concerns. Our long-term commitment to sustainability and corporate social responsibility is embedded in all we do at Group and operating company level, from our interactions with our customers through to employees and shareholders, so we do not identify our communities or the environment as a distinct stakeholder group. Our aim is to be a force for good in the communities in which we operate and, in doing so, create value for all our stakeholders. More detailed information is provided in the operating companies and sustainability sections of this report. An overview of the relevance for IAG’s business model and strategy of these key stakeholders, and the key topics of interest during the reporting period are summarised in the following table. In addition, on the following pages, we include a more detailed analysis of each stakeholder and its relationship with IAG. Customers How we engage • Daily “Voice of Customer” survey to collect feedback on their experience Key topics/interests during 2022 • COVID-19 travel restrictions and requirements • Customer service and personalisation capabilities, • Brand surveys (to understand needs and particularly when there is disruption Employees expectations) • Channels to raise claims and make suggestions • Contact Centre services and digital channels1 • Corporate websites, email and social media accounts • On-board and airport colleagues How we engage • Operating companies’ communication channels adapted to their cultures and profiles (formal and informal channels, including employee forums, internal social networks, local cascade meetings, newsletters, workshops, engagement surveys) • Each operating company engagement surveys, at least annually, across full workforce2 • Employee-led network groups • Collective bargaining arrangements • European Works Council (EWC)3 • Airports’ challenges, including congestion, staff shortages, and baggage issues • Digitalisation of customer journey • Flexibility measures, such as our “Book with Confidence” policy • Expansion of our partnerships • Sustainability Key topics/interests during 2022 • Future plans including modernisation of our fleet • Recruitment, resourcing and capacity • Fair reward, cost-of-living crisis, pay conditions • Terms and conditions including flexible working practices • Safety and well-being, including specific COVID-19 measures (where applicable) • Building the right culture including diversity, equity and inclusion • Training and career development • Corporate purpose and impact on the world • Sustainability 1 In 2022, a key focus has been developing new digital channels and enhancing existing ones, such as meta-chat bots in our websites or WhatsApp 24/7, for customers to raise queries in an accessible and relevant way, which will also help us to ensure that our contact centre agents are focused on the most complex cases. 2 In 2021 IAG undertook an Organisational Health Survey with managers across the Group to benchmark our working practices against world-class companies. In 2022 this survey has been extended to all colleagues with over 22,000 colleagues sharing their views. These surveys have helped management teams to refresh their people strategies and to adapt processes and policies to best support colleagues. 3 The EWC brings together representatives from the different European Economic Area (EEA) countries in which the Group operates. EWC representatives are informed about and, where appropriate, consulted on transnational matters which may impact employees in two or more EEA countries. IAG completed an election and appointment process for the new Select Committee and Chair in early 2022, and the transition was completed in May. 24 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Shareholders, lenders and other financial stakeholders How we engage • Calls and online and in-person meetings • Formal meetings held every year (Annual General Meeting and four quarterly results briefings) • Investor conferences and roadshows • Contacts with equity, credit and ESG research analysts • Regular interactions with credit analysts, global banks, debt investors and credit rating agencies. • Interactions with aircraft operating lessors • Mailbox for institutional and individual shareholders Suppliers How we engage • Customary procurement processes, and pre- established periodic senior business reviews • Industry conferences • Supplier workshops Key topics/interests during 2022 • Progress of demand recovery and plans to restore capacity after removal of Government travel restrictions • Recovery from operational ramp-up challenges • Outlook for unit cost with the recovery of capacity, higher fuel prices and increasing inflation and the ability to pass these on • Negotiations with employee groups concerning pay, cost-of-living, productivity, competitiveness and financial performance • Cash flows, funding sources, financial leverage and liquidity • Known capital spending and debt repayment commitments • Short- and medium-term outlook for operating profitability • Impacts on consumer and business demand of a potential global economic recession, especially in Europe • Environmental, social and governance performance, including climate change initiatives. • M&A and industry consolidation including Air Europa Key topics/interests during 2022 • Global inflationary challenges • Airport capacity and resources • Fair engagement with suppliers • Compliance with regulations • Global supply chain issues • Responsible and robust supply chain • Sustainability, with a focus on delivering upon the Group’s Scope 3 commitments How we engage • Regular one-to-one meetings and interviews • Contacts through our various industry associations Key topics/interests during 2022 • Safety and security, including COVID-19 related measures Governments and regulators (Asociación de Líneas Aéreas (ALA) in Spain, Airlines UK, IATA and A4E) • Participation in the International Civil Aviation Organisation (ICAO) • Impacts of conflict, especially the war in Ukraine • Consumer rights • Sustainability, including climate change • Diversity and inclusion • International relations including air service agreements • Infrastructure regulation including airspace modernisation, airport charges and slot allocation policy INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 25 STAKEHOLDER ENGAGEMENT CONTINUED Customers Rebuild from COVID-19 pandemic IAG’s NPS in 2022 decreased 7.4 pts versus the 2019 reported figure. Following two years of turbulence as a result of the COVID-19 pandemic which severely impacted the aviation industry, in 2022 we continued to focus on the recovery and transformation of our businesses. This rebuild phase was an extremely challenging period. Disruption in its many forms had the biggest impact on our 2022 NPS. The quick ramp up of air travel demand resulted in huge volumes of passengers going back to travel, and a lack of staff to manage this demand. This, together with remaining COVID-19 sickness levels among staff, generated some operational issues including long queues at security and check-in desks as well as an increase in mishandled baggage issues or flight cancellations, some of them without adequate notification to the customer. Despite all the above-mentioned challenges, our airlines have made relentless efforts to mitigate these through various actions such as reducing schedules to provide otherwise compromised stability and certainty for customers, re-training office-based colleagues to enable them to help at the airport or improving communications to disrupted passengers through new channels to assist customers, and, in the particular case of British Airways, speeding up the biggest recruitment drive in the airline’s history. Additionally, our airlines have continued their commitments to invest and enhance on our customers’ experience, by re- introducing their full catering propositions and developing entirely new ones, upgrading content on our in-flight entertainment platform through new partnerships or enabling in-seat order solutions for our customers. Results from engagement with our customers In response to the feedback received, and based on the tracking of key performance metrics, our operating companies have launched different initiatives to address our customers’ needs. Throughout the year, our airlines have made tremendous efforts to enhance their customer propositions through: • Driving forward customer transformation and digitalisation initiatives some of these include: the launch of the first meta-chat bot to allow customers to raise issues that are relevant to them; implementation of a LiveChat on one of our airline’s websites to quickly address simpler queries and ensure agents focus on the more complex ones; introduced more automation in our customer engagement centres; rolled out an i-coupon solution for customers to use at the airport when there is disruption; developed a new online functionality to enable customers to report and track mishandled baggage through some of our airlines’ websites; rolled out new kiosks for check-in and bag drop at London Gatwick and other European airports; trialled new biometric technology for domestic and international flights to speed up the experience and remove friction from airport travel; trialled a virtual queue system for customers to use during disruption. • Improving the food and drink proposition: some of our airlines re-introduced their full catering proposition, while others developed an entirely new one for their longhaul cabins (premium and non-premium). Other culinary improvements included the introduction of enhanced menus across all cabins and new in-seat order alternatives for customers. • Starting customer first training: developing and starting to deliver training for cabin crew and all other front-line staff to ensure service received by our customers is aligned to each Group airline’s purpose, values, mission and vision. • Other product and service improvements: include the continuation of on-board WiFi roll-out and development of a new on-board free text messaging solution, the roll-out of a “report my bag” functionality in one of our airlines websites, the content upgrade on our in-flight entertainment with new partnerships (e.g., Paramount Plus), increase of our contact centre teams to provide a better customer care service as the airlines faced industry- wide challenges, or the continuation of the business Club Suite roll-out. • Co-locating our New York operations: alongside American Airlines to enhance the customer proposition with our Atlantic Joint Business and oneworld alliance partner, offering our customers easy onward connections to 30+ destinations in the US and Caribbean. • Supporting our customers and front-line colleagues during the disruption peaks: office-based colleagues at our different airlines have supported our front-line operational colleagues with different tasks including checking-in customers, marshalling them to aircraft from remote stands, or repatriation of mishandled baggage. • Environmental, social, and governance: IAG continues to develop more environmentally sustainable products and services for customers. For example, all airlines now have online platforms enabling customers to mitigate the environmental impact of their flights, and IAG Cargo sold sustainable aviation fuel to the cargo customer Kuehne + Nagel. Other services help customers to mitigate the environmental impact of their meals or contribute to wider sustainability goals. 26 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Employees Rebuild from COVID-19 pandemic The commitment, resilience, flexibility and support of our employees has been fundamental to our ability to navigate through the unprecedented challenges of the last few years. Throughout the pandemic, we have had to react to changing regulations and travel restrictions and implement changes to policies and ways of working, often at short notice, and we have relied on our colleagues to keep our customers and each other safe, and to continue to deliver the best customer experience possible. During 2022, as restrictions eased, we have continued to ensure colleagues remained safe and supported, and to enable them to manage the different and changing regulations and working practices required in the countries in which we operate. The pace with which restrictions have been removed, and the surge in demand we have experienced across all markets, has placed additional challenges on colleagues, as IAG and the broader industry built up resources and capacity. At times, this has placed additional demands and challenges on colleagues, and we are incredibly grateful for their continued commitment and support. In 2022 we have seen around an additional 17,400 colleagues join our business, and thousands more have applied and will join in the months ahead. We are delighted by the high volume and quality of applicants applying and joining the Group. Ensuring we can on-board and train new colleagues effectively and obtain the required security clearance has been a major focus in 2022, so that they can be deployed operationally to support the increasing demand. At IAG, we hold innovation, commitment, care for people, responsibility, pragmatism, execution, ambition and resilience as key values that enable us to fulfil our purpose; colleagues have consistently demonstrated these values in responding to the various challenges that they have been faced with across the year. Crew Swaps In 2020 British Airways Crew Swap facility was switched off as part of a broader review of working practices and the introduction of new terms and conditions, combined with IT issues in managing the facility. Following feedback from crew about the importance of this feature in terms of balancing work and personal lives and being trusted and empowered to make changes that work for them, this feature has been re-introduced. It enables the business to continue to serve customers, whilst providing more flexibility and choice to colleagues. IAG Loyalty In response to feedback from contact centre teams seeking greater flexibility (particularly from those with caring responsibilities), IAG Loyalty implemented a new system, Availability Point, enabling colleagues to add preferred shift options five to nine weeks out, with the planning team generating schedules and confirming shifts at four weeks. This allows people to build shifts around their lives and has been extremely positively received and a key to retaining talent and to attract more candidates. Catering As offices have reopened during the pandemic, we have continued to look to provide the right working environment and facilities, and to balance this with the changing working patterns for colleagues, often with lower building occupancy than pre-pandemic. Based on feedback from colleagues in our Waterside office in London Heathrow, we have opened ‘street food’ stalls and a new ‘salad bar’ to provide a range of hot and cold snacks, with a variety of options across the week. This change included the introduction of more casual seating, providing colleagues with space to connect and work in a more informal setting. Iberia Iberia has introduced new tools to support colleagues with career development including the Aircraft Maintenance Technician career path system, AQCESS, and the launch of IBTalent, an intranet portal for managers and specialists to develop their careers and access tailored training. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 27 STAKEHOLDER ENGAGEMENT CONTINUED We recognise the critical role that colleagues continue to play in the recovery and transformation of IAG and are constantly looking at how we support them and to create a diverse and inclusive culture. In 2022, we refreshed our Equality, Diversity and Inclusion Policy, building on the diversity strategy and framework that was established in 2021. We are proud of the progress we have made to make IAG more diverse and inclusive but know we have further to go to achieve our ambition. We continue to focus on our ambition as the composition of our workforce changes. IAG’s unique operating model continues to provide fantastic opportunities for career development and progression, and our strengthened approach to talent management and succession planning is enabling us to fill the majority of our roles with talent from across the business. Results from the engagement with our employees We use a range of channels to understand what matters to our colleagues and to help us improve our people policies. Each operating company runs regular engagement surveys, and across IAG we conduct an organisational health survey to better understand colleagues’ experiences and perceptions. We continue to evolve our channels for communication and information, to improve advocacy and engagement and ensure information is available on a range of employee-related issues. Feedback from these channels have highlighted that resourcing and operational challenges, flexibility and choice, development and careers and fair pay remain the most important issues for colleagues. Shareholders, lenders and other financial stakeholders We held two shareholders’ meetings in 2022, our annual general meeting on June 16, and an extraordinary meeting on October 26, to approve fleet orders. Both meetings were hybrid, allowing for in person attendance and to participate remotely through the electronic meeting platform arranged for such purpose. Shareholders were invited to submit questions before or at the meeting, all of which were addressed. In addition, any requests for information, clarifications or questions made in writing and the written replies provided were posted on the company's website unless the information requested was already available on the company's website. Both meetings were also webcast live on the IAG website. In conjunction with the Investor Relations team, IAG’s Chairman, the Remuneration Committee Chair, as well as the Group’s Chief Executive and Chief Financial Officer have engaged on many occasions with shareholders, equity investors and lenders. The Chief Executive and the Chief Financial Officer hosted two in-person roadshows following the full-year and half-year results in March and September. These roadshows took place over a period of five days in March and five days in September and covered investors in Germany, Spain, the United Kingdom and United States. In addition, they also held virtual meetings with a number of our key institutional investors and the Investor Relations team attended numerous investor meetings and broker conferences for investors throughout the year. The discussions in these meetings were wide-ranging on a number of strategic, financial, operational and ESG topics. In March, the main focus of investors concerned the prospects and plans for a recovery from the Omicron variant of COVID-19, the implications of the Russian invasion of Ukraine on demand and fuel prices and IAG’s relatively high level of financial leverage, despite a high level of liquidity. The focus of investor discussions subsequently shifted to the operational ramp-up challenges, especially in the UK, the strength of pent-up demand, rising inflation and cost-of-living issues and implications for collective bargaining agreements. Environmental, social, and governance ESG continues to be an area of focus for engagement with investors. The Investor Relations team has an ongoing dialogue with ESG research analysts and has hosted several meetings for the Group Head of Sustainability with key shareholders and institutional investors. In May, for the first time, the Group Chief Executive hosted an ESG Investor Day, which was an in-person event, for analysts, investors and other financial stakeholders. The focus of the day was of IAG’s progress on climate change and people developments. This was the first ESG-specific event hosted by a major European airline. The feedback from several shareholders and investors is that IAG is leading other European and global airlines in terms of focus on climate change issues and climate change-related targets and disclosures. The Chairman hosted a combined in- person and virtual roadshow with six key shareholders in April and May to discuss a range of ESG matters, in particular on climate change, diversity, remuneration policy and Board governance matters, as well as the recovery from the pandemic and strategic issues. The former and current Chair of the Remuneration Committee consulted with our main shareholders and proxy advisers during the year on remuneration policy issues. A first consultation process took place prior to our annual shareholders’ meeting on a proposal to amend our policy to increase the quantum on the Restricted Share Plan for IAG Chief Executive. Based on the feedback received, the Board decided to reduce the initially proposed increase of 175 per cent to 150 per cent. Although the votes cast against the proposed amendment were below the 20 per cent threshold, the new Chair of the Remuneration Committee wrote to several major shareholders and proxy advisors, and held various meetings in December and January this year to follow up on concerns raised in relation to this proposal. Further detail is provided in the Directors’ Remuneration Report. 28 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Extraordinary shareholders meeting for the acquisition of aircraft We held a shareholders’ meeting on October 26, 2022 to propose the approval of the acquisition of 50 Boeing 737 family aircraft and 37 Airbus A320neo family aircraft. Given the size of the proposed transactions, these purchases constitute a Class 1 Transaction under the UK Listing Rules and were therefore subject to the approval of IAG's shareholders. The circular published by the Company in relation to these transactions provided shareholders with information about the proposed agreements, the background to and reasons for the proposed acquisitions and the reasons why the directors believe that these acquisitions are in the best interests of shareholders. Further details of this Board decision from a stakeholder perspective point of view are provided as part of the section 172 statement included in the corporate governance report. Suppliers Global supply chain challenges The Russian invasion of Ukraine and the impact of COVID-19 on certain markets have impacted the global supply chains in many of IAG’s key supplier groups. In the case of aircraft and engine manufacturers, access to raw materials such as titanium and certain sub- components including semiconductors has slowed the delivery of key components required in the manufacture and Maintenance, Repair and Overhaul (MRO) of aircraft and engines. It is also the case that many of our suppliers reduced the size of their skilled workforces during the slow-down experienced during COVID-19 and have struggled to build either manufacturing output or MRO capacity to pre-pandemic levels. This, together with the same difficulties from other key manufacturers, has led to delays in the delivery of aircraft to IAG and has slowed down MRO activities on our existing fleet impacting their availability. IAG has worked closely with our suppliers to understand and mitigate this impact and where this has not been possible, fleets have been re-planned to extend existing aircraft for a short period to fill gaps left by delayed deliveries. further building and driving sustainability awareness and performance. In addition, all IAG GBS employees have sustainability targets embedded as part of their performance objectives. Results from the engagement with our suppliers In 2021, IAG led the industry by becoming the first airline group worldwide to extend its net zero commitment to Scope 3 (supply chain) emissions by 2050, and a 20 per cent reduction by 2030, relative to 2019. Since that ambitious target was set, IAG Global Business Services (IAG GBS) has started to engage with, support and monitor suppliers to ensure all products and services provided to IAG are on a path to net zero. EcoVadis, a market-leading provider of business sustainability ratings, has continued to partner with IAG GBS to support the Group’s supply chain sustainability roadmap, including environment, labour and human rights, and ethics. The IAG GBS Group procurement team leads the Supply Chain Sustainability Programme by delivering across four key areas: • The Supplier Code of Conduct • Independent risk screening and Sustainability Assessments • Corporate Social Responsibility (CSR) audits • Embedding sustainability as standard in the procurement process The Supplier Code of Conduct clarifies the standards of behaviour expected from all 13,000 suppliers working with any part of our business across every category and emphasises the importance and requirements of our sustainability journey. It has already been issued to the existing supply chain and integrated into the new supplier onboarding process. In 2022, IAG GBS has embedded sustainability aspects into the day-to- day operation of the organisation, by establishing an enhanced training programme for procurement employees, Together with EcoVadis, we assess suppliers using a holistic Environmental, Social and Governance (ESG) scorecard. This provides valuable insights to identify opportunities to improve sustainability performance, which gives IAG, and its suppliers, a baseline for improvements across ESG. We want to work with suppliers who share our vision and are committed to joining IAG on our journey to net zero. Additionally, once assessed, suppliers receive a scorecard that can be used with their other customers. This benefits wider industry supply chains on their journey to sustainability. As a minimum, all suppliers undergo annual screening for any legal, social, environmental and financial risks. The procurement and compliance teams assess any suppliers identified as having potentially higher levels of risk and implement mitigation plans where necessary. Any issues are flagged to the risk owners within the Group to jointly take appropriate action. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 29 STAKEHOLDER ENGAGEMENT CONTINUED In addition, the supply of certain narrow- bodied aircraft has been limited by the inability of aircraft and engine manufacturers to recover to pre-pandemic capacity. IAG has taken important steps to secure access to new aircraft that will be required in the 2020s and has the option of delivery positions to secure access to narrow-bodied and wide-bodied aircraft to protect the future requirements of IAG. IAG’s long-term commitments with key engine suppliers have limited the impact of these supply chain challenges on the MRO operations of the Group’s airlines. Environmental impact A key feature of IAG achieving its environmental and social targets is access to more fuel-efficient aircraft with lower carbon emissions, reduced community noise, and improved local air quality through reduced Nitrogen oxides emissions. To achieve this, IAG has secured access to the efficient aircraft it requires. IAG’s fleet and environment teams have engaged in detailed discussions with the major aircraft manufacturers to understand and inform their future product developments to ensure we are well-placed to take advantage of new technology and to stress the role of these suppliers in supporting the delivery of our environmental targets. IAG has also engaged with key suppliers to understand the emissions in their own supply chains to understand and influence the related Scope 3 emissions from their manufacturing activities. Governments and regulators Rebuild from COVID-19 pandemic and global challenges The COVID-19 pandemic meant that regulators and national governments took a different but also closer involvement than ever before in the operation of airlines as travel restrictions were imposed and specific aspects of air travel regulated. In turn, requirements for information about passengers or measures on the handling of customers on-board, e.g. the need to wear masks, became more common. Although COVID-19 related impacts have largely become easily manageable, final restrictions in the UK and Spain were only lifted in March and September respectively this year. Additional requirements remain in place in many jurisdictions whereby vaccinated status is a standard in many countries to allow unrestricted entry. This leaves a legacy of continued need for careful engagement with both regulators and customers to facilitate information sharing and ongoing monitoring of standards around the world. In some markets, particularly in Asia, requirements over crew movement and testing, intended to manage the spread of the virus, are still severe enough to have delayed IAG operating companies resuming services. In such cases ongoing engagement with national governments and regulators by IAG government affairs and local operating company teams continues in order to understand, comply with, and where appropriate influence the lifting of the most onerous rules. IAG observes that the close government control of the industry exerted during the pandemic led to increased scrutiny of the sector and demands for information on operational matters as consumer demand was allowed to return. The unforeseeable difficulties in recruiting staff after the pandemic, fast enough to provide planned service levels, caused significant disruption in major western aviation markets and was a particular source of interest to governments, which sought detailed information on resilience planning. IAG has supported operating companies in providing consistent inputs as required. The tragedy of the war in the Ukraine surpasses all airline interests but the impact of Russia’s invasion has also been to generate further challenges commercially and operationally. Russian airspace is closed to UK and EU carriers resulting in considerably longer flight times for services to Asia. Among other impacts this adds complexity to rostering and congestion in the airspace of countries providing alternative routes, all of which necessitates further contact with regulators and policy makers. 30 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Airport charges IAG and its operating companies made the case for strong regulation of monopoly providers of airport services so that reasonable levels of charges are set. In Spain airline contributions to the discussion helped secure a decision by the regulator to keep charges flat until 2026 and a specific decrease in charges for 2022 of 3.17 per cent. The UK CAA, having allowed charges to increase by over 50 per cent in setting an interim price cap for 2022, subsequently extended to 2023 at the same rate, recognised airline arguments in reaching its welcome Final Proposals that require Heathrow Airport to reduce its overall yield per passenger by a rate of RPI 5.75 per cent over the remaining three years of the regulatory period. Market access IAG continues to support individual operating companies in securing market access. This included attendance at or contribution to international air service agreement talks to support IAG operating company positions. IAG also provides ongoing support to British Airways in securing operating permits and code-share expansion to deliver market access and revenue benefits, all of which activities require close engagement with governments and their negotiators. Results from the engagement with government and regulators The first aim of engaging with policy makers, and often with sector-specific regulators, is to increase understanding of the potential impacts of policy measures and of the benefits of IAG’s proposed positions.IAG has done so directly and through inputs to its trade associations on a range of topics. In many cases successes are measured in the effect of mitigating or preventing potentially adverse regulations and in building trust and positive relationships to support our specific arguments. More widely, ICAO’s adoption of its Long-term Global Aspirational Goal (LTAG) on net-zero carbon emissions by 2050 was a success for the whole airline industry. As a leader in the sustainability field, IAG played its part in industry working groups contributing to the UK, US and other government positions in support of the proposals. Sustainability In 2022 the IAG government affairs team led a programme of engagement with officials and parliamentarians in the institutions of the European Union addressing the EU’s Fit for 55 policy. This included discussions with the cabinets of European Commissioners in several directorates, Members of the European Parliament from Spain and Ireland and other Member States and (working with other airlines and trade associations) directly with the Transport Commissioner.From these direct meetings we have been able to explain the Group’s leadership in this field and canvass support for our positions. In the UK, IAG’s sustainability team has engaged regularly with the Government directly and through trade associations, in particular to support the Group’s policy on SAF. This included providing senior level representation working groups of the government’s cross departmental Jet Zero Council on SAF and through the British Airways’ Chief Executive’s membership of the Jet Zero Council itself. During the year, the UK adopted two key measures that IAG had promoted when the Government declared in July a mandate for 10 per cent SAF by 2030 (in line with IAG’s own target); and in December stated a commitment of £165 million support for the planning and production of five SAF plants in the country. Customer service and resilience Frequent engagement was required in 2022 on customer service and resilience matters following the removal of travel restrictions and the subsequent challenges in meeting fast-returning demand. IAG and its operating companies engaged closely to ensure policy makers understood the interconnected nature of aviation operations and to campaign for intervention to be directed fairly and in a constructive way. In the UK this resulted in positive relationships with officials in relevant Government departments during a summer of disruption for the whole industry. British Airways also provided evidence to two parliamentary select committee hearings to increase the level of knowledge of the industry and explain the approach to maintaining resilience and customer service for the airline. Slot policy The impacts of the pandemic continued to be felt in the issue of airport slot allocation and the need for regulatory relief from the usual slot usage rules that require airlines to operate each slot 80 per cent of the time to retain it in the following year.IAG representatives played a key part in the development of an agreed industry position on relief, with airports and slot coordinators, to support temporary requests for waivers that were granted in the EU and the UK.IAG is also engaging with the European Commission in its on-going review of the Slot Regulation that was launched in September. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 31 FINANCIAL OVERVIEW Building back our financial strength Nicholas Cadbury Chief Financial Officer “I look forward to working with the team to return the Group to historical levels of profit and to continue to strengthen the balance sheet.” In my first year at IAG it has been very encouraging to see the Group return to profitability, whilst continuing to focus on its investment needs, balance sheet and strong liquidity. Return to profit In 2022, our markets opened up steadily through the year, particularly from the second quarter onwards. The Group turned profitable at the operating level from the second quarter, delivering an operating profit before exceptional items for the year of €1,225 million, versus an operating loss before exceptional items of €2,970 million in 2021. The Group focused on deploying capacity to those areas of strongest demand, with routes flying west from Europe to North America and South America performing particularly well. There was also strong demand for European travel in the summer period. 32 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Cash generation and liquidity The year 2022 saw strong cash generation, with Net cash flows from operating activities of €4,835 million, driven by the operating profit and significant working capital inflows, as the airlines’ schedules were restored and average yields increased, leading to higher forward bookings for travel in 2023. The Group successfully sourced regular, long-term financing arrangements for all of its 27 aircraft deliveries in 2022, with financing for five of these to be drawn in 2023. At the end of 2022, the Group had Cash, cash equivalents and interest-bearing deposits of €9,599 million, with committed and undrawn aircraft and general facilities leading to Total liquidity of €13,999 million, an increase of €2,013 million from December 2021. This position will stand us in good stead to repay near-term debt maturities and face future risks, such as refinancing, inflation and interest rates. It is a great privilege to join IAG, and I look forward to working with the team to return the Group to historical levels of profit and to continue to strengthen the balance sheet. Nicholas Cadbury Chief Financial Officer The recovery has evolved differently across the Group, in line with government and operating restrictions and demand, with Spanish markets being ahead of Ireland and the UK. The industry has experienced resourcing and operational constraints as capacity has been restored and these were notably seen at London Heathrow. Despite these challenges, colleagues at each operating company have focused on rebuilding operations market by market. Whilst the Group has felt the impact of considerably higher fuel prices and inflation it has also focused on optimising load factors and yields, with passenger unit revenues higher than 2019, particularly in the second half of the year. The recovery in leisure traffic has been ahead of business and the premium leisure segment has performed very well. The strength seen in the second half of 2022 has not abated in early 2023 and although business travel is recovering slowly, there continues to be strong demand across the leisure segment. The Group remains focused on taking actions to offset as much of the impact of high global inflation and fuel prices as it can through its transformation programmes. Balancing investment and debt The Group continues to make important investments in its aircraft fleets, customer products and services, IT infrastructure and sustainability. In 2022 the Group took delivery of 27 new aircraft, as aircraft deferred in 2020 and 2021 started to be delivered. The Group also placed orders for a total of 109 shorthaul aircraft from Airbus and Boeing, which will allow it to replace older aircraft with more fuel-efficient modern technology, with fuel savings of up to 20 per cent. Whilst investment in the business is key, we have also been focusing on our balance sheet and levels of debt. The Group raised additional debt and boosted liquidity during the most impactful period of COVID-19 in 2020 and also raised €2.7 billion of equity in 2020. In 2022 no additional debt for general corporate purposes was drawn and the Group repaid €600 million of non-aircraft debt. As profitability improves, IAG is targeting a reduction in debt and leverage, which will allow the Group to return to its previous leverage target, based on net debt to EBITDA before exceptional items, in the medium-term. We are also monitoring carefully the mix of our net debt between total borrowings and cash, to ensure sufficient liquidity to offset economic uncertainty whilst managing interest expense and metrics based on gross debt. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 33 FINANCIAL REVIEW IAG capacity The year 2022 was a year of rebuilding capacity, with COVID-19 related travel restrictions eased or removed in most of the Group’s markets, allowing the airline industry to substantially restore capacity towards levels seen in 2019, in line with strong pent-up demand for travel. For the year, IAG capacity, measured in available seat kilometres (ASKs), reached 78.0 per cent of 2019. Each airline had a different recovery path, reflecting its respective network, markets served and constraints at hub and other airports. Group capacity increased steadily over the quarters, starting at 65.1 per cent of 2019 in quarter 1 and reaching 86.6 per cent of 2019 in quarter 4. Proportion of 2019 passenger capacity operated by quarter Year to December 31, 2022 (per cent) Aer Lingus British Airways Iberia Level Vueling Group Q1 69.0 57.4 84.7 30.3 72.9 65.1 Q2 85.6 69.1 87.0 60.7 100.2 78.0 Q3 89.9 74.2 84.2 55.5 102.9 Q4 98.5 79.8 92.8 51.3 111.3 81.1 86.6 Total 86.8 70.3 87.1 50.5 98.2 78.0 Capacity operated as a percentage of 2019 by quarter by region Year to December 31, 2022 (per cent) Domestic Europe North America Latin America and Caribbean Africa, Middle East and South Asia Asia Pacific Total network Q1 90.1 63.3 62.6 Q2 105.1 84.7 83.8 Q3 101.5 88.2 92.0 Q4 Total 104.0 100.6 96.0 94.0 84.0 83.9 90.2 81.0 75.0 85.5 82.8 64.3 5.9 65.1 73.9 9.5 78.0 79.0 10.4 81.1 88.8 19.2 86.6 76.4 11.3 78.0 The impact of COVID-19 and related travel restrictions was significantly less than in 2021, when many countries were still in lockdown or had severe travel restrictions in place. The strong recovery in demand and traffic was reflected in the Group’s passenger load factor, which reached 81.8 per cent for the year, down just 2.8 points from 2019. The recovery increased across the year, with the passenger load factor in quarter 1 at 72.2 per cent and quarter 4 rising to 83.2 per cent. Capacity operated out of London Heathrow airport was lower than originally planned at the start of the year. British Airways’ capacity was capped by Heathrow Airport and along with limited access to South Asia, capacity reached 70.3 per cent of 2019 levels. In addition, there was an impact from the Omicron variant of COVID-19 in January and February. As global travel restrictions eased, British Airways restarted routes such as Sydney, San Jose in California, Tokyo and Hong Kong. In March 2022 British Airways also launched its new shorthaul Gatwick subsidiary, BA Euroflyer, operating to 35 new destinations in the summer, flying under the British Airways brand. Iberia’s capacity saw increasing recovery over the course of the year, after quarter 1 was negatively impacted by Omicron. Performance improved steadily, especially in the Latin America and Caribbean (LACAR) region, North America and Europe. For the year, Iberia significantly grew its capacity in LACAR versus 2021 by increasing frequencies to destinations such as Mexico and Colombia. Load factor was at 84.6 per cent in this region, only 0.8 points lower than 2019. The increase in capacity versus 2019 was lower in quarter 3 than quarter 2, as in 2019 the seasonal increase in Iberia’s schedule to LACAR for the peak summer months was greater than in 2022. Vueling adopted a new strategy to reduce its seasonality and increase aircraft utilisation during the winter travel months. The airline started seeing the results of this strategy in quarter 4, when Vueling had capacity growth above 2019 levels by 11.3 per cent, despite fewer aircraft in service, with new routes and growth into existing markets such as the Canary Islands. Aer Lingus was able to restore the majority of its transatlantic services and in addition operated three transatlantic services from its new Manchester Airport base in the UK, all of which started in late 2021. These services represented 13 per cent of Aer Lingus’ transatlantic capacity and 8 per cent of its total network in 2022. The Manchester base supported Aer Lingus in restoring longhaul passenger capacity to similar levels to 2019 by the end of the year. IAG regional capacity ASKs higher/ (lower) v2019 ASKs higher/ (lower) v2021 Passenger load factor (per cent) 0.6% 36.9% (16.0%) 138.2% Higher/ (lower) v2019 Higher/ (lower) v2021 (1.7)pts 10.6pts (2.1)pts 12.4pts (4.8)pts 29.9pts 85.5 81.5 79.3 (17.2%) 73.5% 85.1 (1.3)pts 15.3pts North America (16.1%) 192.9% Year to December 31, 2022 Domestic Europe Latin America and Caribbean Africa, Middle East and South Asia (23.6%) 130.0% Asia Pacific (88.7%) (7.1%) Total network (22.0%) 116.1% 81.1 84.0 81.8 (1.9)pts 13.7pts (1.8)pts 44.6pts (2.8)pts 17.3pts Domestic and Europe Capacity in IAG’s Domestic markets recovered to a greater extent than other regions, with capacity slightly higher than 2019 by 0.6 per cent and higher than 2021 by 36.9 per cent. Iberia and Vueling benefited from strong leisure demand to the Canary and Balearic Islands, with capacity increases above 2019. Passenger load factor for the region remained the highest for the Group at 85.5 per cent, down 1.7 points versus 2019 and up 10.6 points versus 2021. The Group’s capacity in Europe was 16.0 per cent lower than 2019; however, it recovered to 138.2 per cent above 2021 as demand for travel increased. Outside of Russia and the countries neighbouring Ukraine, the impact of the conflict has been relatively limited in this region. Vueling expanded its operations from Paris Orly in November 2021, with an additional 18 slots that allowed Vueling 34 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Basis of Preparation At December 31, 2022, the Group had total liquidity of €13,999 million, comprising cash, cash equivalents and interest- bearing deposits of €9,599 million, €3,284 million of committed and undrawn general facilities, and a further €1,116 million of committed and undrawn aircraft-specific facilities. The Group has been successful in raising financing since the outbreak of COVID-19, having financed all aircraft deliveries in 2020, 2021 and 2022. The Group continues to secure aircraft financing on long-term arrangements. In its assessment of going concern over the period to June 30, 2024 (the ‘going concern period’), the Group has prepared extensive modelling, including considering a plausible but severe downside scenario and further sensitivities to the downside scenario. Having reviewed these scenarios and sensitivities, the Directors have a reasonable expectation that the Group has sufficient liquidity to continue in operational existence over the going concern period, and hence continue to adopt the going concern basis in preparing the consolidated financial statements. In adopting the going concern basis of accounting, the consolidated financial statements have been prepared without the inclusion of a material uncertainty, which has been removed since the 2021 Annual Report and Accounts. The removal of the material uncertainty arises from the reduction in uncertainty over the going concern period due to both the continued recovery subsequent to the COVID-19 pandemic and the strength of the Group’s liquidity at December 31, 2022. Summary The Group was able to substantially restore its capacity by the end of the year, having operated a significantly reduced schedule in 2020 and 2021 due to the impact of the COVID-19 pandemic. As capacity was increasingly restored through the year the operating result improved, with the third quarter, which includes the airlines’ summer peak seasons, approaching levels of profitability seen in 2019. Fuel prices were significantly higher than both the previous year and 2019 and the airline sector also experienced high supplier price inflation. Due to the strong demand, passenger unit revenues also rose above those in 2019, thus allowing the airlines to recover a substantial portion of the fuel price increase and other cost inflation. The net result was an operating profit for the year of €1,256 million, versus an operating loss of €2,765 million in 2021. The profit after tax for the year was €431 million, versus a loss of €2,933 million in 2021. to base an additional four aircraft at the airport, taking its total to nine at an airport which is highly slot-constrained. British Airways launched a new route to Nuremberg in Germany and BA Cityflyer launched a number of new routes from London City, including to Barcelona, San Sebastian and Thessaloniki. Iberia reopened its route to Bergen in Norway. Passenger load factor for the region was down 2.1 points versus 2019 to 81.5 per cent and was up 12.4 points versus 2021. North America IAG’s North American capacity was 16.1 per cent lower than 2019 and was up significantly versus 2021, by 192.9 per cent. The United States Government eased its COVID-19 travel restrictions in November 2021 for vaccinated passengers and removed the need for a COVID-19 test prior to arrival in June 2022. British Airways was able to substantially restore its network to North America by the end of the year by reopening seven routes and adding a new service to Portland, Oregon. During the year, Iberia reopened flights to San Francisco and launched new routes to Washington and Dallas. Aer Lingus reopened six routes to North America during the year. Passenger load factor for the region was down 4.8 points versus 2019 to 79.3 per cent and was up 29.9 points versus 2021. Latin America and Caribbean (LACAR) IAG’s capacity in LACAR was down 17.2 per cent on 2019 but increased 73.5 per cent on 2021. Demand in this region was strong, with the Group benefiting from pent-up demand as COVID-19 travel restrictions to LACAR were lifted earlier than in other regions. Iberia significantly increased its capacity to LACAR during the year, with Mexico up to three flights daily and increased frequencies for Bogotá, Colombia from 10 to 14 flights per week in February 2022. Passenger load factor was down 1.3 points versus 2019 at 85.1 per cent and was up 15.3 points versus 2021. Africa, Middle East and South Asia (AMESA) Capacity to this region was down 23.6 per cent versus 2019 and up significantly versus 2021. British Airways had restored almost 90 per cent of its 2019 capacity to AMESA by quarter 4 and during the year reopened routes to Morocco, Doha and Cape Town. Iberia had strong results in Israel as Tel Aviv recovered faster than expected, and North Africa also performed well with good recovery to Morocco. Vueling launched new routes to Cairo, Alexandria and Amman. Passenger load factor for the region was down 1.9 points versus 2019 at 81.1 per cent and was up 13.7 points versus 2021. Asia Pacific During 2022, the Asia Pacific region remained the most capacity- constrained region, as strict travel restrictions continued to severely impact demand. Australia opened its borders to international travel in February 2022, while other countries such as Singapore, Japan and Hong Kong lifted travel restrictions later, while China did not lift restrictions until January 2023. During the year, British Airways restarted routes to Sydney, Hong Kong and Tokyo. Passenger load factor for the region was down 1.8 points versus 2019 at 84.0 per cent and was up 44.6 points versus 2021. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 35 FINANCIAL REVIEW CONTINUED Profit/(loss) for the year Statutory results € million Operating profit/(loss) Profit/(loss) before tax Profit/(loss) after tax 2022 1,256 415 431 2021 (2,765) (3,507) (2,933) Higher/ (lower) vly 4,021 3,922 3,364 The biggest driver of the year-on-year changes in revenues and costs was the significant restoration of the airlines’ flying programmes, linked to the opening of markets and recovery from the substantial impacts of COVID-19 in 2020 and 2021. Passenger capacity, measured in ASKs, was more than double the level of the previous year, up 116 per cent on 2021. Such an increase has made percentage increases not meaningful and hence they are excluded from the tables below. Summary of exceptional items The Group uses Alternative Performance Measures (APMs) to analyse the underlying results of the business excluding exceptional items, which are those that in management’s view need to be separately disclosed by virtue of their size or incidence in understanding the entity’s financial performance. In 2020 and 2021, the Group recorded a number of exceptional items arising as a direct result of COVID-19, which during 2021 principally related to the fair value movements on derivatives de-designated from hedge accounting and the reversal of the impairment of certain aircraft stood back up in 2021. In 2021 all items were associated with the impact of COVID-19, except for the termination payment to Globalia. During the course of 2022 the Group recorded exceptional credits relating to the partial reversal of a fine issued to British Airways in 2010 and the reversal of the impairment of certain aircraft returned to service in 2022. A summary of the exceptional items relating to 2022 and 2021 is given below, with more detail in the Alternative Performance Measures section, including a breakdown of the exceptional items by operating company. Credit/(charge) to the Income statement € million Exceptional item description 2022 Discontinuation of hedge accounting for foreign currency derivatives for revenue Restructuring costs Discontinuation of hedge accounting for fuel and associated foreign exchange derivatives Inventory write down and charge in relation to contractual lease provisions Reversal of fine Impairment reversal of fleet and associated assets Termination payment to Globalia - - - - 23 8 - 2021 5 18 154 7 - 21 (75) Income statement line Passenger revenue Employee costs Fuel, oil and emissions costs Engineering and other aircraft costs Property, IT and other costs Depreciation, amortisation and impairment Non- operating costs Tax Tax on exceptional items (2) (25) See the Alternative Performance Measures section for further information. 36 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Excluding the impact of the exceptional items shown above, the operating profit for 2022 was €1,225 million, €4,195 million better than the operating loss of €2,970 million for 2021, reflecting the continued recovery in capacity. The profit after tax and before exceptional items was €402 million, €3,440 million higher than the 2021 loss of €3,038 million. Alternative Performance Measures (before exceptional items) € million Operating profit/(loss) Profit/(loss) before tax Profit/(loss) after tax 2022 1,225 384 402 Higher/ 2021 (lower) vly (2,970) (3,637) (3,038) 4,195 4,021 3,440 Revenue € million Passenger revenue1 Cargo revenue Other revenue Total revenue 2022 19,458 1,615 1,993 23,066 2021 5,835 1,673 947 8,455 Higher/ (lower) vly 13,623 (58) 1,046 14,611 1 For 2021 includes an exceptional credit of €5 million related to discontinued hedge accounting of revenue foreign currency derivatives. Further information is given in the Alternative Performance Measures section. Total revenue increased €14,611 million versus 2021, of which €782 million was due to favourable exchange rate movements. Passenger revenue The increase in passenger revenue of €13,623 million was significantly ahead of the increase in passenger capacity, driven by higher yields and higher load factors than in 2021, linked to the reopening of markets, strong pent-up customer demand and increases in ticket prices to reflect a higher cost environment, with higher fuel prices and supplier price inflation, particularly following the outbreak of the war in Ukraine in February 2022. The passenger load factor for the year of 81.8 per cent was 17.3 points higher than in 2021 and only 2.8 points lower than in 2019, with recovery increasingly seen as the year progressed and the final quarter of the year just 1.1 points lower than in 2019. Passenger yields, measured as passenger revenue per revenue passenger kilometre (RPK) were 21.7 per cent higher than in 2021 and up 14.7 per cent on 2019. The resulting passenger unit revenue (passenger revenue per ASK) for the year was 54.4 per cent higher than in 2021 and 11.0 per cent higher than in 2019. Passenger unit revenue also steadily rose as capacity was restored, being 11.7 per cent lower than 2019 in the first quarter, achieving 21.9 per cent higher than in 2019 in the summer peak of quarter 3 and still 16.4 per cent higher than 2019 in the fourth quarter. Cargo revenue Cargo revenue, at €1,615 million, was only 3.5 per cent lower than in 2021, which was a record year for cargo revenue and was linked to the number of additional cargo flights that were operated due to the severely restricted passenger flying programmes. In 2022, as passenger flying schedules were restored, there were significantly fewer cargo-only flights operating, with 502 during the year, compared with 3,788 in 2021. The early part of 2022 experienced global supply chain disruption, which eased across the year as shipping capacity returned, with cargo volumes, measured in cargo tonne kilometres (CTKs), 15.9 per cent higher than the previous year in quarter 1, but lower than in the previous year by 3.5 per cent by quarter 4; total cargo carried for the year was almost the same as in 2021, up 0.3 per cent. Cargo yields, measured as cargo revenue per cargo tonne kilometre, were 3.7 per cent below those of 2021, although double those of 2019. As global supply chain issues eased, cargo yields also declined across the year, with quarter 1 up 6.5 per cent on the previous year but quarter 4 being 17.2 per cent lower than in quarter 4 2021. The yield environment is expected to moderate, along with global air cargo volumes, in 2023. Other revenue The largest Other revenue streams for the Group are BA Holidays, Iberia’s Maintenance, Repair and Overhaul (MRO) and Handling businesses and IAG Loyalty. Other revenue from activities linked to the volume of passenger flying rose significantly with larger flying programmes, resulting in Other revenue more than double the level in 2021 and 3.7 per cent higher than that of 2019. BA Holidays bookings benefited from an increase in British Airways’ flying schedule and the strong demand for leisure travel. Iberia’s third party MRO and handling businesses improved, reflecting higher activity. IAG Loyalty improved (on both 2019 and 2021), with a significant growth in the number of Avios issued linked to its partnerships, including with American Express, resulting in an increase in customers collecting Avios and with higher average numbers of Avios collected per customer. IAG Loyalty also launched a new partnership with Barclays in 2022. Operating costs Total expenditure on operations rose from €11,220 million in 2021 to €21,810 million in 2022, linked to the higher volume of flights and passenger numbers, together with adverse foreign currency movements of €1,104 million, which were mainly due to the strengthening of the US dollar against the euro and pound sterling. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 37 FINANCIAL REVIEW CONTINUED Employee costs € million Employee costs1 2022 4,647 2021 3,013 Higher/ (lower) vly 1,634 1 For 2021 includes an exceptional credit of €18 million related to the release of restructuring provisions. Further information is given in the Alternative Performance Measures section. The rise in Employee costs to €4,647 million versus €3,013 million in 2021 reflected an increase in employee numbers as the Group restored capacity and the end of the various government schemes to support employees and businesses during the most intense periods of the COVID-19 pandemic. The use of government wage support and related schemes in 2022 was limited to a small residual amount of €14 million, all in the first quarter, versus €555 million for the year in 2021. The Group agreed pay deals with the substantial majority of its bargaining groups and employees during 2022. Fuel, oil and emissions costs € million Fuel, oil costs and emissions charges1 2022 2021 Higher/ (lower) vly 6,120 1,781 4,339 1 For 2021 includes an exceptional credit of €154 million related to the discontinuation of hedge accounting for fuel derivatives and fuel foreign currency derivatives as a result of the impact of COVID-19. Further information is given in the Alternative Performance Measures section. Fuel, oil and emissions charges were up significantly on 2021, up €4,339 million, reflecting increased flying volumes and the significant rise in commodity prices for jet fuel, most notably following the Russian invasion of Ukraine early in the year. Foreign exchange movements accounted for €505 million of the increase, principally due to the average US dollar exchange rates being stronger versus the euro and pound sterling in 2022 compared with 2021. Average spot prices in 2022 were 80 per cent higher than the previous year, with prices at the end of 2022 39 per cent higher than at the start of the year. Jet fuel price trend ($ per metric tonne) 1,300 1,100 900 700 500 300 100 8 1 - n a J 8 1 - r p A 8 1 - l u J 8 1 - t c O 9 1 - n a J 9 1 - r p A 9 1 - l u J 9 1 - t c O 0 2 - n a J 0 2 - r p A 0 2 - l u J 0 2 - t c O 1 2 - n a J 1 2 - r p A 1 2 - l u J 1 2 - t c O 2 2 - n a J 2 2 - r p A 2 2 - l u J 2 2 - t c O 2 2 - c e D Fuel hedging The Group seeks to reduce the impact of volatile commodity prices by hedging prices in advance. The Group’s fuel hedging policy was approved by the Board in May 2021 and is designed to provide flexibility to respond to both significant unexpected reductions in travel demand or capacity and/or material or sudden changes in jet fuel prices. The policy allows for differentiation within the Group, to match the nature of each operating company, and the use of call options for a proportion of the hedging undertaken. The policy operates on a two-year rolling basis, with hedging of up to 60 per cent of anticipated requirements in the first 12 months and up to 30 per cent in the following 12 months, and with flexibility for low-cost airlines within the Group to adopt hedging up to 75 per cent in the first 12 months. For all Group airlines, hedging between 25 and 36 months ahead is only undertaken in exceptional circumstances. Fuel consumption The Group continued to benefit from reduced fuel consumption, associated with the investment in new fleet, together with the early retirement of older aircraft, including the retirement of 15 Airbus A340-600 and 32 Boeing 747-400 aircraft in quarter 2 of 2020. Increasing passenger load factors versus 2021 also contributed to reduced carbon intensity. See Sustainability section for further information. Supplier costs € million Handling, catering and other operating costs Landing fees and en-route charges Engineering and other aircraft costs1 Property, IT and other costs2 Selling costs Currency differences Total Supplier costs 2022 2021 Higher/ (lower) vly 2,971 1,308 1,663 1,890 923 967 2,101 950 920 141 1,085 758 434 (14) 1,016 192 486 155 8,973 4,494 4,479 1 For 2021 includes an exceptional credit of €7 million related to the reversal, due to adjusted fleet plans, of a 2020 inventory write-down and a charge relating to contractual lease provisions. Further information is given in the Alternative Performance Measures section. 2 Includes an exceptional credit of €23 million related to the partial reversal of the historical fine, plus accrued interest, initially issued by the European Commission to British Airways for involvement in cartel activity and recognised as an exceptional charge in 2010. Further information is given in the Alternative Performance Measures section. Total Supplier costs rose by €4,479 million to €8,973, double the level of 2021, reflecting the higher capacity operated. Supplier costs were impacted by higher levels of inflation, although the impact was partially mitigated by the Group’s procurement initiatives. Property, IT and other costs include an exceptional credit of €23 million, due to the partial reversal of a fine originally issued to British Airways in 2010. Supplier costs include a €141 million currency differences charge in 2022 versus a €14 million currency differences credit in 2021; currency differences mainly reflect the retranslation of current financial assets and liabilities at the closing foreign exchange rate for the period, which in 2022 reflects the strengthening of the US dollar against both the euro and the pound sterling over the course of 2022. Total foreign currency impacts on Supplier costs, including currency differences, were €526 million adverse versus 2021. 38 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Ownership costs Ownership costs include depreciation, amortisation and impairment of tangible and intangible assets, including right of use assets. € million Ownership costs1 2022 2,070 2021 1,932 Higher/ (lower) vly 138 1 Includes an exceptional credit of €8 million (2021: exceptional credit of €21 million) related to the partial reversal of an impairment relating to fleet assets that were previously stood down in 2020. Further information is given in the Alternative Performance Measures section. The increase in ownership costs versus 2022 is mainly driven by the increase in the Group’s fleet of aircraft, linked to the restoration of capacity and 27 deliveries of new aircraft in the year. An exceptional credit of €8 million was recorded in the year, reflecting the partial reversal of an impairment related to six aircraft previously stood down by Vueling in 2020 on the assumption these aircraft were no longer required and would not return to service; in 2022 it was determined the aircraft are required for Vueling’s flying programme and they were stood up and re-entered service. Aircraft fleet In 2022, the in-service fleet increased by 27 aircraft, with 25 of the new aircraft delivered in 2022 in service by the end of the year; the remaining two entered service early in 2023. During the year 12 aircraft were removed from service, pending lease return or disposal, and 14 aircraft re-entered service, having previously been stood down from active service. Number of fleet Number of fleet in-service Shorthaul Longhaul 2022 381 177 558 Higher/ (lower) vly 5.0% 5.4% 5.1% 2021 363 168 531 Exchange rate impact before exceptional items 2022 € million Favourable/(adverse) Translation impact Transaction impact Total exchange impact Total exchange impact on revenue Total exchange impact on operating expenditures Total exchange impact on operating profit 97 685 782 (129) (975) (1,104) (32) (290) (322) 2021 € million Favourable/(adverse) Translation impact Transaction impact Total exchange impact on revenue Total exchange impact on operating expenditures Total exchange impact on operating loss 220 (163) (251) (31) 292 129 The exchange rates of the Group were as follows: Total exchange impact 57 41 98 Translation – Balance sheet £ to € Translation – Income statement (weighted average) £ to € Transaction (weighted average) £ to € 2022 2021 Higher/ (lower) vly 1.14 1.18 (2.8)% 1.17 1.15 1.9% 1.17 1.05 1.23 1.15 1.20 1.38 1.9% (12.6)% (10.8)% In addition to the in-service fleet, there were a further 18 aircraft not in service, made up of 16 aircraft held by the Group pending disposal or lease return and two aircraft delivered late in 2022 and not in service by December 31, 2022. € to $ £ to $ Exchange rate impact Exchange rate impacts are calculated by retranslating current year results at prior year exchange rates. The reported revenues and expenditures are impacted by the translation of currencies other than euro to the Group’s reporting currency of euro, primarily British Airways and IAG Loyalty. 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 typically generates a surplus in most currencies in which it does business, except the US dollar, for which capital expenditure, debt repayments and fuel purchases typically create a deficit which is managed and partially hedged. The Group hedges its economic exposure from transacting in foreign currencies but does not hedge the translation impact of reporting in euro. Overall, in 2022 the Group operating profit before exceptional items was reduced by €322 million due to adverse exchange rate impacts. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 39 FINANCIAL REVIEW CONTINUED Total net non-operating costs Total net non-operating costs for the year were €841 million, versus €742 million in 2021. The main driver of the increase was Finance costs, which were up €187 million, reflecting a full year of interest on the debt raised in 2021 and the impact of higher interest rates on the Group’s floating rate debt. The net change in the fair value of financial instruments of €81 million reflects fair value adjustments at December 31, 2022 of IAG’s convertible bond maturing in 2028, partially offset by the fair value movements on the convertible loan issued to Globalia during quarter 2 and converted into a 20 per cent equity stake in Air Europa Holdings in quarter 3. In 2021 non-operating costs included a €89 million non-cash credit relating to movements in the fair value of the €825 million IAG convertible bond. Other non-operating credits of €132 million (2021: €70 million) represent net gains on derivative contracts for which hedge accounting is not applied; in 2021 the credit of €70 million is net of an exceptional non-operating charge of €75 million, relating to a settlement agreement reached with Globalia to terminate the previous agreements signed in 2019 and 2021 for Iberia to acquire the issued share capital of Air Europa Holdings. Tax The tax credit on the profit for the year was €16 million (2021: tax credit of €574 million), and the effective tax rate was negative 3.9 per cent (2021: 16.4 per cent). The substantial majority of the Group’s activities are taxed where the main operations are based: in the UK, Spain and Ireland, which had statutory corporation tax rates of 19 per cent, 25 per cent and 12.5 per cent respectively for 2022. The expected effective tax rate for the Group is determined by applying the relevant corporation tax rate to the profits or losses of each jurisdiction. The geographical distribution of profits and losses in the Group results in the expected tax rate being 24.6 per cent for the year to December 31, 2022. The difference between the actual effective tax rate of negative 3.9 per cent and the expected tax rate of 24.6 per cent is primarily due to the recognition of previously unrecognised tax losses in the Group’s Spanish companies. The profit after tax for the year was €431 million (2021: loss of €2,933 million). On March 3, 2021 the UK Chancellor of the Exchequer announced that legislation would be introduced in the Finance Bill 2021 to set the main rate of corporation tax at 25 per cent from April 2023. On May 24, 2021 the Finance Bill was substantively enacted, which has led to the remeasurement of deferred tax balances and will increase the Group’s future current tax charge accordingly. As a result of the remeasurement of deferred tax balances in UK entities, a credit of €17 million (2021: €78 million credit) is recorded in the Income statement and a charge of €10 million (2021: €61 million credit) is recorded in Other comprehensive income. On October 8, 2021 the Irish Government announced that it would increase the rate of corporation tax for certain multinational businesses to 15 per cent with effect from 2023. This expected tax rate change has not been reflected in these results because it has not yet been substantively enacted. The Group is monitoring the OECD’s proposed two-pillar solution to address the tax challenges arising from the digitalisation of the economy. This proposed reform to the international tax system addresses the geographical allocation of profits for the purposes of taxation, and is designed to ensure that multinational enterprises will be subject to a minimum 15 per cent effective tax rate. On December 15, 2022, the Council of the European Union formally adopted the EU Pillar Two Directive. Member States are expected to transpose the Directive into national law by the end of 2023. The Group is continuing to assess the implications of the reform and these will be determined when the relevant legislation is finalised. 40 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Operating profit and loss performance of operating companies Statutory Passenger revenue Cargo revenue Other revenue Total revenue Fuel, oil costs and emissions charges Employee costs Supplier costs Ownership costs1 Operating profit Operating margin British Airways £ million 2022 9,215 1,060 755 11,030 2,929 2,100 4,595 Higher/ (lower) vly 6,894 (37) 474 7,331 2,099 629 2,407 1,084 105 2,091 322 2.9% 50.7 pts Aer Lingus € million Higher/ (lower) vly 1,372 15 6 1,393 450 213 341 2022 1,679 80 10 1,769 539 393 646 146 6 383 2.6% 92.6 pts 45 Iberia € million Higher/ (lower) vly 2,318 (47) 456 2,727 794 438 872 21 602 14.8 pts 2022 4,042 347 1,122 5,511 1,313 1,161 2,284 371 382 6.9% Vueling € million Higher/ (lower) vly 1,573 - 9 1,582 541 170 464 (21) 428 2022 2,584 - 14 2,598 739 370 1,088 206 195 7.5% 30.5 pts Alternative Performance Measures2 Passenger revenue Cargo revenue Other revenue Total revenue before exceptional items Fuel, oil costs and emissions charges Employee costs Supplier costs Ownership costs1 Operating profit before exceptional items Operating margin before exceptional items 9,215 1,060 755 11,030 2,929 2,100 4,614 1,084 303 2.7% 6,899 1,679 1,371 4,042 2,318 2,584 1,573 (37) 474 7,336 1,990 618 2,426 99 2,203 54.1 pts 80 10 1,769 539 393 646 15 6 1,392 440 213 341 146 6 392 2.6% 94.7 pts 45 347 1,122 5,511 1,313 1,161 2,284 371 382 6.9% (47) 456 2,727 785 433 872 21 616 15.3 pts - 14 2,598 739 370 1,088 214 187 - 9 1,582 532 170 457 (26) 449 7.2% 33.0 pts 1 Ownership costs reflects Depreciation, amortisation and impairment. 2 Further detail is provided in the Alternative Performance Measures section. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 41 FINANCIAL REVIEW CONTINUED Review by operating company All four of the airline operating companies saw a return to profitability in 2022, following the significant negative impacts of COVID-19 in 2020 and 2021. The shape of each airline’s recovery was linked to the pace of the easing of government travel restrictions and re-opening of travel in their key markets, together with operating constraints at their hubs and other airports. British Airways operated the lowest passenger capacity relative to 2019, with ASKs at 70.3 per cent of 2019, partly linked to constraints at London Heathrow Airport. Aer Lingus operated at 86.8 per cent of 2019, including the impact of a new base at Manchester Airport in the UK, with Iberia at 87.1 per cent and Vueling at 98.2 per cent, including its expanded operation at Paris Orly. Operating profit/(loss) before exceptional items British Airways (£ million) Aer Lingus (€ million) Iberia (€ million) Vueling (€ million) 2022 303 45 382 187 2021 (1,900) (347) (234) (262) 2019 1,890 276 497 240 Iberia and Vueling saw the greatest return to profit versus 2019, linked to strong demand in the Domestic, Europe and LACAR regions. Aer Lingus saw an increasing recovery through the year and a strong quarter 3, in which there was strong pent-up demand for summer travel. British Airways also experienced rising profitability through the year, strong pent-up demand and significantly increased unit revenues versus 2019 in the second half of the year, as load factors improved and average yields rose. All of the airlines experienced significantly higher fuel prices than in 2019 or 2021, although the impact was partly mitigated by the Group’s hedging policy. Supplier costs were impacted by the high levels of price inflation and costs to restart the business following COVID-19 restrictions, with the impact lessened by procurement and transformation initiatives. IAG Loyalty showed significant growth in its non-airline partner revenue streams, together with benefiting from the recovery in the Group’s airlines, leading to operating profit before exceptional items of £240 million (€282 million), up from £113 million (€131 million) in 2021. Capital expenditure In 2022 the Group increased investment in its aircraft fleets, customer products and services, IT infrastructure and sustainability, as the business recovered, with capital expenditure of €3,875 million, compared with €744 million in 2021. During 2022 the Group took delivery of aircraft delayed from 2020 and 2021 due to the impact of COVID-19, together with making pre-delivery payments for future aircraft deliveries, which had also been deferred. In 2022 the Group took delivery of 27 aircraft: 10 for British Airways, 15 for Iberia and two for Aer Lingus. Of these deliveries, 25 were aircraft acquired from Airbus and Boeing and two were leased directly from aircraft lessors. This contrasts with 2021, in which only five A320neo family aircraft were acquired from Airbus, with the remainder of the 11 deliveries in the year on direct lease arrangements from aircraft lessors. Aircraft deliveries Airbus A320 family Airbus A330 Airbus A350 Boeing 787-10 Embraer E190 Total 2022 2021 12 - 12 3 - 27 8 1 - - 2 11 Aircraft orders The Group exercised options for 22 Airbus A320neo family aircraft in the first half of 2022, for delivery in 2024 and 2025. The Group entered into direct leasing contracts for and took delivery of two Airbus A320neo aircraft in the year. In October 2022 an Extraordinary Shareholders’ Meeting approved the acquisition of a further 37 Airbus A320neo family aircraft and 50 Boeing 737 aircraft. The aircraft will replace Airbus A320ceo family aircraft and are up to 20 per cent more fuel-efficient than the aircraft they replace. These aircraft are expected to be delivered between 2024 and 2028. Aircraft future deliveries at December 31 2022 2021 Airbus A320/A321 Airbus A321 XLR Airbus A350 Boeing 737 Boeing 777-9 Boeing 787-10 Total 91 14 12 50 18 7 192 42 14 26 - 18 10 110 Following the orders placed in 2022, at December 31, 2022 the Group held options to acquire a further 246 aircraft from Airbus and Boeing. See Aircraft fleet section for further information. Capital commitments Capital expenditure authorised and contracted for at December 31, 2022 amounted to €13,749 million (2021: €10,911 million), with the increase attributable to the net of the aircraft deliveries and orders described above. Most of these commitments are denominated in US dollars. The Group has certain rights to cancel commitments in the event of significant delays to aircraft deliveries caused by the aircraft manufacturers. No such rights had been exercised as at December 31, 2022. Working capital The Group saw strong booking inflows for travel in 2023 during the second half of 2022, reflecting expanded flying programmes as the recovery from COVID-19 continued, with capacity in 2023 expected to approach that of 2019 and with higher average yields. At December 31, 2022, Deferred revenue on ticket sales, which includes loyalty points (Avios), had risen €1,092 million on the previous year to close at €7,644 million. Of this balance, €7,318 million is included in current liabilities and €326 million within non-current liabilities, associated with the renewal of IAG Loyalty’s multi-year contract with American Express in 2020. 42 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Sales in advance of carriage, related to passenger ticket sales, were up €1,282 million versus 2021, at €5,014 million. Vouchers issued for future travel in lieu of a cash refund represented 13 per cent of sales in advance of carriage. Net debt € million Debt The value of loyalty points (Avios) issued and yet to be recognised in revenue was down €190 million versus 2021 at €2,630 million, reflecting the net impact of the unwind of the remainder of a pre-payment from American Express made in 2020 and the balance of Avios issued versus redeemed in 2022. Trade receivables rose by €595 million to €1,330 million, related to the increased flying programmes and higher yields. Trade and other payables rose by €1,497 million to €5,209 million, again due to the significantly increased flying schedule and cost inflation. In quarter 4, 2022, the period to which the Trade and other payables mainly relates, the Group operated 86.6 per cent of 2019 passenger capacity, versus 58.3 per cent operated in quarter 4 of 2021. Funding and debt IAG’s long-term objectives when managing capital are: to safeguard the Group’s ability to continue as a going concern and its long-term viability; to maintain an optimal capital structure in order 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 a stable outlook; IAG’s credit ratings remained investment- grade up until the outbreak of COVID-19. The impact of COVID-19 on the Group and wider airline industry led to ratings falling by three notches for S&P and two notches for Moody’s. The Group’s current ratings (at February 23, 2023) are: S&P: BB, Moody’s: Ba2. Debt and capital The Group monitors leverage using net debt to EBITDA before exceptional items, in addition to closely following measures used by the credit ratings agencies, including those based on total borrowings (gross debt). See Alternative Performance Measures section for calculation. The Group had previously set a target of net debt to EBITDA before exceptional items below 1.8 times. In 2022, net debt to EBITDA before exceptional items was 3.1 times, compared with 1.4 times in 2019, reflecting a partial recovery in operating profitability in 2022 following the significant impact of COVID-19 in 2020 and 2021, together with the impact of debt raised during the pandemic to boost liquidity and resilience. In 2021, EBITDA was negative, rendering the net debt to EBITDA before exceptional items ratio not meaningful; the calculation for 2021 resulted in net debt to EBITDA before exceptional items of minus 11.5 times. Cash, cash equivalents and interest-bearing deposits Net debt at January 1 Increase in cash net of exchange Movements in total borrowings Net cash outflow from repayments of borrowings and lease liabilities Net cash inflow from new borrowings Non-cash impact of new leases (Decrease)/increase in net debt from regular financing Exchange and other non-cash movements Net debt at December 31 2022 19,610 2021 15,679 Higher / (lower) 3,931 (7,943) 11,667 (5,917) (2,026) 9,762 1,905 (1,656) (2,026) 370 (2,505) (2,265) (240) 1,436 1,017 4,817 518 (3,381) 499 (52) 3,070 (3,122) 426 10,385 861 11,667 (435) (1,282) Net debt reduced by €1,282 million, principally due to the recovery in profitability and positive working capital from bookings into 2023, partially offset by the capital expenditure of €3,875 million. Gross debt increased by €374 million during the year to €19,984 million. Repayments exceeded new borrowings by €1,069 million, reflecting scheduled repayments of aircraft debt, new aircraft debt raised during the year and the repayments of non-aircraft financing as detailed below. Gross debt is subject to foreign exchange translation movements, as the majority of the Group’s aircraft debt is denominated in US dollars. Over the course of 2022 the euro and pound sterling weakened against the US dollar which increased gross debt by €518 million. Cash Cash, cash equivalents and interest-bearing deposits € million British Airways Iberia Vueling Aer Lingus IAG Loyalty IAG and other Group companies Cash, cash equivalents and interest-bearing deposits 2022 2,877 2,389 766 375 993 2021 1,986 761 441 228 954 Higher/ (lower) 891 1,628 325 147 39 2,199 3,573 (1,374) 9,599 7,943 1,656 British Airways, Iberia, Vueling and Aer Lingus all experienced significant positive operating cash flow in the year. The reduction in the balance of cash, cash equivalents and interest-bearing deposits in IAG and other Group companies reflects the repayment of unsecured debt in IAG and intragroup loan payments to Iberia and Aer Lingus. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 43 FINANCIAL REVIEW CONTINUED Debt Long-term aircraft financing was successfully secured during 2022 for all 27 of IAG’s aircraft delivered in the year; financing for five of these aircraft for British Airways will be drawn in 2023. Committed aircraft financing facilities at December 31, 2022 includes an amount of €571 million for these five aircraft, together with one further Airbus A320neo, which will be delivered in 2023. Seven aircraft were financed via operating leases, reported as Lease liabilities, with five Iberia A350-900s financed through sale and leaseback transactions subsequent to the delivery of the aircraft and two Aer Lingus A320neos leased directly from aircraft lessors. All of British Airways’ 10 deliveries and the remaining 10 Iberia aircraft were financed through finance leases, reported as Asset financed liabilities. During 2022 IAG repaid its €500 million convertible bond originally issued in 2015 and Aer Lingus repaid €100 million of its loan from the Ireland Strategic Investment Fund (ISIF), thereby increasing the amount of its ISIF facility that is undrawn and available to draw in the future, if needed, to €300 million. The maturity profile of the Group’s Bank and other loans includes, in 2023, the maturity of a €500 million unsecured bond issued in 2019, along with the first amortisation of the syndicated loans to Iberia and Vueling drawn in 2020, which were partly backed by Spain’s Instituto de Crédito Oficial (ICO). In 2026, the main maturity is a €2.3 billion (£2.0 billion) syndicated loan to British Airways drawn in 2021, which was partly backed by UK Export Finance (UKEF). Maturity profile of Bank and other loans € million Payment of debt principal 2023 715 2024 287 After 20261 2025 2026 875 2,738 2,096 1 Includes the €825 million IAG 2028 convertible bond. Equity No equity was raised or repaid during the year, nor in 2021. Liquidity facilities During the year, the Group extended its facility with Ireland’s ISIF for Aer Lingus by €200 million, bringing the total facility to €350 million. At December 31, 2022 €50 million had been drawn and €300 million was undrawn. The Group also exercised a one-year extension to the availability of its $1,755 million (€1,654 million) Revolving Credit Facility (RCF), which now has committed availability until March 2025. The facility was originally agreed and executed with a syndicate of banks in 2021, with availability for three years, plus two consecutive one-year extension periods, at the discretion of the lenders. The facility is available to Aer Lingus, British Airways and Iberia, each of whom has a separate borrower limit within the overall facility. Any drawings under the facility would be secured against eligible unencumbered aircraft assets and/or take-off and landing rights at London Heathrow or London Gatwick airports. This facility was undrawn at December 31, 2022. The other major general facility for the Group is a £1,000 million (€1,143 million) committed credit facility for British Airways, partially guaranteed by UKEF, which was agreed and executed in 2021 and matures in 2026. This facility was also undrawn at December 31, 2022. The Group also has certain other committed and undrawn general facilities, bringing total committed and undrawn general facilities at December 31, 2022 to €3,284 million (2021: €2,917 million). The Group also holds €1,116 million of committed and undrawn aircraft financing facilities (2021: €1,126 million), including €620 million remaining undrawn from committed and undrawn sustainability-linked aircraft financing for British Airways agreed and committed in 2022 and to be drawn in 2023. The Group also has certain backstop financing arrangements, which can be used against certain future aircraft deliveries. In total, the Group had €4,400 million of committed and undrawn general and aircraft facilities as at December 31, 2022 (2021: €4,043 million). The facilities values above do not include the balance of certain shorter-term working capital facilities available to the Group’s operating companies. Dividends No dividends were proposed or paid in 2022 (2021: nil). Liquidity and cash flow Total liquidity, measured as cash, cash equivalents and interest- bearing deposits of €9,599 million and committed and undrawn general and aircraft facilities of €4,400 million, was €13,999 million at December 31, 2022. This represented an increase of €2,013 million versus total liquidity of €11,986 million at the end of 2021. Cash flow The Group saw strong cash flow generation in 2022, mainly linked to a return to profitability and positive working capital movements, including an increase in bookings for future travel as the airlines’ schedules increased and yields rose in the light of higher fuel prices and inflation. The resulting net cash flows from operating activities of €4,835 million was significantly higher than the net cash outflows from investing and financing activities, leading to an increase in Cash, cash equivalents and interest- bearing deposits of €1,656 million to €9,599 million. Condensed cash flow summary € million Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Net increase in cash and cash equivalents Net foreign exchange differences Cash and cash equivalents at January 1 Cash and cash equivalents at year end Interest-bearing deposits maturing after more than three months Cash, cash equivalents and interest-bearing deposits 2022 2021 Movement 4,835 (141) 4,976 (3,463) (181) (3,282) (56) 2,235 (2,291) 1,316 1,913 (597) (12) 205 (217) 7,892 5,774 2,118 9,196 7,892 1,304 403 51 352 9,599 7,943 1,656 44 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Many of the significant cash flow items are already explained above, including in the sections covering operating costs, non- operating costs, capital expenditure, working capital and other initiatives and funding. Further detail of other movements is provided below. Cash flows from operating activities € million Operating profit/(loss) Depreciation, amortisation and impairment Movement in working capital Payments related to restructuring Pension contributions net of service costs Provision and other non-cash movements Settlement of derivatives where hedge accounting has been discontinued Interest paid Interest received Tax (paid)/received Net cash flows from operating activities 2021 Movement (2,765) 4,021 2022 1,256 2,070 1,884 1,932 1,634 (81) (161) (5) (15) 138 250 80 10 627 305 322 - (824) 42 (134) (497) (640) 3 63 497 (184) 39 (197) 4,835 (141) 4,976 Cash flows from investing activities € million Acquisition of PPE and intangible assets Sale of PPE, intangible assets and investments (Increase)/decrease in other current interest-bearing deposits Payment to Globalia for convertible loan Other investing movements Net cash flows from investing activities 2022 2021 Movement (3,875) (744) (3,131) 837 544 293 (351) (100) 26 91 - (72) (442) (100) 98 (3,463) (181) (3,282) The €837 million of cash inflow from Sale of property, plant and equipment and intangible assets and investments is mainly due to the aircraft sale and leaseback transactions discussed in the Funding and debt section above, together with the disposal of surplus assets, principally aircraft being retired from service. The increase from 2021 is due to the value of aircraft financed through sale and leaseback transactions being higher, as in 2022 it includes five wide-bodied A350-900 aircraft. In March of 2022 IAG entered into a convertible loan with Globalia for €100 million, convertible into an equity stake in Air Europa Holdings of 20 per cent. The conversion option was exercised in August 2022. Restructuring payments principally include payments in Spain relating to redundancy programmes in Iberia agreed prior to 2020. Cash flows from financing activities In December 2022, British Airways agreed the valuation of its main defined benefit pension scheme, the New Airways Pension Scheme (NAPS), with the scheme’s Trustee, which resulted in a deficit as at the valuation date of March 31, 2021 of £1,650 million (€1,887 million). As at December 31, 2022, the scheme was over 100 per cent funded on the 2021 valuation basis and an overfunding protection mechanism agreed with the NAPS Trustee meant that no contributions were due. Deficit contributions could resume should the funding level fall in the future. Previously British Airways had agreed deferrals of deficit contributions with the NAPS Trustee from October 2020 to September 2021. From October 2021 to December 2022, an overfunding mechanism agreed as part of the previous triennial valuation led to no deficit contributions being required. The pension cash flows shown above represent payments to various smaller schemes within the Group. See note 32 to the financial statements Employee benefit obligations for further information. Provision and other non-cash movements mainly relate to restoration and handback provisions for leased aircraft and ETS allowances. The cash outflow for the Settlement of derivatives where hedge accounting has been discontinued of €497 million in 2021 represented cash payments relating to overhedging of fuel and foreign exchange in 2020, linked to the significant fall in airline capacity in 2020, due to the impact of COVID-19. The increase in interest expense in 2022 reflects the full year impact of additional debt raised in 2021 and higher interest rates. Approximately one quarter of the Group’s total debt is on floating rate arrangements. € million Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Settlement of derivative financial instruments Acquisition of treasury shares and other financing movements Net cash flows from financing activities 2022 1,436 (1,050) (1,455) 2021 Movement 4,817 (784) (1,481) (3,381) (266) 26 1,036 (268) 1,304 (23) (49) 26 (56) 2,235 (2,291) Proceeds from borrowings reflect the cash inflows from aircraft financing as described in the Funding and debt section above. There was no non-aircraft financing raised in 2022, whereas in 2021 British Airways raised £2.0 billion (€2.3 billion) through a loan guaranteed by the UKEF, Aer Lingus drew a further €75 million from ISIF and the Group raised €1.2 billion through unsecured bonds and issued a €825 million convertible bond. Repayments of borrowings and lease liabilities includes the repayment of IAG’s 2015 €500 million convertible bond, €100 million to the Ireland’s ISIF and the principal element of ongoing lease payments. Settlement of derivative financial instruments relates to settlements of foreign exchange instruments taken out to hedge long-term debt payments, including US dollar lease payments. The significant inflow in 2022 relates to the strengthening of the US dollar versus the euro and pound sterling. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 45 REGULATORY ENVIRONMENT Positive engagement to support recovery Engagement context IAG continued to face considerable uncertainty in the political and regulatory environment during 2022, not least because travel restrictions designed to limit the spread of COVID-19 remained in place around the world to varying degrees. Throughout the year, therefore, IAG engaged with policy makers to understand and manage changes to travel rules, as well as to explain the benefits of a return to normal travel. We encouraged focus on key issues, in particular sustainability, where policy intervention can provide mutual benefit to customers and all stakeholders in wider society as well as to IAG itself. The impacts of the pandemic in 2022 have been felt not just in the practical implications of travel restrictions but in impacts on other specific areas of aviation policy and in the approach of regulators. The pace of political change in the UK, with its wider impacts on business, has also required monitoring and re- engagement with new ministerial teams. IAG aims to make the case for the economic and social benefits of aviation through connecting people and businesses, facilitating trade and enabling positive international relationships. To do so, the Group directs its engagement largely towards governments and regulators in the countries of its operating airlines and with the institutions of the European Union, working closely with our trade association Airlines 4 Europe. We have also contributed to supra-national policy fora such as ICAO (through IATA) and directly with governments in key world markets to support market access or manage doing business issues for our operating companies. COVID-19 Travel restrictions The removal of travel restrictions has been a staged process through the year, with changes at irregular intervals. For example, while the European Commission advised on March 1 that all EU countries should essentially allow all travel by those with an approved vaccination, a variety of requirements existed across the EU through 2022. While travel to Spain in the summer season was enabled, full entry restrictions were not lifted until September. Ireland saw the removal of requirements for passenger locator forms and proof of vaccination for inbound travel to Ireland on March 6. This was followed by the withdrawal of the Irish Government’s Aviation Protocol covering remaining COVID-19-related restrictions on May 16. In the UK, all travel requirements were lifted on March 18 with the UK Government explicitly recognising the importance of travel to the country by removing them in time for the busy Easter holidays. The requirement for travellers to be vaccinated against the disease remains a standard one in many key markets, including the US. The necessary customer communications have been embedded in IAG’s operating companies but variations in the details of rules around the world continue to mean monitoring of changes is needed. In some countries, largely in Asia, restrictions on travel still present significant barriers to resuming normal operations. In these cases, where there are complex requirements on airlines, IAG and its operating companies continue to engage, both directly and through their relevant national regulators, with the relevant authorities to simplify and lift legacy rules. Other impacts in 2022 Although the safety-critical and strategic nature of international aviation has always meant there is a role for government and regulators in the sector, IAG observes that one legacy of the pandemic is the tendency for governments to seek to be more closely involved in the operation of the aviation industry than before. In the UK this has resulted in increased scrutiny and demands for information. IAG has worked with British Airways and its other operating companies to reduce the associated administrative burden through positive and regular engagement. During 2022, demand returned largely as IAG had anticipated but, in contrast, the very significantly increased time that it took to provide resources to meet that demand could not have been foreseen and presented a serious challenge to all parts of the aviation system. Airlines, airports, ground handlers and air navigation service providers in different parts of the world saw considerable operational difficulties, resulting in delays and flight cancellations in the spring and early summer as restrictions were lifted. Airlines reduced capacity to lower the risk of short-notice impacts on customers and airports and in the case of London Heathrow and Amsterdam Schiphol, even imposed caps on passenger numbers. IAG engaged with governments to highlight the real causes for shortages. In the UK, where the impact was felt most severely, these causes included a smaller pool of labour from which to recruit but also that the time to complete security references tripled. Variations in employment patterns, with applicants having more jobs due to the instability in the employment market, meant that very many more checks with previous employers were required and applicants often had to wait over three months for roles to be confirmed. IAG and British Airways were also able to provide governments with a clear picture of the knock-on effects in the industry where, for example, lack of air traffic controllers in parts of Europe can cause delays at UK airports. War in Ukraine The impact on the aviation industry of Russian’s invasion of Ukraine in February is not to be compared with the human tragedy of the war but there are significant impacts on airline operations by preventing European and UK airlines from accessing Russian airspace. IAG has engaged with its government stakeholders to keep them apprised of the impacts on both operations and on other policy areas. Sustainability IAG has continued to champion the cause of sustainable aviation and to share its plans for reducing carbon emissions as the industry recovers. To explain and promote its sustainability position, the Group and its individual companies have engaged with representatives of the institutions of the EU and governments of Spain, Ireland and the UK. IAG welcomes the EU Green Deal and its objectives, with which the Group is aligned, as a powerful package for change. Accelerating the pace of decarbonisation will, however, require support from all stakeholders in the industry and the involvement of all national governments and European institutions. In this regard, a targeted design of the elements of the package, together with that of other relevant EU aviation regulations, is key to ensuring the sector’s ability to invest in reducing its carbon footprint. 46 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report both systems to flights between EU Member States risks undermining support for CORSIA outside Europe. Similarly, we encourage the use of emissions trading system revenues (in the EU and UK) for investment in carbon reduction measures, as originally envisaged at the creation of the ETS. Slot allocation Regulations introduced to restrict air services during the pandemic meant that some aviation policies that are essential in normal circumstances were not effective or appropriate for crisis conditions. Rules that govern the allocation of slots at airports with scarce capacity provide a good example since low demand made them unnecessary. Although the capacity of the sector was restored to a considerable degree in 2022, there was still need for global regulatory relief from the elements of slot rules that require airlines to operate 80 per cent of any one slot in order to retain it in the following year. The continued relief granted this year recognised that there were divergent recovery rates worldwide and continuing COVID-19 restrictions in some regions. IAG worked with IATA to advocate the adoption of industry-agreed relief measures, as developed jointly with airports and slot coordinators. These guiding principles recognised the value to consumers of allowing temporary waivers from, or more flexible application of, ‘use it or lose it’ rules so as to maintain long- established airline networks for future seasons. The UK, the EU and other jurisdictions sensibly adopted a range of alleviation measures, but the patchwork of market- based approaches adopted worldwide introduced further inconsistencies and complexity to the sector during the recovery phase. Such waivers have been gradually lifted so that from summer 23 the industry is effectively returning to pre-COVID-19 rules. IAG continued to support the use of the proven and effective global policies and procedures set out in the IATA Worldwide Airport Slot Guidelines both while the need for waivers remains but also in the long-term. Through 2022 we continued to advocate this internationally agreed system as a way to provide certainty for investors and consumers as well as to maintain global networks and to introduce competition and is engaging with the European Commission in its on-going review of the Slot Regulation that launched in September. Infrastructure charges The effective and fair regulation of airport and air navigation service charges, set at a reasonable level, continued to be an important regulatory issue in 2022 with consultations in each of IAG’s home markets. IAG and British Airways made detailed representations to the UK CAA in response to its consultation on the price cap for Heathrow Airport’s charges. Having allowed Heathrow Airport Limited (HAL) to increase charges by over 50 per cent in setting an interim price cap for 2022, subsequently extended to 2023 at the same rate, the CAA’s Final Proposals required the airport to reduce its overall yield per passenger by RPI -5.75 per cent over the remaining three years of the regulatory period. This will return charges to roughly the same level in 2026 as they are in 2022. IAG considers that the 2022 and 2023 interim price cap is too high but welcomes the overall position the CAA has adopted with the trend of reducing charges. We continue to provide information to the regulator as we await confirmation of the final position, expected in at the end of the first quarter of 2023. IAG also continues to advocate the need for greater transparency of HAL’s capital plans and regulatory asset base in future regulatory reviews. In Spain, Iberia and Vueling, together with IATA, participated in the consultation process on airport charges to minimise cost increases, and secured a decision by the regulator to keep charges flat until 2026 with a specific decrease in charges for 2022 of -3.17 per cent. In Ireland, Aer Lingus engaged with the Commission for Aviation Regulation which is conducting its third interim review of the 2019 regulatory decision. In December, IAG responded to the UK CAA’s consultation on an increase to NATS En Route Limited’s (NERL) charges, which initially proposed an increase of up to 27 per cent. Market access IAG continues to support individual operating companies in securing market access, expanding partnerships with other airlines and enabling operations on new routes. This included attendance at, or contribution to, talks on international air service agreement talks and other bilateral discussions, as well as support for new Group initiatives, such as the creation of British Airways Euroflyer subsidiary at London Gatwick Airport. IAG has made clear in its advocacy that the Group does not support the removal of the current jet fuel tax exemption. This is not a solution for decarbonisation but will reduce the sector’s ability to invest in more effective measures with a significant impact for citizens and the economy. Instead, we are firmly of the view that policy should focus on increasing the use of SAF and market-based measures such as the EU ETS and ICAO’s Carbon Offsetting and Reduction Scheme (CORSIA). IAG contends that increasing the use of SAF, which reduces lifecycle CO2 emissions by 70 per cent, provides the primary near-term opportunity to drive down industry emissions. In April 2021, IAG became the first European airline group to commit to fulfilling 10 per cent of its fuel needs with SAF by 2030 and the Group supports a 10 per cent mandate for SAF for 2030 for all flights within the EU. We call for a global SAF commitment covering all international flights through ICAO. We also encourage the EU and its Member States to include a package of investment incentives to enable scaled-up production of SAF alongside the blending mandate requirement that the Green Deal introduces. In engaging with UK policy makers, we promote the same public policy levers. We are encouraged that the UK government confirmed its commitment of £165 million to its Advanced Fuels Fund, established to support planning and production of five SAF plants in the country. In December the first £82 million of the fund was awarded to five projects, including three with which IAG is partnering. IAG also welcomed the UK’s declaration in July of a mandate for 10 per cent SAF by 2030 (in line with IAG’s own target) and we encourage the government to pass the necessary legislation as soon as possible. Throughout 2022, IAG has promoted a further policy step necessary to progress towards net zero. In conjunction with industry partners, we advocate adopting a price stability mechanism in the UK for SAF. The successful development of the offshore wind sector in the UK was due to the introduction of Contracts for Difference and IAG recommends this tool should be adopted for SAF to reduce the risk for investors and so boost investment in new technology. On the international stage IAG has long been an advocate for and contributor to the design of CORSIA. We welcomed the October commitment by ICAO to a Long-Term Aspirational Goal for international aviation of net zero carbon emissions by 2050. The Group believes the EU Green Deal must work alongside global measures, not duplicate them, and that the EU ETS should apply to intra-EU flights and CORSIA to extra-EU flights. Applying INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 47 We’re continuing to build a better British Airways Business overview Following two years of turbulence, in 2022 we continued to focus on our recovery and the transformation of our business. This was an extremely challenging period as we sought to bring our grounded aircraft back into service, recruit and re-train colleagues, and ramp up our schedule. Disruption events throughout the year caused by factors including adverse weather and systems issues, alongside resourcing and capacity restrictions, significantly impacted operations at times. Despite these challenges, we are building a more robust operational performance, with a renewed focus on punctuality, and continue to invest in our transformation, the customer experience and our BA Better World sustainability programme. Our people We know our people are key to our success and we’re incredibly grateful for their dedication, commitment and hard work during a very challenging year to ensure we could deliver for our customers. We’re focused on rebuilding pride and trust with our colleagues and creating a more colleague-centric culture, by recognising their contributions to our business through our enhanced recognition programme, creating a high-performing culture that makes colleagues feel valued and empowered to do the right thing for our customers. Diversity and inclusion are a key part of our strategy and this year we outlined new gender and diversity targets, for at least 12 per cent of our leaders to be from ethnically diverse backgrounds by 2025, rising to 14 per cent by 2030. We’ve also committed to increase the representation of women in senior roles, with a target of 40 per cent by 2025. To supercharge our ambitions, we launched a reverse mentoring programme for senior management from across the airline and committed to 100 per cent open recruitment for all roles. As well as investing in our people by unveiling a new, modern uniform designed by Savile Row tailoring expert Ozwald Boateng, we’ve also updated our uniform guidelines, allowing our people to express more of their personalities at work, which we know they appreciate. Throughout the year we’ve built more constructive relationships with the trade unions that represent our people, enhanced our staff travel and family leave policies, and our recent employee survey results show we are making good progress. Our customers We continued to invest for our customers and remain focused on improving our Net Promoter Score. In 2022, we took delivery of 10 new fuel-efficient aircraft and continue to fit our Club Suite onto our Heathrow longhaul fleet. We’ve unveiled new menus across all cabins and reintroduced our full catering proposition in Club World. We’ve also ramped up our transformation programme, which includes innovations across every part of our business. The 57 initiatives currently underway range from introducing electric vehicles into our operation as part of our goal to achieve net zero by 2050, to biometric trials on select international flights departing from Heathrow to improve our operational efficiency and enhance the customer proposition. As travel restrictions eased, we restarted popular routes such as Sydney and Hong Kong, helping customers to reconnect with their loved ones again. In 2022, we launched new routes from Heathrow to Nuremberg and Portland and announced new services from Heathrow to Cincinnati and Florence, and Gatwick to Aruba and Georgetown in 2023. Our planet We remain fully committed to reducing the impact flying has on our planet, and sustainability has continued to be front and centre of our business strategy. “We’re focused on our recovery and transformation to ensure we continue to be the airline of choice for our customers.” Sean Doyle Chairman and Chief Executive Officer of British Airways 2.7% Operating margin before exceptional items 54.1 pts vly -29.7% ASK change vs 2019 89.1 gCO2/pkm Emissions intensity -12.3% vly 48 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report “I’m honoured to be a part of the Customer Experience Management team, empowering our colleagues to go above and beyond.” Ché Gibbs – British Airways Customer Experience Manager Driving diversity through reverse mentoring We know that diverse teams create the best results. British Airways launched its reverse mentoring programme enabling senior leaders to be mentored by a colleague from a different background. This has provided key insights, understanding and learnings to help deliver a more inclusive culture. British Airways responds to Pakistan’s emergency appeal As Pakistan battled devastating flooding during the summer, British Airways flew an aircraft full of vital aid and medical supplies to the country and redirected 100 per cent of its on-board donations to the Disaster Emergency Committee’s appeal, raising more than £176,800. BA Better World Community Fund launched In March, British Airways launched its BA Better World Community Fund, enabling it to offer vital financial support to a diverse range of charities, in areas that align with the themes of its sustainability programme: people, planet and responsible business. In March, we took delivery of the first batch of SAF produced by Phillips 66 Limited, making us the first airline to start using SAF produced on a commercial scale in the UK. This step forward means all British Airways-operated flights departing from Heathrow now fly with a small amount of SAF. We also launched our new carbon offsetting and sustainable fuels online platform, CO2llaborate, to provide corporate, leisure and colleague customers with even more choice and control in addressing their carbon footprint. Looking forward We’ve made a strong recovery from the pandemic, and although we have much further to go to reduce our debt burden, we are continuing to invest in the customer experience through this exciting period of transformation, ensuring we consider our environmental impact at every step along the way, and work together with our colleagues, to create a better British Airways for everyone. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 49 Recovering capacity and returning to profit Business overview In 2022, we continued to recover capacity, up to 87 per cent of 2019, combined with a strong operational performance. During this year we received seven new Airbus A350-900s, six Airbus A320neos and two Airbus A321neos; we opened new US routes, Washington and Dallas; and reached 100 per cent of 2019 capacity in our core Latin American & Caribbean market. Iberia Express celebrated its tenth anniversary. Since 2012, more than 44 million passengers have trusted the company, which has been able to position itself among the top four operators at Madrid-Barajas airport. After overcoming two difficult years for the aviation sector as a result of the global pandemic, this year Iberia Express has exceeded its capacity in 2019 in some markets such as the Balearic and Canary Islands, ending the year with 24 aircraft. Maintenance and Airport services remain positive contributors, with both on the path to recovering to 2019 activity levels. Our cultural change project is supporting diversity in aviation (attracting women into technical careers), offering greater flexible working practices, and also recognising and rewarding people in Iberia who best embody the company's internal values. We have also designed a specific plan for each group based on the findings of the Organisational Health Index (OHI) survey. Our customers During a challenging summer across European airports, in 2022 Iberia and Iberia Express were the most punctual airline and the most punctual low-cost carrier in Europe, respectively. We deployed a new in-flight service on short, medium, and longhaul flights. Our customers now enjoy a high-value gastronomic proposition, new amenities, a wide range of entertainment, and a more interactive experience with cabin crew. In 2022, we also introduced free on-board WiFi, and a new pre-ordering service for short and medium haul customers, that improves service and reduces food waste. During 2022, we also renewed our collective bargaining agreements for pilots, cabin crew and ground staff, a key step towards building the future of Iberia together with our employees. We have again maintained Iberia Plus customers´ status levels until March 2023. From December 2022, they will earn increased benefits from a more transparent and fairer award system. Our people During this complex year we have maintained our commitment to connect Spain with the rest of the world, and all this has been possible thanks to the effort of our people. They are the pillars that hold the company together especially during challenging times. Being together is what makes us stronger. In February, we managed to bring back all the staff we had before the pandemic and during the summer season we began recruiting additional cabin crew, ground staff and pilots. In September, we began negotiating agreements with all staff representatives, and in just four months, in the midst of a climate of great labour unrest across Europe, we succeeded in reaching agreements with pilots, ground staff and cabin crew representatives. Our planet Coinciding with Iberia’s 95th anniversary, we have named our purpose: ‘From Spain, we generate prosperity by connecting people with the world.’ We have also deployed a four-pillar sustainability strategy: The first pillar is supporting the green transition of the aviation sector, which includes all fleet renewal initiatives, operational efficiency, and the use of SAF. In June, in collaboration with REPSOL, we operated our first transatlantic flights (to Washington, Dallas, and San Francisco) using a mix of SAF. We have also signed an agreement with the Spanish global energy company CEPSA to develop SAF and entered a New Fuel Sales Agreement with Gevo for six million gallons of SAF for five years. “In 2022, Iberia has returned to profitability and the swift re- installation of our network has allowed us to capture the strong demand recovery in our main markets, offsetting the impact of fuel cost increases and inflation.” Javier Sánchez-Prieto Chairman and Chief Executive Officer of Iberia 6.9% Operating margin before exceptional items 15.3 pts vly -12.9% ASK change vs 2019 71.7 gCO2/pkm Emissions intensity -11.6% vly 50 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report “The pandemic put Iberia's cadet programme on hold and when I was called to enrol, I couldn't believe it.” Belén Alegre – Iberia Airbus A320 pilot Commitment to innovation and sustainability Iberia Airport Services (IBAS) has introduced electric remote- controlled push-back tractors at Madrid and Barcelona airports. IBAS is the first handling operator in the world to use these pushback tractors with CRJ aircraft, showing its clear commitment to innovation and sustainability. Experience and competitiveness Iberia Maintenance has received authorisation from Pratt & Whitney to service the GTF PW1100G-JM engine, powering the Airbus A320neo family. The Iberia Engine Shop is one of a select number of shops authorised worldwide to overhaul and maintain this engine model, demonstrating its high level of experience and competitiveness. Iberia forest In October 2022, Iberia employees (including the CEO and management committee) planted the last 1,000 trees of the 4,000 that cover an area of eight hectares in Bosque Iberia. The aim of this project is to contribute to the well-being of the communities near Madrid Airport. The second is creating a more sustainable travel experience for customers. We are doing this through the digitalisation of services, the elimination of plastics on-board, the development of the waste management system, and carbon offsetting. We have launched platforms, where customers and corporate clients can offset their flight emissions and contribute to conserving ecosystems in Guatemala and Peru. The third is the team’s participation in community and volunteering initiatives. Last October, more than 200 employees finished planting the Iberia Forest: 4,000 trees at a location near the airport. In 2023, we will introduce a fourth pillar, focusing on aviation’s social impact through connectivity. Looking forward In 2023, we will continue building our capacity through new aircraft deliveries and deploy a new Premium cabin in our new Airbus A350s to improve our customer experience. We acknowledge some macroeconomic uncertainty is ahead and will continue to improve our efficiency while monitoring costs and selectively investing in innovating and becoming greener. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 51 Transforming while emerging from the crisis Business overview Following two years of pandemic-related losses, 2022 marked a return to profitability and pre-pandemic capacity, underpinned by several factors. Perhaps most visibly, we moved to a new, larger headquarters building that allowed us to combine four office locations into one, reducing cost and bringing our people together. Firstly, there was a solid recovery of traffic due to pent-up demand, following the virtual elimination of pandemic-related travel restrictions to the geographies that Vueling serves. Secondly, we maintained constant operational flexibility and readiness. As demand recovered, we were able to ramp up quickly to pre-pandemic capacity levels, thereby strengthening our leadership positions in our core domestic and international markets. Thirdly and most importantly, our transformation plan produced tangible results. This transformation is unlocking Vueling’s full potential by creating value for all stakeholders, creating a profitable and resilient airline for shareholders, with engaged and empowered employees, loved by our target customers, and with a meaningful impact on society. Ancillary revenues and load factors reached our highest ever levels whilst recent expansions at Paris Orly and London Gatwick performed above expectations. Our new line maintenance unit, Yellow Technic by Nayak, and our new open-books contract with Iberia Airport Services mitigated cost pressures. Changes to our operational and network designs enabled higher aircraft utilisation and fleet and supplier negotiations drove a reduction in ownership and supplier costs. Our people Above all, our achievements reflect the exceptional work of our people: cabin crew, pilots and office staff. Their dedication is at the heart of Vueling’s success. Thanks to agreements reached with Vueling labour representatives, we were able to fully maintain employment levels. This has been key for our people and for supporting a rapid, full recovery of our operation when travel restrictions were lifted. Our transformation plan delivered several people-centric improvements in 2022, including a new and expanded internal training platform and upgraded talent acquisition and onboarding models. During the year we also engaged in collective labour agreement negotiations. In the fourth quarter these negotiations led to industrial action being called by one of our cabin crew unions in Spain, and we worked diligently to minimise the impact on our customers. Our customers We are steadfastly committed to our customers, so much so that ’Make it customer-oriented’ is one of our six values. As always, one of the most important things we can do for our customers is deliver a reliable, on-time operation, and in 2022 we were the fourth most on-time airline in Europe according to Cirium with 82.7 per cent of flights arriving within 15 minutes of schedule. This is an improvement of 5.1 percentage points versus 2019, despite a challenging environment at a number of airports this summer. We have advanced the transformation of our customer experience by further digitalising the Vueling customer journey, championing great service in every human interaction, and increasing consistency. All of these improvements allowed us to maintain a high Net Promoter Score (NPS) of 22.8 in 2022. Our planet During the year we implemented several changes to reduce waste and our carbon footprint. These have included: The deployment of on-board trolleys that allow cabin crew to separate waste from recyclables during the flight, significantly improving waste segregation and recycling. Digitalisation of all flight documents, supporting optimised routes and reduced emissions. We became the first low-cost carrier to allow customers to purchase Sustainable Aviation Fuel (SAF) during the booking process. We also matched each purchase ‘euro-for-euro’ and within the first five months, more than 40,000 customers took advantage of this opportunity, reducing carbon emissions by 150 tonnes. “Vueling proudly returned to profitability in 2022, while surpassing pre-pandemic capacity levels from the second quarter onwards. At the same time, we continued implementing our ambitious transformation plan at pace.” Marco Sansavini Chairman and Chief Executive Officer of Vueling 7.2% Operating margin before exceptional items 33.0 pts vly -1.8% ASK change vs 2019 83.3 gCO2/pkm Emissions intensity -11.8% vly 52 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report “Being part of an airline and helping stranded customers get home makes me feel like I’m fulfilling my purpose.” Silvia Maria Manosalvas – Vueling Airport Duty Reconnecting loved ones Thanks to the close collaboration between our teams, we have been able to return operations to 2019 levels by progressively starting new routes as soon as the borders re-opened. We have seen families reconnecting with loved ones. Going beyond During Christmas time the operation was particularly complicated with many flights rescheduled. We provided impacted customers not only with accommodation, but also prepared a dinner, a New Year's Eve party and a tour to see the Northern Lights. The customers told us that, despite everything, it was a happy and unforgettable time. Ukraine rescue operation Following Russia’s invasion of Ukraine, we were asked by the Spanish embassy to fly several aircraft to repatriate women and children. We utilised the empty legs by fully stocking the aircraft with vital aid and medical supplies for those in need. We demonstrated our commitment to a sustainable future by completing the implementation of an environmental management system under ISO 14001 standards. Vueling has thus completed full IATA environmental certification (IEnvA Stage 2), after being the first low-cost carrier to obtain IEnvA Stage 1 certification in 2020. Looking forward Despite a notable recovery in 2022, we are aware that challenges lie ahead. The key to Vueling’s competitiveness will lie in continuing our transformation in all its dimensions. In so doing, we can not only withstand these challenges, we can develop Vueling to its full potential. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 53 Looking forward to continued recovery and future growth Business overview The impact of the COVID-19 Omicron variant and the prolonged requirement to work from home in Ireland led to a weak start to 2022. However, the robust leisure demand on key sun routes, particularly Spain and Mediterranean destinations led to a strong summer performance. The third quarter’s performance was key to Aer Lingus returning to profitability in 2022. Aer Lingus’ preparations and recruitment began early. In the summer peak, Aer Lingus operated over 90 per cent of its 2019 capacity level with an overall schedule completion of 98 per cent, better than most network operators. In addition, our punctuality outperformed our key competitors in the Dublin hub throughout 2022. As aviation began to recover, the industry, experienced resource shortages at key airports affecting terminal facilities, security screening, baggage and airport passenger services. The challenges for Aer Lingus were compounded by a system outage in September which had a significant impact on our customers. We recovered our operations within hours, rebooked passengers where possible and increased resources to expedite processing of customer claims. 2022 marked the first full year of transatlantic operations at our new Manchester base and also the start of operations with our regional franchise partner Emerald Airlines, the latter greatly increasing connectivity between the UK and Ireland and providing strong flows of connecting passengers onto our transatlantic network. Our people Over the last two years our people have gone above and beyond in their roles to deliver for customers and this year our teams endured a challenging summer as the industry resumed operations at scale. We introduced new policies to better support families and refreshed facilities to provide a better working environment for many of our teams. We also made a once-off payment of €1,700 to all employees (excluding members of our executive management committee) in the context of the challenges faced in the recovery of the business and the inflationary pressures facing our employees. Our people are key to our success and to this end we launched the Purpose, Vision, Mission and Values to guide the delivery of our strategy and our transformation plan and to unlock the full potential of Aer Lingus. Our customers Customer satisfaction has remained high with Aer Lingus’ on-board service and in 2022 we improved the in-flight proposition with new aircraft and better longhaul business cabin catering. We also made a number of technology improvements for payment functionality and mobile check-in. Further investment in the digital customer experience is a core pillar of our transformation plan. Our planet In 2022, Aer Lingus continued to make good progress on our sustainability journey. We signed two SAF offtake agreements commencing from 2025. From 2026, 50 per cent of our fuel on flights from California will be SAF. We secured two Airbus A320neo aircraft which are significantly more fuel efficient than the aircraft they replaced, while we also launched recycling on-board flights, becoming the first airline segregating waste flying into Ireland. “The anticipated rebound in peak leisure travel and the associated summer capacity growth underpinned our 2022 profitability.” Lynne Embleton Chairman and Chief Executive Officer of Aer Lingus 2.6% Operating margin before exceptional items 94.7 pts vly -13.2% ASK change vs 2019 85.7 gCO2/pkm Emissions intensity -26.5% vly 54 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report “I'm proud to be part of the Maintenance team working to ensure customers have a safe journey.” Casey O’Hanlon – Aer Lingus Apprentice Engineer First Airbus A320neo arrives in Dublin Accelerating sustainability is a key pillar in our transformation plan and taking delivery of two Airbus A320neo aircraft this year was key to our journey. The new- generation aircraft deliver up to 20 per cent reduction in fuel burn and CO2 emissions and close to 50 per cent reduction in noise footprint. Celebrating diversity Diversity and inclusion is celebrated through our Proud Flies network. The initiative works to build an inclusive, open LGBTQ+ allies community where employees feel they can bring their whole selves to work. As part of this, Aer Lingus has been a proud sponsor of the Dublin Pride Festival since 2018, as the official airline partner. Rebuilding our network This summer our people went above and beyond to help deliver 90 per cent of our 2019 schedule. Working together, we delivered a strong summer at Aer Lingus, completing 98 per cent of our planned schedule for June and July and 99 per cent for August. Looking forward The return to profitability in 2022 was welcome as we repair the damage of the COVID-19 pandemic. While there is much to build on, recovery in business travel lags that of leisure and the economic and geopolitical forces causing higher oil prices, exchange rate fluctuation and rising interest rates continue to increase the cost base of airlines. During 2023, our strategy to build our Dublin hub will be supported by network expansion across the North Atlantic and further developments with our airline partners. Aer Lingus’ sponsorship of the opening game of the US College Football Series, which is played in Ireland, also serves to further strengthen our brand in the US market. Growing our North America Leadership is just one of the six key pillars in our transformation plan which, along with accelerating sustainability and developing our digital customer experience, reflect the continued innovation, collaboration and progress that we look forward to in 2023. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 55 Our strongest year ever Business overview 2022 has been a remarkable year for our business, as we continue to drive deeper engagement with customers through new partnerships and improvements to the Avios proposition. We invested in our technology and business platforms and delivered new products for our customers. Revenue from our external partners was 25 per cent higher than in 2019 and now accounts for 80 per cent of all billed revenue; this percentage is slightly down versus 2021, due to the recovery from the Group’s airlines, which is also reflected in the operating margin. Early in 2022 we launched our new Avios partnership with Qatar Airways and have seen a positive reception and engagement from customers within the British Airways Executive Club and the Qatar Airways Privilege Club. We continue to explore other similar partnerships and in areas where our combined network and loyalty proposition can provide increased relevance to customers. In the last quarter we launched our first new business within IAG Loyalty. The Wine Flyer is a full retail e-commerce platform enabling us to grow new revenue streams and capabilities, while offering an improved customer value proposition. We expanded at speed in nearly every area in 2022. One area we would have liked to move faster was in customer experience. Achieving a seamless experience for our customers that adds value at every touchpoint will be a continued focus for us. The pace we moved at also brought about the additional challenge of building an operational infrastructure that can keep up. We will continue to address this and invest in more effective solutions to ensure sustained growth in a way that will positively affect our customers. Our people We have continued to invest in a strong people proposition enabling us to attract stand-out talent to the business. Our employer value proposition has come to life this year, alongside a new set of values co-designed with colleagues to be truly representative of who we are. We have made exceptional progress on our ambitious people plan, spanning talent development, people experience and culture. We have deployed multiple mechanisms to enable colleagues to play an active part in work and life at IAG Loyalty, from weekly all-colleague meetings, to company-wide agile workshops, to regular channels for new ideas to come to the fore. Combined with our expertise, this has accelerated our early careers, talent acquisition, colleague retention, equity, diversity and inclusion plans. Our colleague listening indicators continue to be positive, showing our work in this space is effective. Our customers In 2022, 25 per cent more members enrolled into an IAG airline loyalty programme than in 2019, further proving the increased value of loyalty to the customer as well as the Group. We launched five new partnerships with market-leading brands in 2022, including two new credit cards launched in partnership with Barclaycard, giving members more choice than ever before. Iberia Plus launched a new way for customers to earn Avios, joining Vueling and Aer Lingus in a “spend-based earn” model. The British Airways Executive Club announced that it will also be making this change to its programme in 2023. The new model is a fairer and more transparent way of rewarding our members and we expect that we will be awarding more Avios with this change. Our partnership with American Express continues to perform very well, with spend on card higher than 2019 levels and a record number of acquisitions for British Airways American Express co-brand credit cards in 2022, 36 per cent higher compared with 2019. We also expanded our current Reward Flight Saver product for British Airways Executive Club members to all routes and cabins for UK and US customers, significantly reducing the amount of cash needed to redeem. “Our loyalty business had its best year ever in 2022. We expect to continue to achieve significant growth in 2023, focusing on our customers and on the IAG airlines.” Adam Daniels Chairman and Chief Executive Officer of IAG Loyalty 28.4% Operating margin before exceptional items -1.5 pts vly 80% External billed revenue -7 pts vly 83.1 billion Total Avios redeemed +138% vly 56 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report “We've achieved incredible things in 2022, it has all been made possible by our brilliant people.” Helen Miller – IAG Loyalty, Chief People Officer Qatar Airways adopts Avios Members can now collect and spend Avios in even more countries around the world, as Qatar Airways adopted Avios in a landmark partnership this year. It's an exciting moment as we extend our leading position in loyalty. Using innovation to stay connected In yet another way of collecting which fits seamlessly with members' lifestyles, we announced our partnership with Uber in the UK. The partnership helps collectors get one step closer to their next dream getaway. Investing in an inclusive workplace We are investing in our colleagues to help support and create an equitable, diverse and inclusive organisation. Our women’s development programme EmpowHER provides support for both vertical and horizontal career growth. Our Male Allyship programme coaches on advocating change. Our planet Supporting British Airways’ BA Better World sustainability programme and providing IAG’s customers with even more ways to give back, from November 2022 British Airways Executive Club members have been able to donate their Avios to a range of causes supported by the BA Better World Community Fund. IAG Loyalty has pledged up to £200,000 of support to match the value of Avios donations made by members. British Airways Executive Club members can continue to use their Avios to contribute to verified carbon offset projects on non-domestic shorthaul flights via the Speedbird Cafe. Looking forward We will continue to grow our business in 2023 and beyond, by investing in people, technology and improved customer propositions. With more ways to collect and use Avios, we will build further on the uniqueness of the loyalty asset for the IAG airlines and our global brand partners. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 57 Empowering our people, building partnerships, connecting the world “In 2022 we have delivered another strong revenue performance, where we focused on optimising our commercial opportunities, whilst creating the foundations of a culture that prioritises customer needs and makes IAG Cargo a great place to work.” David Shepherd Managing Director of IAG Cargo Business overview It was another positive year for IAG Cargo with operating performance ahead of pre-pandemic levels. The business delivered revenues of €1,615 million in 2022, up 44.6 per cent from 2019, despite the Group’s return to passenger-led flying. The network-shape saw a significant increase in transatlantic capacity and a higher utilisation of longhaul aircraft for normal airline operations making cargo-only flying less available. The conflict in the Ukraine and continuing COVID-19 restrictions in Asia, have led to challenges in viable network options into the Asia-Pacific region. In the first half of the year, severe disruption continued in the sea freight industry, leading to greater demand globally for air freight products, with a subsequent positive impact on yields. In the last quarter of 2022, we saw increased pressure on yields as global supply chains reopened; this was consistent with trends seen in the broader market. In October, we completed the building of our new premium product facility at Heathrow Airport. This will enable us to expand our existing pharmaceutical capability through state-of-the-art temperature- controlled facilities. Our people In 2022, we invested in technology to improve productivity and to support our people in their roles. We launched CoLAB, a global programme, created to listen to and capture the ideas of our people, and we have already successfully turned numerous ideas into reality. We have invested in learning and development opportunities for our people with the aim of upskilling our workforce and supporting talent retention. A new Leadership course saw 236 managers training to improve their frontline people management skills. We have also provided access to a new online learning platform, available to all colleagues across the business. In addition, we opened a 24/7 gym at our Heathrow campus and launched mental health awareness training, enrolling 59 Mental Health First Aiders. We have always prided ourselves in supporting the communities in which we operate, so this year we launched ‘A day to make a difference’, our employer-supported volunteering scheme – where colleagues can request a day of paid leave to give back to society through volunteering. Our customers The year saw us continue to focus on enhancing the customer experience, growing our digital presence, and improving our online merchandising. Operational effectiveness has been given significant attention and we have established a continuous improvement culture to enhance the service we provide to our customers. We invested in new technology, optimising weight and dimensional checks of goods to best utilise capacity. We established a customer satisfaction programme to listen to the voice of the customer, tracking sentiment across all key touch points from booking to delivery and to promote customer advocacy. Key initiatives taken this year include proactive communication to customers at times of disruption and standardisation of global recovery. This has resulted in a steady increase in NPS over the course of the year. Our Cargo Live, a live stream series focused on delivering industry insights, continued to be an effective way to communicate with our customers, attracting an audience of over 7,000. Celebrating its 5th anniversary, IAG Cargo’s loyalty programme FORWARD.REWARDS for SMEs increased its membership base by 12 per cent and transactions from small and medium-sized enterprises grew 8 per cent in the year. Our planet We are committed to making air cargo more sustainable and our customer partnerships are instrumental in driving change. In 2022, we worked alongside long-term partners, Kuehne + Nagel, Bolloré Logistics, and DB Schenker to purchase 12.5 million litres of Sustainable Aviation Fuel reducing their supply chain emissions on a net lifecycle basis by approximately 29,600 tonnes of CO2. 58 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report “It’s an exciting time of transformation for the business, and I am looking forward to working with the senior leadership to unlock the potential of our growing workforce.” Caroline Andrews – IAG Cargo Chief People Officer Sustainability in action IAG Cargo began to trial the first electric Terberg at London Heathrow. By replacing an existing terminal tractor with an electric version, approximately 30 tonnes of CO2 will be saved per vehicle per year – this is the equivalent of planting over 1,250 trees. IAG Cargo's premium offering IAG Cargo completed its brand-new premium product facility at Heathrow Airport, New Premia, a building twice the size of its current premium facility. Always looking at ways to improve how we do business IAG Cargo is delighted to be working with IATA, supporting our customers with innovative digital solutions. Implementing the IATA DG AutoCheck platform will eliminate manual processes to transform and automate dangerous goods acceptance checks whilst increasing safety and operational efficiency. On the ground, we began trialling the first electric cargo Terberg operating airside at London Heathrow, with the ambition to replace all current diesel terminal vehicles in the near future. We have also launched the use of a new sustainable film for wrapping cargo: this solution is 100 per cent recyclable and biodegradable by landfill. This is beneficial on a global scale, where the receiving country of the goods will be able to sustainably dispose of the film. Air cargo plays a crucial role in supporting crises around the world to deliver aid so desperately needed. In 2022, IAG Cargo worked with several charity partners to donate 159 tonnes of capacity to the Ukraine and Pakistan. Looking forward Our vision is clear: to be the first choice for businesses transporting their cargo across the world and to make optimal use of the Group’s cargo assets. We are focused on developing an environment of continuous improvement throughout the business, creating sustainable air cargo solutions, leading digitalisation and establishing IAG Cargo as a great place to work. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 59 Consolidating our position in Barcelona “2022 has been a record year for LEVEL in many respects. This confirms the success of the business model and represents a key contribution to the development of Barcelona's longhaul connectivity.” Fernando Candela Chief Executive Officer of LEVEL destinations of great importance for Barcelona. Our planet We are constantly looking for ways in which we can reduce our environmental impact. To name a couple of examples, the pre-sale platform, used by one in four of our customers, has enabled us to reduce the weight of food cargo by 29 per cent. In addition, we have implemented what is known as the ‘H-30’. This consists of recalculating fuel requirements 30 minutes before flight departure, (considering the weather and the final load on-board the flight) to adjust the fuel load to the exact needs of the operation. Doing this has enabled us to reduce the fuel loaded by 2 per cent, which means a reduction of 0.67 per cent of our CO2 emissions. Looking forward We will continue with our strategy and commitment to be where Barcelona needs us to be. We’ll continue to support and promote the city, developing alliances and synergies with local partners and providing Barcelona with a solid map of direct connections to South and North America. Business overview This year we have broken all-time records in terms of passengers carried (6.4 per cent more than in 20191), connecting flights (15 per cent of our total volume) and seats offered (8 per cent more than 20191 and triple the number from five years ago). All this while remaining true to our commitment to offering competitive fares. In 2022, we consolidated our position as Barcelona Airport's second-largest operator to the United States and the number one operator to Latin America. Thus, one in four seats between Barcelona and the United States and one in two seats between Barcelona and Latin America were operated by LEVEL. Moreover, seven of the eight routes we operated in 2022 were routes offered only by LEVEL. With a flight regularity of over 99 per cent, we have demonstrated the resilience to recover to pre-COVID-19 pandemic rates and to do so on time: around 82 per cent of flights have arrived on time at their destination. Our people In June we celebrated our fifth anniversary, an important milestone for both our business, and our team. We also moved offices, providing the entire team with new, modern facilities shared with Vueling, which will result in multiple synergies and strengthen IAG’s corporate culture. Throughout the year we took part in a number of events to increase our visibility, such as Barcelona Pride in support of our key values of diversity and equality. Our customers In 2022, LEVEL once again proved to be an airline that listens to its customers and adapts to their feedback. Through increased digitalisation we continue to adapt our product to the preferences of each individual customer. We have also resumed routes that were in great demand, such as San Francisco and Boston. These routes, together with the restarting of services between Barcelona and Santiago de Chile in October and additional daily flights to Argentina, mean we are offering direct connections to 1 Comparison against 2019 is for LEVEL Spain and excludes LEVEL France routes (now discontinued). 60 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Transforming for the future “In IAG GBS, we continued our journey to become the working capital and data analytics Centre of Excellence for the Group, optimising our unique platform and position to provide valuable insights and analysis and create further synergies.” Zoe Davis Director of IAG GBS Overview In 2022, we continued to deliver on our four transformation pillars (driving further synergies, continuing the in-depth restructure of the Group's cost base, delivering automation and analytics, and proactively monitoring any potential supplier risks to mitigate emerging issues) and were proud to further expand our scope of work into areas such as direct operating cost analysis and supplier sustainability tracking, whilst supporting the operating companies as they recover from the effects of the pandemic. In the current inflationary environment, our significant role in supporting the delivery of IAG’s unit cost targets has become increasingly important as the Group recovers its operations. By leveraging our unique position within the Group, we have driven additional value for the operating companies and their customers, created further synergies, and ensured supply chain continuity in challenging times. We have also reinforced our focus on automation and innovation by introducing new and improved analytics, chatbots, and process mining tools. Our people IAG GBS continues to thrive as a diverse, global organisation with over 36 different nationalities represented in our workforce, and 45 per cent of our senior leadership positions held by women. In 2022, we have remained focused on keeping our people at the heart of our business, continuing to attract, engage, develop and retain experts to further enhance our high-performing team. We have continued to invest in our Learning Academy, providing multiple development opportunities. All this has been reflected in continually improving workforce engagement results. We have delivered numerous mental and physical well-being initiatives to support our people, and introduced an equity, diversity and inclusion policy. We are proud of our people and the way they have supported those in need who have been affected by the war in Ukraine, opening their homes and collecting much-needed goods, providing language courses, and helping with visa applications. Our customers Following a comprehensive market review, we have entered into several new partnerships to provide enhanced business process services, data insights and automation. These will offer greater opportunities for IAG GBS to further standardise and increase the level of touchless processing, ultimately providing a more efficient and cost-effective solution for the Group operating companies. Earlier this year, we were delighted to launch a new self-service portal that allows direct analysis and comparison of supplier cost metrics and performance. The portal will be further enhanced with operational statistics such as unit cost and market intelligence tools, which will further equip the Group Procurement team with the insights and data they need to maximise value for the Group and its customers. Our planet IAG GBS plays a vital role in delivering IAG’s Scope 3 commitment. Through our Supply Chain Sustainability Programme and partnership with EcoVadis, we liaise with, support and monitor suppliers to ensure the Group is on track to deliver net zero emissions by 2050 for all products and services provided to IAG. We accelerated the assessment of our supply chain, measuring ESG maturity. This provides valuable insights to identify opportunities to improve our supply chain performance. It also provides a clear ESG baseline and target to drive the sustainability performance of our suppliers. This accepted and recognised methodology means performance can be shared beyond IAG and may contribute to transforming wider industry supply chains. Looking forward 2023 will see IAG GBS moving towards establishing ourselves as the analytics centre for the Group, using our unique view across IAG to consolidate data and analyse opportunities to provide constructive insights and drive increased value. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 61 Delivering further value to the Group “In 2022, we continued to evolve our IT operating model, focusing on establishing agile product teams delivering value to our customers, employees and other stakeholders.” John Gibbs Chief Information Officer Overview During 2022, we experienced some significant outages related to both internally and externally hosted systems. We are working closely with our partners to improve the stability of their systems and in parallel, we continued to modernise the estate which has improved the overall resilience and performance. This includes moving over a third of our IT estate into the cloud. In addition, we continued to invest significantly in our core customer, commercial, operational and back-office systems alongside our cyber security and infrastructure. We have continued to attract new talent to our IT teams and develop our existing talent through the IAG Tech academy, which is also focused on driving a Digital First mindset across the whole Group. Over half of all our delivery is now via product teams utilising agile methodologies ensuring we maximise the value to the business of our IT investments. Our people We are proud to have won the Best Graduate Employer at the UK Women in Tech Awards earlier in 2022, and we continue to develop the next generation of technology experts through our graduate and apprentice programmes. We have evolved our IT operating model by increasing the adoption of product teams and development, security and operations (DevSecOps) methodologies to accelerate digital innovation and delivery for our customers. We further strengthened our technology leadership team as well as recruited technology talent throughout the organisation, resulting in 25 per cent of the IT department being new to the Group in the last two years. In addition to developing a Digital First culture through our Academy, we now have over 1,000 employees across our Guilds sharing best practice, knowledge, and insights across the Group. Our customers We have made significant investments in the modernisation of our customer platforms with new functionality delivering real value to our customers: • we extended the functionality of our new Global Loyalty Platform, added new partners and migrated our British Airways Executive members onto it; • we added new functionality to our .com platforms while streamlining the sales and order processes resulting in increased sales of ancillary products and services; • we modernised our call centre technology including the use of AI (Artificial Intelligence) and ML (Machine Learning) to provide a more responsive and intuitive service; and • we introduced more efficient disruption management tools. In addition, significant investment has been made into refreshing devices to ensure Group employees have the right tools to support our customers. Our planet We are significantly reducing the carbon footprint and energy costs of our IT estate through the decommissioning of systems and the migration to the cloud. Our Cloud Centre of Excellence ensures that we drive the adoption of cloud capabilities, and that we optimise the use of the cloud. New operational planning tools are allowing us to further optimise the network and the utilisation of our assets. We have also invested in technology to monitor and significantly improve fuel utilisation. We are also investing in technology to identify and reduce waste such as pre-flight ordering of food and tools to help customers calculate and offset carbon emissions, such as the carbon mitigation tool. Looking forward As a priority, we are continuing to improve our systems and services to provide operational stability and resilience. In parallel, we are continuing to migrate our systems to the cloud, to modernise our customer-facing applications, especially our .com and mobile platforms, and making significant investment in cybersecurity tools, services and capabilities. We will also continue to evolve our IT operating model and the adoption of product and agile ways of working. 62 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report INTRODUCTION TO SUSTAINABILITY Sustainability supporting our purpose Contents of this section A. Planet TCFD summary, transition plan, metrics and progress, emissions reduction initiatives, scenario analysis, risks and opportunities, stakeholder engagement Waste, noise and air quality C. Principles of governance Sustainability strategy, governance frameworks, workforce governance, supply chain governance, ethics and integrity, ESG risk management, reporting and data governance, alignment with GRI and SASB standards B. People and Prosperity Key metrics, health, safety and well-being, human rights and modern slavery, community engagement and charitable support The full contents of this sustainability report are included in the IAG Non-Financial Information Statement (NFIS) which is third-party independently verified to limited assurance standards in line with ISAE3000 (Revised) standards. IAG’s most material environmental metric – Scope 1 emissions – receives additional verification each year as part of the EU, Swiss and UK Emissions Trading Schemes (ETS) and international Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), within six months of the issuance of this report. Any material changes are restated in future reports. Compliance with specific frameworks and standards is listed under relevant section headings and summarised in C.8. While IAG does not align with the Global Reporting Initiative (GRI) Core or GRI Comprehensive standards, it aligns with selected GRI standards based on compliance with Spanish Law 11/2018 and chooses to voluntarily align with other GRI standards on material issues. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 63 SUSTAINABILITY AT A GLANCE Our vision Our strategy Is to be the world’s leading airline group on sustainability. Is to pursue nine sustainability leadership KPIs as listed in section C.1. Our governance Board-level oversight Safety, Environment and Corporate Responsibility Audit and Compliance IAG Management Committee oversight Chief People, Corporate Affairs and Sustainability Officer (CPCASO) Operating company oversight Management committees oversee tailored sustainability programmes Cross-Group alignment Group sustainability team updates Group sustainability strategy Our material issues and initiatives IAG takes a holistic approach to sustainability1. A. Planet Key material issues B. People and prosperity C. Principles of governance • Reducing our climate impact • Influencing policy • Engaging with employees • Building a diverse, inclusive and equal workplace • Investing in the future • Planning for climate-resilient operations • Working with suppliers Key policies • Environmental Sustainability Policy • Equity, Diversity and Inclusion (EDI) Policy • Modern slavery and anti-trafficking statement • Code of Conduct • Supplier Code of Conduct • Anti-bribery and corruption Policy • Whistleblowing Policy • Policy on disclosure of corporate information and engagement with shareholders Annual initiatives • Flightpath Net Zero strategy • Climate-related remuneration • Policy advocacy for green solutions • Leadership in trade associations Key UN Sustainable Development Goals • Organizational Health Index (OHI) surveys • EDI and engagement initiatives • Community giving and fundraising • Developing a social roadmap • Accelerator programme and ventures • Supply Chain Sustainability Programme • Task Force on Climate-related Financial Disclosures (TCFD) scenario analysis Targets 2019 Target Baseline • 11% better carbon efficiency, • 10% Sustainable to 80 gCO2/pkm • Comprehensive waste targets • 10% lower noise per take off vs 2020 • 40% women in senior leadership roles Aviation Fuel (SAF) • 20% drop in net Scope 1 emissions, to 22 MT • 20% drop in net Scope 3 emissions, to 6.6 MT • Net zero Scope 1, 2, and 3 emissions across our full operations and supply chain. • Removals for any residual emissions 2025 2030 2050 1 The above pillars align with World Economic Forum ‘Measuring Stakeholder Capitalism’ report in 2020. ‘Running a profitable business’ and ‘Pleasing our customers’ are material issues relevant to Prosperity which are covered in other sections of the NFIS. 64 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Towards more sustainable journeys Our sustainable products and services for customers help them to reduce their carbon emissions and support wider sustainability goals. We continue to trial new offers. Pre-flight services at airports Ground transport at airports On-board impacts • Renewable electricity in lounges1 • Vegan menus in lounges2,3 • Pre-ordering meal service to reduce food waste3 • Trialling electric buses for passengers2 • Electric Mototoks to pull aircraft to runways2,3 • Trialling electric trucks5 • Renewable electricity to power aircraft on the ground1 • Voluntary offsetting for customers using verified6 offsets1 • Voluntary SAF for customers2,4 • Use of IAG-procured SAF2 • Vegan food2,3 • Recycling on-board2,3,4 1 All airlines. 2 British Airways. 3 Iberia. 4 Vueling. 5 IAG Cargo. 6 Gold-standard or Verra-accredited projects to ensure real carbon savings. Planet highlights A prestigious award for our climate action 250,000 tonnes First of SAF secured for 2030, which is 25 per cent of our target volume alcohol-to-jet SAF plant in the world, the LanzaJet Freedom Pines project, in a signed partnership with IAG 100% 12% of IAG airline senior executives have climate-related remuneration annual improvement in carbon efficiency, on track for our 2025 target People and prosperity highlights 66,044 17% Governance highlights 6 100% people employed across the Group in 79 countries increase in our workforce versus 2021 meetings of the Board SECR committee of suppliers screened for sustainability risks 89% 34% of staff covered by collective bargaining agreements women in senior leadership roles 0 74% instances of modern slavery identified in our business or supply chain of suppliers, by spend, completed ESG scorecards INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 65 SUSTAINABILITY A. PLANET A.1. Planet – climate change A.1.1. TCFD summary IAG was an early adopter of the Task Force on Climate-related Financial Disclosures (TCFD) guidance and first carried out TCFD- aligned scenario analysis in 2018. Descriptions of TCFD recommendations are on the TCFD website. IAG has applied the TCFD Guidance for All Sectors to the disclosures in this report. Cross-references to relevant sections are below. An internal review of compliance with the 11 core TCFD recommendations identified no material gaps or material changes from last year. Governance Strategy Risk management Metrics and targets Disclose the organisation’s governance around climate-related risks and opportunities (a, b) Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning where such information is material (a, b, c) Relevant disclosures in this report a. See C.2., C.6. a. See A.1.6. b. See A.1.5, C.2., C.6., Risk management and principal risk factors section b. See A.1.6., C.6., Risk management and principal risk factors section Current activities Board oversight via SECR Committee and Audit and Compliance Committee; multiple layers of robust governance; 2021 materiality assessment still relevant and so not updated Planned future activities Review assurance, repeating materiality assessment in 2024 c. See A.1.5. Delivering against Flightpath Net Zero strategy and nine leadership KPIs; sustainability-linked loans for British Airways and Iberia; TCFD-aligned scenario analysis; one- and three-year financial and business plans integrate sustainability aspects; new sustainability contract clause for suppliers Ramp up of SAF procurement, ongoing scenario analysis, reviewing guidance and evidence on pathways to support 1.5°C transition Disclose how the organisation identifies, assesses and manages climate-related risks (a, b, c) Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material (a, b, c) a. See A.1.5., A.1.6., C.6., Risk management and principal risk factors section b. See above c. See above a. See A.1.3., A.1.5., Report of Remuneration Committee b. See A.1.3., A.1.6. c. See Sustainability at a Glance, A.1.2., A.1.6. Sustainable aviation risks are treated as a principal risk and regularly reviewed within Enterprise Risk Management (ERM) processes; risk disclosures received an ‘A’ rating from CDP Clear metrics and targets for 2025, 2030 and 2050 (see ‘At a Glance’); climate-related remuneration for senior executives and managers More detailed work on risk impacts to 2030 and 2040, actions to maximise climate resilience, and risk mitigation KPIs Delivery against existing targets, review 2030 targets in line with latest evidence on 1.5°C-aligned transitions 66 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Leading our industry in SAF projects What is Sustainable Aviation Fuel? Sustainable Aviation Fuels (SAF) are chemically almost identical to kerosene. The feedstocks for these fuels – currently waste materials such as used cooking oil, municipal waste or waste wood – absorb CO2 in their growth Key SAF projects – production dates cycle before this carbon is recycled into fuel and then consumed in the flight. There are eight certified pathways to making SAF based on use of specific technologies. These processes are certified to international standards to ensure the fuels are safe to use. SAF can be used in existing aircraft and airport fuelling infrastructure. IAG also ensures its SAF complies with strict sustainability certification schemes to ensure the feedstocks come from sustainable sources, and that the production processes conserve water and energy and have minimal wider impacts. aemetis California, USA LanzaTech South Wales, UK LanzaJet Georgia, USA Neste Finland; Singapore Phillips 66 Humber, UK Velocys Immingham, UK Gevo Minnesota, USA Velocys Mississippi, USA LanzaJet/ NovaPangaea Teesside, UK 2023 2024 2025 2026 2027 2030 Role in IAG transition plan SAF is a key solution in IAG’s transition plan to net zero (Section A.1.2). It reduces carbon emissions on a greenhouse gas lifecycle basis and typically by 70 per cent or more compared with the fossil jet fuels it replaces. IAG is on track to deliver a 100-fold increase in its SAF volumes between 2022 and 2030 and expects to use SAF for 70 per cent of total fuel in 2050. In 2021, the Group set a target of using one million tonnes of SAF a year by 2030, dependent on appropriate government policy support, and this volume will save as much carbon as taking one million cars off the road a year. The Group has now secured 250,000 tonnes of SAF for 2030, committing US$865 million in SAF offtakes and investments.1 The Group has also made direct investments in new and innovative SAF production capacity, catalysing the wider development of the SAF market. These investments are typically coupled with SAF purchase agreements, which are critical to the financeability of the new SAF production capacity. Group airlines will be taking delivery of 7,500 tonnes annually from the Lanzajet Freedom Pines facility once construction is completed towards the end of 2023. 1 Based on an assumed jet fuel price in 2030 of $900 per metric tonne and contracted margins for SAF production. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 67 SUSTAINABILITY A. PLANET Planet spotlight: Sustainable Aviation Fuel in 2022 First alchohol-to-jet SAF plant In October, the LanzaJet Freedom Pines plant in the US (see above) was the first SAF project in the world to receive a grant – of $50 million – from the Breakthrough Energy Catalyst Fund. IAG invested in this plant and will receive offtake when it is operational, which is expected to be the end of 2023. First UK-produced commercial scale SAF Across 2022, in partnership with the refining company Phillips 66, British Airways received the first UK-produced SAF on a commercial scale, which is manufactured using sustainable waste oils. New SAF offers for customers From June 2022, Vueling offered customers the option to fund SAF use on the day of their flight, via a partnership with Avikor. Over 50,000 passengers contributed, and Vueling matched their contributions, supplying over 50 tonnes of SAF at Barcelona and Madrid airports. 68 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report A.1.2. Transition plan Overview IAG is targeting net zero emissions by 2050 across its Scope 1, 2, and 3 emissions. ‘Net zero’ means any residual emissions from IAG operations in 2050, or by the manufacture and transport of goods supplied to the Group, will be mitigated by an equivalent amount of CO2 removed from the atmosphere via carbon removals. IAG is on track to deliver its 2025, 2030 and 2050 climate targets (see below) by carrying out emission-reduction initiatives, working in collaboration with key stakeholders and proactively advocating for supportive government policy and technology development. IAG is also driving internal action by using climate-related annual incentives for over 7,400 senior executives and managers. Key measures to reduce emissions are fleet modernisation, SAF, market-based measures including the UK and EU ETS and CORSIA, and carbon removals. Less than 10 per cent of the emissions reductions to 2050 are from offsets. Roadmap to net zero IAG was the first airline group in the world to commit to net zero emissions and has been publishing its latest roadmap to this goal every year since 2019. The version below is a core Group scenario which assumes continued policy support for aviation decarbonisation, an overall recovery to 2019 levels of passenger demand by 2024 and annual demand growth aligned with the long-term growth forecasts disclosed in Note 4 and 17 of the Financial Statements. Key changes versus last year’s roadmap are an earlier ramp up of carbon removals, larger net emissions reductions from CORSIA, fuel efficiency gains tapering by 2050, and an increased share of SAF in 2050 to reflect proposed mandates. This roadmap maintains the assumption on hydrogen aircraft in the fleet from 2040 and 5 per cent saving from airspace modernisation by 2050. 2019 Emissions (tonnes CO2e) Latest IAG Roadmap to Net Zero Scope 2 20,000 0.05% Scope 3 8,265,000 21.18% Total 39,029,000 100% Scope 1 30,744,000 78.77% Scope 1 Scope 2 Scope 3 Pillar of carbon roadmap Delivery plans Venture investments/key innovation partners New aircraft and operations • €13.5 billion investment between 2023-30 ZeroAvia (hydrogen aircraft manufacturer) for 192 new, efficient aircraft I6 (fuel management software) NAVflight services (flight planning services) Honeywell Forge (fuel efficiency software) SAF • US$865 million committed to date on SAF LanzaJet (sustainable fuels producer) offtake and agreements, based on assumed energy prices Carbon removals • Refining the IAG carbon removals roadmap Heirloom (carbon capture start-up) Market-based measures and offsets • Support for the global CORSIA scheme to limit CHOOOSE (customer offsetting platform) net emissions from aviation • All airlines offer voluntary offsets for customers Supply chain • 74% of suppliers by spend have submitted EcoVadis (business sustainability ratings) scorecards on ESG performance • New supplier contract clause on sustainability IAG invests in innovation to meet its targets, drive decarbonisation and accelerate wider change towards a more sustainable industry. IAG supports climate technology innovation via its Hangar 51 accelerator, venture capital investments, university collaborations, pilot schemes, supporting applications for grant funding, and research and development consortia. Since 2019, a dedicated sustainability category has been included in the Group accelerator programme Hangar 51. IAG supports the 1.5°C ambition of the Paris Agreement and continues to review evidence on aviation pathways which support this. Where possible, IAG will work with relevant stakeholders, including the Science-Based Targets initiative (SBTi) and Transition Pathway Initiative (TPI), to build an understanding of aviation industry pathways to net zero, how these contribute to national and global goals, and how companies and policy makers can drive investment into a green transition. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 69 205020452040203520302025Demand growthMillion tonnes CO2 (MT)Gross emissions20152020Net emissionsSAFIAG net zero targetNew aircraft and operationsETS/CORSIA and offsetsCarbon removals2019 baseline emissionsPercentage CO2 reductions(SAF is 70% of fuel in 2050)41%41%42%42%17%17%IAG interim targets: 11% improvement in fuel efficiency 2019-2025, 20% drop in net Scope 1 and 3 emissions2019-30, 10 per cent SAF in 2030, net zero by 2050.83127 SUSTAINABILITY A. PLANET Future emissions intensity Delivery of current decarbonisation plans, dependent on appropriate policy support, is expected to enable the following changes versus 2019: Gross emissions (MT CO2): • 2030 – 15 per cent lower • 2050 – 73 per cent lower Gross emissions intensity (g CO2/pkm): • 2030 – 27 per cent lower • 2035 – 39 per cent lower • 2050 – 83 per cent lower IAG supports the inclusion of carbon removals in industry decarbonisation pathways, and in external assessments of support for the 1.5°C global ambition. IAG’s short- and long-term targets have been independently assessed by TPI as 1.5°C-aligned and it’s mid-term target assessed as well-below-2°C-aligned. The TPI assessment compared the milestones in the 2021 IAG roadmap with an industry-wide pathway modelled by the International Energy Agency (IEA), taking removals commitments into account. What are carbon removals? Role in IAG transition plan Carbon removals solutions extract CO2 already in the atmosphere and store it in biological or geological ways. By 2050, IAG will only use carbon removals to mitigate any residual emissions from its operations. Four key types are relevant for IAG: • Nature-Based Solutions (NBS) – include creating new forests and peatland • BioEnergy Carbon Capture and Storage (BECCS) – capturing biogenic carbon from industrial facilities and storing it in e.g. underground aquifers • CCS with SAF production – as above and including the use of byproducts which can absorb CO2 • Direct Air Capture (DAC) – absorbing CO2 directly from the air using a catalyst Carbon removals projects differ from carbon avoidance projects, which prevent the future release of CO2. IAG sees carbon avoidance projects as a key transitional solution en route to full use of removals. When IAG or operating companies choose to voluntarily invest in carbon avoidance and removal projects, they work in collaboration with key partners, carry out due diligence to select reputable providers and select projects carefully to meet and align with verified quality standards such as Gold Standard and Verified Carbon Standard (VCS). Within the Group, British Airways started offering removals projects to customers in 2022: mangrove restoration in Pakistan and a biochar project in Oregon, USA. By 2050 it will only work with suppliers who do the same, as part of meeting the Group Scope 3 commitment. It is already encouraging suppliers to transition from offsets to removals as part of a new supplier contract clause which is being rolled out across its supply chain. Based on the latest roadmap detailed below, the Group expects to use approximately 100 MT of carbon removals between 2022 and 2050 to mitigate Scope 1 emissions and could potentially be removing 2 MT annually in 2030, conditional on clear and globally agreed verification and quality standards for removals, inclusion of removals in ETS schemes, and stable policy support. IAG expects to use removals to meet an increasing share of its CORSIA obligations between 2024 and 2035, conditional on the above, and supports wider guidance on how to transition to removals such as the Oxford Offsetting Principles. It continues to advocate for policies that will accelerate global uptake of carbon removals, via the Coalition for Negative Emissions and other trade associations listed in A.1.7., and supports the inclusion of removals in the EU, Swiss and UK ETS. Illustrative carbon removals ramp up 70 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 2050204520402035203020202025CCS with SAF productionTotalDACBECCS8MT CO2NBSStrategic Report A.1.3. Metrics and progress Overview IAG’s transition plan focuses on reducing CO2 from jet fuel use, as this represents over 99 per cent of Scope 1 emissions. The Group measures its full carbon footprint and tracks multiple metrics each quarter to ensure progress on tackling climate change. 2022 saw strong progress against the key metric of carbon efficiency. With a 12 per cent improvement to 83.5g CO2/pkm1, the Group is on track to deliver the 2025 target of 80g CO2/pkm. Calculation methodology Emissions are calculated by multiplying fuel and energy use by appropriate conversion factors that are aligned with the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report. 2022 UK Government conversion factors are applied across the Group as these are deemed to be the most robust available. Other factors like International Energy Agency emissions factors are used in specific cases as described in the NFIS. IAG discloses methane (CH4) and nitrous oxide (N2O) as Scope 1 non-CO2 greenhouse gases (GHGs), in line with the UK conversion factors. Emissions of CH4 were 13,072 tonnes in 2022 and N2O were 198,324 tonnes. A detailed Scope 3 emissions breakdown is available in the IAG NFIS. 2022 Emissions2 Scope 2 12,000 0.05% Scope 3 5,481,000 20.57% Total 26,648,000 100% Scope 1 21,155,000 79.38% Scope 1 Scope 2 Scope 3 Scope 3 emissions2 Franchises 9% Capital goods 4% All other Scope 3 categories 7% Total 5,481,000 100% Fuel and energy-related activities 80% Key carbon footprint metric Scope 1 CO2e Net Scope 1 CO2e Scope 2 location-based Scope 2 market-based Scope 3 GRI standard 305-1 305-2 305-2 305-3 Unit MT CO2e MT CO2e kt CO2e kt CO2e MT CO2e vly 94% 82% 30% 40% 65% v2019 (31%) (29%) (31%) (40%) (34%) Key emission reduction metric GRI standard Unit vly v2019 Flight-only emissions intensity GHG reduction initiatives Net reduction (ETS3) Net reduction (offset projects) Fleet age 305-4 305-5 gCO2/pkm ktCO2e ktCO2e ktCO2e years (12%) 38% (7%) 6% 720% (44%) 17% 6% n/a 5% Other metric GRI standard Unit vly v2019 Scope 2 emissions intensity Revenue per tonne CO2e Jet fuel SAF Electricity Energy Renewable electricity4 Renewable energy 305-4 301-1 302-1 302-1 gCO2/pkm €/tonne CO2e MT fuel (41%) 41% 94% kT fuel 338% ‘000 MWh Mn MWh % % 13% 93% (5pts) (8%) 32% (31%) n/a (20%) (31%) 9pts (0.1pts) 0.2pts 2022 21.15 19.13 51.1 11.7 5.48 2022 83.5 82.4 1,796 229 11.9 2022 0.20 1,088 6.64 10.3 213.7 81.5 81% 0.4% 2021 10.92 10.50 39.2 8.4 3.32 2021 94.6 59.7 219 196* 11.2 2021 0.34 771 3.42 2.4 189.0 42.1 86% 0.5% 2020 11.02 10.85 48.2 9.3 3.66* 2020 106.2 17.2 0 168 10.6 2020 0.47 705 3.45 nr 200.1 41.9 86% 0.4% 2019 30.74* 26.95* 74.6* 19.7* 8.27* 2019 89.8 77.4 3,182 nr 11.4 2019 0.22* 827 9.65 nr 2018 29.99 27.22 70.4 40.7 8.79 2018 91.5 65.9 2,634 nr 11.3 2018 0.22 811 9.41 nr 267.7 234.9 119.7 72% 0.2% 119.4 54% nr Descriptions and commentary on other metrics is available in the Additional Disclosures section of the IAG NFIS. Note: ‘nr’ means ‘not reported’. * means restated using the latest data and assumptions. 1 pkm means ‘passenger-km’. The passenger-km used for this calculation is 213,376 million, which excludes no-show passengers. The cargo-tonne-km used is 3,712 million, which excludes cargo carried on other airlines or trucks. The jet fuel used excludes fuel for franchises and engine testing. 2 Rounded to the nearest '000 tonnes CO2e. 3 2020 emissions were below the EU ETS sector cap for aviation so no net reductions were delivered. 4 For completeness, Scope 2 emissions cover electricity use at airports and overseas offices, which are partly outside IAG’s operational control. As part of complying with UK Streamlined Energy and Carbon Reporting regulation, IAG can disclose that 56 per cent of Group energy use was UK energy use, based on Scope 1 emissions and Group electricity use in UK-based offices. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 71 SUSTAINABILITY A. PLANET A.1.4. Emissions reduction initiatives Relevant standards: TR-AL-110a2. GRI 305-5. Reducing gross and net emissions is a collective effort across the Group. Examples are throughout this report. By 2030, fleet renewal and SAF programmes will have the biggest impact on reducing gross emissions, and CORSIA will have the biggest impact on reducing net emissions. In addition, other specific initiatives are run within operating airlines. Here are savings from key initiatives in 2022, rounded to the nearest 10,000 tonnes: 1,580,000 30,000 illustrative tonnes of CO2 saved this year from a more efficient fleet, compared to the 2019 fleet pre-COVID-19 tonnes of CO2 saved from SAF purchased this year, five times higher than the saving in 2021 80,000 230,000 tonnes of CO2 saved from operational efficiency initiatives such as reduced use of landing flaps, single-engine taxi-in and reduced weight on-board tonnes of CO2 avoided due to use of certified carbon offset projects, in locations such as Cambodia, Peru, the Congo Basin, Sudan and Malawi Examples of initiatives across the Group: Operating company 2022 examples British Airways 9,980 tonnes of SAF delivered from Phillips 66, saving almost 30,000 tonnes of CO2 Rolled out a new fuel efficiency dashboard enabling pilots to better match fuel use to fuel needs Iberia Trials at airports of an electric bus for passengers and use of hydro-treated vegetable oil (HVO) in ground vehicles Began operation of a 10,000m2 solar installation to generate 2.7 million renewable kWh annually Efficiency initiatives across the whole flight phase including take-off, cruise, approach and landing Aer Lingus Welcomed two A320neos to the fleet, which save up to 20 per cent of fuel compared to the aircraft they replace Vueling IAG GBS IAG Cargo IAG Tech IAG Loyalty More efficient flightpaths out of Dublin airport saved around 1,200 tonnes of CO2 Demonstrated 72% CO2 saving on a Green Flight between Barcelona and Lyon using SAF and a straighter path Moved to a new, more sustainable headquarters, certified to international BREEAM1 standards Rolled out a new supplier contract clause encouraging emissions reductions SAF deals with key cargo customers including Kuehne + Nagel, Bolloré Logistics, DB Schenker and DHL Trials including a lease of 40 tractor units running on HVO biofuel, and an electric tractor Migration of IT services to Amazon cloud servers, saving energy and CO2 British Airways Executive Club Members can use Avios points to contribute to verified carbon offset projects A diverse portfolio of SAF IAG continues to work with technology developers to establish a range of SAF supply options, including the projects listed below. The Group uplifts jet fuel in multiple locations including the US and Europe and therefore is exploring projects in multiple regions. It is working to support SAF projects which also remove carbon or capture and store it. IAG has secured 25 per cent of its 2030 target volume of 1 million tonnes. Key SAF partnerships Partner Phillips 66 Neste LanzaJet aemetis LanzaTech Gevo Velocys2 LanzaJet/NovaPangaea2 Velocys2 Project name if relevant Production location Planned production start Freedom Pines oneworld Project Dragon Bayou Fuels Speedbird Altalto Humber, UK Finland; Singapore Georgia, USA California, USA South Wales, UK Minnesota, USA Mississippi, USA Teesside, UK Immingham, UK In production 2023 End 2023 2024 2025 2026 2026 2026 2027 1. Building Research Establishment Environmental Assessment Method. 2. Includes carbon capture and storage. 72 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report A.1.5. Scenario analysis Overview In 2022, IAG carried out multiple and aligned forms of scenario analysis: • The IAG Sustainability team and the Enterprise Risk Management (ERM) team reviewed all climate-related risks and opportunities and potential impacts to 2024 and 2030. The impacts of material risks are quantified as part of the Company-wide ERM process which receives Board oversight • Operating airlines modelled compliance- related costs, including from the UK and EU ETS and CORSIA, to 2030 EU and UK ETS prices are based on market prices and the UK Department for Transport (DfT) Aviation Forecast, and CORSIA prices are based on internal analysis and ICAO industry price forecasts. TCFD-aligned scenario analysis In 2022, IAG repeated a TCFD-aligned scenario analysis exercise, building on the 2018 and 2021 exercises. This was a structured, qualitative discussion of potential climate-related impacts and business responses, using the latest evidence and analysis from reputable sources like the UN, Eurocontrol and Climate Action Tracker (CAT). • TCFD-aligned scenario analysis was repeated using a dual timeframe of 2030 and 2040 • Ongoing analysis was carried out on the Flightpath Net Zero strategy to 2050 1.5°C scenarios1 were chosen for transitional risks, in recognition of IAG and global targets. 2°C and 3°C warming scenarios were chosen for physical risks, based on the latest UN projections. This scenario work informs strategy, planning, risk management and financial management. IAG takes a proactive approach to managing climate-related risks and opportunities, and is committed to managing their regulatory, reputational, financial, market and technology aspects. Applying carbon prices IAG concurrently applies carbon prices to financial planning and to future scenario analysis. The fleet team uses updated carbon prices and price forecasts for shorthaul and longhaul fleet purchasing decisions, based on market values and reputable external sources. The Group airlines use carbon prices in financial planning, and flight operations teams and pilots use carbon prices in operational decisions about fuel uptake. Potential acquisitions include an assessment of exposure to climate-related issues and policy. For the period 2022-30, UK ETS prices of £75-£150/tonne, EU ETS prices of €67- €130/tonne and CORSIA prices of $11-$21/ tonne were used for modelling compliance costs. 2030 was chosen as the key timeframe, based on IAG targets and key policy timelines e.g. for SAF mandates. 2040 was also considered due to the possibility of the world overshooting 1.5°C in the 2030s leading to faster societal changes. The 2021 and 2022 exercises involved representatives from multiple teams including Strategy, Treasury, Finance, Government Affairs, Commercial Planning, Investor Relations, People, Enterprise Risk Management, IAG Tech, IAG GBS, IAG Loyalty and sustainability representatives from all operating airlines. The Group Sustainability team collated inputs, which were reviewed by the IAG Sustainability Steering Group. The Group remains resilient to the most material climate-related impacts – industry-wide policy shifts – and these have been quantified and mitigation plans embedded into financial and strategic planning. Industry-wide changes also create opportunities for the Group to move to become more resilient than its competitors. To address significant uncertainty around future policy, technology and market trends, IAG is repeating scenario analysis annually. It will implement action plans in 2023 to further improve resilience to wider changes. 1 ‘Orderly’ and ‘disorderly’ scenarios were chosen as per TCFD definitions. These scenarios compare smooth, predictable and idealised climate-related changes with abrupt, variable and disjointed changes across regions. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 73 SUSTAINABILITY A. PLANET A.1.6. Risks and opportunities Climate-related risks are assessed and managed within the ERM framework as described in Section C.6. and in the Risk management and principal risks factors section under Principal Risk ‘Sustainable Aviation’. Opportunities are managed within relevant teams. Transitional risks primarily affect airline activity between European destinations, which contributed 37 per cent of flying activity in 2022. Physical risks could affect IAG operations across its global network, reflecting the global nature of climate change. The carbon-reduction targets in the Flightpath Net Zero strategy are the key measures for assessing the mitigation of these risks, along with the consideration of these risks in relevant governance processes. The external risk environment, materiality of risks, mitigation actions and KPIs for these mitigating actions are reviewed regularly. The table below lists risks assessed through the ERM process. The most material risks are policy risks. Risk timeframes align with corporate planning timelines. TCFD risk type Physical Risk and/or opportunity combined description Resilience to acute weather events Resilience of routes and assets to chronic climate changes Market Customer spend due to perceptions of IAG ESG progress Customer spend due to perceptions of aviation industry ESG progress Perceived quality of offset and removal projects Supply chain readiness Policy Demand impact of EU and UK climate policy Resilience to changes in ETS/CORSIA pricing Policy asymmetry across regions Extra regulation on activity not emissions Lack of supporting SAF infrastructure or policy Regulation on non-CO2 effects Access to and readiness for lower-emission technologies Technology Access to SAF Risk time frame M L S S M L M M M L M L L M Risk trend Stable Stable Up Up Stable Down Stable Stable Up Stable Down Up Down Down Scenario dependency1 Temperature Temperature Transition Transition Transition Transition Transition Transition Transition Transition Transition Transition Transition Transition Key: short-term (S) is 1-2 years, medium-term (M) is 3-5 years, long-term (L) is more than 5 years. IAG continues to analyse risk and transition scenarios to inform mitigation plans to 2030. Key parameters for defining scenarios are below, based on UN, CAT, UK Climate Change Committee and internal analysis. These are kept under review. Physical risk parameters Current projection Global scenario to 2100 2.4°C 2°C scenario RCP2 2.6 3°C scenario RCP 4.5 Transition risk parameters Current policies/projections Current targets 1.5°C-aligned scenario1 Global emissions vs 2019 UK emissions vs 2019 EU emissions vs 1990 US emissions vs 2005 0% -28% -55% (via Fit for 55) -37% Aviation (net) emissions vs 2019 -15% (via CORSIA) -7% -42% -55% -50% -15% -41% (-27%)3 -42% -62% -58% -15% 1 Whether the cost impacts depend more on the temperature scenario (2°C or 3°C), or type of transition (orderly or disorderly). 2 Representative Concentration Pathway (RCP), a globally recognised scenario for physical changes under different temperature ranges. 3 A 41 per cent drop by 2030 represents an orderly transition. A 27 per cent drop represents a disorderly transition because smaller global emissions reductions to 2030 require rapid decarbonisation after 2030 to return to 1.5°C by 2100. 74 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Risk Impacts and Mitigation Description as per previous page Potential unmitigated financial impacts How IAG is mitigating Resilience to acute weather events Days of lost revenue due to additional flight disruption and associated mitigation and passenger compensation costs Existing operational resilience processes can minimise extra disruption from e.g. more turbulence from US-UK flights Resilience of routes and assets to chronic climate changes Changed revenue from a different route network or a different frequency of flights to climate-affected destinations, changes in operational maintenance costs Customers change frequency of flying, duration of trips, or spend less relative to other carriers Scale of route network means impacts above plan are not material so no immediate action needed. Aircraft are mobile assets which can be moved to different locations to account for e.g. more hurricanes in Caribbean Delivering emissions reductions, developing emissions dashboards for customers, expanding customer communications Customers change frequency of flying, duration of trips, or spend less relative to other travel modes Support for global instruments like CORSIA, working via trade associations to advance green solutions Exposure to sudden variability in prices, cost of CORSIA credits, scale of growth in revenue by 2050 due to available volume of removals to deliver net zero Strategy to avoid price spikes, governance to ensure offset quality, a removals roadmap based on external evidence, advocacy for policy support and monitoring regimes Sustainability compliance or technology change causing unplanned changes in cost of goods and services provided to IAG or associated supplier management costs, margin erosion Supply chain sustainability programme which includes ESG scorecards and supplier risk screening Customer spend due to perceptions of IAG ESG progress Customer spend due to perceptions of aviation industry ESG progress Perceived quality of offset and removal projects Supply chain readiness Demand impact of EU and UK climate policy Pass-through of industry-wide costs affects ticket prices and so demand Impacts of emerging policy assessed as part of longer-term financial planning and strategy Resilience to changes in CORSIA/ETS pricing Policy asymmetry across regions Extra regulation on activity not emissions Lack of supporting SAF infrastructure or policy Regulation on non-CO2 effects Exposure to long-term price increases affects compliance costs Strategy to reduce impact of price spikes; using carbon prices in fleet and financial planning Changing numbers of customers relative to other carriers who are under more favourable or more restrictive policy regimes Industry-wide taxes or levies increase operating costs and have potential demand impacts, demand management measures equate to lost revenue Advocacy for global solutions such as the ICAO Long-Term Aspirational Goal agreed in 2022 Advocacy in support of emissions-reducing measures like SAF and against economically inefficient measures like taxes Higher prices of SAF in core markets due to lack of investment in SAF production or cost of inputs Advocacy for SAF policy, e.g. via UK Jet Zero Council, and a strategy to procure SAF in regions where supportive policy exists Potential multiplier on ETS costs, lost revenue due to route restrictions, or operational costs due to non-CO2 management External research suggests just 10% of flights could be 80% of impacts. Advocacy via trade associations to support monitoring and targeted solutions such as route optimisation and SAF uptake Access to and readiness for lower-emission technologies Higher ETS costs if technology access is restricted or technology development is slow Hangar 51 Ventures team aligns research and work with the Flightpath Net Zero strategy Access to SAF Changing unit prices of SAF in core markets Securing SAF deals and taking equity in early-stage projects where relevant INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 75 SUSTAINABILITY A. PLANET A.1.7. Stakeholder engagement Relevant standards: GRI 102-13/43/44 Overview The aviation industry will decarbonise faster with stakeholder and policy support. The Group and its operating airlines regularly engage with key stakeholders: governments and regulators, shareholders, lenders and other financial stakeholders, trade associations, customers, suppliers, employees, communities, NGOs and academic institutions to advocate for support for emissions reductions and to share progress on Flightpath Net Zero. As one example, IAG successfully delivered its first ESG day for investors in 2022, as described in the CEO letter in the ARA. Internal governance ensures that wider stakeholder engagement on climate change is consistent with material issues and environmental goals. As per the IAG Code of Conduct, IAG does not use Company funds or resources to support any political party or candidate. Key stances on climate change IAG supports cost-effective approaches to deliver net zero emissions by 2050, advance low-carbon solutions, and support global efforts to align with 1.5°C. Actions across ten associations are listed below. If the climate-related positions of trade associations are deemed to be substantially weaker or inconsistent with these internal stances, IAG representatives take roles on task forces and working groups and respond to consultations to communicate our stances and constructively move to alignment. IAG is proud to have consistent stances on climate change with all the organisations of which it is a member (below). IAG has positively influenced this outcome by contributing expertise and time to drive net zero commitments, and create and support roadmaps to net zero emissions across SA, A4E, oneworld, JZC, and ATAG. IAG has also driven and encouraged higher SAF ambitions across the JZC, oneworld and WEF. IAG and key trade associations are listed on the EU Transparency Register. Key principles of climate-related engagement Aviation is a global industry and IAG remains committed to global policy approaches. In 2022, it supported the strengthening of the global UN-regulated CORSIA scheme. Changes agreed at the ICAO General Assembly will ensure that net emissions from international aviation will be 15 per cent below 2019 levels in 2030, en route to the ICAO target of net zero emissions by 2050. IAG advocates for carbon pricing as a key instrument to determine both the pace of emissions reductions for the aviation industry and the balance of in-sector and out-of-sector reductions. IAG prioritises advocacy on SAF too, as this is a key emissions reduction driver in the next decade, and supports policies on operational efficiency, zero-emission aircraft and carbon offsets and removals. It advocates for policies that are effective and fair across multiple airlines. Member of organisation IAG involvement in organisation and actions to ensure and move to consistent stances UK focus Sustainable Aviation (SA) One of 13 members of SA Council, which governs activities for 44 members Jet Zero Council (JZC) Royal Aeronautical Society (RAeS) – Greener by Design group (GbD) Spain/Europe focus Drove development of net zero roadmap in 2020, proposed interim industry climate targets in 2021, active participant in workstreams to advance green solutions Chairs SAF Delivery Group, supported creation of UK Jet Zero Strategy in 2022 to deliver net zero UK aviation by 2050, British Airways CEO a member Executive Committee of GbD, attended non-CO2 conference in 2022 to understand how best to mitigate these effects Grupo Español para el Crecimiento Verde Iberia is one of over 50 corporate members supporting green growth Airlines 4 Europe (A4E) Global focus Coalition for Negative Emissions oneworld (represents 15 airlines) Air Transport Action Group (ATAG) Founding member, drove development of net zero roadmap in 2021, supported RefuelEU consultation responses and other work to advance green solutions Founding member in 2020, Steering Group member, active contributor to consultation responses to UK Government on how to scale up carbon removals Chairs Environment Strategy Board (ESB), coordinated net zero roadmap and 10 per cent SAF ambition across 2020-21, hosted two ESB meetings in London in 2022, continues to provide support for advancing green solutions Significant airline contributor to global aviation roadmap to net zero in 2020-21, which helps to inform industry priorities for continual advancement of green solutions World Economic Forum (WEF) – Cleaner Skies for Tomorrow Coalition Regular contributor to reports on how to scale up SAF as a low-carbon solution, advocated for 10 per cent SAF ambition by 2030 IATA (represents 300 airlines worldwide) Chaired IATA Sustainability and Environment Advisory Council (SEAC), representatives on IATA working groups to advance policies for green solutions, supported advocacy for net zero commitment at ICAO and strengthening of CORSIA baseline 76 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report A.2. Planet – wider issues A.2.1. Waste Relevant standards: GRI 306-1/2/3 (2020). Overview IAG has one of the most comprehensive waste reduction plans in the airline industry. The ‘5 by 2025’ plan covers five waste streams and five business units, with waste generation and recycling targets across on-board, office, cargo and maintenance waste and a zero-based approach to single-use plastic (SUP). IAG is committed to reducing, reusing and recycling waste and dealing with any hazardous waste in line with relevant national and international regulations. Track record on waste Iberia joins the EU LIFE+ Cabin waste project 160 tonnes of SUP saved across the Group On-board services are the main source of waste. Key waste outputs include plastic packaging, leftover food waste, drinks cans and cabin items such as wrappers. Key inputs included on-board meals and amenity kits supplied to passengers. In 2022, IAG operations generated: • 52,106 tonnes overall (27,613 in 2021) • 51,133 tonnes non-hazardous waste • 973 tonnes hazardous waste. 13,806 tonnes were recovered or recycled. Waste is typically offloaded and processed at airports by third-party caterers, with some materials recovered on-site and other materials incinerated or sent to landfill. The majority of cabin and catering waste is processed at IAG’s hub airports – London, Madrid and Barcelona – although the Group flies to over 200 airports worldwide. Reducing food waste remains an area of focus. For example, Iberia offers a Buy- Before-You-Fly service on shorthaul flights and British Airways offers a pre-ordering service for products from the on-board SpeedBird Cafe, to give passengers the choice of buying fresh and ambient products before departure. These services remove food waste from unpurchased shorthaul economy cabin meals while maintaining customer choice. British Airways has a target to halve food waste volumes between 2019 and 2025. The Group is also expanding its efforts to increase recycling. For example, in 2022 Aer Lingus trialled the first-ever flights into Ireland to recycle on-board, Iberia segregated glass on-board for the first time, and Vueling rolled out trolleys which enabled waste segregation. British Airways targets 700 tonnes SUP saved a year but had to cancel due to COVID-19 First Group-wide waste targets EU SUP ban comes into force New initiatives to recycle more on-board waste Delivery of ‘5 by 2025’ waste targets 2016 2019 2020 2021 2022 2025 Below is the Group’s most comprehensive waste disclosure to date. Waste trends remain unusual due to the COVID-19 recovery and are expected to stabilise in 2023, allowing for more in-depth analysis of progress towards the 2025 goals. Metric On-board waste per passenger Office waste per full-time employee Unit 2019 base 2025 target Kg/pax Kg/FTE 0.33 0.27 (-20%) 95.7 47.8 (-50%) Maintenance waste per unit of activity Kg/person-hr 0.63 0.47 (-25%) Cargo waste per unit of cargo carried Kg/tonne cargo On-board waste at hubs recycled/recovered Office waste recycled/recovered Maintenance waste recycled/recovered Cargo waste recycled/recovered % % % % 1.55 24% 35% 50% 63% 1.16 (-25%) 40% 60% 70% 80% 2020 0.75 124.5 0.67 1.59 31% 16% 35% 55% 2021 0.47 103.1 0.56 1.43 26% 13% 45% 61% 2022 0.41 77.4 0.36 1.59 24% 26% 60% 59% vly (12%) (25%) (35%) 11% (2pts) 13pts 15pts (2pts) INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 77 SUSTAINABILITY A. PLANET Commentary on key metrics Key metrics Description Commentary Overall waste Waste recycling and recovery Single-Use Plastic (SUP) Includes waste from all streams – on-board, office, cargo and maintenance waste – and an extrapolation of waste processed at overseas airports, where waste destinations are not always reported by third parties. Waste volumes increased as flying recovered and waste intensity metrics are returning to pre- pandemic levels. Trends are expected to stabilise in 2023. Includes re-use, downcycling, upcycling, energy from waste, composting and anaerobic digestion. Regulations, including International Catering Waste (ICW) regulations, limit the amount which can be recycled. Overall recycling/recovery rates are 26 per cent, up from 21 per cent in 2019. The impact of airline recycling initiatives is expected to become clearer in 2023. Items made wholly or partly of plastic and are typically intended to be used just once or for a short period of time before they are thrown away. This aligns to the EU definition. 160 tonnes of SUP were reduced from initiatives such as using birchwood cutlery and replacing packaging on blankets. The IAG GBS Procurement team is evaluating alternatives to plastic as part of procurement processes. Waste/pax at hubs On-board catering waste generated per passenger, including volumes later recycled and recovered. Waste generation ratios per passenger are gradually decreasing back to pre-pandemic levels. Passenger numbers are based on those inbound and outbound passengers who have their waste processed at hub airports London Heathrow and Gatwick, Madrid, Barcelona and Dublin. Detailed descriptions of all waste metrics are available in the NFIS. A.2.2. Noise and air quality Relevant standards: GRI 305-7. IAG has delivered a 12 per cent reduction in noise per take-off and landing cycle (LTO) versus 2019, driven by fleet renewal. It remains committed to reducing the impact of aircraft noise and air pollution on local communities near airports and supports innovation as a means of delivering this. Noise and air quality performance are monitored using national databases and global aircraft noise standards. Group airlines continue operational practices to minimise noise impacts, such as the use of continuous descents. They engage with stakeholders such as community groups, regulators and industry partners to understand their concerns and participate in research and operational trials to identify and refine solutions. In 2021 and 2022, Iberia participated in the EU AVIATOR project to better understand air pollution at airports, including the impact of a 30 per cent SAF blend. As indicated in the 2021 Annual Report, IAG planned to update noise targets in 2022 but has delayed this review until 2023 when flying demand is expected to stabilise. Detailed descriptions on all noise metrics are available in the IAG NFIS. Metric Noise per cycle NOx per cycle ICAO Chapter 14 CAEP Chapter 8 Unit1 QC per LTO kg per LTO % at standard % at standard vly (0%) (4%) 3pts 2pts v2019 (12%) (4%) 6pts 6pts 2022 0.88 8.8 59% 41% 2021 0.88 9.222 56% 39%2 2020 0.96 9.84 58% 40% 2019 1.00 9.23 53% 35% 2018 1.07 9.71 50% 29% 1 % at standard is based on the fleet position at the end of 2021, including parked aircraft and excluding leased aircraft. Metrics per LTO are based on aircraft operational during the year. 80% of the IAG Fleet is CAEP Chapter 6-compliant, up from 74% in 2018. 2 Restated using the latest available data. Related risk: Operational noise restriction and charges Risk and/or opportunity description and potential impact Mitigating actions Airport operators and regulators apply operational noise restrictions and charging regimes which may introduce additional costs or restrict airlines’ ability to operate, e.g. restrictions on night flights. • Investing in new quieter aircraft as part of fleet modernisation • 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 Ireland, Spain and the UK to manage noise challenges 78 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report B. People B.1. Overview Our people are central to our business and key in delivering for our customers. The flexibility, commitment and support our colleagues have demonstrated have been critical to enable the Group’s recovery as markets re-opened and travel restrictions eased. Each airline had a different recovery path, reflecting their network and markets served. All have faced resourcing challenges as we established the capacity to meet increasing demands for travel. This resourcing challenge included recruiting around 17,400 new colleagues across the Group, driving a 17 per cent increase in our workforce year on year. The strength of the Group’s brands was key to attracting talent, but we faced industry-wide shortages in skilled resources especially in engineering and airport operation roles. At the end of 2022, around 66,000 people were employed across the Group in 77 countries. Voluntary turnover at 8 per cent reflects both more normalised levels and the dynamic talent market in our key hubs. The pandemic and inflation have created pressure for the business and for our people, and the approach to pay and conditions in each operating company reflected the different starting points and business context they face. The agreements reached by operating companies have endeavoured to strike the right balance between benefits to our employees and the competitiveness of the business in the long-term. At the start of 2022 we announced our ambition for 40 per cent of women in senior leadership roles by 2025. This new ambition was underpinned by a new diversity and inclusion framework and strategy and we have been making strong progress in making IAG a more inclusive place to work. In 2022, we have seen the percentage of women in the IAG Management Committee increase 8 percentage points with the appointment of Sarah Clements as IAG’s new General Counsel. We end the year at 34 per cent of women in senior leadership roles, up from 33 per cent in 2021. We remain confident we are on track to deliver on our 40 per cent ambition and have instigated new succession and talent processes and implemented changes to ensure our recruitment processes are inclusive, and we are seeing more talent mobility across the Group as a result. B.2. Key metrics and progress Relevant standards: GRI 102-7, 102-8, 401-1, 405-1 Key measures are provided in the next few pages together with explanations. Headcount 71,134 72,268 Headcount by employment categories 66,044 57,928 56,658 10% 34% 21% 23% 12% 2018 2019 2020 2021 2022 Number of senior women increased to 34% Cabin Crew Pilots Airport Corporate Maintenance Headcount by employment contract Headcount by employment type 5% 95% 20% 80% Permanent Temporary Full-time Part-time INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 79 SUSTAINABILITY B. PEOPLE Table of key measures Metric GRI standard Unit Employment Headcount Composition 102-7 102-7 102-8 Composition 102-8 Composition 102-8 Average manpower equivalent1 Number of people2 % headcount by employment type % headcount by employment contract % headcount by employee categories Employees by country % of people Sub-category vly 2022 2021 2020 2019 2018 +18.5% +16.6% 2pts -2pts -1pts 1pts 2pts -1pt 50,222 59,505 66,044 56,658 78% 80% 20% 95% 5% 34% 12% 22% 96% 4% 32% 13% 60,612 66,034 64,734 57,928 72,268 71,134 79% 21% 97% 3% 31% 13% 74% 26% 94% 6% 35% 11% 75% 25% 94% 6% 35% 11% 0pts 23% 23% 25% 26% 26% 2pts -3pt 2pts -2pts 0pts 0pts 21% 10% 51% 34% 7% 8% 19% 13% 49% 36% 7% 8% 20% 11% 50% 34% 8% 8% 17% 11% 54% 31% 7% 8% 18% 10% nr nr nr nr Full-time: Part-time: Permanent: Temporary: Cabin crew: Pilots: Airport Operations: Corporate Function: Maintenance: UK: Spain: Ireland: Other: Note: ‘nr’ means ‘not reported’. 1 The mean of the manpower equivalent captured quarterly to reflect seasonality. 2 Actual number of people employed across the Group at December 31, 2022. 80 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Table of key measures continued Relevant standards: GRI 102-7, 102-8, 401-1, 405-1 Metric Gender diversity GRI standard Unit 405-1 % women at Board level Sub-category % women at senior executive level % women at Group level Age diversity 405-1 % of managerial staff in each age band % of non-managerial staff in each age band Workforce turnover 405-1 Attrition rate (%) Overall % by age group Overall % by gender <30 30-50 50+ <30 30-50 50+ Voluntary Non-voluntary <30 30-50 50+ Women Men Relevant standards: GRI 102-41, 403-9, 404-1. TR-AL-310a1 vly 3pts 1pt 2pts 4pts 1pts -5pts 5pts -4pts -1pt 3pts 0pts 5pts -4pts -1pt -2pts 2pts 2022 45% 34% 44% 6% 56% 38% 21% 49% 30% 8% 1% 40% 42% 18% 47% 53% 2021 42% 33% 42% 2% 55% 43% 16% 53% 31% 5% 1% 35% 46% 19% 49% 51% 2020 42% 30% 43% 3% 57% 40% 18% 54% 28% 16% 5% 16% 33% 51% 52% 48% 2019 33% 30% 44% 4% 55% 41% 21% 50% 29% 7% 2% 37% 36% 27% 47% 53% 2018 33% 27% 45% 7% 57% 36% 22% 50% 28% 8% 3% 35% 34% 31% 51% 49% GRI standard Unit 102-41 % covered by collective bargaining agreements vly -2pts 2022 89% 2021 91% 2020 89% 2019 87% 2018 86% 404-1 Average hours per employee per year 80% 53.3 29.6 26.4 48.4 41.1 403-9 LTI per 200,000 hours worked 33% 3.01 2.27 2.41 4.34 4.20 Average days lost per LTI -21% 23.98 30.47 37.80 22.64 21.12 Metric Social dialogue and trade unions Average hours of training Lost Time Injury (LTI) frequency rate LTI severity rate Fatalities 403-9 Number of fatalities 0pts 0 0 0 0 1 Note: ‘nr’ means ‘not reported’. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 81 SUSTAINABILITY B. PEOPLE Description and commentary for key workforce metrics Metric Employment Average Unit manpower equivalent Headcount Number of people Composition % headcount by employment type, contract and employee categories Employees by country Number of people Description Manpower equivalent is the number of employees adjusted to include part-time workers, overtime and contractors. The average is the mean of the manpower equivalent captured quarterly to reflect seasonality. Headcount is the actual number of people employed across the Group (employees) at December 31, 2022. Composition is a breakdown of headcount as at December 31, 2022. Full-time employees are defined as those working full contractual hours as at December 31, 2022. A temporary employment contract has a defined end date. The employee category breakdown portrays the distribution of the major groups within IAG’s workforce ’in the air‘ – pilots and cabin crew – and ’on the ground’ – airport, corporate and maintenance and logistics. This metric depicts the distribution of the Group’s employees according to the country in which they are based. Gender diversity % women at Board, senior executive, and Group level The share of women as a proportion of all staff at specific levels of seniority across the Group. Age diversity % of staff in each age band The ‘on the ground’ managerial population includes all airport, corporate and maintenance roles equivalent to a manager across the Group. Workforce turnover % voluntary and non- voluntary turnover The ‘in the air’ managerial population includes all pilot and cabin crew roles equivalent to captains and cabin service managers. Measured as the number of leavers as a percentage of the average number of Group employees in the year. The number of leavers excludes temporary contracts and death in service. 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). 82 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Commentary The 18.4% increase reflects our business’s growing recovery in 2022 and substantial recruitment and increases in full-time employment across the business. This is an average figure and most of the on-boarding of new recruits has taken place in the second half of 2022. This measure accounts for employees’ contractual schedule of work. Overall headcount has increased by 17% in 2022. This reflects recruitment drives across the Group’s key hubs. Increases in temporary workers to pre-pandemic levels of 5%, driven by short-term capacity requirements and a return to more normalised seasonal resourcing. We have also seen an increase in full-time employees to 80%. There have been significant net increases in full-time cabin crew +25% and airport operations employees +25%. Cabin crew composition levels have recovered this year to 34% of the Group workforce. The increase in the proportion of Group employees based in the UK reflects the recruitment drive currently underway in British Airways. This has seen nearly 9,000 UK-based employees join the Group. At the end of 2022 IAG had employees based in 77 countries. There were 221 senior executives as at December 31, 2022. Gender diversity increased to 45% at Board level. IAG’s proportion of women in senior executive roles is currently 34%. An increase in the proportion of women across the Group is associated with the recruitment drives in roles with a traditionally more balanced gender mix e.g. cabin crew. Employee turnover for <30 year old was 31% (2,951); 10% for 30-50 year old (3,022); and 7% for >50 year old (1,427). Overall, the Group has seen a decrease in the proportion of employees aged between 30-50 years old. This is linked to significant growth in the <30 years age joining the group (+19%). The overall annual turnover in 2022 was 9% – a total of 5,930 employees, of which 916 were non-voluntary leavers. This compares to 6% in 2021, a total of 5,054 of which 685 were non-voluntary leavers. This increased turnover reflects more normalised turnover levels and the dynamic talent market in key hubs. Strategic Report B.3. Equity, Diversity and Inclusion Diversity is one of IAG’s core strengths, with colleagues joining us from across the world, and working in around 80 countries. IAG continues to champion and make positive progress relating to equity, diversity, and inclusion (EDI) initiatives and practices. A robust integrated framework for EDI guides our journey towards a diverse and inclusive culture and workforce. In 2022, we reset our ambition of 40 per cent women in senior leadership roles by 2025 and we have made strong progress in our first year with a 1 percentage point increase to 34 percent. Our Group-wide plans go beyond gender. We are reviewing how we manage declarations in our core countries of operation, reflecting the cultural and regulatory environment, with an aim to use data and insights to set progressive targets and action plans. The IAG Diversity Panel, created in 2021, sees representatives across all operating companies sharing best practice and leading on the co-design and implementation of new EDI initiatives. In 2022, the panel welcomed internal and external guest speakers on specialist subjects such as gender diversity in aviation and reverse mentoring. Members of the panel have joined Women in Hospitality and Leisure (WiHTL) Committees, including specialist areas such as Race & Ethnicity and Disability. To support and underpin actions and initiatives across the group, work has taken place to review IAG’s key employment policies, ensuring they are inclusive and fair for all. Achievements in 2022 • IAG has increased the number of women in senior executive roles to 34 per cent, a 1-percentage point increase on last year. • IAG’s new Equity, Diversity and Inclusion policy was approved by the IAG Board of Directors in July 2022. • Launch of the ‘Peppy’ menopause support App across IAG head office, British Airways and IAG Loyalty, recognising the impact of the menopause at work and offering 24/7 advice, support, and information to those impacted both directly and indirectly. • Having achieved the Bronze Investors in Diversity Award from the Irish Centre for Diversity, Aer Lingus now targets the Silver Award, with significant improvements to parental leave policies implemented in 2022 and a continuation in support for Dublin’s Pride Parade. • British Airways achieved 40% women in senior leadership roles for the first time. The airline also successfully undertook a 9-month pilot for reverse mentoring with colleagues from racially and ethnically diverse backgrounds and members of the British Airways Management Committee. In 2023, this programme will be rolled out to all senior managers across British Airways. • IAG Cargo invested in mental health first aid training for 59 colleagues across the company, supporting a culture of support and inclusion. In recognition of the global nature of the Cargo business, Rosetta Stone Language Learning launched and was made available to all colleagues. • IAG GBS have launched the first Equity, Diversity, and Inclusion policy for the company. • IAG Loyalty placed EDI at the centre of its new values this year, stating ‘We take belonging seriously’. Bringing this to life included forming a colleague ‘squad’ focused on the topic, the launch of a women’s development programme in partnership with Amazing If and an organisation-wide EDI survey. • Iberia have incorporated EDI into their values, transforming the previous value of ‘We are one’ into ‘We are one and diverse’. In 2022, the company also created and launched a network of diversity ambassadors who will be supported as champions and role models. • In Iberia Express the management committee reached 50 per cent female representation for the first time and there was a substantial improvement in female representation in First Officer pilot roles, moving from 9 to 11 per cent • Vueling finalised its D&I strategy and action plan. The company also celebrated achieving a 50% female management committee and a positive 44% of female colleagues working in team leader positions. “Diversity is one of IAG’s core strengths” INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 83 SUSTAINABILITY B. PEOPLE B.4. Health, safety and well-being Overview IAG is committed to safeguarding the health and safety of our employees, customers and all others related to our activities. This means operating in a healthy, safe and secure way in compliance with all applicable laws, regulations, Company policies and industry standards. Health and safety are fundamental to our business, whether in the air or on the ground. IAG has robust governance processes in place led by the safety committees in each operating company. The IAG SECR Committee has oversight of all matters related to the operational safety and corporate responsibility of IAG’s airlines as well as to the systems and resources dedicated to safety activities across the Group. IAG’s 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. Focus areas As IAG continues to recover and grow in 2022, health and safety has remained a priority area for the Group. While Lost Time Injury (LTI) frequency rates have increased this year to 3.0 incidences per 200,000 hours worked, this is still relatively low compared to pre-2019 levels, and reflects the increase in hours worked by front-line operational teams compared to 2021. To support and prioritise employees’ health and safety, our operating companies continue to provide employees with access to occupational health services and rehabilitation services. For example, British Airways has relaunched its Early Active Rehabilitation programme to assist employees back to work to help keep LTI severity rates low whilst providing employees the necessary support to get back to work. British Airways will also be commencing a project in 2023 to replace its current Occupational Health software to provide employees and managers with a better platform for colleague referral. IAG Cargo has trained 59 accredited Mental Health First Aiders as part of a new vision, mission and values launch across the business. Most of our operating companies have supplemented government and healthcare-provided influenza vaccinations with their own programmes. Given the low levels of influenza since COVID-19 this initiative is seen as key to keeping our employees healthy and protected and maintaining productivity in the Group. For example, Iberia has continued its ‘Elige Cuidarte’ (‘Choose to take care of yourself’) programme with an objective to vaccinate all employees against the flu and providing workers with suggestions of health lifestyle habits. B.5. Human rights and modern slavery IAG had no known cases of human rights violations across the Group during 2022, the same as in 2021. IAG is taking steps to prevent incidences of modern slavery within the Group and across its supply chains. The IAG Group Slavery and Human Trafficking Statement outlines these actions and is available on the IAG website. This statement is made under section 54, part 5 of the 2015 UK Modern Slavery Act (MSA). In terms of policies associated with human rights, IAG asks suppliers to comply with the Supplier Code of Conduct, which expressly prohibits the use of child labour and any form of slave, bonded, forced, involuntary prison labour, human trafficking or exploitation. Modern slavery clauses feature in all new supplier contracts as well as contract renewals. IAG remains committed to taking swift and robust action if any evidence relating to slavery or human trafficking in our business supply chain is identified. IAG is taking steps to prevent human trafficking. Human trafficking is of particular concern to IAG and to the wider aviation industry, as the Group transports millions of passengers every year and has tens of thousands of suppliers across the world. Operating airlines work closely with governments and the airports in which they operate to ensure that any suspected trafficking on our flights is identified, reported and dealt with appropriately. IAG also supports the 2018 IATA resolution denouncing human trafficking and reaffirming a commitment to tackle this issue. Operating airlines also train staff to recognise and respond to the signs of potential human trafficking situations and provide procedures for reporting where any cases are suspected. This training is managed at airline level. In 2022, over 24,000 employees have completed training covering human rights topics, compared to 27,000 employees in 2021. Related risk: Human rights Risk description and potential impact Mitigating actions Not preventing potential incidences of human trafficking via IAG routes, damaging efforts to improve human rights and associated legal and reputational impacts. Potential human rights or modern slavery violations in the supply chain leading to fines, compliance issues, business interruption or reputational damage. • Updated Group Slavery and Human Trafficking Statement • Training for staff to recognise signs of potential human trafficking and guidance and processes in place to report this • See C.4. Supply chain governance In 2022, IAG planned to review its assessment of human rights risks within the business. This review has been shifted to 2023. 84 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report B.6. Community engagement and charitable support Relevant standards: GRI 102-13, 201-1. In 2022, IAG raised over €6.5 million for charitable causes across the Group, including campaigns related to the floods in Pakistan and the war in Ukraine. Of this, 43 per cent came from customer contributions, 35 per cent from Company donations, 16 per cent from employee contributions, and 6 per cent from in-kind donations. The Group also carried over 19 million COVID-19 vaccines between 2020 and 2022. Metric GRI Standard Unit Total raised € million vly 141% 2022 6.5 2021 2.7 2020 4.6 2019 5.7 2018 nr Group operating companies have partnerships with a range of organisations including: Disasters Emergency Committee (UK) Flying Start (UK) Save the Children (Spain) Lovaas Foundation (Spain) Dublin Pride (Ireland) Special Olympics (Ireland) Business vs Smog (Poland) Noble Gift (Poland) UNICEF (global) INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 85 SUSTAINABILITY B. PEOPLE Aer Lingus and Paralympics Ireland In October 2022, Aer Lingus was announced as the Official Airline of Paralympics Ireland and will support Team Ireland as it prepares for and competes in the Paris 2024 Paralympic Games. Following the support of the team for its Tokyo 2020 campaign, Aer Lingus will continue to support Irish para-athletes to World Games in the lead up to qualification for Paris 2024. 86 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report C. Principles of sustainability governance C.1. Sustainability strategy IAG’s vision is to be the world’s leading airline group on sustainability. That means using its scale, influence and track record to not only transform the business but drive the system-wide changes required to create a truly sustainable aviation industry. IAG is committed to delivering best practices in sustainability programmes, processes and impacts, while executing Group strategy. IAG aligns its environmental strategy with the three overall strategic priorities of the business described in the Strategy section. Material issues IAG orientates its sustainability strategy around material issues: those which are most important to key stakeholders and which have the biggest external impacts. To identify these issues over a three-year timeframe and to 2030, IAG repeated a materiality assessment in 2021 which was facilitated by an independent third party. External stakeholders included investors, corporate customers, policy makers, trade associations, fuel suppliers, airports, and NGOs. Internal stakeholders included IAG Board members, all IAG Management Committee members, and operating company sustainability representatives. The results inform ongoing disclosures and strategy. Tackling climate change was identified as the most material issue in the long-term. In the short-term, as the business recovers from the COVID-19 pandemic, profitability and customer and employee engagement and well-being remain high priorities. IAG will consider use of a double materiality assessment when it next repeats this analysis, which is expected to be 2024. IAG does not have specific risk provisions, targets or guarantees related to non- material issues such as water consumption, biodiversity, raw materials consumption or light pollution. More information on water and biodiversity is available in the Additional Disclosures section of the NFIS. Leading net zero by 2050 roadmaps and commitments IAG commitment (first airline group worldwide) IAG roadmap launched at Capital Markets Day Sustainable Aviation roadmap and commitment oneworld commitment A4E roadmap and commitment oneworld roadmap IATA commitment ICAO commitment Oct 10, 2019 Nov 8, 2019 Feb 4, 2020 Sept 11, 2020 Feb 11, 2021 Aug 31, 2021 Oct 4, 2021 Oct 3, 2022 Leading 10% SAF by 2030 commitments IAG (first European airline group to commit) World Economic Forum oneworld alliance UK Government (Cleaner Skies for Tomorrow Coalition) Apr 22, 2021 Sept 22, 2021 Oct 4, 2021 Oct 9, 2021 Leading innovation CDP A-List company Sustainability category added to Group accelerator programme. Founding member of Coalition for Negative Emissions, supporting carbon removals. Secures first aviation sustainability-linked loan linked to ESG targets, via British Airways Invests in hydrogen aircraft (ZeroAvia) Offers carbon removals to customers (British Airways) Dec 2017 Sept 2019 Oct 2020 Jan 2021 2021 Nov 2022 Drove/leading role Supported IAG-specific INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 87 SUSTAINABILITY C. PRINCIPLES OF SUSTAINABILITY GOVERNANCE Sustainability leadership KPIs 9 1 8 7 6 2 3 4 Our 9 KPIs 5 IAG drives progress based on nine strategic KPIs agreed by the Board in 2021. 1 Clear and ambitious targets relating to IAG’s most material issues 2022 action 2025, 2030 and 2050 carbon targets and published transition plan. British Airways and Iberia have sustainability-linked loans related to 2025 carbon efficiency. 2 Low-carbon transition pathway embedded in business strategy 2022 action Sustainability aspects included in one-year, three-year and 2030 business planning for operating companies. 3 Management incentives aligned to delivering a low-carbon transition plan 2022 action Over 7,400 senior executives and managers have 10 per cent of their annual incentive linked to annual carbon intensity targets. 4 Leadership in carbon disclosures 2022 action A-List company in CDP climate ratings in 2022 (Top 3 per cent). Highest-ranked airline in TPI climate ratings (Score: 17/18). 5 Accelerating progress in low-carbon technologies including aircraft technology, SAF, carbon offsets and carbon removals 2022 action Sustainability remains a focus area within the IAG accelerator programme Hangar 51. 6 Accelerating innovation in low-carbon technology as above 2022 action LanzaJet Freedom Pines SAF plant was the first project worldwide to receive a catalyst grant from the Breakthrough Energy Catalyst Grant. 7 Industry leadership in the innovation and deployment of SAF including power-to-liquids 2022 action 250,000 tonnes of SAF secured for 2030, 25 per cent of target. 8 Stepping up our social commitments including on diversity, employee engagement and sustainability as a core value 2022 action 34% women in senior executive roles, a 1 percentage point increase on 2021. 9 Industry leadership in stakeholder engagement and advocacy 2022 action Leadership roles across multiple trade associations. See A.1.7. 88 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Leadership in carbon disclosures IAG leads the aviation industry in external ratings of climate action. For four of the past six years, IAG has been awarded Leadership grades by The Carbon Disclosure Project (CDP), which assesses almost 15,000 companies globally on climate action. CDP awarded IAG a prestigious A-List award in 2022, placing the Group in the top 3 per cent of respondents worldwide. For the past two years, IAG has also been the highest ranked airline in the global Transition Pathway Initiative (TPI) ratings, which assess 600 companies across 47 countries on their readiness for the low-carbon transition. IAG is in the top 10 per cent of airlines assessed by Sustainalytics, which gives ESG risk ratings to around 15,000 companies worldwide based on public disclosures. IAG continues to engage with other relevant ESG rating agencies to enable more accurate calculations of IAG’s scores and to identify actions to improve these scores. Strategic Report Governance spotlight: Jet Zero Council Overview In 2021, the UK Government created a new initiative called the Jet Zero Council (JZC), to provide advice on the Government’s ambitions to deliver net zero aviation and zero-emission flights. IAG support IAG staff chaired two subgroups – a COP26 Group and the SAF Delivery Group – and the British Airways CEO is a member. In 2022 the work of the JZC supported the launch of an ambitious ‘Jet Zero Strategy’ for UK aviation. Jet Zero Strategy Delivering net zero aviation by 2050 July 2022 Next steps The Government also committed to reviewing the strategy every five years, and adapting its approach based on the progress made. The JZC model has been so successful that it is being replicated in other countries. Jet Zero Consultation A consultation on our strategy for net zero aviation Scope The JZC is a partnership between industry and Government to bring together ministers and CEO-level stakeholders, with regular meetings and subgroups to drive the ambitious delivery of new technologies and innovation to cut aviation emissions. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 89 SUSTAINABILITY C. PRINCIPLES OF SUSTAINABILITY GOVERNANCE C.2. Governance frameworks Relevant standards: GRI 102-46/-48 Overview IAG has robust governance in place to ensure joined-up and progressive decisions on sustainability. This also helps to ensure that wider stakeholder engagement is consistent with material issues and environmental priorities and goals. An annual meeting planner for the Board ensures sustainability governance processes fit within the reporting and disclosure framework of the Group. The Group’s unique structure means that each individual operating company has a distinct sustainability programme. These are regularly reviewed to ensure alignment with the Group sustainability strategy and principles, which covers material issues, KPIs and engagement plans. Relevant forums and levels of responsibility are indicated below. Information flows between groups is covered in Sections C.6., on the second page of the Risk Management and Principal Risk factors section, and in the Corporate Governance section. Board/management committee Frequency of meetings Responsibility in relation to sustainability Board At least quarterly Board Safety, Environment and Corporate Responsibility (SECR) Committee At least quarterly IAG Audit and Compliance Committee At least quarterly IAG Management Committee At least quarterly Approval for strategy, major investments, risk management and controls and review of progress against environment and people plans including climate-related goals and targets Dedicated oversight of Group sustainability programme and alignment with strategic priorities, review of progress against environment and people plans. Provides a link between operating company management committees and the IAG Board Ensures compliance with relevant regulation and reviews Annual Report and Accounts and Non-Financial Information Statement Reviews and challenges Group programmes, the alignment of operating company-specific programmes with Group priorities and strategy, and progress against plans Operating company management committee At least quarterly Reviews and challenges operating company-specific environment and people programmes Forum Frequency of meetings Responsibility in relation to sustainability IAG Sustainability Steering Group (SSG) At least quarterly Comprised of senior representatives from across the Group who provide oversight of environmental and social initiatives and reporting IAG SAF Steering Group At least quarterly A cross-Group meeting focusing on SAF projects and progress IAG Sustainability network Monthly Hangar 51 Governance Committee At least bi-annually Sharing sustainability updates and ideas across all business units and over 30 sustainability representatives. In 2022, three Group workshops were also hosted: in Spain, Ireland and Poland Reviews new potential investments to consider emerging climate technologies and partnerships with sustainability start-ups Members include the Chief Strategy Officer, Chief Financial Officer, Chief Information Officer and General Counsel Individual IAG CEO Frequency of reporting Responsibility in relation to sustainability At least quarterly IAG Chief People, Corporate Affairs and Sustainability Officer (CPCASO) At least quarterly Chairs the IAG Management Committee, updates the Board, and ensures Board-level decisions are directed into action across the Group Reports into the IAG CEO. A member of IAG Management Committee. Chairs the SSG and provides approval and direction of Group programmes IAG Group Head of Sustainability Regularly as relevant Reports into IAG CPCASO. Chairs the Sustainability network IAG Group Head of People Regularly as relevant Reports into IAG CPCASO Wider governance Wider governance processes integrate sustainability aspects. As part of the Group-wide ERM process, sustainable aviation and people, culture and employee relations risks are presented bi-annually to the Audit and Compliance Committee and annually to the Board. One-year financial plans and three-year business plans are coordinated by Group Finance and include sustainability aspects. In 2022, Group Sustainability representatives also attended the away days of other teams to support the embedding of sustainability. 90 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Diversity At IAG, we believe diversity is key to innovation and to the future growth and success of our business. IAG is proud of the diversity of its workforce, with colleagues having joined from across the world, working in 77 countries, speaking dozens of languages and representing every element of the communities we live and operate in. It is this richness of backgrounds, of experiences, of cultures and ideas that makes our business tick. We want our workforce to reflect the full diversity of the communities we live and work in. We want everyone to see role models they can identify with and to have the same chance of progression and development, and we want everyone who works for IAG to feel that their unique difference is recognised and valued. This means a focus on equity, diversity and inclusion. This allows us to be a place where everyone’s talents are recognised, where skills and capabilities grow, and where future leaders are nurtured and developed. IAG has recently published a revised Group-wide Diversity, Equity and Inclusion Policy to address and eliminate discrimination and promote equality of opportunity regardless of age, gender, disability, ethnicity, religion or sexual orientation. At Group level, IAG also 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 IAG Management Committee. These policies have been approved by the Board of Directors. See Section B.3. for more diversity initiatives. C.3. Workforce governance Relevant standards: GRI 403-4, 408-1, 409-1. IAG aims to create an environment in which employees feel motivated, safe and able to thrive as this is central to the continued success of the Group. Working policies and rights at work Core principles in the IAG Code of Conduct include fair and equal treatment, non-discrimination, fairness and respect for human rights. This Code applies to all directors, managers and employees of the Group and e-learning training to support it is mandatory and applicable to all employees and directors. In addition to the Code of Conduct, individual operating companies have responsibility for policies and procedures relating to their employees, including appropriate reward frameworks to ensure they can continue to attract and retain the best talent for every role. IAG has employees based in European countries which comply with the conventions of the International Labour Organization (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. Outside the EU, IAG recognises trade unions in many jurisdictions, has collective agreements and meets/exceeds all relevant labour standards. Collective bargaining arrangements are in place for 89 per cent of our workforce. In addition, IAG has a European Works Council (EWC) which brings together representatives from the different European Economic Area (EEA) countries in which the Group operates. EWC representatives are informed about and, where appropriate, consulted on transnational matters which may impact employees in two or more EEA countries. IAG completed the election and appointment process for the new Select Committee and Chair in early 2022, and the transition was completed in May this year. Training and development Within the Group, individual operating companies have responsibility for the policies and procedures relating to their employees to ensure they can continue to attract and retain the best talent for every role. Measures to support employee satisfaction and talent management are primarily managed within operating companies and each operating company has its own established methods of measuring employee satisfaction. In addition, IAG has introduced an organisational health survey, initially focused on management populations across all operating companies to benchmark management practices against a globally recognised metric. This survey was run initially in November 2020 and repeated every six months since. Insights from the survey are used to shape and prioritise cultural development plans. Individual operating companies are responsible for learning, development and talent within their business, to enable them to ensure they have the right skills and capabilities required to support their strategy. In May, IAG completed a detailed review of succession planning and talent for all critical and senior roles which has been used to shape the Group’s talent and leadership development priorities and plans. Due to the diverse nature of Group businesses, both in terms of jurisdictions and operations, all training policies and programmes are implemented at operating company level. Each is responsible for determining the specific courses offered within their organisation, the frequency with which training courses must be completed, and the employees required to attend. However, across the Group, all operating companies are required to run the following mandatory corporate training courses for their employees: • Code of Conduct • Compliance with Competition Laws • Anti-bribery and Corruption Compliance • Data Privacy, Security and Protection INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 91 SUSTAINABILITY C. PRINCIPLES OF SUSTAINABILITY GOVERNANCE C.4. Supply chain governance Relevant standards: GRI 308-2, GRI 414-2. Overview IAG Global Business Services (IAG GBS) continues to engage with, support and monitor suppliers to ensure all products and services provided to IAG are on a path to net zero by 2050. The IAG GBS Group Procurement team leads the Supply Chain Sustainability Programme by delivering in four key areas: • The Supplier Code of Conduct (SCoC) • Independent risk screening and sustainability assessments • Corporate Social Responsibility (CSR) Audits • Embedding sustainability as standard in the procurement process From insight to action in 2022 The SCoC has been issued to the existing supply chain and integrated into the new supplier onboarding process. New suppliers are requested to acknowledge their commitment to achieving net zero emissions by 2050, and the need for a roadmap, supported by deliverable plans, to achieve this target. IAG GBS is also partnering with EcoVadis, a market-leading provider of business sustainability ratings, to assess suppliers using a holistic environmental, social and governance (ESG) scorecard. In 2022, IAG GBS embedded sustainability aspects into the day-to-day operation of the organisation and included sustainability targets in the performance objectives of all IAG GBS employees. This gives IAG and its suppliers a baseline for improvements across ESG issues, and suppliers can share them with customers and other stakeholders, which benefits wider industry sustainability. As a minimum, IAG requires its suppliers to provide a safe and healthy environment for their workforce. Supplier selection considers potential industry and geographical risk and, where necessary, on-site audits are carried out. These audits are performed by independent inspectors with CSR expertise using the SEDEX Members Ethical Trade Audit (SMETA) methodology. In 2022, 32 of these audits were completed. All suppliers also undergo annual screening for any legal, social, environmental and financial risks. The Group Procurement and Compliance teams assess any suppliers identified as having potentially higher levels of risk and implement mitigation plans where necessary. Any issues are flagged to the risk owners within the Group to jointly take appropriate action. IAG GBS has verified the existing, active supplier base and IAG’s airlines’ interline relationships in Russia and Belarus in order to determine the potential implications of, and actions to be taken, due to the trade sanctions issued as a response to the war in Ukraine. Follow-up and support have been provided to IAG’s operating companies with regard to mitigation actions taken in response to the findings (e.g. payment stop/blockage) in coordination with the relevant Compliance Teams. Building a sustainable future in 2023 IAG GBS plans to assess the sustainability performance of suppliers representing at least 80 per cent of IAG’s total spend, and include sustainability aspects in the category planning process and additional measures into the selection and contract award process. Issued Supplier Code of Conduct All suppliers screened for sustainability risks Net Zero Scope 3 commitment EcoVadis partnership and supplier sustainability clause Embedding sustainability into category planning 2019 2020 2021 2022 2023 (planned) Tracking metrics and progress Total number of suppliers Suppliers screened Suppliers with additional compliance assessments Critical suppliers under regular risk monitoring Independent CRS audits GRI Standard 308-2, 414-2 vly 6% 6% (63%) (6%) 7% 2022 14,045 14,045 557 32 32 2021 13,272 13,272 1,510 34 30 2020 22,947 22,947 1,818 35 25 2019 27,033 18,369 2,912 n/a 28 2018 nr nr nr nr nr Related risk: Supply chain sustainability compliance Risk and/or opportunity description and potential financial impact Mitigating actions Potential breach of compliance on sustainability, human rights or anti- bribery by an IAG supplier resulting in financial penalties, legal, environmental, social and/or reputational impacts. • IAG GBS procedures above as well as integrity, sanctions and IAG Know Your Counterparty due diligence for higher-risk third parties • Internal governance on supplier management to identify challenges and mitigation • Supplier screening using external business intelligence databases which actively monitor supplier status and flag risks including sustainability 92 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report C.5. Ethics and integrity governance Relevant standards: GRI 102-16/-17, 205-1/-2/-3 Overview All directors and employees are expected to act with integrity and in accordance with the laws of the countries in which they operate. IAG’s Group Code of Conduct (CoC), last revised in 2019 and approved by the Board, sets out the general guidelines that govern the conduct of all directors and employees of the Group when performing their duties in their business and professional relationships. Mandatory CoC training and communications activities are carried out for directors, employees and third parties on a regular basis to maintain awareness and understanding of the principles that govern the conduct of the Group. This policy is available on the IAG website. In 2022, a new Group-wide Whistleblowing Policy was issued and all the Group channels consolidated to one whistleblowing channel provided by an independent third-party provider, EthicsPoint, where concerns can be raised on an anonymous and confidential basis. This channel is available to members of staff as well as suppliers, with information on how to access it published in the CoC and SCoC. If any employee has a concern about unethical behaviour or organisational integrity, they are encouraged to first speak with their manager or a member of the Legal, Compliance or Human Resource teams. Similarly, suppliers are encouraged to contact their primary contact within the business. IAG will not tolerate any retaliation against individuals using the whistleblowing channel or contributing to investigations arising from reports to the whistleblowing channel. Whistleblowing reports received for each Operating Company are triaged by the Compliance teams to direct to the most appropriate area for investigation, maintaining independence in this investigation process. The IAG Audit and Compliance Committee reviews the effectiveness of the whistleblowing channel on an annual basis. This annual review considers the volume of reports by category; timeliness of follow- up; process and responsibility for follow- up; emerging themes and lessons; and any issues raised of significance to the financial statements or reputation of the Group or other areas of compliance. In 2022, whistleblowing reports concerned issues relating to employment matters (64 per cent), dishonest behaviour/reputation (29 per cent), health and safety (6 per cent) and regulatory matters (1 per cent). All reports were followed up and investigated where appropriate, and no material concerns were identified. Anti-corruption and anti-money laundering IAG and its operating companies do not tolerate any form of bribery or corruption. This is made clear in the Group CoC and supporting policies which are available to all directors and employees. An anti- bribery policy statement is also set out in the SCoC. In 2022, a Group-wide anti-bribery and corruption policy was issued. This sets out the minimum standards that are expected by the Group, its directors and employees, including definitions and guidance for bribery, gifts and hospitality guidance, political and charitable donations, public officials, facilitation payments amongst others. Each Group operating company has a Compliance Department responsible for managing the anti-bribery programme in their business. The compliance teams from across the Group meet regularly through Working Groups and Steering Groups, under the IAG General Counsel. They conduct an annual review of bribery risks at operating company and Group level. The main risks identified for 2022 were unchanged from the previous year and relate to the use of third parties, operational and commercial decisions involving government agencies, and the inappropriate use of gifts and hospitality. No material compliance breaches were identified in 2022, as in 2021. Anti-bribery and corruption training is mandatory for all relevant personnel in IAG operating companies, Group functions and the Board. Individual training requirements are set by each operating company and function and are determined by factors such as the level and responsibilities of an employee. Revised Group-wide anti-bribery e-learning was rolled out in 2019 and is required to be completed every three years. To identify, manage and mitigate potential bribery and corruption risks, IAG uses risk-based third-party due diligence which includes screenings, external reports, interviews and site visits depending on the level of risk that a third party presents. Any risks identified during the due diligence process are analysed and a mitigation plan put in place as necessary. Certain risks could result in termination of the proposed or existing relationship with the counterparty. The IAG Audit and Compliance Committee receives an annual update on the anti-bribery compliance programme. There were no legal cases regarding corruption brought against the Group and its operating companies in 2022, as in 2021, and management is not aware of any impending cases or underlying issues. IAG has processes and procedures in place across the Group, such as supplier vetting and management, Know Your Counterparty procedures and financial policies and controls, which help to combat money laundering in the business. Employees completing anti-bribery e-learning Speak Up (whistleblower) reports vly 248% 54% 2022 4,880 252 2021 1,404 164 2020 1,984 193 2019 7,933 nr 2018 nr nr INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 93 SUSTAINABILITY C. PRINCIPLES OF SUSTAINABILITY GOVERNANCE C.6. ESG risk management Relevant standards: GRI 102-11/-15. Overview Sustainable aviation risks and People, culture and employee relations risks are reported as principal risks to IAG. These risks are considered and assessed under the Group ERM framework which is presented bi-annually to the Audit and Compliance Committee and annually to the SECR Committee and Board. More details on this framework, risk identification and assessment, and risk management can be found in the Risk management and principal risks factors section. All principal risks are linked to the Group strategic priorities which includes environmental sustainability. Sustainability risks and opportunities, including climate-related risks and opportunities, are also identified and assessed by the Group Sustainability team, in conjunction with the Group ERM team, and presented to the IAG CPCASO, IAG MC and SECR Committee. Plans to mitigate risks are developed by relevant risk owners in specific areas of the business, with agreed initiatives included in relevant operating company business plans. People, culture and employee relations risks are managed by the Group’s operating companies with guidance from the Group as appropriate. Impact on operations and strategy Sustainability risk assessments have informed specific decisions related to business operations and strategy, and IAG allocates significant resources to environmental risk management. Examples include: • In 2018, TCFD-aligned scenario analysis identified a need for more ambitious action on climate change, which contributed to the 2019 decision to design and adopt the industry-leading Flightpath Net Zero strategy to deliver net zero emissions by 2050. • In 2021, IAG set a new net zero target by 2050 for Scope 3 emissions and IAG GBS appointed EcoVadis to help to track supplier sustainability performance and mitigate supply chain-related sustainability risks. • In 2022, IAG expanded its commitment to invest in SAF development, production and supply, from US$400 million to the equivalent of US$865 million based on assumed energy prices, to manage climate policy risks and take advantage of energy- related opportunities. IAG is committed to mitigating the impacts of hazards which, if they occur, have uncertain but potentially negative outcomes on the environment or people. As such, IAG adopts precautionary measures to mitigate these hazards, an approach known as the precautionary principle. For example, the precautionary principle is applied to the planning of operations and the development and launch of new services, by integrating climate considerations into three-year business plans and one-year financial forecasts and aligning activities with the Flightpath Net Zero strategy. IAG also manages risks via the use of ISO-14001-aligned environmental management systems and is planning for all material environmental impacts across 100 per cent of flight operations and corporate activities to be covered by the IATA Environmental Management System (IEnvA) by the end of 2023. IEnvA is the airline industry version of ISO 14001, the international standard for environmental management systems. IEnvA is tailored specifically for airlines and is fully compatible with the International Organization for Standardization (ISO). Vueling achieved full IEnvA certification in 2022 and British Airways and Aer Lingus have achieved partial (Stage 1) accreditation. In terms of the amount of provisions and warranties for environmental risks, IAG does not take out any specific insurance to cover environmental risks. Related risk: Environmental regulation compliance Risk description and potential financial impacts Mitigating actions An inadvertent breach of compliance requirements related to ESG reporting, emissions or waste management, or other environmental issues, leading to fines and potential reputational damage. • Strengthening sustainability governance including reviews of annual disclosures via the Audit and Compliance Committee • Internal governance, training and assigning ownership for environmental compliance obligations • Working towards IEnvA accreditation to improve internal compliance processes 94 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report C.7.1. Reporting and data governance The full contents of this sustainability report are included in the IAG Non- Financial and Sustainability Information Statement (NFIS), which is third-party independently verified to limited assurance standards in line with ISAE3000 (Revised)1 standards. Compliance with specific frameworks and standards is listed under relevant section headings. IAG complies with current and emerging standards on sustainability reporting. These include obligations under EU Directive 2014/95/EU on non-financial reporting and its transposition in the UK and Spain, the 2018 UK Streamlined Energy and Carbon Reporting regulation, the Task Force on Climate-related Financial Disclosures (TCFD), and the EU Taxonomy Regulation (2020/852). IAG does not align with GRI Core or GRI Comprehensive options but instead aligns with selected GRI standards based on compliance with Spanish Law 11/2018. In cases where GRI alignment was not possible, other standards aligned to airline industry guidance or internal frameworks were used and described. Emissions data from intra-European flights is also independently verified within six months of the year end, for compliance with the UK and EU ETS, and for all flights for the UN CORSIA scheme. Any material changes to key metrics are highlighted in future Annual Reports. IAG also goes beyond compliance requirements and voluntarily aligns sustainability reporting with the Sustainability Accounting Standards Board (SASB), the IATA Airlines Reporting Handbook, GRI Standards for material issues, and relevant criteria from external ESG rating agencies. IAG supported IATA and the GRI to develop the IATA handbook. The scope of environment performance data in this report includes all IAG airlines, subsidiaries and cargo operations over which IAG has operational control. This is also the scope of the net zero targets. Some exceptions for non-material business units have been applied for specific metrics, and these are clearly stated with rationale provided. The scope of workforce and ethics and integrity data includes all IAG operating companies and support functions. Some exceptions have been applied and these are clearly stated with rationale provided. The scope of human rights and modern slavery reporting is as above and includes data from all suppliers in the IAG supply chain. For any specific cases where full-year data was not available for selected metrics, estimates have been applied based on business forecasts and data from prior months. Internal governance is in place to ensure that any estimations made are robust. Any prior-year restatements are indicated next to relevant metrics with reasons provided. C.7.2. Alignment with GRI and SASB standards Key: Green is GRI CORE Sustainability section Sustainability subsection A.1. Planet – climate change A.2. Planet – wider issues B. People and prosperity C. Principles of sustainability governance A.1.3. Metrics and progress A.1.4. Emissions reduction initiatives A.1.7. Stakeholder engagement A.2.1. Waste A.2.2. Noise and air quality B.2. Workforce metrics B.6. Community engagement and charitable support C.2. Governance frameworks C.3. Workforce governance C.4. Supply chain governance C.5. Ethics and integrity C.6. ESG risk management GRI SASB 305-1/2/3/4/5, 301-1, 302-1 TR-AL-110a.1. 305-5 TR-AL-110a.2. 102-13/-43/-44 306-1/-2/-3 (2020) 305-7 102-7/8, 401-1, 405-1, 102-41, 404-1, 403-9 102-13, 201-1 102-46/-48 403-4, 408-1, 409-1 308-2, 414-2 102-16, 102-17, 205-1/-2/-3 102-11, 102-15 TR-AL-310a.1. 1 ISAE3000 is the assurance standard for compliance, sustainability and outsourcing audits, issued by the International Federation of Accountants (IFAC). INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 95 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS Managing risk to protect the business and support delivery of sustainable change Agility in Enterprise Risk Management (ERM) The Group’s ERM framework continues to adapt and evolve to the needs of the business and our stakeholders. This allows the Group and its businesses to both respond to changes in the external risk environment and support the pace and scale of business transformation to achieve sustainable change. In the year, the Group has reviewed the macroeconomic and geopolitical landscape to identify emerging risks and implications for existing principal risks as well as competition and market risk changes, particularly those that could impact operational resilience. By continuing to develop the Group’s assessment of the interdependencies of risks; scenario planning to quantify risk impact under different combinations and assumptions; and considering the risks within the Group’s risk environment that have increased either as a result of the external factors or as a result of decisions made by the Group, its Board and management are better informed and can react more quickly. Where further action has been required the Board has considered potential mitigations and, where appropriate or feasible, the Group has implemented or confirmed plans that would address those risks or retain them within the Board’s determined Group risk appetite. New guidance from regulators and investors is reviewed on an ongoing basis and best practice sought from other risk management sources. Emerging risks and longer-term threats Consideration is given to emerging risks and longer-term threats that the Group or the industry could face. Where emerging risks are identified, they are within the overall risk framework as “on watch” until they are re-assessed to be no longer a potential threat to the business or where an assessment of the risk impact over the next two or three years can be made, and appropriate mitigations can be put in place or the risk becomes a principal risk. Other high-impact, low-likelihood risks are also considered and discussed. ERM policy and framework The Group Enterprise Risk Framework is set out in the ERM policy, which has been approved by the Board. The comprehensive risk management process and methodology ensures a robust identification and assessment of the risks facing the Group, including emerging risks. The risk management framework is embedded across all of the Group’s businesses. Enterprise risks are defined as any risk that could impact the three-year Strategic Business Plan (“the plan”). They are assessed and if the impact is above a threshold, plotted on an enterprise risk heat map, based on probability and impact. Consideration is given to changes in the speed of potential impact. Risks are also considered in combining events where a number of risks could occur together. This process is led by the Management Committee supported by the ERM function. The Group considers risks to the plan over the short-term up to two years, also medium-term from three to five years and in the longer-term beyond five years. Risk outcomes are quantified as the potential cash impact to the plan over two years. Non-financial considerations include the Group’s sustainability commitments, potential for increased regulatory scrutiny, as well as damage to customer and employee trust impacting the Group’s brand and share price. Key controls and mitigations are documented, including appropriate response plans. Where risk treatments require time to implement, short-term mitigations are assessed and the timeline to risk mitigation and consequent risk acceptance discussed and agreed. Every principal risk has clear Management Committee oversight. Risk heat maps for each operating company and central functions are also reviewed by their operating company’s management committee or function leadership team. Where the Group’s operating companies have a reliance on other parts of the Group for services delivery, risks are reflected appropriately across risk heat maps to ensure accountability is clear. The ERM function also works with other compliance and Group functions, such as Government Affairs, Investor Relations, Legal and Sustainability, leveraging their frameworks and assessments where appropriate. At the Group level, key risks from the operating companies, together with Group-wide risks, are maintained in a Group risk heat map. Risk appetite IAG has a risk appetite framework which includes statements informing the business, either qualitatively or quantitatively, of the Board’s appetite for certain risks. Each risk appetite statement applies either on a Group-wide basis or for specific programmes, initiatives or activity within the Group. The framework has continued to operate throughout the year, with the Board assessing its appetite across all of the framework statements at the half year and year end against the Group’s performance and its anticipated delivery of the Board-approved strategic business plan priorities and initiatives. The Board is satisfied that the Group continued to perform and deliver initiatives throughout 2022 as planned to mitigate risk as set out in its framework statements or necessary additional mitigations to risks have been addressed as they occurred. The appetite framework has been subject to review and a new framework will be implemented in 2023. This will allow the setting of tolerances more dynamically across the business plan period. The framework will also allow consideration of trade offs to allow appropriate prioritisation of initiatives to seek opportunities and manage risk within the defined appetite tolerances. The new framework is aligned to the Group strategy approved by the Board in 2022 which sets the level of ambition and investment across the business plan period. Viability assessment The Board’s assessment of the viability of the Group is directly informed by the outputs of the ERM framework. Full details of our approach, scenarios modelled and the viability assessment are shown at the end of this report. 96 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Risk management roles and responsibilities Risk owners and management Operating companies’ management committees IAG Management Committee Operating companies review risk during the year including risk heat map reviews semi-annually, in advance of the Group risk heat map reviews. They escalate risks that have a Group impact or require Group consideration in line with the Group ERM framework. They confirm to their operating company board and audit committees, where they have them, as to the identification, quantification and management of risks within their operating company at least annually. Local risk heat maps are in place for subsidiary businesses, together with Group support platforms including Group Business Services and IAG Tech. The IAG Management Committee reviews risk during the year, including the Group risk heat map semi- annually in advance of reviews by the Audit and Compliance Committee, in accordance with the 2018 UK Corporate Governance Code and the Spanish Good Governance Code for Listed Companies. The IAG Management Committee reviews the performance of the Group at half year and full year against the risk appetite framework and reports any near tolerance or out of tolerance assessments to the Audit and Compliance Committee. The Management Committee recommends scenarios for stressing the strategic business plan as part of the annual Group viability assessment. Across the Group, risk owners are responsible for identifying potential risks and appropriately managing decisions within their area of responsibility that could impact business operations and delivery of the plan. As the Group undertakes transformation activities within its operating companies, the pace and agility of the changes required creates risks and opportunities. For transformational risks, business owners are assigned, and the business will agree appropriate mitigations and timelines for implementation, following discussions with all relevant stakeholders. Emerging risks are assessed and risk owners consider and identify any potential impact to plans. Longer- term ‘on watch’ risks are subject to review as part of the framework. Management is responsible for the effective operation of the internal controls and execution of the agreed risk mitigation plans. IAG Board and Audit and Compliance Committee The IAG Board has overall responsibility for ensuring that the Group has an appropriate, robust and effective risk management framework, including the determination of the nature and extent of risk it is willing to take to achieve its strategic objectives. The IAG Audit and Compliance Committee discusses risk and considers the risk environment regularly throughout the year, as does the IAG Board as part of wider Board discussions, in addition to the IAG Audit and Compliance Committee’s bi-annual risk heat map review, including a review of the assessment of the Group’s performance against its risk appetite, scenarios for assessment of viability and the outputs from the viability modelling. The Audit and Compliance Committee has early sight of management consideration of scenarios to enable it to challenge subjectivities and confirm rationale. It then reviews the outputs at year end and makes recommendations on the viability assessment and statement to the Board. The IAG Board reviews the Group’s risk heatmap annually and it has completed a robust assessment of the Group’s emerging and principal risks in the year. Enterprise Risk Management function The Enterprise Risk Management function provides support across the Group to ensure risk management processes are appropriately embedded and applied consistently, as well as working with management to identify risk, challenge assessments and strengthen the risk culture across the Group. The function provides enterprise risk management guidance and shares best practice across the Group and its operating companies, keeping them informed of any risk-related regulatory developments. The function is responsible for ensuring that the Enterprise Risk Management framework remains agile and responsive to meet the needs of the business and its stakeholders. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 97 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Year in review The highly regulated and commercially competitive environment, together with the businesses’ operational complexity, expose the Group to a number of risks. The Group’s exposure to the external risk environment and the weaknesses in the resilience of the aviation sector’s supply chain and inflation impacts, combined with an ambitious transformation and change agenda has required assessment of how risks are evolving and responding to mitigating actions. With the return of operations as markets have re-opened, the Group has reviewed macroeconomic and geopolitical events to identify emerging risks and implications for existing principal risks. The Group has also considered operational resilience, competition and market risk changes, the status of the financial markets and access to finance, people and culture across the Group and customer satisfaction and trust. Macroeconomic uncertainty and impacts on inflation, interest and exchange rates have been reflected in the principal risk assessments. Management remains focused on mitigating these risks at all levels in the business and investing to increase resilience whilst recognising that such risk events may not be so easily planned for and that mitigations are more responsive in nature. Business responses implemented by management and that effectively mitigate or reduce the risk are reflected in the Group’s latest business plan and related risk scenarios. No new principal risks were identified through the risk discussions in the year. One risk has been reconsidered as part of the reviews and has been reframed as ‘Operational resilience’ from ‘Event causing significant network disruption’ to recognise that the risk to the operational resilience of the business may be challenged by multiple combining events with significant network and customer impact and these may be more significant to the Group where they persist over a longer timeframe compared to one-off events. Principal risks influence The relative level of influence each principal risk has on the other principal risks Principal risk radar The assessed likelihood of risk materialisation for each principal risk 16 1 15 2 14 Compliance and regulatory risks 3 Strategic risks Financial risks Influence of risk 13 12 4 5 11 10 Business and operational risks 9 8 6 7 Strategic Business and operational 5 7 6 8 9 10 4 3 2 1 Low High 16 15 Compliance and regulatory 11 12 13 14 Financial Key Stakeholder impact Customers Employees Suppliers Governments and regulators Shareholder, lenders and other financial stakeholders Link to principal risk Strategic priorities Risk trend Considered in viability assessment scenarios 1 2 3 Increase V 1 2 3 4 Stable Decrease 98 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Principal risk Strategic 1 2 3 4 5 Brand and customer trust Chief Strategy Officer Competitive landscape Chief Strategy Officer Critical third parties in the supply chain Chief Transformation Officer Economic, political and regulatory environment Chief Strategy Officer/Chief People, Corporate Affairs & Sustainability Officer Sustainable aviation Chief People, Corporate Affairs and Sustainability Officer Business and operational 6 7 8 9 10 11 Cyber attack and data security Group CIO IT systems and IT infrastructure Group CIO/Chief Transformation Officer Operational resilience Chief Strategy Officer/Operating company CEOs People, culture and employee relations Chief People, Corporate Affairs and Sustainability Officer/Operating company CEOs Safety or security incident Operating company CEOs Transformation and change Chief Transformation Officer Financial risk including tax 12 13 Debt funding Chief Financial Officer Financial and treasury-related risk Chief Financial Officer 14 Tax Chief Financial Officer Compliance and regulatory 15 16 Group governance structure General Counsel Non-compliance with key regulation and laws General Counsel Strategic priorities Stakeholder impact Risk trend 2021 2022 Viability scenario 2 1 2 2 1 2 4 3 3 1 2 3 2 2 1 1 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 99 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Principal risk register Risks are grouped into four categories: strategic, business and operational, financial including tax and treasury, 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. Additional key business responses implemented by management are also set out. The list is not intended to be exhaustive but does reflect those risks that the Board and Management Committee believe to be the most likely to have a potential material impact on the Group. Strategic 1 Brand and customer trust Chief Strategy Officer Strategic priorities 1 32 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status The Group’s ability to attract and secure bookings, and generate revenue depends on customers’ perception and affinity with the Group airlines’ brands and their associated reputation for customer service and value. The Group airlines’ brands are, and will continue to be, vulnerable to adverse publicity regarding events impacting service and operations. Reliability, including on-time performance, is a key element of the brands and of each customer’s experience. Where customers have been impacted as a result of operational resilience issues in the year, all airlines have worked directly with their customers to resolve the issues and ensure, where possible, that customers have been able to complete their travel plans. IAG remains focused on strengthening its customer-centricity to ensure that its operating companies continue to adapt and focus their business models to meet changing customer expectations and needs. Customer sentiment to travel and their expectations when they travel are intrinsic to brand health. The resilience and engagement of our people as customer service ambassadors to deliver excellent customer service is critical to retaining brand and customer trust. Risk description Strategic relevance Mitigations Erosion of the brand and customer trust through poor customer service or lack of reliability in operations, 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. Failure to meet customer expectations on sustainability and the Group’s impact on stakeholders and society could impact the Group and its brands. • The Group’s brands are • All IAG airlines are considered within the brand positioned in their respective markets to meet their customer propositions and deliver commercial value. Any change in engagement or travel preferences could impact the financial performance of the Group. • IAG will continue to focus on its customer propositions to ensure competitiveness in its chosen priority customer demand spaces and to ensure that it adapts to meet changing customer expectations. • The Group is clear on the key levers to improve brand perception and satisfaction for each of its operating company brands. portfolio review. • Brand initiatives for each operating company have been identified and are aligned to the plan. • Product investment to enhance the customer experience supports the brand propositions and is provided for in the plan. • All airlines track and report to IAG on their Net Promoter Score (NPS) to measure customer satisfaction. • IAG Customer Steering Group meets monthly and shares initiatives. • Hygiene and travel protocols have been implemented across the Group’s airlines to address regulatory requirements resulting from the COVID-19 pandemic. • Enhanced disruption management tools within airlines to allow customers to manage their travel preferences. • Enhanced flexibility in airline booking policies. • Increased focus on the end-to-end customer journey from flight search through to arrival and baggage reclaim. • The Group’s global loyalty strategy builds customer loyalty within IAG airlines. • The Group’s focus on sustainability and sustainable aviation including the IAG Climate Change strategy to meet the target of net zero carbon emissions by 2050. • Robust portfolio process to determine the right investments across the Group. • The Group’s CIO and Chief Transformation Officer are members of the IAG Management Committee. • Additional focus on customer feedback. 100 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Strategic 2 Competitive landscape Chief Strategy Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status The recovery of demand in the year has seen a significant return of capacity into the market. The distortionary effects of the governmental support and aviation-specific state aid measures on the competitive landscape, including those provided in response to the COVID-19 pandemic, continue to be assessed. The Group is investing in new fleet and products to maintain its competitive position in the markets in which its airlines operate. IAG acquired 20 per cent of Air Europa by converting its convertible loan in August 2022 and has agreed the acquisition of the remaining 80 per cent as at February 23, 2023, subject to relevant regulatory approvals. See Financial review section The Group continues to lobby over the negative impacts of government policies on aviation or policy asymmetry, such as increases in Air Passenger Duty (APD). Risk description Strategic relevance Mitigations Competitor capacity growth in excess of demand growth could materially impact margins. Any failure of a joint business or a joint business partner could adversely impact the Group’s airline business operations and financial performance. 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. • 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. Some competitors have other competitive advantages such as government support or benefits from insolvency protection. • Regulation of the airline industry covers many of the Group’s activities including route flying rights, airport landing rights, departure taxes, security and environmental controls. The Group’s ability to comply with and influence changes to regulations is key to maintaining operational and financial performance. • The IAG Management Committee meets weekly and undertakes regular operating company-specific reviews. • The Board discusses strategy throughout the year and dedicates two days per year to undertake a detailed review of the Group’s strategic plans. • The Group strategy function supports the Management Committee by identifying where resources can be devoted to exploit opportunities and accelerate change. • The airlines’ revenue management departments and systems optimise market share and yield through pricing and inventory management activity. Additional processes and reviews have allowed daily and weekly route analysis as required to respond to the rapidly changing environment resulting from government actions. • The Group maintains rigorous cost control and targeted investment to remain competitive. The Group Procurement function reviews all critical contracts. • The Group’s airlines are focused on customer-centricity and operational resilience. • The portfolio of brands provides flexibility as capacity can be deployed at short notice as needed. • The IAG Management Committee regularly reviews market share and the commercial performance of joint business agreements. • The Group’s airlines review their relationships with business partners supported where appropriate by the Group strategy function. • The Group’s Government Affairs function monitors government initiatives, represents the Group’s interest and forecasts likely changes to laws and regulations. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 101 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Strategic 3 Critical third parties in the supply chain Chief Transformation Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status The aviation sector has been affected by global supply chain disruption which has impacted aircraft deliveries, component availability, resource availability and/or threat of employee industrial action in critical third parties and airport services such as Border Force. It has also been impacted by the high inflationary environment driving additional costs. Operational staffing shortages at hubs and airports have required capacity adjustments, including managing the impact on British Airways’ customers and operations of the decision by Heathrow Airport to cap passenger numbers during the summer of 2022. The Group proactively assessed its schedules to ensure our customers had sufficient notice of any changes to their flight plans wherever possible and within our airlines’ control. Learnings from the summer disruptions were identified and actions to improve resilience have been implemented. The Group continues to work with all critical suppliers to understand any potential disruption within their supply chains from either a shortage of available resource or production delays which could delay the availability of new fleet, engines or critical goods or services, in some places. This has led to increased costs to secure such services. Additional focus was placed on key suppliers given the inflationary environment impacting wages and costs of goods, to understand any business or operational continuity impacts. The Group continues to lobby and raise awareness of the negative impacts of air traffic control (ATC) airspace restrictions and performance issues on the aviation sector and economies across Europe, particularly with the capacity recovery and continued closure of Russian airspace. The Group relies on the provision of airport infrastructure and is dependent on the timely delivery of appropriate facilities. The Group continues to challenge unreasonable levels of increases in airport charges, especially at London Heathrow. Risk description Strategic relevance Mitigations • The Group mitigates engine and fleet performance risks, including delays to delivery and unacceptable levels of carbon emissions, to the extent possible by working closely with the engine and fleet manufacturers, as well as retaining flexibility with existing aircraft return requirements. • 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 at an EU policy level and in consultations with airports covered by the EU Airport Charges Directive. • The Group pro-actively works with suppliers to ensure operations are maintained and the impact to their businesses understood, with mitigations implemented where necessary and inflation minimised. • The Group procurement function has oversight of all critical contracts across the Group’s businesses. • Alternative suppliers are identified where feasible. • Transformation initiatives to offset inflation. IAG is dependent on the timely entry of new aircraft and the engine performance of aircraft to improve operational efficiency and resilience and meet the commitments of the Group sustainability programme. IAG is dependent on the timely, on-budget delivery of infrastructure changes, particularly at key airports. IAG is dependent on resilience within the operations of ATC services to ensure that its flight operations are delivered as scheduled. IAG is dependent on the performance and costs of critical third-party suppliers that provide services to our customers and the Group such as airport operators, border control and caterers. Increases in costs or where suppliers face ongoing financial stress or restructuring where they exit the market for supply of services may impact the Group’s operations. IAG is dependent on the availability and production of alternative fuels to meet its carbon commitments. This may require investments in infrastructure in the markets in which the Group operates. • Any sub-optimal service delivery or asset supplied by a critical supplier can impact on the Group airlines’ operational and financial performance as well as disrupting our customers and impacting our brand and reputation. • Infrastructure decisions or changes in policy by governments, regulators or other entities could impact operations but are outside the Group’s control. • London Heathrow has no spare runway capacity. • An uncontrolled increase in the planned cost of expansion could result in increased landing charges. • Airport charges represent a significant operating cost to the airlines and have an impact on operations. • Inflationary cost pressures within the supply chain may increase the cost of travel. 102 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Strategic 4 Economic, political and regulatory environment Chief Strategy Officer Chief People, Corporate Affairs and Sustainability Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status The economic impact of energy shortages and increases in commodity and wage costs have driven significant inflation and uncertainty over the economic outlook. The Group is closely reviewing the impacts of wage and supplier inflation on margins and customer demand. The Group will continue to adjust its future capacity plans accordingly, retaining flexibility to adapt as required and where possible. The Group airlines have utilised the slot alleviation waivers granted by regulatory bodies in 2022. Impacts and consequences of the pandemic have continued in 2022, such as the gradual opening of China and with restrictions remaining in countries with varying degrees of passenger and airline operational complexity to comply with. Wider macroeconomic trends are being monitored such as a potential economic recession, tone of dialogue between the US, Russia, China and the EU and UK which can influence markets and result in imposition of misaligned policies or tariffs. The trend of increased nationalism and the potential impact to the Group is also kept under review. Recent supply chain disruptions have occurred in many markets and the level of disruption and potential impacts are considered across the Group. The Group also considers changes in government in key markets and the implications for trade, respective economic health and how it views the aviation industry, with elections expected in the UK, Ireland, Spain and the US over the next two years. Developments in relevant international relationships, in particular as they affect air services agreements to which the EU or UK are party, are monitored throughout the year and IAG operating companies’ positions advocated with national governments. Any further macroeconomic trends or potential requirements arising from Brexit are monitored by the IAG Government Affairs function. See the Regulatory environment section Risk description Strategic relevance Mitigations Economic deterioration in either a domestic market or the global economy may have a material impact on the Group’s financial position, while foreign exchange, fuel price and interest rate movements create volatility. Uncertainty or failure to plan and respond to economic change or downturn impacts the operations of the Group. Changes in government may result in a change in sentiment to aviation and access to markets. Government policy asymmetry impacting a domestic market could increase the burden of regulation and cost to our passengers. • IAG remains sensitive • The Board and the Management Committee review the to political and economic conditions in the markets globally, particularly in our hub markets. All of the following can be influenced by political and economic change • Business and leisure demand for travel • Inflation impacts on the cost base • Access to markets for new or existing routes • Increasing levels of regulation • Supply of products financial outlook and business performance of the Group through the monthly trading results, financial planning process and the quarterly reforecasting process. • Reviews are used to drive the Group’s financial performance through the management of capacity, together with appropriate cost control measures including the balance between fixed and variable costs, management of capital expenditure, and actions to improve liquidity. • External economic outlook, fuel prices and exchange rates are carefully considered when developing strategy and plans and are regularly reviewed by the Board and IAG Management Committee as part of business performance monitoring. • IAG Government Affairs function monitors governments’ initiatives, represents the Group’s interest and gives the Group and its operating companies early sight of likely changes to laws and regulations, e.g. any review of slot allocation policy in the UK or EU. • The Group engages with its regulators, governments and other political representatives and trade associations to help represent the views and contribution of the Group and aviation to society and economies. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 103 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Strategic 5 Sustainable aviation Chief People, Corporate Affairs and Sustainability Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status IAG is committed to a target of net zero carbon emissions across its operations and supply chain by 2050 along with 2025 and 2030 targets. The Global Business Services (GBS) procurement function will have a key role to play in ensuring its delivery of the Scope 3 commitment for the Group with supplier sustainability ratings and sustainability clauses in supplier contracts key considerations for future contract negotiations and renewals. IAG has also committed to 10 per cent Sustainable Aviation Fuel (SAF) usage on average across its fleet by 2030. In July 2021, the EU announced its ‘Fit for 55’ package of proposals. The Group continues to model potential impacts and costs, which includes the removal of aviation jet fuel tax exemption from 2024, with mitigation plans embedded into financial and strategic planning. All of the Group’s airlines have agreed new deals for the production of SAF to meet the Group’s target on the path to decarbonisation. Overall aviation industry requirements will require infrastructure investments across markets to support the production of SAF to meet demand expectations. Availability of SAF may be restricted at airports served by the Group in the medium to longer-term, where markets may not have such strict eco targets or government set policy. IAG was an early adopter of the Task Force on Climate-related Financial Disclosures (TCFD) guidelines for climate-related scenario analysis and climate-specific risk assessments. The Group continues with its assessment of climate-related risks, by testing and revising the assumptions on updated forecasts for future business growth and the regulatory context and future carbon price. The Group has also embedded forecasting of its climate impacts into its strategic, business and financial planning processes and is resilient to material climate-related impacts. See the Sustainability risk and opportunities section Risk description Strategic relevance Mitigations • IAG is committed to being the leading airline group in sustainability. This means that environmental considerations are integrated into the business strategy at every level and the Group uses its influence to drive progress across the industry. • Our stakeholders and potential investors seek confirmation over our sustainability agenda and may link their purchasing, investment or lending decisions to our commitments and progress against them. • Our customers look to ensure that our airlines allow them to offset their flight emissions. Increasing global concern about climate change and the impact of carbon affects Group airlines’ performance as customers seek alternative methods of transport or reduce their levels of travel. New taxes, the potential removal of aviation jet fuel exemptions and increasing price of carbon allowances impact on demand for air travel. Customers may choose to reduce the amount they fly. The airline industry sector is subject to increased regulatory requirements, driving costs and operational complexity, particularly with policy asymmetry in key markets. Sustainable fuels mandates are implemented and demand exceeds supply or infrastructure and production is not available in the markets the Group’s airlines serve. • IAG climate change strategy to meet target of net zero carbon emissions by 2050. • Annual incentive plans link manager bonuses to annual carbon intensity targets to enable 2025 target. • All of the Group’s airlines have platforms to offset or mitigate passenger flight emissions over time. • British Airways and Iberia have loans linked to 2025 carbon intensity targets. • Embedded climate impacts into the financial statements, balance sheet and other relevant disclosures. • British Airways customer proposition for carbon renewal credits on BA.com which uniquely offers offsets, removals or SAF. • IAG investment in SAF with operating companies securing deals in 2022. • Fleet replacement plan is introducing aircraft into the fleet that are more carbon efficient. • EcoVadis partnership with IAG GBS to better track sustainability performance in the IAG supply chain and mitigate supply chain-related sustainability risks. • Partnering with ZeroAvia to explore hydrogen-powered aircraft technology. • Participating in CORSIA, the ICAO global aviation carbon offsetting scheme and the EU-ETS and UK-ETS emission trading schemes. • Horizon scanning of potential partners and technology. • Engagement across UK, EU and global trade associations to shape effective climate policy and drive support for low-carbon solutions. 104 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Business and operational 6 Cyber attack and data security Group CIO Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status The risks from cyber threats continue as threat actors seek to exploit any weaknesses in defences particularly through social engineering and human behaviours. The threat of ransomware attacks on critical infrastructure and services has increased as a result of the war in Ukraine and the potential for state-sponsored cyber attacks. The Group continues to focus its efforts on appropriate monitoring to mitigate the risk. The regulatory regimes associated with data and infrastructure security are also becoming more complex with different regulators applying different framework approaches and guidance for reporting. The Group airlines are subject to the requirements of privacy legislation such as GDPR and the National Information Security Directive (NISD). Investment in cyber security systems and controls continues as planned, although addressing the risk is also dependent on business capacity and the delivery of solutions to address technical obsolescence within IAG Tech. All planned investment is linked to a Group-wide maturity assessment based on a leading industry standard benchmark. Data centre migration activity to the cloud across the Group’s airlines will further help to improve the security controls environment. As the Group improves its security posture and maturity, it better understands the rapid nature of potential attack vectors and how to detect them. Risk description Strategic relevance Mitigations The Group could face financial loss, disruption or damage to brand reputation arising from an attack on the Group’s systems by criminals, foreign governments or hacktivists. If the Group does not adequately protect customer and employee data, it could breach regulations and face penalties and loss of customer trust. Changes in working practices and environments for the Group’s employees and third-party suppliers could result in new weaknesses in the cyber and data security control environment. • The cyber threat environment remains challenging for all organisations, including the airline industry. Cyber threat actors, criminals, foreign governments and hacktivists have the capacity and motivation to attack the airline industry for financial gain and other political or social reasons. • The fast-moving nature of this risk means that the Group will always retain a level of vulnerability. • The Group has a Board-approved cyber strategy that drives investment and operational planning. • A cyber risk management framework ensures the risk is reviewed across all operating companies. • The Group Cyber Governance board assesses the portfolio of cyber projects quarterly and each operating company reviews its own cyber projects at least quarterly. • The IAG Chief Information Security Officer provides assurance and expertise around strategy, policy, training and security operations for the Group. • Detection tools and monitoring are in place. The Group- wide security engineering and operations teams proactively seek to identify and respond to threats and vulnerabilities, including ongoing testing of the Group’s defences. • External attack surface monitoring and threat intelligence is used to analyse cyber risks to the Group. • External benchmarking on cyber posture. • 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. • Data Protection Officers are in place in all operating companies, coordinated through a Group-wide Privacy Steering Group. • Working practices are reviewed to ensure the integrity of the cyber and data security. • All third-party suppliers have confirmed their adherence to IAG security requirements within any revised security protocols. • Security architecture team embedded into Datacentre migrations programmes. • Desktop exercises to test business response plans have been held across the Group airlines during the year. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 105 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Business and operational 7 IT systems and IT infrastructure Group CIO Chief Transformation Officer Stakeholder impact Strategic priorities 1 2 3 Risk trend 2022 2021 Viability scenario V Status The Group recognises the importance of technology to business transformation and growth. The Chief Information Officer (CIO) works with the Chief Transformation Officer (CTO) to ensure appropriate prioritisation and investment in the Group’s transformation. Both are members of the IAG Management Committee. The Group has reviewed its IT operating model and has moved more resources into product teams more closely aligned to business needs. All of the Group’s businesses have a Chief Digital and Information Officer (CDIO) who represents their business within IAG Tech. This has strengthened IAG Tech’s focus on supporting the transformation of the Group’s legacy estates to deliver digital customer experiences. The IAG Tech Management Committee governance structure is mirrored across into the Group’s businesses to ensure that IT investment and operating company requirements are appropriately prioritised and delivered. The Group is reliant upon the resilience of its systems and networks for key customer and business processes and is exposed to risks that relate to poor performance, obsolescence or failure of these systems. The Group is currently engaged in a number of major programmes to modernise and upgrade its IT systems, digital capability, customer propositions and core IT infrastructure and network where required. Mitigating actions that prioritise operational stability and resilience have been built into all cutover plans. Operational outages are tracked and root causes identified to help minimise any impact to our customers and operations. Risk description Strategic relevance Mitigations • IAG is dependent on IT systems for most key business processes. 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. • Competitors and new entrants to the travel market may use digital tools and technology more effectively and disrupt the Group’s business model. The dependency on IT systems and networks for key business and customer processes is increasing and the failure of a critical system may cause significant disruption to the operation and lost revenue. The level of transformational change at pace required by the Group’s airlines may result in disruption to operations as the legacy environment is addressed. Obsolescence within the IAG Tech estate could result in service outages and/or operational disruption or delays in implementation of the Group’s transformation. Technology disruptors may use tools to position themselves between our brands and our customers. • IAG Tech works with the Group operating companies to deliver digital and IT change initiatives to enhance security and stability. • Operating companies’ IT boards are in place to review delivery timelines. • IAG Tech leadership and professional development framework. • Reversion plans are developed for migrations on critical IT infrastructure. • System controls, disaster recovery and business continuity arrangements exist to mitigate the risk of a critical system failure. • Robust portfolio process to determine the right investments across the Group. • IAG Tech CIO and MC have strategic relationships with all critical IT suppliers and oversight of all critical IT contracts across the Group’s businesses. • The Group continues to develop platforms such as the New Distribution Capability, changing distribution arrangements and moving from indirect to direct channels. • IAG Tech continues to create early engagement and leverages new opportunities with start-ups and technology disruptors. 106 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Business and operational 8 Operational resilience Chief Strategy Officer Operating company CEOs Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status The COVID-19 pandemic resulted in an unprecedented level of disruption to the aviation sector and changed the Group’s perspective on how resilient it needed to be to withstand severe unexpected stresses. Potential high-impact, low-likelihood events have been considered that could have the potential to disrupt IAG and/or the aviation sector. Many of these events remain outside the Group’s control such as adverse weather, another pandemic, civil unrest or a terrorist event seen in cities served by the Group’s airlines. The Group is reliant on critical third parties for services and goods, many of which have been impacted by resourcing challenges, inflation and supply chain disruption. Ongoing labour shortages, threat of strike action in the aviation sector and staff sickness have impacted the operational environment of the Group’s airlines as well as the operations of the businesses on which the Group relies. Many of these events can occur within a close timeframe and challenge operational resilience. In addition, the Group has significant IT infrastructure changes to complete which could impact operations. The Group is focused on minimising any unplanned outages or disruption to customers with additional resilience built into the airlines’ networks. Risk description Strategic relevance Mitigations • The Group’s airlines may be disrupted by a number of different events. • A single prolonged event, or a series of events in close succession, impact on the Group airlines’ operational capability, financial status and brand strength. • The Group needs to adhere to • Management has business continuity plans to mitigate this risk to the extent feasible, with focus on operational and financial resilience and customer and colleague safety and recovery. • Resilience to minimise the impact of ATC airspace restrictions and strike action on the Group’s customers and operations are in place. • All of the Group’s airlines are focused on developing customer disruption management tools to help our customers in times of disruption. local governments’ restrictions and regulations especially related to safety and public health and is therefore sensitive to any consequential impact on demand. An event causing significant network disruption or the inability to promptly recover from short-term disruptions may result in lost revenue, customer disruption and additional costs to the Group. Public health concerns impacting populations at scale could see an adverse effect on the Group where governments choose to impose restrictions, as would any future pandemic outbreak or other material event impacting operations or customers' ability to travel. The Group’s airlines may not be able to resource their operations sufficiently resulting in impacts to customers and brands. The Group’s airlines are reliant on critical third parties to deliver services and any failure of the level of service may impact operational resilience and our customers. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 107 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Business and operational 9 People, culture and employee relations Chief People, Corporate Affairs and Sustainability Officer Operating company CEOs Stakeholder impact Strategic priorities 1 2 3 Risk trend 2022 2021 Viability scenario V Status The resilience and engagement of our people and leaders are critical to achieving our transformation plans. Our people are a critical enabler of the Group’s future success. Our leadership recognises the efforts of our staff and their resilience and commitment supporting the ramp up of operations. Resource shortages and the timelines to secure resource, particularly in the UK and Ireland, impacted operational readiness and resilience. The Group is focused on measures to attract and secure flight and ground staff into its airlines to enable them to fulfil their schedules and maintain competitiveness. The Group is focused on staff well-being and people morale and motivation, including supporting agile and hybrid working models. Welfare support schemes are in place to support the Group’s staff, and initiatives to build trust and engagement continue across the Group’s businesses. The Group has identified the skills and capabilities that are required to manage its transformation, which include enhancing its leadership capability and delivering on the Group’s diversity and inclusion plans. All operating companies recognise the critical role that their employees will play in the recovery and transformation of the Group and they are focusing on improving organisational health and employee engagement. Risk description Strategic relevance Mitigations • The Group has a large unionised workforce with around 89% of colleagues represented by a number of different trade unions under collective bargaining agreements. IAG relies on the successful agreement of collective bargaining arrangements across its operating companies to operate its airlines. • The right skillsets and culture are needed to transform our businesses at the pace required. • The Group’s airlines require specialist skillsets to continue to operate. • Ongoing information sharing, consultation and collective bargaining with unions across the Group take place on a regular basis led by operating companies’ human resources specialists, who have a strong skillset in industrial relations. • Ensuring that remuneration is aligned to local markets in terms of productivity and pay. • Operating companies’ people strategies are in place in our businesses. • Succession planning within and across operating companies has been reviewed by the IAG Management Committee and Board and a consistent process is being implemented across the Group. • Focus on recruiting and developing skills to run and transform our business. • Operating companies’ engagement and organisational health surveys have been conducted with subsequent action plans developed to create a positive and inclusive culture. • Access to support individuals’ well-being. • IAG Code of Conduct is supported by annual awareness programmes and mandatory training for all of our staff. 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 and customer perceptions of the airlines. Our people are not engaged, or they do not display the required leadership behaviours. The Group businesses fail to attract, motivate, retain or develop our people to deliver service and brand experience. Critical skillsets are not in place to execute on the required transformation and drive the business forward. If the Group’s airlines cannot recruit to respond to the demand environment, given wider recruitment challenges across sectors of the economy, manpower shortages may impact operational capabilities. 108 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Business and operational 10 Safety or security incident Operating company CEOs Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Status The Group’s airlines were focused on a safe return to operations in the year. As capacity increased, British Airways focused on recruiting, onboarding training new cabin crew and ground colleagues, with appropriate training to build their skills and knowledge. The IAG Safety, Environment and Corporate Responsibility (SECR) Committee of the Board and the Board of each operating company continued to monitor the safety performance of IAG’s airlines. Safety and security responsibility lies with each Group airline in accordance with its applicable standards. Further detail is provided in the SECR Committee report. Risk description Strategic relevance Mitigations A failure to prevent or respond effectively to a major safety or security incident or intelligence may adversely impact the Group’s brands, operations and financial performance. • The safety and security of our customers and employees are fundamental values for the Group. • The corresponding safety committees of each of the airlines of the Group satisfy themselves that they have the appropriate resources and procedures which include compliance with Air Operator Certificate requirements. • The Group’s airlines have comprehensive training and maintenance programmes in place, supported by a just culture environment. • There is ongoing security engagement with airports, regulators and public authorities across the airlines’ networks. • Incident centres respond in a structured way in the event of a safety or security incident or intelligence. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 109 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Business and operational 11 Transformation and change Chief Transformation Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status The Group has established a Transformation Programme Management Office which has oversight of an agreed portfolio of initiatives across the Group focussed on improving customer service, revenue and cash efficiency. Many of the programmes are multi-year and all are subject to the ongoing review and investment approvals of the IAG Board. Risk description Strategic relevance Mitigations • The transformation agenda is critical to the Group’s ability to deliver strong returns, compete in the new competitive marketplace, where distortionary effects of aviation support schemes may have allowed competitors to accelerate their change agendas and invest to improve capabilities and customer propositions. • The Chief Transformation Officer has clear oversight of all programmes acrosss the Group’s businesses. • Mirrored structures in the operating companies. • Consistent core metrics and dashboard reporting used to assess performance against plan. • The IAG Management Committee has regular operating company-specific meetings to assess their transformation agenda and the risks to delivery. • The Group transformation agenda is subject to Board approval and progress is regularly monitored by the Board. • There is operating company-led communications to our employees on change initiatives and changes that may affect them. • Consideration is given to the Group’s sustainability commitments and agenda for all programmes. • Any potential changes that could impact the brand are reviewed to mitigate against brand damage. Failure to transform the business to effectively deliver cost efficiency initiatives, maintain or grow share in the new competitive environment, fully implement all programmes across the Group and realise the benefits of the change initiatives to deliver Group digital platforms and customer propositions. The pace of change may expose the Group to execution risk as multiple initiatives are delivered across processes and systems that serve our operations and customers. The impact on our people of the wide-ranging change agenda if poorly managed or uncoordinated could lead to logistical and engagement challenges with the potential to negatively impact NPS, revenue and efficiency benefits. Further standardisation, simplification and efficiencies of the Group platforms are not delivered. Competitors, or new entrants, may invest to deploy digital technologies, sustainability initiatives and/or platforms ahead of the Group. The Group focus on cash preservation, debt and debt repayment could limit the investment available to deliver initiatives. 110 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Financial risk including tax 12 Debt funding Chief Financial Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status Access to the unsecured debt markets may be restricted for sub investment-grade organisations, which may reduce the external funding options available to the Group for new aircraft financing or where it chooses to re-finance upcoming maturities. The Group successfully raised financing for all its aircraft deliveries during 2022, using normal long-term aircraft financing arrangements. Rising interest rates also increase the debt servicing cost for floating rate debt and new debt arrangements. As at December 31, 2022 approximately one quarter of the Group’s debt was floating rate. See Financial review section Risk description Strategic relevance Mitigations Failure to finance ongoing operations, committed aircraft orders and future fleet growth plans. New financial arrangements, in addition to the repayment of existing arrangements, and government support schemes (as applicable) may impact plans to transform the Group and will influence the timing for IAG to resume paying dividends to its shareholders. Higher interest rates in the market for new finance arrangements or re-financing may impact the Group’s cost base. • 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, financial institutions’ appetite for secured aircraft financing and the financial market’s perceptions of the future resilience and cash flows of the Group. • The IAG Board and Management Committee review the Group’s financial position and financing strategy regularly. • The Group has maintained clear focus on protecting liquidity with c.€14bn of liquidity at 31 December 2022. • During 2022, the Group extended the availability of its $1.755 billion revolving credit facility by one year to March 2025. • Maintain strong relationship with banks, lenders and lessors. • Scenario planning for different financial environments. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 111 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Financial risk including tax 13 Financial and treasury-related risk Chief Financial Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Viability scenario V Status Fuel cost increases have been partly mitigated by the Group’s fuel hedging policy. Access to fuel hedging instruments or the ability to pass increased fuel costs on to consumers could impact the Group’s profits. The Group continues to assess the strength of the US dollar against the euro and pound sterling and the potential impacts on the Group’s operating results. All airlines hedge in line with the Group hedging policy. The approach to fuel risk management, 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 continue to be assessed to ensure the Group responds to the rapidly changing financial environment appropriately. Details are set out in the Group financial statements. Risk description Strategic relevance Mitigations Failure to manage the volatility in the price of oil and petroleum products. Failure to manage currency risk on revenue, purchases, cash and borrowings in foreign currencies other than the airlines’ local currencies of euro and sterling. Failure to manage the impact of interest rate changes on floating finance debt and floating operating leases. Failure to manage the financial counterparties’ credit exposure arising from cash investments and derivatives trading. • The volatility in the price of oil and petroleum products can have a material impact on the Group’s operating results. • The volatility in currencies other than the airlines’ local currencies can have a material impact on the Group’s operating results. • The volatility in floating interest rates can have a material impact on the Group’s operating results. • The Group is exposed to non-performance of financial contracts that may result in financial losses. • Fuel price risk is partially hedged through the purchase of oil derivatives in accordance with the Group risk appetite. • All airlines hedge in line with the Group hedging policy under the Group Treasury oversight. • The IAG Audit and Compliance Committee and IAG Management Committee regularly review the Group’s fuel and currency positions. • Currency risk is hedged through matching inflows and outflows and managing the surplus or shortfall through foreign exchange derivatives. • All airlines review routes to countries with exchange controls to monitor delays in the repatriation of cash and/or with the risk of material local currency devaluation. • The impact of rising interest rates is mitigated through structuring selected new debt and lease deals at fixed rates throughout their term as well as through derivatives instruments. • The Group has a financial counterparty credit limit allocation by airline and by type of exposure and monitors the financial and counterparty risk on an ongoing basis. • The IAG Management Committee and the IAG Audit and Compliance Committee regularly review the financial risks and the hedged amounts. Any position outside of policy limits has to be approved by the IAG Audit and Compliance Committee. 112 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Financial risk including tax 14 Tax Chief Financial Officer Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Status Tax is managed in accordance with the Tax Strategy, found in the Corporate Policies section of the IAG website. Further information about taxes paid and collected by IAG is set out in note 10 of the Group financial statements. Risk description Strategic relevance Mitigations The Group is exposed to systemic tax risks arising from either changes to tax legislation and accounting standards or challenges by tax authorities on the interpretation or application of tax legislation. Businesses and consumers may be subject to higher levels of taxation as governments seek to increase environmental taxes, redesign the global tax framework and recover the national debts arising from COVID-19 pandemic support measures. The Group’s stakeholders’ expectations of the tax behaviours of large corporates may lead to reputational risk from the Group’s management of tax. • Payment of tax is a legal obligation. Changes in the tax regulatory environment, including changes in tax rates, may result in additional tax costs for the Group and in additional complexity in complying with such changes. The Group’s tax strategy aims to balance the needs of our key stakeholders, recognising that tax is one of Group’s positive contributions to the economies and wider societies of the countries in which IAG operates. • 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 in conjunction with the IAG Tax function. • Tax risk is overseen by the Board through the Audit and Compliance Committee. • The Group seeks to understand its stakeholders’ expectations on tax matters, e.g. cooperative working with tax authorities and its interaction with non- governmental organisations. • The IAG Board annually reviews the tax strategy. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 113 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Compliance and regulatory 15 Group governance structure General Counsel Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Status The aviation industry continues to operate under a range of nationality and other restrictions, some of which are relevant to market access under applicable bi-lateral and multi-lateral air service agreements, while some are relevant to eligibility for applicable operating licences. The Group will continue to encourage stakeholders to normalise ownership of airlines in line with other business sectors. See Corporate governance section Risk description Strategic relevance Mitigations IAG could face a challenge to its ownership and control structure. • Airlines are subject to a significant degree of regulatory control. In order for air carriers to hold EU operating licences, an EU airline must be majority- owned and effectively controlled by EU nationals. British Airways is a UK carrier and not subject to the same requirement. • The Group has governance structures in place that include nationality structures to protect Aer Lingus’, British Airways’ and Iberia’s operating licences and/or route rights. These have been approved by the relevant national regulators. • IAG will continue to monitor regulatory developments affecting the ownership and control of airlines in the UK and EU. 16 Non-compliance with key regulation and laws General Counsel Strategic priorities 1 2 3 Stakeholder impact Risk trend 2022 2021 Status The Group has maintained its focus on compliance with key regulations and mandatory training programmes have continued throughout the year. For safety- and security-related regulatory risks, please refer to the ‘Safety and Security Incident’ risk. Risk description Strategic relevance Mitigations The Group is exposed to the risk of an individual employee’s or groups of employees’ inappropriate and/or unethical behaviour resulting in reputational damage, fines or losses to the Group. • Carrying out business in a compliant manner and with integrity is fundamental to the values of the Group, as well as the expectation of the Group’s customers and stakeholders. • The Group has clear frameworks in place including comprehensive Group-wide policies designed to ensure compliance monitored by the IAG Audit and Compliance Committee. • There are mandatory training programmes in place to educate employees as required for their roles in these matters. • Compliance professionals specialising in competition law and anti-bribery legislation support and advise the Group’s businesses. • IAG Code of Conduct is supported by annual awareness programmes and mandatory training for all of our staff. • Data Protection Officers are in place in all operating companies. 114 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Viability assessment Risk assessment across the timeline of the plan Longer-term trends and risk considerations Viability scenario process The directors have assessed key threats and trends faced by the industry, emerging risks and opportunities, as well as other industry and Group-specific risks that could impact the Group’s business plan: • These are considered in light of their impact on our business model and relevance, operations, customers, financial status and include changes in regulations, customer trends and behaviours, macroeconomic predictions on growth, regional market opportunities, technology trends, environmental implications and infrastructure developments that could impact our operations, as well as more existential threats to aviation. • When developing the Group’s three-year business plan, longer-term considerations have been assessed by the Management Committee and the Board in conjunction with the priorities of and risks faced by the business. • The Board has also conducted its annual strategy session in addition to progress reviews during the year. Following this process, short-, medium- and longer- term priorities, challenges and opportunities have been identified and actions agreed. Scenarios modelled The Group undertakes extensive analysis, forecasting and scenario modelling throughout the year. Stresses reflect specifics to markets and regions relevant to the Group’s airlines as well as the analysis completed at the Group level. When considering the viability of the Group, the directors evaluated the risk landscape and recommended the following plausible but severe downside scenarios. 1. Downside case 2 4 8 12 13 2. Business transformation and operational resilience 1 2 3 5 8 9 11 3. Cyber security and IT infrastructure 6 7 8 4. Sustainability 5 Full details of modelled scenarios provided on the next page Link to Principal risks The directors have assessed industry, Group-specific and non sector-specific longer-term trends over a timeframe beyond the plan period, such as climate change regulation, infrastructure proposals at hubs, availability and timing of technologies in fleet that will benefit the environment, move to and exploitation of the cloud and disruptive innovation. This may require the business to consider strategic responses, plans to adapt and require new skillsets to implement ahead of any potential impact to the Group plan. • Other considerations include: • economic trends and shifts in the relative strengths of global economies including market dynamics and inflation, the competitive landscape and changes in customer behaviours or sentiment to travel • supply chains and connectivity, movement of physical goods, inflationary and availability pressures on key suppliers • costs of compliance to environmental and climate change regulations and/or lack of availability of infrastructure within countries to meet commitments or government mandates • areas of risk or opportunity for the Group, such as workforce availability, war for talent, diversity and inclusion ambitions, hybrid ways of working and different career expectations from new joiners into workforces and the aviation industry • structural changes in how customers travel and the potential macroeconomic consequences of rising unemployment and inflation • the potential longer-term economic impact of Brexit • the Group’s resilience to future events impacting aviation or global markets, financial markets, interest rates and exchange rates, particularly the US dollar • stakeholder expectations over commitment to acting with integrity to protect our planet, particularly climate change and carbon impacts Management has assessed and the Board considered the longer-term sustainability and climate risks, applying scenario analysis techniques as set out by the TCFD process. Further details can be found in the Sustainability report. When considering the viability of the Group, for the purposes of this report, the directors have evaluated the risk landscape facing the Group and recommended plausible but severe downside scenarios that could impact the Group’s refreshed three-year plan to determine the Group’s resilience to such impacts. The results of these scenarios on the plan have been presented both pre and post an assessment of the likely effectiveness of the mitigations that management reasonably believes would be available over this period (and not already reflected in the plan). • The scenarios have been defined by management and designed to consider principal risks that could materialise over the viability period and weaken the Group’s liquidity position, and therefore its financial sustainability. Each scenario considered the impact on liquidity, solvency and the ability to raise financing in an uncertain and volatile environment. • Management has also assessed mitigations that are available to the business beyond operating cost reductions including further financing, capital expenditure plans and potential disposals. Options that may not have been previously considered are presented as appropriate to the Board to assess. In reviewing and approving the scenarios, the Board considered, amongst other matters, the availability and sufficiency of potential mitigations, the expected speed of implementation in response to the uncertainty and the future flexibility required for the Group to adapt further as needed. • Sensitivities in the scenarios’ assumptions have been highlighted by management and challenged by the Board. In addition, the Board reviewed the results of capacity and margin reverse stress tests, which demonstrated the level of sustained capacity reductions, with losses capped as experienced through the pandemic and losses followed by margin decline (before mitigations) that would result in the Group using all available liquidity (including cash and currently available undrawn credit facilities) and compared this to the outputs from the scenarios. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 115 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED Scenarios modelled No. Title 1 2 3 4 Downside case Downside case stressing the plan models a combination of risks facing the Group, including risks to economies following the pandemic and as a result of the war in Ukraine. Scenario configures a blend of commercial and operational adverse impacts which would result in capacity reductions over and above the Group’s business plan assumptions. In addition, a more severe downside case with increased sensitivities, including increased fuel prices, has also been considered. Economic considerations include demand impact from global economic pressures resulting in reduced revenues, and increased operating costs due to inflationary pressures. Operational considerations factor in operational disruption as a result of airport capacity, resourcing issues or strike action; and further schedule disruption as a result of severe weather, winter resourcing or other operational issues. Reduction in capacity modelled from these considerations further impacts the Group’s revenues. The Downside case assumes that €350 million of the €3.3 billion of available general credit facilities are required to be drawn, assuming no further mitigating actions. As part of the modelling, consideration was given to some of the key factors that could influence the evolution of cash in the Downside case. Cost mitigations were considered across all operating cost lines, including the sensitivity to cost variability being lower than that assumed. Fuel was modelled directly, based on fuel curves and hedging plans. Working capital and capital expenditure adjustments were applied within the scenarios. The scenarios assume that the Group is able to continue to secure financing for future aircraft deliveries, having successfully financed all aircraft deliveries during 2020, 2021 and 2022 and, in addition, has further potential mitigating actions, including asset disposals, it would pursue in the event of adverse liquidity experience. The Group has considered the acquisition of Air Europa Holdings for the purposes of the viability assessment. The period to June 2024 of this Downside case has also been applied as the Downside case set out in the going concern analysis (see note 2 of the Group financial statements). Business transformation and operational resilience Potential for lost revenue impact arising from delays in delivering and realising the benefits of business transformation initiatives and increased costs of securing required resourcing levels. Lost revenue within some IAG airlines from pre-emptive flight cancellations with resultant reputational impact in response to resourcing challenges. Increased staff attrition and industrial relations strike action across IAG airlines due to nature and pace of business transformation plans increases costs and impacts revenues. Further revenue impact considered from reduced capacity as a result of airport capacity and air traffic control airspace restrictions. Cyber security and IT infrastructure A stress to model the impact of a ransomware attack on an IAG airline. The scenario assumes a disruption period of one week resulting from the attack before full connectivity is restored, impacting customers and operations of the affected airline. It also assumes lost revenue due to disruption of operations at the affected airline with knock-on impacts to other IAG airlines due to need to isolate and switch off connectivity of Group shared credentials platforms. There are also further lost revenues due to reputational impact and increased EU 261 costs. Associated costs of recovering from the incident include the disruption through the investigation period including increased IT costs as well as brand impacts, and the potential for regulatory scrutiny and fines. In addition, the scenario considers an unplanned outage owing to data centre migration activity resulting in short notice flight cancellations causing further lost revenue and increased EU 261 costs. Sustainability An increasing revenue stress on shorthaul operations across the Group to reflect changes in customer behaviours towards shorthaul travel where other travel options exist, with the additional imposition of costs from sustainable fuel usage (with no/limited ability to pass this on to the customer). Transatlantic revenues below plan expectations also modelled to reflect a potential long-term change in corporate business travel behaviours. Revenue impact from schedule disruption due to extreme weather events also considered within the scenario alongside increased costs from new taxes and additional fuel costs in years 2 and 3 due to biofuels mandate. Longer-term consideration of the impacts of climate change and carbon and regulatory initiatives to address this within the aviation sector, such as the implementation of new regulatory policy, carbon costs and the cost and availability of Sustainable Aviation Fuel are also subject to assessment and modelling by the Group. Link to principal risks 2, 4, 8, 12, 13 1, 2, 3, 5, 8, 9, 11 6, 7, 8 5 116 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Strategic Report Viability statement The directors have assessed the viability of the Group over three years to December 2025. They have considered the post pandemic global macro- economic environment and uncertainty, the health of the aviation industry and its supply chain, the assumptions of the plan, the strategy of the Group and the Board’s risk appetite. Although the prospects of the Group are considered over a longer period, the directors have determined that a three-year period is an appropriate timeframe for assessment as it is aligned with the Group’s strategic planning period (as reflected in the plan) and the external uncertainties facing the aviation sector more widely are significantly beyond any experience to date and continue to drive change in the external risk environment. The Board recognises the pace of change required within the Group to further adapt and respond to this environment in addition to the rapidly changing competitive landscape and wider global macroeconomic conditions. The Group has modelled the impact of mitigating actions to offset further deterioration in demand and capacity, including reductions in operating expenditure and capital expenditure. The Group expects to be able to continue to secure financing for future aircraft deliveries and in addition has further potential mitigating actions it would pursue in the event of adverse liquidity experience. Further details on debt financing can be found in the Going Concern disclosures in note 2 of the Group financial statements. Based on this assessment, the directors have a reasonable expectation that the Group will be able to continue in operation, meet its liabilities as they fall due and raise financing as required over the period to December 2025. However, this is subject to a number of significant factors that are outside of the control of the Group. In reaching this assessment the directors have made the following assumptions when considering both the plan and the Downside case (the most severe and plausible of the viability scenarios considered): • the Group will continue to have access to funding options and that the capital markets retain a level of stability and appetite for funding within the aviation sector; • the Group can implement any further structural changes required in agreement with any union consultation processes and regulatory approvals; • future COVID-19 pandemic or other public health related restrictions do not result in further prolonged and substantial capacity reductions and groundings beyond 2022; and not to Q2 2020 levels, as governments do not have the appetite for the economic impact and stress that it would place on their respective economies; • any new virus strain or threat to public health that emerges during the viability period can be managed within existing health and testing regimes without recourse to government regulations that significantly affect our airlines’ operations. In the event of another risk scenario resulting in an adverse liquidity impact in excess of the Downside case and other stresses it has considered, the Group would need to implement additional mitigation measures and would likely need to secure additional funding over and above that which is forecast at February 23, 2023. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 117 CHAIRMAN'S INTRODUCTION TO CORPORATE GOVERNANCE Sustainability at the heart of all we do Javier Ferrán Chairman “Our increased focus on sustainability demonstrates our commitment to delivering long-term value for our people, customers, shareholders and our society.” 118 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 I am delighted to present this year’s Corporate Governance report for IAG. The aim of this report is to explain IAG’s governance framework and outline how it was applied on a practical basis in the year under review – a year that has continued to be hugely challenging as we emerge from the COVID-19 pandemic and one that has still required great adaptability, resourcefulness, and governance strength in depth. The Board continues to look to the future, and our increased focus on sustainability demonstrates our commitment to delivering long-term value for our people, customers, shareholders and our society. We are proud of the endeavours that have been made to boost our ESG endeavours, and the work of the Safety, Environment and Corporate Responsibility Committee has allowed us to understand the interests of all our stakeholders and oversee the important work being carried out by our management team. During the year, we were the first major airline group in Europe to host a dedicated ESG event for Corporate Governance Our robust and efficient governance processes underpin our ability to live our values and deliver our strategy. The Board is committed to ensuring that we continue to adhere to high standards of corporate governance so that we can create long-term sustainable value for our shareholders and perform in the interests of all our stakeholders. As I have said before, our people are at the heart of our business and I would like to express once again our deep appreciation for the efforts and commitment shown during this transitional year. I would also like to thank my Board colleagues for their continued support and dedication throughout this period. Javier Ferrán Chairman investors. This commitment to sustainability can also be seen through our strategic decision to renew our fleet with the latest generation of more fuel-efficient aircraft to support our ambition of achieving net zero carbon emissions by 2050. In the last year, the Board has met 12 times, including two separate strategy sessions. We were also delighted to start the return of site visits and in May we spent time with the Vueling management team in Barcelona. Board composition There was only one change to the Board during the year, with Alberto Terol departing the Group after nine years. I would like to thank Alberto for his tireless commitment and dedication to IAG, and the support he gave to me in his role as Senior Independent Director. Heather Ann McSharry has now taken on the role of Senior Independent Director. Management changes As reported last year, Nicholas Cadbury joined the Group in March 2022 as Group Chief Financial Officer. He also took on the role of Interim Chair of IAG Cargo in November 2022 following the departure of David Podolsky, with Julio Rodriguez appointed as Interim Strategy Director. In November, Sarah Clements joined IAG as General Counsel to replace Chris Haynes. The Board wants to recognise Chris's great contribution to British Airways and IAG over a career spanning almost 24 years and would like to thank him for his support and advice during these years. Sarah joins from GSK. She began her career in private practice before moving to senior corporate legal roles with Dupont, Schering Plough, Novartis, and Alexion, prior to joining GSK where she has held several senior leadership roles. Culture and diversity The Board’s role in setting the Group’s culture and core values is a significant one and engaging with our workforce throughout the year has been vital to the delivery of our purpose. During 2022 a comprehensive workforce engagement programme was completed which included five non-executive directors meeting with employees across the different operating companies, and covering different areas including above wing, below wing, customer engagement, engineering and corporate functions. We intend to build on this plan and incorporate new areas and functions into this programme to ensure that we continue to consider the views of our workforce as we transform for the future. Creating a diverse and inclusive culture remains important to us, and we are proud to have 45 per cent female representation on the Board, a woman as Senior Independent Director, and three of our Board advisory committees being chaired by female directors. The make-up of our Board ensures we meet the targets set by the FTSE Women Leaders Review and the Parker Review in the UK, and complies with the Spanish Corporate Governance Code. Succession planning and overseeing the implementation of our refreshed Diversity, Equity and Inclusion Policy will be a priority for us in the coming years, particularly at a management level where we have set a target of 40 per cent female representation by 2025. Board evaluation Reflecting our commitment to good governance, the Nominations Committee oversaw the external evaluation of the Board and all our committees’ performance. The outcome of this review and details of the process are provided later in this report. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 119 BOARD LEADERSHIP Our Board of Directors Giles Agutter Luis Gallego Eva Castillo Maurice Lam Margaret Ewing 120 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Key Committee Chair A Audit and Compliance Committee N R Nominations Committee Remuneration Committee S Safety, Environment and Corporate Responsibility Committee Maurice Lam A S Key areas of experience: Professional services, financial accounting, audit and compliance in the banking industry Current external appointments: Independent Director, Chairman of the Audit Committee and Member of the Board Risk Committee, Bank of China (Europe) S.A. Independent director and Chairman of the Audit & Compliance Committee of Banque Internationale à Luxembourg S.A. Previous relevant experience: Independent Director, Chairman of the Audit Committee and Member of the Board Risk Committee of Quintet Private Bank (Europe) S.A. 2015-2020. Member of the Board of Directors of LuxConnect S.A., a Luxembourg State owned Company, acting as a business enabler in the ICT market 2013-2016. Independent Director, Generali Fund Management S.A. 2013. Deloitte Luxembourg, Managing Partner and CEO, 2000-2010, Head of Audit 1993-2000, Audit Partner, Financial Services 1988-1993 ; Deloitte & Touche UK 1979-1985. Margaret Ewing A N Key areas of experience: Professional services, financial accounting, corporate finance, strategic and capital planning, corporate governance, risk management Current external appointments: Senior Independent Director and Chair of the Audit and Risk Committee, ConvaTec Group Plc. Non-executive director and Chair of the Audit and Risk Committee, ITV Plc. Previous relevant experience: Trustee and Chairman of the Finance and Audit Committee, Great Ormond Street Hospital Children’s Charity 2015-2020. Non-executive director, Standard Chartered Plc 2012–2014. Independent external member of the Audit and Risk Committee, John Lewis Partnership Plc 2012–2014. Non-executive director, Whitbread Plc 2005–2007. Vice Chairman, Managing Partner, Public Policy, Quality and Risk and London Practice Senior Partner, Deloitte LLP 2007–2012. Director, Finance, BAA Ltd 2006 and Chief Financial Officer, BAA PLC 2002–2006. Group Finance Director, Trinity Mirror PLC 2000–2002. Partner, Corporate Finance, Deloitte & Touche LLP 1987–1999. Giles Agutter N S Key areas of experience: Airline industry Current external appointments: CEO, Southern Sky Ltd. Director, JSX Airlines. Previous relevant experience: Non-executive director, LATAM Airlines Group 2017-2020. Non-executive director, Air Italy 2017-2020. Luis Gallego Key areas of experience: Airline industry, general management Current external appointments: Member of the Board of Governors and Member of the Chair Committee, IATA. Previous relevant experience: Chairman and CEO, Iberia 2013-2020. CEO, Iberia Express 2012-2013. Chief Operating Officer, Vueling 2009-2012. Founder of Clickair 2006-2009. Eva Castillo A R Key areas of experience: Financial sector, telecoms sector Current external appointments: Non-executive director, Caixabank. Trustee of the Council for Economy of the Holy See (Vatican), Trustee of the Board of the Comillas ICAI Foundation. Member of Entreculturas Foundation. Member of Advantere School of Management. Previous relevant experience: Non-executive director, Zardoya Otis 2019-2022. Non-executive director, Bankia 2012-2021. Chair Telefónica Deutschland AG. 2012-2018. Non- executive director, Telefónica, S.A. 2008-2018. Non-executive director VISA Europe Plc 2014-2017. President and CEO, Telefónica Europe 2012-2014. Non-executive director, Old Mutual Plc 2011-2013. President and CEO Merrill Lynch Capital Markets, Spain 1999-2006. President and CEO, Merrill Lynch, Wealth Management EMEA 2006-2009. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 121 BOARD LEADERSHIP CONTINUED Nicola Shaw Javier Ferrán Robin Phillips Emilio Saracho Peggy Bruzelius Heather Ann McSharry 122 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Key Committee Chair A Audit and Compliance Committee N R Nominations Committee Remuneration Committee S Safety, Environment and Corporate Responsibility Committee Nicola Shaw R S Key areas of experience: Transport sector, public policy and regulatory affairs, consumer, safety and environment operational management Current external appointments: Chief Executive, Yorkshire Water. Previous relevant experience: Executive Director, National Grid plc 2016-2021. Non-Executive Director Ellevio AB 2015–2017. CEO, HS1 Ltd 2011–2016. Non-Executive Director, Aer Lingus Plc 2010–2015. Director and previously other senior positions FirstGroup plc 2005–2010. Director of Operations and other management positions Strategic Rail Authority 2002–2005. Deputy Director and Deputy Chief Economist, Office of the Rail Regulator (ORR) 1999–2002. Javier Ferrán N Key areas of experience: Consumer, finance, sales/marketing, governance Current external appointments: Chairman, Diageo Plc. Senior advisor to BlackRock Long Term Private Capital and director of investee company. Previous relevant experience: Non-executive director, Coca Cola European Partners Plc 2016-2020. Chairman of Supervisory Board, Picard Surgelés 2010-2020. Member, International Advisory Board ESADE 2005–2019. Non-executive director, Associated British Foods plc 2005–2018. Non-executive director, Desigual SA. 2014-2017. Non-executive director, SABMiller plc 2015–2016. Vice Chairman, William Grants & Sons Limited 2005–2014. Non-executive director, Louis Dreyfus Holdings BV 2013–2014. Non- executive director, Abbott Group 2005–2008. Non-executive director, Chupa Chups SA 2000-2003. Partner, Lion Capital LLC 2005– 2018. President EMEA, President and CEO, Bacardi Group 1992-2004. Robin Phillips S Key areas of experience: Finance, airline industry and transportation Peggy Bruzelius A N Key areas of experience: Financial services, corporate finance Current external appointments: Chairman, Development Funding Board, Pancreatic Cancer UK. Senior Advisor, Circadence Corporation (US). Board member, IR – Scientific (Canada). Previous relevant experience: Global Head/Co-Head of Corporate and Investment Banking, Head of Global Banking and Markets (Hong Kong), Group Head Climate committee, Head of Global Industries Group, Head of Transport, Services and Infrastructure, HSBC 2003-2019. Global Co-Head of Transport & Infrastructure Group, Citigroup 1999-2003. Executive Director, Transportation and Aviation Investment Banking, UBS Warburg 1992-1999. Assistant Director, Capital Markets, Kleinwort Benson 1985-1991. Emilio Saracho R S Key areas of experience: Banking, corporate finance, investment management Current external appointments: Senior Advisor, Altamar Capital Partners. Non-executive director, Inditex. Previous relevant experience: Chairman, Banco Popular Español 2017. Vice Chairman and Member Investment Banking Management Committee, JP Morgan 2015–2016. Deputy CEO EMEA 2012–2015, Co-CEO Investment Banking for EMEA 2009-2014, JP Morgan. CEO, JP Morgan Private Banking for EMEA 2006–2008. Director, Cintra 2008. Director, ONO 2008. Chairman, JP Morgan Spain & Portugal 1998–2006. Global Investment Banking Head, Santander Investment (UK) 1995–1998. Head Corporate Finance Iberia, Goldman Sachs International 1990–1995. Current external appointments: Chair, Lancelot Holding AB. Member, the Royal Academy of Engineering Sciences. Previous relevant experience: Non-executive director, Skandia Mutual Life Insurance 2012-2022. Non-executive director, Lundin Energy AB 2012-2022. Chair, Swedish National Agency for Higher Education 2008-2011. Member Board of Trustees, Stockholm School of Economics 2000-2011. Various Corporate Boards, Trygg Hansa Liv AB, Celsius AB, AB Ratos, Scania AB, The Body Shop Plc, Axel Johnson AB, Axfood AB, Husqvarna AB 1992-2019. Senior Independent Director, AB Electrolux 1996-2012. Non-executive director, Syngenta AG 2001-2014. Non-executive director, Diageo plc 2009-2018. Non-executive director, Akzo Nobel nv 2007-2019. Executive Vice President, Head of Asset Management Skandinaviska Enskilda Banken 1997-1998. CEO, ABB Financial Services AB 1991-1997. Heather Ann McSharry N R Key areas of experience: General management, pharmaceuticals/health care, financial services, consumer products, food and construction industry sectors, governance Current external appointments: Non-executive director, Chair of Nominations and Governance Committee, Jazz Pharmaceuticals Plc. Previous relevant experience: Non-executive director, CRH plc 2012-2021. Non-executive director, Greencore plc 2013-2021. Non-executive director, Uniphar Plc 2019-2020. Non-executive director, Bank of Ireland Plc 2007-2011. Chairman, Bank of Ireland Pension Fund Trustee Board 2011-2017. Managing Director, Reckitt Benckiser Ireland 2004-2009. Managing Director, Boots Healthcare Ireland 1998-2004. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 123 CORPORATE GOVERNANCE the Company’s bylaws contain certain share ownership restrictions which are contrary to the provisions of the first recommendation of the Spanish Code. As far as the 2018 UK Corporate Governance Code is concerned, the Company confirms that it applied the principles and complied with all the provisions of the Code in the reporting period. Statement of compliance with applicable corporate governance codes As a company incorporated and listed in Spain, IAG is subject to applicable Spanish legislation and the associated corporate governance framework. In accordance with this, this Corporate Governance Report details its compliance with the Spanish Good Governance Code of Listed Companies, last updated and published by the Spanish Comisión Nacional del Mercado de Valores (“CNMV”) in June 2020, and available on its website (www.cnmv.es). 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”). A copy of the current version of the UK Corporate Governance Code applicable to this reporting period (updated and published in July 2018) is available at the website of the FRC (www.frc.org.uk). IAG has prepared a consolidated Corporate Governance Report responding to both Spanish and UK reporting requirements, which is available on the Company’s website (www.iairgroup.com), as well as on the CNMV website (www. cnmv.es). Pursuant to the CNMV regulations, this report has been filed with the CNMV accompanied by a statistical annex covering some legally required data. This Corporate Governance Report is part of the IAG Management Report for the year 2022. In addition, and as required by the LSE Listing Rules, this Report includes an explanation regarding the Company’s application of the principles of the UK Corporate Governance Code and how it has complied with its supporting provisions during the year. Details of where key information can be found is provided below. During 2022, IAG fully complied with all applicable recommendations of the Spanish Corporate Governance Code; even though the Company acknowledges that, due to applicable legal and regulatory requirements of the aviation sector, Applying the principles of the UK Corporate Governance Code Board leadership and company purpose Chair’s introductory statement 118-119 Board leadership and company purpose Corporate culture Investment in the workforce Board activities How the Board considers stakeholders’ interests Board decisions, corporate interest and stakeholders Section 172 statement Whistleblowing Conflicts of interests Division of responsibilities Governance framework and group structure Board of Directors: division of responsibilities Board and Committee meetings Directors’ independence Board and Committee attendance during 2022 129 129 129 135 130 131 131 93, 149, 153 137 125-126 125 134 127, 142 134 Composition, succession and evaluation Board biographies Board composition Nominations Committee report Appointment, reelection, resignation and removal of directors Board evaluation Audit, risk and internal controls Audit and Compliance Committee report Fair, balanced and understandable confirmation Confirmation re assessment of emerging and principal risks Risk management and internal control Principal risks and uncertainties Remuneration Remuneration Committee Chair Statement Directors’ Remuneration Report Alignment with Provision 40 121-123 127-128 140-143 127, 142 143 147-157 149-150 97 96-97 98-114 158-159 160-185 162 124 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance IAG governance framework and division of responsibilities IAG Board of Directors The Board has ultimate responsibility for the long-term success of the Group and for delivering sustainable shareholder value as well as contributing to wider society Key positions: Chairman Javier Ferrán Senior Independent Director Alberto Terol (up to June 16, 2022) Heather Ann McSharry (from June 16, 2022) n o i t a g e e D l Board Advisory Committees Audit and Compliance Nominations Remuneration Safety, Environment and Corporate Responsibility IAG Management Committee Key position: Group CEO Luis Gallego Led by the Chief Executive, is responsible for the day-to-day management of the Company. It is responsible for the performance of the Group and the implementation of the strategy approved by the Board The corporate governance framework was last approved by the Board on February 25, 2021 Key matters reserved to the Board are: • Submission of proposals to the shareholders’ meetings • Preparation of the annual statutory disclosures • Approval of the Group’s strategy, business and financial plans • Approval of the Group’s general policies • Appointment and removal of senior executives • Determination of the policy on shareholders’ remuneration • Approval of significant investment or divestment decisions • Approval of the risk management and control policy, setting risk appetite • Ensuring effectiveness of the corporate governance system y t i l i b a t n u o c c A The Chairman: • Chairs shareholders’ meetings • Leads the Board’s work • Sets the Board’s agenda and directs its discussions and deliberations • Acts as main link with the Group CEO and management • Seeks regular engagement with major shareholders • Promotes and ensures highest standards of corporate governance The Senior Independent Director: • Acts as a sounding board for the Chairman and appraises his performance • Serves as intermediary for other directors when necessary • Available to shareholders if concerns are not resolved through normal channels The Group CEO: • Is responsible and accountable to the Board for the management and operation of the Company • Leads the Company’s management team • Oversees the preparation of operational and commercial plans • Develops an effective management strategy • Puts in place effective controls • Coordinates Group activities INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 125 CORPORATE GOVERNANCE CONTINUED Group structure IAG, as the Group’s parent company, is responsible for defining the Group’s long-term strategy, as well as setting performance targets, monitoring their progress and allocating capital within the Group. With a light structure, IAG oversees intragroup coordination and manages central functions, including the development of its common integrated platform. Each operating company has an individual brand and cultural identity and is responsible for executing its strategy and accountable for its results. Each company has its own board of directors and its own management committee, led by the top executive of each company. Further details on the Group structure can be found in the Business Model section within the Strategic Report. Board of Directors: division of responsibilities The IAG Board is responsible for establishing the Company’s purpose, values and strategy, promoting its culture, overseeing the business and its performance, as well as for the Group’s long-term sustainable success. As stated in its Regulations, the Board endeavours to reconcile the corporate interest with the legitimate interests, as applicable, of the employees, suppliers, customers and other stakeholders that might be affected, also taking into consideration the impact of its activities on the community as a whole and on the environment. Examples of this long-term focus and consideration of stakeholders’ interest are discussed further on in this report and in the stakeholder engagement section. Consistent with its governance role, the Board of Directors retains a schedule of matters reserved for its decision, as detailed in article 3.4 of the Board Regulations, which are available on the Company’s corporate website (www.iairgroup.com). The Board has four advisory committees that provide dedicated focus on a number of areas. Each Board committee comprises non-executive directors only and has an experienced non-executive independent chair. Copies of the minutes of all committees’ meetings as well as the documents distributed ahead of each committee meeting are made available to all Board members. The different Board positions and their respective responsibilities are detailed in the Board Regulations as amended on February 25, 2021 (available on the corporate website). The Board also approved new and separate regulations for each one of the Board committees as part of the governance review completed in February 2021. These regulations are available on the corporate website. The roles, memberships and activities of these committees during 2022 are described in their individual reports within this corporate governance report. There is a clear separation of the roles of the Chairman and the Group Chief Executive, their main responsibilities are established in articles 5 and 6 of the Board Regulations. The Chairman is responsible for the operation of the Board and for its overall effectiveness in directing the Company. The Group Chief Executive and his management team are responsible for the day-to-day management and performance of the Group and for the implementation of the strategy approved by the Board. All the powers of the Board have been permanently delegated to the Group Chief Executive save for those which cannot be delegated pursuant to applicable legislation, the Company Bylaws or the Board Regulations. 126 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Board composition The IAG Board comprises eight independent non-executive directors, one of which is the Chairman, two proprietary non-executive directors and one executive director, IAG’s Chief Executive. The biographies of each member of the Board are set out in the Board of Directors section. At the 2022 Shareholders’ Meeting, Alberto Terol, who held the role of Senior Independent Director, did not stand for re-election having served as an independent director for nine years. As a result, the Board appointed Heather Ann McSharry as Senior Independent Director. 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, 2022, the Board composition was: Name of Board Member Javier Ferrán Luis Gallego Heather Ann McSharry1 Giles Agutter Peggy Bruzelius Eva Castillo Margaret Ewing Maurice Lam Robin Phillips Emilio Saracho Nicola Shaw Position/Category Chairman Chief Executive Senior Independent Director Director (proprietary) Director (independent) Director (independent) Director (independent) Director (independent) Director (proprietary) Director (independent) Director (independent) First appointed June 20, 2019 September 8, 2020 December 31, 2020 September 8, 2020 December 31, 2020 December 31, 2020 June 20, 2019 June 17, 2021 September 8, 2020 June 16, 2016 January 1, 2018 1 Appointed as Senior Independent Director on June 16, 2022 following the retirement of Alberto Terol. 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. The Group Chief Financial Officer, Nicholas Cadbury, and the Group General Counsel, Sarah Clements, attend all Board meetings. Directors’ independence The Board, as reported by the Nominations Committee, reviewed directors' independence at its meeting held on January 19, 2023. It is satisfied that those directors classified as independent are free from any business or other relationship that could materially interfere with exercising an independent judgement, both as a question of character and judgement. Further details are provided on conflicts of interests and independence of directors later in this report and the Nominations Committee report. The Chairman was considered independent on appointment and neither he nor any of the non-executive directors has exceeded the maximum nine-year recommended term of service set out in the UK Corporate Governance Code, with our longest serving director, Emilio Saracho, having served on the Board since 2016. Appointment, re-election, resignation, and removal of directors The selection and appointment process is described in detail in the Nominations Committee report. 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 independent directors, or its recommendation report for all other categories of 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 17.2 of the Board Regulations, among other things when the director ceases to have the good standing, suitability, reliability, competence, availability or commitment to office necessary to be a director of the Company or when his or her remaining on the Board might affect the Company’s credibility or reputation or otherwise jeopardises its interests. According to article 24.2 of the Board Regulations, directors have a number of disclosure obligations, including the duty to inform the Company of any situation in which they are involved and that may seriously affect the reputation of the Company, in particular if they are involved in any investigation in a criminal proceeding. In such circumstances, the Board would consider the case as soon as practicable and adopt the decisions it deems fit, taking into account the corporate interest, following a report by the Nominations Committee. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 127 CORPORATE GOVERNANCE CONTINUED The Board 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 them from dedicating the necessary time to the performance of their duties as a director, otherwise breaches their duties as a director or unexpectedly becomes subject to any of the circumstances provided for in article 17.2 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. Company should publish an announcement of the departure as soon as possible, with sufficient reference to the reasons or circumstances provided by the director. A director who stands down before the end of their term of office must adequately explain the reasons for this decision, or in the case of a non-executive director, their opinion on the reasons for the Shareholders’ Meeting resolution, in a letter to be sent to all directors. In addition, these explanations need to be included in the Company’s annual corporate governance report and if relevant for shareholders, the The rules above have been updated in accordance with the Spanish Corporate Governance Code Recommendations approved in June 2020 and are incorporated in the Board Regulations approved in February 2021, which are available on the Company’s website (www.iairgroup.com), and on the website of the Spanish CNMV (wwww.cnmv.es). Nationality Gender Tenure1 4 Spain 4 UK 1 1 Ireland 1 Luxembourg 5 6 Sweden 1 3 4 Male Female 0-3 years 4-6 years 7-9 years Board experience2 Related industry General management Consumer Brands B2C Corporate transactions ESG/Sustainability CEO/Chair experience in a listed company Accounting, financial and related Technology 40% 60% 20% 70% 20% 20% 80% 10% 1 The tenure chart, which is as at the 2023 shareholders’ meeting, comprises solely of independent non-executive directors, including the Chairman (eight directors). For the sake of completeness, the three remaining directors' tenure is less than three years 2 Non-executive directors only 128 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Board leadership and company purpose IAG’s purpose – ‘To connect people, businesses and countries’ – underpins the Group’s vision to be the world’s leading airline group, maximising sustainable value creation for its shareholders. IAG will continue to use its unique business model to pursue this purpose and vision, and always aims to deliver sustainable value for its customers, its people, its shareholders and the communities it serves. By connecting people, businesses and countries, the Group can provide the jobs, prosperity and cultural benefits that travel has always created. While a number of important new initiatives and projects have been launched during the year, there is more to be done to achieve the aspirations the Group has set for itself. The Board believes that IAG can achieve its purpose and vision by promoting the Group’s key values, which are innovation, commitment, care for people, responsibility, pragmatism, execution, ambition and resilience. In 2022, the Board reviewed how these values are embedded in the organisation and how this is linked to the ongoing work on corporate culture and on people. The Board considers the work and focus on corporate culture and values to be essential elements in the transformation and execution of the Group's strategy. Further detail on IAG’s purpose and values can be found throughout this annual report, and in particular on the first pages of the Strategic Report and the introductory letters of the Chairman and the Group Chief Executive. Corporate culture The Board has reviewed with interest the work on culture that the Group started in 2020. The Board believe that the focus on corporate culture is a critical factor in ensuring the delivery and success of the Group’s strategy. The Board is closely following and supporting management’s endeavours to transform the culture of IAG and to create an inclusive, supportive, and healthy working environment. Specifically, during 2022, the Board has been briefed on the outcome of the organisational health survey completed for all employees in May and the follow-up Pulse survey undertaken in November, including the insights by operating companies and the agreed priorities for improvement. Further, through the ongoing workforce engagement visits, representatives of the Board have heard first hand from employees across the Group on their experience of working within the IAG Group, the prevailing culture and things they would like to see change. Finally, the Board strategy meeting held in September 2022 had a specific focus on people, leadership and culture, and individual operating company plans were also reviewed to understand the extent to which their people transformation priorities and plans supported the delivery of the operating company strategy. For example, the Board was updated on British Airways’ investment in leadership and colleague centricity and how Iberia completed 360˚ feedback on all senior leaders aligned to the IAG leadership framework. Further, the Board was updated on the IAG senior leadership conference where the entire second day was devoted to supporting leaders in understanding their role in shaping IAG’s culture. Investment in the workforce In general terms, all Group companies invest in their employees through training and development programmes, as well as through healthcare and well-being programmes. Terms and conditions are set and managed within each operating company, enabling them to put in place appropriate rewards to reflect their specific operating model and local market conditions. Across the Group we look to ensure that all rewards and benefits are simple, clear, competitive, and fair. Across the UK, Spain, and Ireland close to 90 per cent of IAG’s workforce are part of collective bargaining agreements, with varying levels in other countries in which the Group operates. We work closely with employee representatives to consult on reward matters. For those outside of collective agreements, we benchmark roles and rewards against local markets to ensure they remain attractive and competitive. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 129 CORPORATE GOVERNANCE CONTINUED How the Board considers stakeholders' interests Key themes included the companies’ growth plans and the opportunities they will bring in terms of careers and development (including for example in maintenance or at the recently opened Manchester base), the importance of communication and engagement especially with senior management, pay competitiveness and concerns regarding cost of living, and the importance of flexibility and hybrid working arrangements. Each visit included a debrief for senior teams on emerging issues to ensure appropriate actions are taken forward. In addition to direct engagement with employees, the Board has been regularly informed about initiatives at each operating company with respect to its workforce. Further, a session at the annual Board strategy meeting was devoted to the Group people strategy including updates on talent, diversity and inclusion, and culture, The Remuneration Committee was updated on workforce remuneration and how the operating companies were supporting colleagues with cost-of-living challenges, ensuring reward remained fair and competitive, and how the experience of IAG’s workforce compared to senior management. Workforce engagement In 2022, the designated directors have met with employees through a series of site visits and round table discussions across 12 separate locations. These visits have proven invaluable in understanding what matters to colleagues across the business, in our airlines and platform businesses, from ground and flight operations to our customer support and corporate teams, and with a mix of new recruits and colleagues with long tenure reflecting the changing composition of the Group workforce. Eva Castillo is the director responsible for coordinating the Board workforce engagement, and she has been supported in this workforce engagement role by Heather Ann McSharry, Maurice Lam, Nicola Shaw and Emilio Saracho. Recent Board engagement sessions have been held with employees at British Airways at Heathrow and Gatwick, Iberia, IAG Loyalty, IAG Cargo, IAG GBS Krakow, Vueling and Aer Lingus (Dublin and Manchester). The sessions have been very constructive with an opportunity to hear from different employee groups. The Board considered the feedback from the 2022 engagement at its December meeting and noted the high levels of pride and loyalty across the Group, and the determination to support the recovery of the business and the aviation sector following the pandemic. Colleagues showed a keen interest in the Group’s sustainability agenda and its fleet modernisation and broader growth plans. Several visits took place against the context of resourcing ramp ups and operational challenges and ongoing industrial relations discussions. How the Board considers stakeholders’ interests Day-to-day stewardship of all stakeholder relationships is delegated to management, with the Board having a supervisory role based on the information provided and discussions held with management teams. In addition to this, the Board has direct engagement with the Company’s shareholders and with the workforce as recommended by the UK Corporate Governance Code. Information on the Board’s engagement with the workforce is provided in the workforce engagement section of this Governance report. More information on our stakeholders, how they fit in our strategy and business model, their main interests, and our engagement with them can be found in the stakeholder engagement section of this annual report. Shareholders and investors Shareholders’ interests have always been present in the Board’s considerations. The Board engages directly in active dialogue with shareholders and investors mainly through the Group Chief Executive and the Chairman, who regularly meet with shareholders and investors. In April and May 2022, the Chairman held several meetings with major shareholders in order to discuss ESG matters, as well as the performance of the Group and its strategy. In addition, the former and the current Chairs of the Remuneration Committee held several meetings with investors as detailed in the stakeholders section and in the directors’ remuneration report. Non-executive directors had the opportunity to meet shareholders at the two shareholders’ meetings held in 2022, as well as during the first IAG ESG Day that took place in May. In addition to this, the Group Chief Executive and the Group Chief Financial Officer had regular contact with shareholders and investors during the year. The Board is regularly apprised of shareholders’ feedback and main issues discussed with shareholders and investors. Additional information can be found the stakeholder engagement section of this annual report. 130 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Board decisions, corporate interest and stakeholders The IAG Board has delegated the day-to-day management of the Company to the Group Chief Executive and the Group’s management team but it has reserved for itself the authority on a number of matters including three main ones as set out below: • Approval of the Group strategy and the supervision of its implementation, which entails the approval of the business plan, management objectives and annual financial plan, monitoring of the internal information and control systems, and of the risk management framework and processes. • Approval and compliance oversight of the Group general policies including: the investment and financing policy; the enterprise risk management policy; the corporate responsibility or sustainability policy. • According to certain quantitative thresholds, the approval of contractual commitments, asset acquisition or disposals, capital expenditures, borrowings or equity investments. The Group’s decision-making process is regulated by an internal instruction covering the IAG Board, the IAG management committee as well as the boards of the main subsidiaries. In addition, another instruction regulates the Group investment process. This framework and the dedication and expert support provided by the different Board advisory Committees ensures the existence of an adequate governance system. The impact on our different stakeholders, as applicable, as well as the consequences of any decision in the long-term are considered and discussed by the Board. It is not always possible to provide positive outcomes for all stakeholders and on occasions the Board has to make decisions based on the competing priorities of stakeholders. The principles set out in article 3.6 of our Board Regulations, which coincide with those reflected in section 172 of the UK Companies Act, are not exclusively a matter for the Board, they are embedded throughout the Group’s decision-making processes. Section 172 Statement (and compliance with article 3.6 of IAG’s Board of Directors’ Regulations) In their discussions and decisions during the reporting period, the IAG Board have acted in good faith, with unity of purpose and independent judgement, guided by the corporate interest to promote the success of the Company as a profitable and sustainable business in the long-term and giving the same treatment to all shareholders in the same position. In doing so the Board had regard and tried to reconcile the corporate interest with the legitimate interests of employees, suppliers, customers and other stakeholders, also taking into consideration the impact of its activities on the community as a whole and on the environment. Information on how the directors discharged their duties under these principles during the year, including how they had regard to the matters set out above in their discussions and decision- making, is included in this section. Further details can also be found throughout the strategic and governance reports. Feedback from stakeholders is received at a number of different levels and helps inform numerous decisions directly or indirectly overseen by the Board. In many circumstances, the views of stakeholders are considered and embedded in the proposals shared with the Board or submitted for its decision. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 131 CORPORATE GOVERNANCE CONTINUED Board decision-making: aircraft purchase benefits of lower fuel consumption and reduced CO2 emissions from these new generation aircraft. Specifically, they offer 15-20 per cent improvements in fuel consumption and CO2 emissions (depending on the aircraft they replace) and, together with other improvements in seating capacity, maintenance costs and airport charges, will result in a 10-20 per cent reduction in operating costs. Moreover, this investment is in line with the Group’s net zero commitments and with IAG’s sustainability strategy, which is a relevant factor from the point of view of our shareholders and equally important from the perspective of the long term sustainability of our business. These aircraft purchases constituted a Class 1 transaction under the UK Listing Rules, and were therefore conditional on shareholder approval at a general meeting, which was sought at the Shareholders’ Meeting held on October 26, 2022. IAG directors recommended that shareholders voted in favour of each of the proposed resolutions, and provided all relevant information, explained the background to and reasons for the proposed purchases and why they believed these were in the best interests of the shareholders taken as a whole in the circular prepared and made available to all shareholders. Environment One of the key issues that the Board took into consideration was that this investment is fully aligned with IAG’s environmental commitments. The aircraft proposed for purchase are some of the most fuel efficient shorthaul aircraft available. Both aircraft types offer between 15-20 per cent improvements in fuel burn and CO2 emissions. Thus, the addition of these latest generation more fuel-efficient aircraft is an important step towards IAG meeting its climate commitments, including achieving net zero carbon emissions by 2050. Moreover, these new aircraft are significantly quieter, with a lower noise footprint versus the older aircraft they will replace. As a result of the pandemic IAG delayed the replacement of our shorthaul fleet. The shorthaul market is an essential part of the Group's network, with a strong presence in the extensive Spanish domestic market, as well as point-to-point and connecting flows to and from the Group's hub airports, which feed and complement our longhaul services. The Board considered that the replacement of IAG's short-haul fleet is of strategic importance. Moreover, looking ahead to 2030, the Board determined that the Group needed to renew its fleet in order to maintain its size and benefit from the improved operating economics and environmental impact of new generation aircraft. Consideration of s172 impacts Shareholders and long term success As the industry moves on from the COVID-19 pandemic and customer demand returns, the Board believed that the underlying fundamentals of the Group’s airlines remained strong, and that, in this context, access to new generation aircraft was a strategic priority for IAG, as they will help deliver sustainable returns to shareholders over the long term and contribute to the Group's ability to compete effectively. The Board considered that these purchases provided the best opportunity for the Group to obtain commercially attractive and competitively priced terms for the purchase of new generation aircraft. Furthermore, replacing the Group’s older generation shorthaul aircraft with the more fuel efficient Boeing 737 family aircraft and Airbus A320neo family aircraft will generate significant savings in fuel cost, offer maintenance cost savings and an improvement in reliability and, due to the aircraft’s improved utilisation of on-board space, provide increased revenues and decreased costs and emissions per seat. In addition, rising fuel prices and the existing and potential impact of greenhouse gas related charges in Europe and the UK would increase the Image courtesy of Boeing 132 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Customers and employees Even in times of uncertainty and difficulty, with this decision the Board demonstrates to its employees its commitment to invest in the business, as well as its commitment to sustainability and in particular to the environment. Taking into account the addition of Boeing as a supplier of narrow bodied aircraft, the Board contemplated the various measures required to ensure the efficient introduction of these new shorthaul aircraft, including the re-training of ground staff and crew. The fact that this investment is in line with the Group’s environmental commitments also responds to one of the fundamental concerns expressed by IAG’s customers. From a commercial perspective, the Board also took into consideration that these new aircraft will enable IAG to offer a state-of- the-art experience to its customers. Finally, the Board also satisfied itself in relation to the risks concerning the types of aircraft to be purchased, bearing in mind the priority that the Group always gives to the safety and security of both its passengers and its crews. Suppliers When considering the need to maintain healthy competition between suppliers and given the constrained availability of shorthaul aircraft in the period to 2028, the Board thought it necessary to move its Airbus shorthaul fleet to a mix of Airbus and Boeing aircraft. The Board were also informed of the actions designed to ensure that the transition to a mixed Airbus and Boeing shorthaul fleet is carried out as efficiently as possible by reducing related costs, including those related to new crew training, maintenance and spare parts. The agreements reached provide flexibility for IAG to purchase larger or smaller variants of aircraft from both Airbus and Boeing, as well as deferral rights to allow the pace of replacement to slow down if necessary. Information was also provided to the Board regarding engine maintenance arrangements. Committing to the purchase and maintenance of these aircraft and engines allows IAG to properly understand its cost exposures and allow the manufacturers to efficiently plan future production and maintenance activities. Other financial stakeholders (debt providers) In its deliberations, the Board took into consideration that these purchases will require substantial payments by the Group, and that the Group will need sources of financing to meet its payment obligations, and consequently the potential impact that this could have on its existing debt providers. In this regard, the Board took into account that the deliveries of these aircraft are stretched over several years, meaning that the related capital expenditure is spread over a period of time. Additionally, the Group normally finances aircraft on delivery and hence the cash impact is reduced and spread over the period in which it expects to operate these aircraft. Governance framework The transaction was conducted with an appropriate governance framework, in accordance with the Group’s high standards of business conduct. The project was undertaken with appropriate governance and regulatory oversight and the Board engaged its sponsor and legal advisers to ensure appropriate independent advise was provided. Image courtesy of Airbus INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 133 CORPORATE GOVERNANCE CONTINUED Board and committee meetings The Board was scheduled to meet eight times during the year, including its annual two-day strategy meeting scheduled for September 2022. The total number of Board meetings held during the reporting period was 12. Details of attendance at Board and committee meetings are shown further on in this report. The Board Secretariat together with the General Counsel maintains an annual agenda schedule for Board meetings that sets out strategic, standard and operational matters to be considered. The Chairman sets a carefully structured agenda for each meeting in consultation with the Group Chief Executive, with support from the General Counsel and the Board Secretariat. During 2022, the Board’s main focus, emerging from the COVID-19 pandemic, was to create sustainable value over the long-term, supporting management and exercising oversight over the Group’s businesses and stakeholders’ interests. The key activities of the Board in 2022 are detailed in the Board activities table further on in this report. After the review and approval of the minutes of the prior Board meeting, each Board meeting continues with a report from each of the committees’ chairs which have held meetings prior to that meeting. The reports focus on the key discussions and decisions considered by the respective committees, providing an opportunity for directors to comment or ask questions on the matters dealt with by each committee. This is followed by a general update from the Group Chief Executive and subsequently, from the Chief Financial Officer. All scheduled Board meetings include a private session for non-executive directors to meet with the Chairman to discuss any matters arising. In addition to this, at least once a year there is a private meeting with the Chairman that includes independent non-executive directors only. The Senior Independent Director also met with the non-executive directors, without the Chairman, as part of the chair annual evaluation process. 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, except for the Chairman, although he cannot represent more than half of the Board members. As far as possible, proxies should be granted including voting instructions. Board and committee attendance during 2022 Board member Javier Ferrán Luis Gallego Giles Agutter Peggy Bruzelius1 Eva Castillo Margaret Ewing Maurice Lam Heather Ann McSharry2 Robin Phillips Emilio Saracho Nicola Shaw Alberto Terol3 Audit and Compliance Committee Nominations Committee Remuneration Committee Safety, Environment and Corporate Responsibility Committee 7/7 7/7 7/7 7/7 6/6 5/6 3/3 6/6 6/6 3/3 6/6 6/6 5/6 5/6 5/6 7/8 8/8 8/8 8/8 4/4 Board 12/12 12/12 11/12 11/12 10/12 12/12 10/12 12/12 12/12 12/12 12/12 5/5 1 Appointed member of the Nominations Committee on June 16, 2022 2 Appointed Chair of the Remuneration Committee on June 16, 2022 3 Retired from the Board, stepped down as Chair of the Remuneration Committee and member of the Nominations Committee on June 16, 2022 134 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Board activities 2022 continued to be an unprecedented year for the Group, as it continued to face the biggest challenge the airline industry has ever encountered. The Board activity clearly reflects these circumstances. In accordance with this, there was considerable focus during the year on the operating companies plans and operational resilience, particularly in the case of British Airways. The key areas of Board activity during 2022 are outlined below: Strategy and planning Ad hoc Board/management committee session on strategy as a preparation for the September meeting. Joint Board/ management committee two-day strategy session in September, including: • Group operating model • Role of the Centre • Transformation plans • People update • Customer framework • Strategic plans for British Airways and Iberia • IAG Loyalty • Cargo update • Sustainability • Financial outlook • Strategy follow-up items Performance and monitoring • Operating companies’ regular reporting • Quarterly and full year financial reporting • Monthly financial report (reviewed at the relevant meeting or distributed to all Board members) • Review of different joint business arrangements COVID-19 crisis • Updates on liquidity status and forecasting, and passenger revenue information • Follow up on travel restrictions and updates on capacity • Customer recovery Significant transactions, investments and expenditures • Loan to Globalia and conversion to equity in Air Europa • Financing arrangements • Fleet updates • Financing arrangement for the acquisition or lease of aircraft • Disposals/write-off of aircraft and deferral agreements • Lease agreements for airport lounges • Treasury shares buy-back programme • Sustainable fuel provision agreements Shareholders, stakeholders and governance • Transactions with related parties • Sustainability update • Modern Slavery statement review • Anti-bribery and corruption policy, Speak-up policy, Environmental policy and Equity, diversity and inclusion policy reviews • Review feedback from institutional shareholders, roadshows as well as analyst reports • Board and management succession • Remuneration matters and an amendment to the Directors’ Remuneration Policy • Shareholders’ meetings call notices and proposed resolutions • Review of the Board committees’ composition • Board and committees evaluation and Risk management and internal controls • Review risk map and risk appetite improvement priorities • Update on the D&O insurance performance and statements programme • Assessment of viability and going concern • Corporate governance updates • Gender diversity and directors’ selection • Effectiveness review of the internal and diversity policy review control and risk management systems • External auditor’s yearly report to the • Organisational Health Index – culture review Board • External audit fees • IT updates • Shareholder engagement policy review • Regular reporting from matters discussed by the Audit and Compliance Committee, the Nominations Committee, the Remuneration Committee and the Safety, Environment and Corporate Responsibility Committee INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 135 CORPORATE GOVERNANCE CONTINUED Board information and training In general, all Board and committee meeting documents are available to all directors ahead of meetings, including the minutes of each meeting, through an online platform which facilitates an efficient and secure access to all materials. 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 2022 financial year. Emerging from the COVID-19 pandemic provided the opportunity for our normal programme of site visits to resume, commencing with a session with the Vueling management team in Barcelona. This provided the opportunity to meet the Vueling leadership team in person and to review and discuss Vueling’s strategy and performance. 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 this as part of the Board annual performance evaluation. During 2022, directors’ training needs were met by a combination of internal presentations and updates as part of Board and committee meetings and specific sessions or deep-dives on particular topics, where required. For various reasons, two of the sessions planned for this year, the first an update on competition law and the second, a session on safety which was to be presented by an external speaker, have had to be delayed to 2023. Induction of directors According to the induction guidelines, approved by the Nominations Committee, on joining the Board every newly appointed director has a thorough and appropriate induction. Each programme is based on the individual director’s needs and includes meetings with other directors, senior management and key external advisors as appropriate. The induction is designed to provide a wide overview of the industry and the sector, including details of each of the markets in which the Group operates, as well as an understanding of the Group business model and its different businesses. The programme is also a useful tool to introduce new directors to the IAG management committee as well as to the different operating companies’ teams. The feedback received from directors on the IAG induction programme is very positive. Directors consider that the programme of meetings is very thorough, providing very complete information on the Group and the industry. Board and committee evaluation The effectiveness of the Board and its committees is reviewed annually, with an independent, externally facilitated review being conducted every three years. Following internal reviews in 2020 and 2021, an external review was undertaken in 2022 by Independent Board Evaluation (IBE). IBE was selected by the Nominations Committee to provide continuity and build on the evaluation completed in 2019. IBE has no other connection with the Company. IBE undertook a formal and rigorous evaluation which included: • A comprehensive brief given by the Chairman to the evaluation team, defining the main focus of the evaluation • Interviews held with all directors • Interviews with key Board contributors including the Group CFO and the Group General Counsel, the Board Secretary and Deputy Secretary, the IAG Head of Group Audit, as well as the external auditors and the Remuneration Committee independent advisor • The evaluation team observed main Board and committee meetings held in July 2022; and had access to the papers for these meetings • Support materials for briefing purposes were provided by the Company • Discussion of the main conclusions with the Chairman and those of the committees with their respective chairs The overall conclusions of the review were positive, confirming that the Board and the committees continue to adequately fulfil their responsibilities and operated effectively during the reporting period. Directors considered that there has been an outstanding commitment and engagement from all Board members during the year while the business continues to emerge from the COVID-19 pandemic, whilst dealing with strong economic headwinds globally. 136 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance In relation to the areas for focus agreed for 2022, the Board considered that good progress had been made during the year. The return of in person meetings and the visit to Barcelona in May 2022 allowed the Board to increase the level of engagement with senior executives and the Vueling leadership team. Ensuring the Board continues to have the relevant skills and expertise remains an ongoing area of focus for the Nominations Committee. The Board has ensured the successful set up of the Safety, Environment and Corporate Responsibility Committee, whose activities are reported later in this report. Beyond the agreed action plan for 2022, the Board evaluation highlighted the strengthening of the Board workforce engagement programme, as well as the enhancement of the focus on culture and people at Board level. Actions agreed for 2023 include: • broadening the Board’s visibility on engagement with stakeholders, with an increased focus on suppliers. • ensuring additional insight is provided in respect of customer related matters, and how the company is perceived against its competitors. • reinforce information provided to the Board for consideration of the full range of stakeholder views. • overseeing the cultural transformation of the Company. • prioritising focus on talent development plans and succession planning. Any potential conflict of interest that might affect such proprietary directors is managed by applying the duty of abstention in accordance with the procedure for managing conflicts of interest described below. In addition, the Spanish and the United Kingdom regimes on related parties’ transactions are also applicable as detailed below. In accordance with article 3.4 of the Board Regulations, the Board of Directors has the exclusive authority to approve transactions with directors or shareholders that have a significant holding or that are represented on the Board or with any persons related to them, on the terms established in the law and the Board Regulations and this will require a prior report from the Audit and Compliance Committee. The execution of these type of transactions needs 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. IAG’s internal regulations on related party transactions establish that the Audit and Compliance Committee needs to issue a report to the Board assessing whether the transaction is fair and reasonable from the standpoint of the Company and, where applicable, of the shareholders other than the related party, and report on this assessment, including the assumptions and methods used. Where appropriate, the directors related to the transaction shall not participate in the preparation of such report. Depending on the amount or value of the proposed related party transaction, different corporate governance and disclosure requirements may apply under both the Spanish and UK legal frameworks. In accordance with IAG procedures on related party transactions, 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. 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. According to article 21 of the Board Regulations, directors have an obligation 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 their duties to the Company. In the event of conflict, the affected director must inform the Company and abstain from participating in the discussion of 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. The 2022 Annual Shareholders’ Meeting, held on June 16, 2022, approved the re-election of Giles Agutter and Robin Phillips as non-executive proprietary directors as proposed by IAG’s significant shareholder Qatar Airways Group (Q.C.S.C.) (‘Qatar Airways’). Qatar Airways, a Middle East air carrier headquartered in Doha, has been the single largest shareholder of IAG since 2016, owning, as of the date of this report, 25.143 per cent of the share capital of the Company. Throughout this period there has been a long-standing business and commercial relationship between Qatar Airways and the airlines of the IAG Group. This close relationship of commercial cooperation, which has always been undertaken on an arm’s length basis and on market terms, significantly reduces the potential existence of permanent conflicts of interest between Qatar Airways and the Group’s airlines. As far as the relationship of the proprietary directors with the significant shareholder who proposed their appointments is concerned, it should be noted that Giles Agutter is the owner and Chief Executive of the consultancy services firm Southern Sky Limited, one of whose material clients is Qatar Airways, and that Robin Phillips has no relevant connection with Qatar Airways. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 137 CORPORATE GOVERNANCE CONTINUED Share issues, buy-backs and treasury shares The Annual General Meeting held on June 16, 2022 authorised the Board, with the express power of substitution, for a term ending at the 2023 Annual General Meeting (or, if earlier, 15 months from June 16, 2022), to: • increase the share capital pursuant to the provisions of Article 297.1.b) of the Spanish Companies Law, by up to 50 per cent 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 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), through the issuance and placement into circulation of new shares (with or without a premium) the consideration for which shall be cash contributions; • 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 50 per cent 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); • 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 16, 2022; • carry out the acquisition of its own shares directly by the Company or indirectly through its subsidiaries, subject to the following conditions: • 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 16, 2022, the date of passing the resolution; • the minimum price which may be paid for an ordinary share is zero; • the maximum price which may be paid for an ordinary share is the highest of: • 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 the transaction is performed; and • 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. 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 29 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. Capital structure and shareholder rights As of December 31, 2022, the share capital of the Company amounted to 497,147,601 euros (2021: 497,147,601 euros), divided into 4,971,476,010 shares (2021: 4,971,476,010 shares) of the same class and series and with a nominal value of €0.10 each (2021: €0.10 each), fully subscribed and paid. As of December 31, 2022, the Company owned 17,052,745 shares as treasury shares. 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. 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, 2022 the equivalent of 48,799,780 shares was held in ADR form (2021: 55,871,936 shares). Company’s share capital During the year there were no changes to the share capital. The significant shareholders of the Company as at December 31, 2022, calculated according to the Company’s share capital as at the date of this report and excluding positions in financial instruments, were: Name of shareholder Number of direct shares Number of indirect shares Name of direct holder Qatar Airways (Q.C.S.C.) 1,249,999,997 – Total shares 1,249,999,997 Percentage of capital 25.14% On February 3, 2023 Capital Research and Management Company notified the Spanish National Securities Market Commission (CNMV) the acquisition of a shareholding of 3.256 per cent. 138 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Shareholders’ 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. There were two Shareholders’ Meetings held in 2022 with the Annual Shareholders’ Meeting being held on June 16, 2022 in Madrid. This was held in person for the first time in three years, with the option for shareholders to also attend remotely. The extraordinary meeting, to approve IAG’s fleet orders, was also held in Madrid and remotely on October 26. The Shareholders’ Meeting Regulations, which establish the operating rules of the shareholder meeting, are available in the Corporate Governance section of the Company’s website. 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 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-qualifying shareholders provided that such maximum may not be lower than 40 per cent of the Company’s share capital. If such a determination is made and notified to the stock market, no further acquisitions of shares by non- qualifying persons can be made. In such circumstances, if non-qualifying persons acquire shares in breach of such restriction, 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-qualifying 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-qualifying person. 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: • Certain significant IAG financing arrangements allow for prepayment, redemption or early termination in certain circumstances if there is a change of control of the Company. 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. 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. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 139 REPORT OF THE NOMINATIONS COMMITTEE Report of the Nominations Committee Dear Shareholder On behalf of the Nominations Committee, I am pleased to present the Nominations Committee Report for the year ended December 31, 2022. This year the committee has focused on succession planning and continued to oversee the work being done on diversity and inclusion. During the year, we welcomed Peggy Bruzelius onto the committee to replace Alberto Terol following his departure from the Board at the 2022 Shareholders’ General Meeting. I would like to take the opportunity to thank Alberto for his contribution and commitment to this committee. Succession planning continues to be a priority for this committee, and we continue to ensure the Board has the relevant skills and balance to oversee the implementation of the Group’s strategy. Taking into account the findings of the external Board evaluation conducted this year, and our own identified needs based on the Group's business and strategic plans, we will continue to work to seek the most effective way to bring the necessary expertise and experience to our Board. Another important area of focus for the committee has been management succession planning and talent development, with a plan for 2022–2025 being put in place to support this work. The Group’s vision is to build the bench strength and the diversity of our senior leadership team, which we see as being a critical enabler of transformation and long-term value creation. In March 2022, we welcomed Nicholas Cadbury as Group Chief Financial Officer, and continued to oversee the strengthening of the management committee through the appointment of Sarah Clements in November 2022 as our new General Counsel. We remain committed to the Group’s focus on creating an inclusive and diverse team. In 2022, we refreshed our Equality, Diversity and Inclusion Policy, to build on the diversity strategy and framework that was established in 2021. This ensured we continued to meet the expectations of the UK and Spanish Corporate Governance Codes. This also included the amendment of the Directors Selection and Diversity Policy, which was reviewed by the committee and approved by the Board in September 2022. Javier Ferrán Nominations Committee Chair Committee members Javier Ferrán (Chair) Giles Agutter Margaret Ewing Heather Ann McSharry Peggy Bruzelius Date appointed September 8, 2020 September 24, 2020 January 28, 2021 December 31, 2020 June 16, 2022 We remain satisfied that the Board composition meets the target for the proportion of women on boards set out in European and Spanish standards and in the UK FTSE Women Leaders Review, as well as the recommendation on ethnic diversity on boards in the UK Parker Review. The committee also closely follows and supports management's efforts to strengthen the presence of women in the senior management of the Company and across the Group. Despite progress made in 2022, we still have a long way to go to reach our target of 40 per cent women in senior leadership roles by 2025. In line with the expectations of the UK and Spanish Corporate Governance Codes, we undertook an external Board and committee effectiveness review. More information on the results of this evaluation, and how it was carried out, can be found elsewhere in this report. The evaluation was very positive, and it remains the case that we are satisfied that the Board is effective and provides the highest standards of leadership and oversight of the Group’s strategy. Javier Ferrán Nominations Committee Chair 140 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance The Nominations Committee The composition, competencies and operating rules of the Nominations Committee are regulated by article 31 of the Board Regulations and by the Nominations Committee Regulations as approved by the Board on February 25, 2021. A copy of the Board and the Nominations Committee Regulations can be found on the Company’s website. 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. The committee also reports to the Board on the proposed appointment of senior executives of the Company and the appointments of the members of the Group company boards. It oversees Board and senior management succession planning and in general the development of a diverse pipeline for succession. The Nominations Committee shall be made up of no less than three non-executive directors appointed by the Board, with the dedication, capacity and experience necessary to carry out its function. A majority of the members must be independent directors that are EU nationals. The only change in the committee’s membership during the year was the appointment of Peggy Bruzelius in June 2022, replacing Alberto Terol following his departure from the Board. The committee’s responsibilities The Nominations Committee’s responsibilities can be summarised as: • evaluating the mix of competencies, knowledge, and experience necessary in the Board‘s membership and reviewing the criteria for the Board composition and the selection of candidates • submitting the recommendation for appointment of directors to the Board for approval, and reporting on the proposed designations of the members of the Board committees and their chairs • succession planning for Board members making proposals to the Board so that such succession occurs in a planned and orderly manner • reporting to the Board on the appointment and removal of senior executives (which includes all of the IAG management committee) The committee’s activities in 2022 The committee met six times during 2022, with three scheduled and three ad-hoc meetings called to discuss management changes or appointments to the Group company boards. Directors’ attendance at these meetings can be found in the Corporate Governance section. The Group Chief Executive was invited to attend the committee’s meetings as and when necessary. The committee focused on the following activities during the year: • review of the composition of the Board and the committees: appointment of Heather Ann McSharry as Senior Independent Director and Chair of the Remuneration Committee, and of Peggy Bruzelius as a member of the Nominations Committee; • review of the Board committees’ • ensuring that non-executive directors membership; receive appropriate induction programmes • setting diversity targets (gender, ethnicity, and other criteria) both within the senior management and the succession pipeline • ensuring that plans are in place for orderly succession of senior management positions whilst safeguarding the achievement of agreed diversity targets • establishing a target for female and ethnicity representation on the Board which should adhere to the Company’s Directors Selection and Diversity Policy • coordinating the annual evaluation of the performance of the Board and its committees • Board succession planning; • review of the directors’ independence; • review of compliance with the Directors’ Selection and Diversity Policy; • management succession plans, including the recruitment of a new General Counsel; • launching of the Board annual evaluation process, as well as that of the Nominations Committee; • changes to Group company boards • update on regulatory developments on diversity matters; and • update of the Directors’ Selection and Diversity Policy Board succession The committee regularly reviews the formal succession plan for the Board, including analysis of non-executive directors’ length of tenure, skills and experience, and planning for succession of any areas that could require strengthening from a skills and succession perspective. In September 2022, the committee reviewed in detail the Board succession planning, including the Board refreshment timeline, the Board skills matrix, as well as the identification of potential successors for the different positions. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 141 REPORT OF THE NOMINATIONS COMMITTEE CONTINUED Board positions and committee memberships On May 4, 2022 the Nominations Committee considered the composition of the Board ahead of the Annual Shareholders’ Meeting in June, to determine which directors should be put forward for re-election. As part of the Board succession and renewal plan, and due to the fact that he has been an independent director for nine years, Alberto Terol would not stand for re- election. It was further determined that following his departure the Board would consist of 11 members so a search process to replace Alberto Terol’s position would not be undertaken immediately. The committee reviewed the Board’s and the committees’ composition, and proposed the appointment, following the Annual Shareholders’ Meeting in June, of Heather Ann McSharry as Senior Independent Director and Chair of the Remuneration Committee, and the appointment of Peggy Bruzelius as a member of the Nominations Committee. Directors’ independence, performance and re-election The Nominations Committee, having considered the matter carefully, is of the opinion that all the current non-executive directors, with the exception of the two proprietary directors, are 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. All proposals for the appointment or re-election of directors presented to the 2022 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. The committee also reviews the time commitment and availability of each non-executive director. Following this review, the committee was of the opinion that each non-executive director submitting themselves for re-election continued to demonstrate commitment to the role as a member of the Board and its committees, discharged their duties effectively and that each was making a valuable contribution to the leadership of the Company for the benefit of all shareholders. Each director is required to advise the committee and seek its authorisation before accepting any external directorship or other significant appointment that might affect the time they are able to devote to the role as a director of the Company. Management appointments and succession planning In August 2022, the committee considered and reported to the Board on the appointment of Sarah Clements as the new Group General Counsel, with effect from November 21, 2022, replacing Chris Haynes. The Committee also considered the appointment of Julio Rodriguez as Interim Strategy Director to replace David Podolsky who left his role as Chief Strategy Officer on November 1, 2022 with Nicholas Cadbury taking on the role of Interim Chair of IAG Cargo. Following the annual review completed in September 2021, the committee had an update on talent development and succession planning at its May 2022 meeting. As planned, the committee then completed, at its September 2022 meeting, its annual in-depth review of the Company’s plans regarding talent and leadership extending until 2025, together with relevant key performance indicators and agreed targets. The Group’s approach to succession planning was also discussed at this meeting, as well as the actions completed since the last review and actions planned to further improve talent pipelines. Diversity Following the approval by the Board of a new Group Diversity, Equity and Inclusion Policy in July 2022, the committee considered and approved, in September 2022, the amendment of the Directors Selection and Diversity Policy, aiming to: (i) adjust the policy to its new scope of application, given that there is now a general policy on diversity in the Group, (ii) updating its content to the most recent Spanish and UK governance standards and best practices; and (iii) incorporating the latest diversity targets agreed by the Group. The IAG Directors Selection and Diversity Policy is available on IAG’s corporate website. This policy sets out the principles that govern the director’s selection process and the approach to diversity on the Board of Directors, and it is aligned and complements the Group Equity, Diversity and Inclusion Policy, which sets out a broader commitment to promoting and upholding equity, diversity and inclusion throughout all of the Group’s business activities. This Policy updates the Board's diversity objectives by establishing that the IAG Board aspires to maintain a balance so that: (i) at least 40 per cent of the members of the IAG Board of Directors are women; (ii) at least one of the Chair and Senior Independent Director roles on the Board or the Chief Executive and Chief Financial Officer roles is occupied by a woman; and (iii) at least one member of the Board is from an ethnic minority background. The procedure for the appointment of directors follows the principles established in the Directors Selection and Diversity Policy. As recommended by the Spanish Good Governance Code, the Nominations Committee reviews compliance with this policy on an annual basis. This review was completed in January 2023. When considering director appointments, the committee follows a formal, rigorous and transparent procedure, designed to preserve this diversity value in its broader sense, while ensuring that any appointment is made on merit, and considering the specific skills and experience needed at any point in time to ensure continuing Board balance and relevant knowledge. Gender diversity principles are followed throughout the process, while preserving the general diversity and merit-based appointment principles established in the policy. 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. When conducting a search, the Company intends only to engage search firms which have signed up to the latest UK Voluntary Code of Conduct for Executive Search Firms (or its international equivalent). Additionally, the Nominations Committee ensures that Board appointment ‘long list’ provided in the search process are inclusive according to the widest definition of diversity. 142 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Female directors currently represent 45 per cent of the Board of Directors and 63 per cent of the independent non-executive directors (including the Chairman). In addition to this, three of the four Board advisory committees are chaired by women and the Senior Independent Director position is occupied by a woman. From an ethnic diversity perspective, the IAG Board has met the UK Parker Review objective, to have one director from a minority ethnic group. The Board and the Nominations Committee are committed to improving diversity, and gender diversity across the Group, and encourages and supports management actions in this regard. The committee has agreed to maintain its focus on diversity and inclusion as a priority for 2023. The Group has launched a new diversity and inclusion framework and strategy and the Group airlines have implemented a range of initiatives to support diversity and inclusion. In line with this, IAG has a target of 40 per cent women in senior executive positions by 2025. At the end of 2022, IAG had 34 per cent of women in senior leadership roles, up from 33 per cent in 2021. Further explanations of the steps that IAG is taking to promote diversity and inclusion across the Group is set out in the ‘Diversity, inclusion and equality’ section of the sustainability report. The Committee annual evaluation The annual performance evaluation of the Board and its committees was externally facilitated, following internal reviews in 2020 and 2021. The evaluation concluded that the committee operated effectively during the year. The committee continues to maintain as a priority its focus on management succession planning, including talent retention and development, as well as diversity and inclusion, as these are two complex matters where changes are generated over the medium and long- term. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 143 REPORT OF THE SAFETY, ENVIRONMENT AND CORPORATE RESPONSIBILITY COMMITTEE Report of the Safety, Environment and Corporate Responsibility Committee Dear Shareholder On behalf of the Safety, Environment and Corporate Responsibility (‘SECR’) Committee, I am pleased to present the SECR Committee Report for the year ended December 31, 2022. This report marks the first full year of the committee in operation under its new remit, and to ensure we were able to fully support the increased responsibilities of the committee, we held two extra sessions in addition to the four that were originally planned. Under its new remit, this committee was established to support the Board by providing guidance and direction on IAG’s sustainability and corporate responsibility ambitions. We are particularly delighted that IAG’s leadership was recognised in December 2022 by the Carbon Disclosure Project (CDP) as the only European airline company (and one of only two globally) to receive an A grade in their annual rankings. These ratings analyse corporate transparency and action on climate change – requiring companies to demonstrate robust targets, reporting and action across all elements of their businesses. We are also proud to be the first airline group to include a dedicated sustainability category in our business accelerator programme. We recognise that the issues we address within this committee are of great importance to many of our stakeholders, including those of our investors. In May 2022, IAG held a one-day event on ESG for investors and analysts in London, with online attendance provided too. This allowed us to set out a comprehensive overview of the Group’s sustainability strategy, including our initiatives on sustainable aviation fuels and new technologies that are helping to decarbonise aviation, as well as our strategy regarding diversity and inclusion. This was the first ESG-specific event hosted by a major European airline. A separate session of the commitee was also held during the year to review the supply chain sustainability programme, with a particular focus on understanding Scope 3 emissions. IAG was the first aviation group to extend its Net Zero commitment to 2050 to Scope 3 emissions, and to a 20 per cent reduction in net Scope 3 emissions by 2030. The review included the supplier engagement programme, which received an “A” rating Nicola Shaw Safety, Environment and Corporate Responsibility Committee Chair Committee members Nicola Shaw (Chair) Giles Agutter Emilio Saracho Robin Phillips Maurice Lam Date appointed February 25, 2021 February 25, 2021 February 25, 2021 February 25, 2021 June 17, 2021 within the CDP assessment in 2021, putting IAG in the top five per cent of companies who got a supplier engagement rating and one of only two airline groups globally. During this session, we also considered the external review of the Group’s supply chain sustainability carried out by Ecovadis. Finally, the committee continue its work monitoring the safety performance of IAG’s airline companies, as well as the systems and resources dedicated to safety activities across the Group. It is always important to highlight that safety and security responsibility lies with each Group airline in accordance with its applicable standards, its own culture and the circumstances and characteristics of each business. In accordance with this, IAG’s SECR Committee exercises a high-level overview of safety activities to ensure a minimum Group standard, but importantly it fosters the Group homogenisation effort in safety reporting, the discussion of common issues and the sharing of best-practices between Group airlines. As I mentioned in last year’s report, it is fundamental to our ambition that we do business in the right way, which is why sustainability is at the heart of our strategy. This was our first full year and therefore whilst we didn’t have a formal review of the performance of the committee, we did fully discuss the work programme and agreed to continue to engage with external parties including those with expertise in the various components of our remit to continue to enhance our work. I am delighted with the progress that has been made in the past year and look forward to continuing our work in 2023. Nicola Shaw Safety, Environment and Corporate Responsibility Committee Chair 144 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance The Safety, Environment, and Corporate Responsibility Committee The committee’s composition, competencies and operating rules are regulated by article 33 of the Board Regulations as well as the Regulations of the SECR Committee, as approved by the Board on February 25, 2021. A copy of the Board and the SECR Committee Regulations can be found on the Company’s website. The committee is made up of no fewer than three directors appointed by the Board, with the necessary dedication, capacity and experience. All the members of the committee shall be non-executive directors with the majority of them being independent directors. In addition to the Secretary and Deputy Secretary, regular attendees at committee meetings included the Chairman, the Group Chief Executive and the Chief People, Corporate Affairs and Sustainability Officer. Senior managers with responsibility for safety matters and others in charge of different sustainability areas were invited to attend specific agenda items as required and when relevant. The committee’s role and responsibilities The committee’s role is to support and advise the Board in matters relating to safety, environment and corporate responsibility. Responsibility for safety matters belongs to the Group’s airlines. IAG, through this 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. In the areas of environment and corporate responsibility, the SECR Committee provides a governance forum for non-executive directors to exercise specific oversight, challenge and support to senior management in shaping the Group’s sustainability strategy, policies and targets, buttressing IAG’s vision to be the world’s leading airline group on sustainability. According to its regulations, the SECR Committee’s remit includes: • 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 review the Group’s strategy and policies on social and environmental sustainability • to evaluate that the Company’s environment and social practices are in accordance with the established strategy and policies • to evaluate the effectiveness of the Company’s environment and social policies, to confirm that they are fulfilling its mission to promote the corporate interest and catering for, as appropriate, the legitimate interests of its stakeholders • to review the Group’s global environment and climate risk mitigation strategy, the implementation of sustainability programmes and any climate related financial disclosure • to review the content of the non- financial information statement or sustainability report • to monitor and evaluate the Company’s interaction with its stakeholder groups, including the workforce • to review the principal environmental, social and reputational risks • to review the general diversity and inclusion policies The committee’s activities during the year During 2022, the committee held six meetings. Directors’ attendance at these meetings is detailed in the Corporate Governance report. Considering that this was the first full year of operation of this committee under its new remit, the committee decided to schedule two additional meetings to the four initially planned in order to reinforce its focus and support on environmental and corporate responsibility matters. In accordance with this at its first meeting in 2022, the committee confirmed its plan of activities and focused on the following during the year: • safety reports of the Group airlines with regular reviews provided by each airline; • review of requirements and safety procedures in relation to lithium batteries; • overview of sustainability trends; • Group sustainability strategy and policies review; • Non-financial information statement and other sustainability reporting, including review of compliance and key metrics; • Update on IAG ESG Day; • supply chain programme review; • Hangar 51 Planet programme review; • ESG management incentives; • environmental, social and reputational risk review; • low carbon update, including sustainable aviation fuels and hydrogen projects; • IAG waste strategy, performance indicators and benchmarking; • stakeholder engagement review; • regulatory updates, including update on 41st ICAO General Assembly, Diversity; Equity & Inclusion Policy review; and • review of the annual update to the Group Modern Slavery Statement. Safety 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 some specific topics, including the Group airlines preparatory work for the transition to new rules regarding Continuing Airworthiness Management Organisation (CAMO) or the existing framework and practices regarding lithium batteries. As part of its ongoing activity, the committee reviewed the relevant areas of each operating company’s performance across the Safety Risk Management activities, recognising and fostering cooperation and sharing of best practices among the Group airlines. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 145 REPORT OF THE SAFETY, ENVIRONMENT AND CORPORATE RESPONSIBILITY COMMITTEE CONTINUED Market trends and EU and national ESG consultations. The committee has been regularly updated on any upcoming ESG policy consultations at international, EU or national level, including the Group’s positioning and actions intended in each of them. This year this included, among others, the UK ETS consultation, the EU ‘Fit for 55’ and the UK ‘Jet Zero Strategy’ consultations. The committee was also updated on the 41st ICAO General Assembly held in October 2022, which IAG actively supported through IATA and member states. Hangar 51 sustainability programme At its meeting held on March 29, the committee considered the sustainability projects within Hangar 51, the innovation platform of the Group, which include the different aerospace technologies being monitored and their potential sustainability impact. In addition to this, key initiatives to support and accelerate pathways for nascent climate technologies for aviation, were presented to the committee. Supply chain programme In 2022, the Committee considered sustainability matters linked to the Group supply change, including the review of IAG’s annual Modern Slavery Statement, which was submitted for approval to the Board in July 2022. The meeting held in March included the review of the supply chain sustainability programme launched by IAG GBS to support the Group’s vision to be the world’s leading airline group on sustainability. The committee was updated on the assessment of the Group supply chain sustainability, including environment, labour and human rights, and ethics, being carried out with EcoVadis, a market- leading provider of business sustainability ratings. Additional detail is provided as part of the Stakeholder section. Corporate responsibility policies In 2022, the committee reviewed the IAG corporate responsibility model and policies framework, and approved a new Group Environmental Sustainability Policy as well as the Group Diversity, Equity and Inclusion Policy. Both policies are available on the IAG’s corporate website. The Environmental Sustainability Policy establishes in a public manner IAG’s commitments and stated positions on material environmental issues, including the Group’s nine strategic sustainability objectives and its climate, noise and waste targets. The Diversity, Equity and Inclusion Policy reaffirms and expands upon IAG’s commitment to diversity and inclusion within IAG’s purpose, including implementation measures and its scope and breach regime. Further explanations of the steps that IAG is taking to promote diversity and inclusion across the Group is set out in the ‘Diversity, Inclusion and Equity’ section of the sustainability report. Review of ESG ratings and relevant sustainability indexes and Group reporting At its July meeting, the committee was updated on the different IAG ESG ratings. The committee considered the situation of each one of them and the actions proposed to be addressed by management, with particular attention to the Carbon Disclosure Project (CDP), on which relevant disclosures were filed at the end of July. On December 13, 2022, IAG received an A grade in CDP’s annual rankings. The committee annual evaluation and priorities for 2023 The annual performance evaluation of the Board and its committees was externally facilitated, following internal reviews in 2020 and 2021. The evaluation concluded that the Committee operated effectively during the year. This was the first full year of the committee operating, and it had addressed the issues identified in the previous year’s internal review with respect to the meeting schedule and restructuring of its plan of activities. Following the discussion on the external review undertaken in 2022, the committee agreed its priorities for 2023 as well as a number of training initiatives for its members. 146 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Report of the Audit and Compliance Committee Dear Shareholder On behalf of the Board, I am pleased to present the 2022 report of the Audit and Compliance Committee, to provide you and other stakeholders with an overview of the role of the Committee, the key matters considered in 2022, as well as insight into how the Committee has discharged its responsibilities and provided assurance on the integrity of the 2022 Annual Report and Accounts (2022 ARA). This has included ensuring the 2022 ARA is aligned with the latest requirements and guidance from the regulators and that financial information published by the Group properly meets the rapidly evolving needs of our stakeholders in a way that is fair, balanced and understandable. In addition, the Committee’s fundamental priorities include ensuring the quality and effectiveness of the external and internal audit processes and monitoring the identification and management of the principal risks of the business. The rapid recovery in travel demand and capacity in 2022 as we emerged from the COVID-19 pandemic brought unique and different challenges for both the aviation industry and the Group. The Committee anticipated and responded to these throughout 2022 and continued to apply an increased level of focus to the effect of this situation on our people, operations, IT processes, controls and financial integrity. The rapidly evolving political and economic uncertainty arising from not only the lifting of COVID-19 related restrictions, but also the Ukrainian crisis and inflationary and recessionary pressures has resulted in constant reassessment of risk and strategy to ensure these have been adequately assessed and reflected by management in forecast, strategy, going concern and viability assessments. In addition, digital security is fundamental to recovery, as is improved digital and IT processes and systems to facilitate the recovery and evolvement of working practices and operational resilience. Our great people have been the key to our ability to meet the significant recovery challenges. I would like to take this opportunity, on behalf of the Committee, to acknowledge and express our significant gratitude to management and all teams across the Group. We recognise recruiting and retaining the best people is more important than ever. Margaret Ewing Audit and Compliance Committee Chair Committee members Margaret Ewing (Chair) Peggy Bruzelius Eva Castillo Maurice Lam Date appointed June 20, 2019 December 31, 2020 December 31, 2020 June 17, 2021 Throughout 2022, I have continued to enjoy unfettered access to the senior leadership and their key team members and I have maintained a dialogue with all members of the Committee, management and the internal auditor. I have met with ‘agenda topic owners’ prior to Committee meetings, ensuring the Committee would be provided with the necessary information to enable it to guide, challenge, advise and, when required, make informed decisions. I also met regularly with the lead partners of our external auditor, KPMG and the Head of Group Audit, as part of our ongoing review of the effectiveness of the external and internal auditors. In addition, other Committee members have joined me in meetings with finance team representatives and management, to fully utilise their specialist areas of expertise in the preparation for Committee meetings. The Committee held seven formal meetings during 2022 (compared to ten in 2021). The key items discussed by the Committee in discharging its oversight responsibilities and its areas of focus are set out in further detail in this report. The Committee has had clear oversight over management’s efforts to recover and take advantage of the pent-up demand for travel particularly in respect of the significant operational, compliance and financial risks that could materially impact the Group’s financial position and ability to execute and deliver its strategy. The intention of this report is to bring the activities of the Committee to life with relevant case studies to describe and demonstrate how the Committee reviewed and scrutinised the Group’s financial results particularly in relation to the significant areas of discussion and challenge with management, the external auditor and internal auditor. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 147 REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE CONTINUED The Audit and Compliance Committee The composition, competencies and operating remit of the Audit and Compliance Committee are regulated by article 29 of the Board Regulations as well as the Regulations of the Audit and Compliance Committee. A copy of these Regulations can be found on IAG’s website. A private session of the Committee members was held at the end of each Committee meeting and during the year the Committee met privately on a number of occasions with each of the external and internal auditor and the Group Chief Financial Officer. The Committee’s composition, competencies and attendance Detailed biographies of all Committee members are included in this Annual Report. The Board is satisfied that the Committee has retained competence relevant to its overall responsibilities, including possessing a wide range of financial, audit, risk management and relevant sector and business experience amongst its members, providing the right mix of skills and experience to provide constructive challenge and support to management. Consistent with 2021, the Board has determined that Margaret Ewing and Maurice Lam have recent and relevant financial experience and the Board, through the Nominations Committee, will continue to review the Committee’s membership to ensure the skills and experience of its members align with the business as it develops. In addition to the Secretary and Deputy Secretary, regular attendees at Committee meetings included the Chairman, the Head of Group Audit (who reports functionally to the Chair of the Committee) and representatives from the external auditor. Members of the Management Committee, 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. The Committee’s responsibilities and activities The Committee’s principal responsibilities are to oversee and provide assurance to the Board on the integrity and quality of financial reporting, effectiveness of audit arrangements and robustness and effective operation of internal controls, compliance and risk management processes and fraud prevention and detection. The Committee meeting agendas are tailored to ensure emerging topics are included and to allow for ad hoc discussion and reviews. A summary of the Committee’s activities relating to the 2022 Annual Report and Accounts and until the date of this report is detailed below. 7% 31% 27% 10% 25% Financial Reporting Risk Management and Compliance Internal Audit External Audit Speak Up and other matters The Committee ensures the reliability of the Group’s financial reporting, and compliance with laws and regulations, through the internal control framework, including the mature Group-wide Internal Control over Financial Reporting (ICFR) and risk management frameworks. During the year, the Committee took the opportunity to refresh its understanding of the key compliance obligations (not only legal and corporate governance compliance, but all key external compliance obligations) and the oversight and assurance provided by the first, second and third lines of defence in place across the Group. This will help to ensure the Board and management are well placed to adopt future governance requirements, including the Audit and Assurance Policy, taking into account any implementation guidance issued by the Financial Reporting Council in the UK. I am confident that, throughout 2022, we have ensured: the key challenges and risks faced by the Group were reflected in the external and internal audit plans; effective controls remained in place; rapidly changing principal and emerging risks were identified and effectively managed; ongoing compliance with all regulatory and legal obligations; and sound financial judgements and estimates continued to be made. The external evaluation of the Committee’s effectiveness during 2022 supported this conclusion. The evaluation findings, which were shared with the Board, indicated that the Committee continued to perform very effectively and had addressed its key priorities and action plan for 2022. In addition, to address the findings of this year’s evaluation, I implemented changes to the structure and operation of meetings to maximise time for question and challenge from the Committee members. These changes have been well received by both the Committee and management. I hope that you find this report informative and can continue to take assurance from the work undertaken by the Committee during 2022 and planned for 2023. The Committee seeks to respond to shareholders’ and other stakeholders’ expectations in our reporting. I welcome feedback on this Committee report or other related issues and an opportunity to meet with investors during 2023. Margaret Ewing Audit and Compliance Committee Chair 148 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Area of Committee focus Activities Financial reporting • reviewing, challenging and considering the external auditor’s views on significant accounting estimates, judgements and accounting policies applied in the financial statements of the Group and related reporting and disclosures; • reviewing the financial statements and announcements of the Group to ensure integrity; and • consideration of the process for confirming and recommending to the Board that the 2022 Annual Report and Accounts is fair, balanced and understandable. External auditor • oversight of the external auditor focusing on audit quality, effectiveness, independence and objectivity to ensure the rigour and challenge of the audit process is maintained. Specific activities undertaken by the Committee to oversee the relationship with KPMG and the audit process are included in this report. Internal auditor • oversight of the internal auditor focusing on the appropriateness of the internal audit skills and resourcing, approving the audit plan, reviewing audit results, monitoring implementation of audit recommendations and ensuring the independence of the internal audit team. Specific activities undertaken by the Committee with regard to internal audit are included in this report. Internal Control over Financial Reporting (ICFR) • consideration and challenge of management’s analysis of risks in financial reporting, identification of key financial controls and documentation of accounting processes; • monitoring the internal controls procedures adopted by the Company, to oversee compliance with them; and • reviewing the results of the internal audits of ICFR, consideration of the external auditor’s findings and conclusions on this matter and tracking the progress of implementation of internal and external ICFR audit recommendations. Enterprise risk management • reviewing the principal and emerging risks facing the Group, including gaining assurance as to the effectiveness of the internal control system, mitigations, and risk management process; • reviewing the performance of the Group against its existing risk appetite and confirming management’s assessment that the Group has applied appropriate mitigations or other effective controls to ensure that the Group has operated within (or agreed) risk appetite throughout the period; • reviewing the approach adopted by the Board in defining the Group’s risk appetite in light of the changing environment in which the Group operates; • reviewing the Group’s fraud risk assessment and design of the internal control framework to prevent and detect fraud, including consideration of the key controls and assurance activities provided across the Group in relation to financial and non-financial fraud risk; • overseeing treasury risk management, including reviewing the Group’s fuel and foreign exchange hedging policies, positions and financial counterparty exposure, compliance with the Group’s treasury and financial risk management policies and consideration of the implications of the approved fuel hedging profile, given the recovery in demand and significant volatility in fuel prices, and ensuring its continued appropriateness in managing these risks; and • overseeing tax risk management, in an environment of increased challenge, investigation and audit by tax authorities across the globe, and considering the tax strategy before recommending to the Board for approval and publishing on the IAG website. Legal and compliance • reviewing the Group’s anti-bribery, sanctions, competition, privacy and Spanish Criminal Code compliance programmes including the latest related risk heat maps, regulatory developments, issues identified during the year, the key programme activities during 2022 and priorities for 2023; • reviewing, on behalf of the Board, the Group’s independent third party-facilitated whistleblowing procedures and the annual report from the Group’s General Counsel on: communication and awareness (plus trust in) the Group’s whistleblowing facilities; incidents reported via the whistleblowing channels, by category and nature; any emerging themes or trends; timeliness and responsibility for follow-up; and investigations and actions taken to address substantiated reports; and • consideration of litigation status reports from the General Counsel including the status of remaining and potential civil litigation actions (see note 33 to the financial statements). INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 149 REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE CONTINUED Area of Committee focus Activities IT, cybercrime and GDPR • reviewing and monitoring key cyber security and data privacy management improvement projects including visibility of trend analysis and benchmarking external data to better understand the Group’s progress and improvement plans. Non-Financial Information • reviewing the processes and integrity of information provided in the Group’s Consolidated Statement of Non-Financial Information in compliance with Law 11/2018, including information on environmental, social, employee, and human rights-related matters and receiving the external auditor’s assurance report and conclusions; and • reviewing the integrity of the reporting and data in respect of the Group’s longer-term sustainability and climate-related risks and opportunities, including the Group’s alignment with the provisions of the TCFD process, and the appropriate reflection of the implications of climate change in the Group’s strategy, financial statements and financial and cash flow forecasts. Insurance • reviewing the Group’s insurance position, including general insurance arrangements and directors’ and officers’ liability insurance, and reporting to the Board on the adequacy and appropriateness of the cover with regards to the Group’s relevant principal and emerging risks (recognising that not all risks are of an insurable nature). Investor relations • reviewing management’s summary and analysis of the Group’s investor/analyst views regarding Governance and other matters accounting policies, risks and disclosures to ensure that investor views are taken into account where required; and • considering investors' and analysts' views (plus those of other external informed commentators) on the future outlook for the Group to ensure the scenarios and assumptions applied in the Group’s viability review are not misaligned with external projections. • reviewing and recommending to the Board the adoption of amendments to relevant policies; and • considering and planning for the implications for the Group of both the European Commission’s consultation “Corporate reporting – improving its quality and enforcement” as well as the UK Government’s proposals regarding audit and corporate governance reforms as the UK consultations progress towards implementation. Significant financial reporting matters considered by the Audit and Compliance Committee The Committee takes account of significant issues and risks, including strategic, business and operating, financial, compliance and regulatory, that may materially impact the integrity and accuracy of the quarterly financial results announcements or the 2022 Annual Report and Accounts. The Committee has also sought to ensure that the Group’s reporting is aligned with the latest guidance and requirements from regulators, that it is fair, balanced and understandable and that all matters disclosed and reported upon meet the rapidly evolving needs of the Group’s stakeholders. The significant accounting judgements, estimates, accounting policies and issues considered by the Committee in relation to the Annual Report and Accounts for the year to December 31, 2022 (including those considered as significant audit issues by the external auditor and described in the Independent Auditor’s Report) are set out in the table below. After robust further consideration, challenge and debate, there are no topics where the conclusion resulted in significant disagreement between management, the external auditor and the Committee, or unresolved issues that needed to be referred to the Board. 150 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Matter Action taken by the Committee and outcome/future actions Viability and going concern assessments Throughout the year and in finalising the 2022 Annual Report and Accounts the Committee has continued to consider and robustly challenge management’s going concern review and viability assessment, including the supporting analysis. The Committee was reassured that management’s assessment in 2022 continued the enhanced level of rigour applied in 2021, reflecting the continued and evolving volatility in the external environment. This included a review of critical estimation assumptions and judgements applied in relation to cash flow forecasts over the short, medium and long-term, including the implications of climate change where they impacted the reference period. Many of the assumptions and judgement are based on events outside of the Group’s control including the political and economic influences such as the Russian invasion of Ukraine, volatile fuel prices and increasing inflation and interest rates. The Viability statement section of this Annual Report provides details of the Base Case and Downside Case applied in assessing the appropriateness of the Board’s viability statement and application of the going concern basis of accounting. The Committee provided robust challenge of the assumptions applied in management’s Base Case and Downside Case projections (ensuring that the Downside Case reflected appropriately severe but plausible assumptions) and reviewed the external auditor’s findings and conclusions on this matter. The Committee also challenged management as to whether the continued used of the ’material uncertainty’ statement in respect of going concern was appropriate for the 2022 half-year interim results given the level of recovery. As a result of this challenge, management removed the ‘material uncertainty’ statement in respect of going concern and viability for both the 2022 half-year interim results and 2022 Annual Report and Accounts. The Committee recommended the viability and going concern statements and related disclosures to the Board for inclusion in the 2022 half-year interim results announcement and the 2022 Annual Report and Accounts. In July, the Committee considered the valuation and accounting of the €100 million convertible loan provided to Globalia including exstensive challenge of the valuation approach. Following this challenge and consideration of external advice from valuations experts, the Committee concluded that the approach adopted by management was acceptable. The Committee also considered management’s accounting for the Group’s 20 per cent investment in Air Europa following the conversion of the €100 million loan into a 20 per cent shareholding. Management recommended that the Group would account for the investment as an equity investment and not as an associate following its assessment that the Group does not have significant influence over Air Europa. The Committee agreed with management’s recommendation and was satisfied that sufficient independent advice had been sought to assist in determining a fair value of the investment which included the use of both discounted cash flow models and multiples derived from recent airline M&A transactions. The Committee focused on the impact of the recovery from the pandemic on the breakage and assumptions driving loyalty revenue recognition. Management concluded that a series of adjustments to the output from the statistical modelling were required to take into account the impact of the level of flight operations and redemption compared to pre-pandemic behaviour. These adjustments consider behavioural patterns of customers and the launch of certain key redemption products which are not yet reflected in the historical data used by the statistical model. The Committee is satisfied that the estimates relating to loyalty revenue recognition are appropriately supported by reasonable management assumptions and those of an independent expert third party and in particular appropriately reflect behavioural data. The Committee also considered the conclusions of the external auditor, who had identified loyalty revenue recognition as a Key Audit Matter. The Committee received an update on management’s assumptions in relation to revenue recognition as a result of voucher breakage. Management’s approach remains unchanged from December 31, 2021 and 2020, and the Group continues to not apply breakage to the overall voucher liability due to the limited historical data in relation to the vouchers that will expire before they are redeemed. The Committee agrees with management’s assessment that breakage cannot be reliably estimated and that there will not be a significant reversal of revenue in future periods if breakage was recorded during 2022. The Committee also recognised that as vouchers begin to contractually expire in 2023 and management may possibly take action to encourage voucher holders to utilise their vouchers before they expire, the Group will have more data upon which to estimate and recognise breakage on unredeemed vouchers during 2023. The Committee considered management’s updated approach to the accounting for the current market volatility of high interest and inflation rates. The Committee was satisfied with the enhancements made by management in the accounting for long-term provisions, including maintenance and employee liabilities, as well as the use of external experts to determine the discount rate to apply for impairment testing. The Committee agreed with the enhanced disclosures pertaining to the sensitivities to both interest and inflation rates for maintenance provisions included as a significant estimate in the Annual report and accounts. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 151 Investment in Air Europa Loyalty revenue recognition Voucher revenue recognition Impact of interest rates and inflation REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE CONTINUED Other significant matters considered Highlights of other key matters that the Committee considered are explained below. Matter Action taken by the Committee and outcome/future actions Fraud procedures The fraud risk profile of the Group evolved rapidly as the business recovered during 2022 including the impact of changing work practices, restructuring and level of business operations. Interest rate and fuel hedging policy CNMV Letter The Committee reviewed management’s report on the Group’s fraud prevention framework, including the annual fraud risk assessment as well as the key controls and lines of defence in place to prevent and detect fraud. The Committee noted good alignment between the risk assessment, the assurance map, including lines of defence, and was satisfied that the approved internal audit plan covered the key financial reporting anti- fraud controls as well as audits targeted at specific fraud risk across the Group during this period. On behalf of the Board, the Committee will continue to monitor fraud and internal controls carefully, including consideration of the views of the external auditor, the results of the annual ICFR audits and the results of a series of focused anti-fraud control internal audits. The Committee reviewed management’s approach to both interest rate and fuel hedging strategy in 2022 given the revisions that were made to the policies in 2021 as a result of COVID-19 related market volatility and the market recovery. The Committee agreed with management that the continuation of the revised fuel hedging policy was appropriate as it provided the necessary flexibility in terms of tenor, instrument selection and range of protection, to suitably manage the Group’s fuel price risk as a result of the volatility arising from the war in Ukraine and the recovery from the pandemic. In addition, the Committee considered the Group’s review of the Interest Rate Risk policies and agreed that no significant change was required given alignment of the policy with peers. The Committee will continue to oversee management’s monitoring of the ongoing applicability of the policies as the recovery progresses. In October 2022 the Company received a letter from the Director of the Departamento de Informes Financieros y Corporativos of the CNMV, requesting certain information and clarifications relating to accounting matters and disclosures in the Group’s 2021 Annual Report and Accounts, 2022 condensed consolidated interim financial statements announcement and 2021 non-financial information statement. The Committee reviewed and concurred with management’s responses, which amongst others, agreed to enhance the disclosures relating to the impact of climate change on the financial position of the Company. The CNMV has accepted IAG’s response and proposals. Corporate governance and audit reform The Committee and management are closely monitoring developments and ongoing consultations with the UK Department for Business and Trade (BAT) and the UK’s Financial Reporting Council (FRC) in relation to the UK Government’s proposals released in May 2022 following on from the BAT open consultation in relation to the UK Government’s white paper “Restoring trust in audit and corporate governance: proposals on reforms”. During the year, the Committee took the opportunity to ask management to refresh the mapping of key laws, regulations and other external compliance obligations for the Group and each operating company to the first, second and third lines of defence in place across the Group to confirm the Committee’s understanding and ensure we are well placed to adopt future governance requirements, including the proposed Audit and Assurance Policy. The Committee believes management is well placed to adopt the provisions once the requirements and guidance are finalised through the UK Corporate Governance Code and UK legislation and, in May 2023, will be reviewing the status of these reforms and management’s and the Committee’s plans to ensure full compliance in accordance with the regulatory and legal timetable. 152 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Matter Action taken by the Committee and outcome/future actions Non-financial information and environment Risk appetite framework Compliance Class 1 Circular In conjunction with the Safety, Environment and Corporate Responsibility Committee, the Committee plays a key role in the governance of regulatory reporting requirements in respect of non-financial information, particularly those related to workforce data and climate-related risks and opportunities. The Committee has improved the communication and coordination with the IAG SECR Committee to ensure the correct level of focus on the integrity of the data, effectiveness of relevant controls, and balance of the narrative supporting each data point disclosed. During 2022, management has continued improving the processes and controls to obtain reliable data and, at the request of the Committee, two internal audits were performed over the improved controls on key sources of non-financial information. The Committee has requested that additional non-financial information process and control internal audits are undertaken in 2023, as well as gaining improved clarity on the sources of assurance and review of aspects of the Group’s sustainability reporting provided by a range of external parties. In ensuring climate change and other matters related to ESG had been considered and disclosed by the Group, with supporting evidence and balance, the Committee continued to receive regular updates in relation to the statements on non-financial information and diversity (prepared in compliance with the requirements of Law 11/2018) as well as management’s demonstration of close alignment with key sustainability frameworks, including TCFD. The Committee considered the financial modelling regarding the Group’s various climate commitments and which of the underlying assumptions had been incorporated into financial reporting, as well as those that had been excluded. The Committee observed that for financial reporting purposes management has incorporated assumptions out to 2030, after which the modelling of assumptions and their interconnectivity becomes too uncertain to incorporate into the modelling, an approach which the Committee endorsed. The Committee also reviewed the enhanced disclosures relating to the impact of climate change on financial reporting and challenged the granularity of such disclosure. The Committee also considered the limited assurance reports from KPMG on the Group’s non-financial information, including TCFD compliance and EU taxonomy. In 2021, the Committee challenged management as to the ongoing appropriateness of the approach adopted by the Board (supported by management) in setting the Group’s risk appetite framework and tolerance. During 2022, in advance of consideration and approval by the Board, the Committee considered management’s proposals for a more pertinent approach to determining the risk appetite framework (reflecting the operating environment for the Group, both current and over the next three years) and agreed with the implementation of a revised framework in 2023. The new framework will allow the tolerances to be set more dynamically across the business plan period and will also enable consideration of trade-offs to facilitate prioritisation of initiatives to manage opportunities and risk within the defined appetite tolerances. The Committee is satisfied that the new framework is aligned to the Group strategy approved by the Board in 2022 and recommended adoption of the new framework to the Board for approval. During 2023, the new risk appetite framework will be reviewed as part of the Board’s annual strategy meeting to ensure continuing alignment between strategy and risk appetite. The Committee reviewed and approved a series of revised compliance policies including the Group Speak Up policy and the creation of a standalone Group Anti-bribery and Corruption policy. In addition, the Committee was very supportive of management’s implementation of a new single Group-wide whistleblower system bringing benefits to the Group arising from a consistent system and process including the opportunity for improved consistent communication of the policy, process and system, revision of existing training programmes and the update of the IAG Code of Conduct and IAG Supplier Code of Conduct. The Committee oversaw management’s preparation of the Fleet Class 1 circular (the circular) including the working capital statement and profit forecast in advance of the October 2022 Extraordinary Shareholders’ Meeting to approve the proposed purchase of 50 Boeing 737 (with 100 additional options to purchase Boeing 737s) and 37 Airbus A320neo family aircraft. The Committee reviewed the circular in detail, received an in-depth briefing (including a detailed written report) from KPMG in their capacity as reporting accountants as well as management’s assessment of working capital. The Committee was satisfied that management’s assessment, including a downside case with sensitivities representing a plausible worst-case scenario, was sufficiently robust to support the working capital statements made in the circular. The Committee will continue to receive regular updates on all the above matters in 2023, other than in respect of the Class 1 Circular which was only relevant to 2022. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 153 REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE CONTINUED • monitoring and protecting internal audit’s independence and standing within the Group, ensuring its ability to influence and engage at the most senior levels across IAG and all operating companies and functions and is closely involved in the Group’s discussions on risk; • performing an effectiveness survey with key stakeholders in December 2022; and • monitoring internal audit’s implementation of improvement opportunities identified in the 2021 independent effectiveness review conducted by Deloitte UK. The Committee is satisfied that delivery of the approved internal audit strategy and plan is providing timely and appropriate assurance on the effectiveness of controls in place to successfully and effectively manage aspects of the Group’s relevant principal risks (i.e. those that are capable of being subject to an audit review). Internal Control over Financial Reporting The Board of Directors is ultimately responsible for the supervision of the existence and effectiveness of Internal Control over Financial Reporting (“ICFR”). The Board has delegated the responsibility for the development of effective controls to the Chief Executive Officer and the supervision of the effectiveness of these controls to the Audit and Compliance Committee. The Group’s ICFR monitoring and auditing is mature and well embedded across the Group covering processes applied by the Company, Aer Lingus, British Airways, IAG GBS, IAG Loyalty, Iberia and Vueling, and processes performed by IAG GBS and IAG Cargo on behalf of the operating companies. This enables the Committee to evaluate and oversee IAG’s management of financial reporting risk and to validate the Group’s approach to complying with the CNMV’s ICFR recommendations. In 2022, the Committee reviewed the results of the internal audits and external audit of ICFR (which included IT general controls). Despite the significant recovery in operating conditions in 2022, no material or significant weaknesses that would impact the integrity of the financial statements were identified, and management continued to improve the control environment across the Group. The Committee also tracked the progress of internal audit recommendations to address any weaknesses identified. The number of weaknesses with mitigating controls has marginally increased. The Committee were satisfied that these had no financial consequences on IAG. Internal audit The Committee’s activities during 2022 in relation to the Internal Audit function included: • reviewing and agreeing the internal audit 2022 plan and 2023 first six months plan (including resourcing and budget to appoint appropriate external specialist resource and recruit additional permanent resource when required to ensure the function is appropriately resourced to provide the required level of assurance over the principal risks, processes and controls throughout the Group) and amendments to the 2022 plan (as the internal auditor responded to the impact of the recovery from the pandemic on the Group). This included ensuring the 2022 plan continued to focus on fraud risk while also ensuring coverage of specific risks, including cyber security, and satisfying ICFR and Spanish Criminal Code requirements; • reviewing key audit conclusions, discussing the quality and timeliness of management’s responses, monitoring the resolution of issues raised and requesting additional audit review of certain weaknesses or concerns identified by internal audit, post management action to remediate; • holding regular meetings during the year between the Committee, the Head of Group Audit and the external audit partner as well as ensuring the Head of Group Audit feels able to raise any concerns informally and directly with the Chair of the Committee; 154 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance External audit External auditor key information Last tender Transition year AGM Approval of current auditor (for three years to December 31) First audited Annual Report Next audit tender required by regulations 2019 – January 2020 2020 September 2020 For appointment effective for year to December 31, 2031 Year to December 31, 2021 The Committee engaged throughout the year with KPMG, with the engagement partners attending all Committee meetings. The Committee Chair met frequently with the Group and lead audit partners throughout the year to review Group developments, audit progress, their planned reporting and audit findings. The Committee’s key activities in relation to its interaction with KPMG included: • review of KPMG’s second year audit arrangements and plan and overseeing progress throughout 2022; • approval of the 2022 external audit plan and strategy including consideration of scope, approach and methodology, emerging industry and Group-specific audit risks and materiality. Monitoring the audit plan’s implementation, including receiving regular reports from KPMG progress against plan on key judgements, audit matters and any significant weaknesses detected in the internal control environment; • discussion, prior to recommendation of the financial statements to the Board for approval, of the audit findings, including audit differences, and observations on internal controls, operations and resources. This included challenging the auditors on their conclusions regarding voucher revenue recognition discussed in significant financial reporting matters. • performing an assessment of the effectiveness and independence of KPMG, including the quality of the 2022 audit (throughout the year), implementation of improvement opportunities identified in the 2021 effectiveness assessment and reviewing and approving the fees and terms of reference; and • reviewing and approving 2022 non-audit services expenditure against policy and previously determined limit guidance. Reviewing and approving non-audit services limit guidance and expectations for 2023. External audit scope, materiality and execution The Committee discussed and agreed the scope of the audit with KPMG in September, having earlier in the year approved the auditor’s interim review plan and prior to the commencement of the year end audit, ensuring that the audit strategy was robust and informed by the auditor’s review of the interim financial statements for the six months to June 30, 2022 and assessment of the Group’s key risks, particularly those that are significant to the audit. KPMG explained to the Committee the key tests that it intended performing on the identified higher-risk audit areas that could lead to material misstatement of the financial statements and significantly influenced the audit plan. The auditor and the Committee confirmed a shared understanding of these risks and key audit matters, including going concern and viability, the carrying value of tangible and intangible assets and how these were to be considered in the audit approach. The auditor confirmed that 99 per cent (2021: 96 per cent) of the Group’s forecast revenue and 95 per cent (2021: 90 per cent) of the Group’s forecast total assets would be subject to a full scope audit and that specific scope procedures would be performed on IAG Loyalty. The Committee agreed, after challenging the external auditor as to whether such a high level of coverage was required, that the approach was appropriate and should provide the Board with a high level of assurance regarding the integrity of the financial statements and subsequently approved the audit plan, recognising that the plan would evolve as the year concluded to reflect any changes in circumstances or outlook. The Committee agreed with KPMG, in considering the accuracy of financial reporting, the scale of accounting errors of lesser significance that were to be brought to the Committee’s attention and the amounts that would need to be adjusted so that the financial statements give a true and fair view. The Committee acknowledged KPMG’s continuing challenge in setting materiality given the rapidly recovering business activity combined with the impact of the political and economic outlook on the Group’s revenues and profitability. The Committee agreed with the increase in planning materiality based on the forecast results for 2022, which the Committee and the auditors kept under review during the final quarter of 2022 and the final stages of the 2022 audit. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 155 • KPMG attended all Committee meetings during the year to answer any questions the Committee had outside of these formal updates; • taking all aspects of the assessment throughout the year into consideration, the Committee concluded that it is satisfied that the KPMG audit was probing, challenging and robust and the approach provided a reliable audit opinion with a reasonable expectation of detecting material errors, irregularities and material fraud. The Committee considered the external audit to have been effective and of a high quality; and • the Committee also thanked Mark Baillache, the lead audit partner, for his valuable guidance of the external audit during the first two difficult years for KPMG as auditor and his determination to deliver a high quality audit, and wished him a good retirement. REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE CONTINUED External auditor quality and effectiveness The Committee is very focused on audit quality and effectiveness, which is reviewed on an ongoing basis to ensure the rigour and challenge of the external audit process is maintained. The Committee received regular updates from KPMG at all Committee meetings, enabling the Committee to assess and measure the quality of the audit through regularly monitoring the auditor’s communications with management and the Committee, including discussion and challenge during Committee meetings, compliance with relevant regulatory, ethical and professional guidance and assess, on an ongoing basis, the audit team’s qualifications, expertise, resources, partner performance and the effectiveness of the audit process. The Committee’s assessment included, in addition to its own independent assessment, a survey as well as detailed discussion with key executives and finance staff, which demonstrated that, while the 2022 external audit was deemed to be effective, robust and of good quality, the implementation of the plan was not as smooth as it could be and there were some areas identified for improvement which have been reported to the Lead Engagement Partner. The Committee’s independent assessment considered the overall quality of the audit, including whether the auditor exhibited an appropriate level of challenge and scepticism in its work and dealings with management and the independence of KPMG. The Committee also assessed the depth of review and level of challenge provided by the external auditor over the significant accounting policies, judgements and estimates made by management. The Committee felt that KPMG challenged management robustly on key judgements and estimates, accounting treatments and disclosures for example in relation to loyalty programme revenue recognition where KPMG’s challenge included an evaluation of the effectiveness of management’s expert and modelling. The observations and conclusion of the Committee in respect of this matter are noted in this report above. In addition to the annual evaluation and regular review of reports to the Committee and observations and feedback on the working practices of the KPMG audit team, the Committee undertook an ongoing assessment of external audit quality and effectiveness including, but not limited to, the following: • the Committee oversaw formal terms of engagement with the auditor and, after significant challenge by management as to the composition and quantum of the proposed fee increase, agreed the audit fee. KPMG assured the Committee that despite a significant increase compared to both the 2020 and 2021 fee, the approved 2022 fee was at a level that was appropriate for the scope of the audit, to enable a quality audit to be undertaken and to allow for additional procedures in relation to the scope and new ISA’s including ISA315r; • reports from the external auditor were reviewed during all Committee meetings in 2022 and again in the February 2023 Committee meeting, covering: the conclusions of the review of the Group’s results for the half year; audit planning updates; interim audit findings (including those of the review of the relevant key IT general controls); progress update for year-end matters; and final report for year-end matters; 156 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance External audit tender and transition 2021 KPMG first year of audit following the appointment approved by shareholders in 2020 for 2021, 2022 and 2023 financial years 2024 KPMG reappointment to be considered and approved by shareholders for year to December 31, 2024 and annually thereafter 2025 Mandatory appointment of new external (KPMG) audit lead partner to sign off on the 2026 financial year 2028/2029 Competitive tender to take place (for application for the year to December 31, 2030) unless carried out earlier 2030 To comply with the Spanish Act 22/2015, a competitive tender will be required for auditor appointment effective for the year to December 31, 2031 To comply with the Spanish Act 22/2015, the Committee conducted an audit tender process that concluded in January 2020. Following KPMG’s appointment (by shareholders) as the external auditor of the Company in 2020 for the years 2021, 2022 and 2023, the Committee has reviewed and monitored the implementation of KPMG’s transition and audit plans as well as the execution of these plans throughout 2022. The Committee will be required to consider and recommend to the Board the reappointment of KPMG from 2024. External auditor non-audit services and independence Non-audit service spend in 2022 is within the total target maximum and was €862,000 with an additional €1,022,000 relating to work performed on a working capital and profit forecast review for the Class 1 Circular in connection with the fleet acquisition. The Committee concluded that KPMG is independent, taking into account the level and nature of non-audit services provided. IAG non-audit services policy, key features Pre-approval All non-audit services require pre-approval in accordance with the table below to ensure services approved are consistent with the IAG non-audit services policy for permitted services. This process ensures all services fall within the scope of services permitted and pre-approved by the Committee and does not represent a delegation of authority for pre-approval. Value More than €100,000 Pre-approver Audit and Compliance Committee Chair and CFO Between €30,000 and €100,000 CFO and Head of Group Audit Less than €30,000 Head of Group Audit Fee Cap The guideline amount is set to ensure the total fee payable for non-audit services should not exceed 70 per cent of the annual audit fee. The overall volume of work is addressed by a target annual maximum for 2022 of €1.7 million with an additional allowance of up to €1.3 million for large projects where the external auditor is uniquely placed to carry out the work. The Committee reviews the nature and volume of the non-audit services undertaken by the external auditor on a quarterly basis. Prohibitions IAG’s policy includes a list of permitted non-audit services in line with the list of permitted services in the FRC’s Revised Ethical Standard 2019. Any service not on this list is prohibited. All non-audit services over €100,000 are put to competitive tender with other providers, in line with the Group’s procurement policy, unless the skills and experience of the external auditor make it the only suitable supplier. Details of the fees paid to the external auditor during the year can be found in note 7 to the Group financial statements. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 157 REPORT OF THE REMUNERATION COMMITTEE Report of the Remuneration Committee Dear Shareholder On behalf of the Board, I am pleased to present our 2022 Directors’ Remuneration Report. This is my first report as Chair of IAG’s Remuneration Committee, having succeeded Alberto Terol in June 2022. I would like to thank Alberto for his contribution during his time as Chair of the Committee and I am very much looking forward to serving you in this new role. The aviation sector has faced unprecedented challenges in the last three years with the sector profoundly impacted by COVID-19 and resulting global travel restrictions, the economic uncertainty driven by the war in Ukraine, inflationary pressures and cost of living crisis have made 2022 another difficult year for the sector. Against this backdrop, IAG’s return to profitability across all of the Company’s airlines and the restoration of capacity to meet the steep ramp up in demand have demonstrated the strength of our businesses and the commitment and flexibility of all of our colleagues, for which I and the Committee are extremely grateful. Within this context, the Committee have sought to take a considered approach to remuneration decisions, balancing the broader experience of the workforce and especially those on lower pay, the experience of shareholders, and the need to continue to attract, retain and incentivise senior leaders in a dynamic and tight labour market. Performance delivered in 2022 This year we returned to profitability for the first time in three years and across all businesses across the Group and are making strong progress in returning to 2019 levels of performance and profitability. This is a significant achievement particularly given the continued economic uncertainty and challenges faced across the year including sector wide skills and resource shortages, inflationary pressures, responding to a number of IT issues and managing the impact of industrial action across the sector. • Operating profit before exceptional items €1,225 million • Capacity recovered to 78 per cent of 2019 levels and over 94 million passengers flown Heather Ann McSharry Remuneration Committee Chair Committee members Heather Ann McSharry (Chair) Nicola Shaw Emilio Saracho Eva Castillo Date appointed December 31, 2020 January 1, 2018 June 20, 2019 December 31, 2020 • Passenger unit revenues higher than 2019, particulary in the second half of the year • Significant progress towards 2025 carbon efficiency target as IAG continues to lead the industry on sustainability • Confirmed acquisition of new more efficient shorthaul aircraft bringing long-term cost savings, lower carbon emissions and improved customer experience Workforce experience Our workforce continues to be at the centre of our recovery and our focus on their well-being is critical to the success of the Group. Committee members have led the Board’s direct workforce engagement programme and made twelve visits to operating companies this year. The impact of the pandemic on our business and on colleagues, the ongoing cost of living challenges, and the sense of pride in the role colleagues have played in supporting the business with its recovery were the most common themes raised. The Committee have received regular updates on workforce experience and in particular the steps the operating companies have taken to support colleagues both in terms of support with cost of living challenges, and their overall wellbeing. With respect to workforce remuneration, each operating company has sought to reach collective agreements which best support colleagues whilst ensuring the business and pay remains competitive. This has included one off payments and contractual pay increases throughout the Group (for example, £1,000 payment made to eligible IAG Loyalty employees and a one-off payment of €1,700 to eligible employees at Aer Lingus). 158 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance This year we have provided more detail on the wider workforce experience to demonstrate the Board’s and this Committee’s commitment to understanding the experience of colleagues and to show how we are using this insight to ensure all decisions regarding executive remuneration reflect the experience and expectations of all stakeholders. This can be found on page 178 of this report. On behalf of the Committee, I would like to take this opportunity to thank our employees across the Group for their ongoing effort, flexibility and hard work which has been fundamental to our recovery. 2022 Remuneration outcomes for the Executive director The remuneration outcomes for IAG CEO during 2022 reflect the strong recovery of the Group in a complex operating environment. The Committee sought to ensure remuneration outcomes fairly and competitively compensated the CEO whilst aligning with wider stakeholder experience. Base salary As disclosed in the 2021 Remuneration Report, the Committee deferred the review of the CEO’s 2022 pay to the second half of 2022, to better understand the Group's recovery from the pandemic. Taking into account a number of factors the Committee decided not to adjust the CEO’s base pay for 2022. 2022 annual incentive outcome The annual bonus plan operated in line with our remuneration policy in 2022 and reflects the strong recovery of the Group in the year and the Group’s return to profitability. This follows the decision by the CEO not to be considered for an annual Incentive award in 2021, and the decision by the Board to cancel the 2020 Annual Incentive Plan in its entirety in light of the impact of COVID-19. The 2022 annual incentive measures were chosen to reflect the most important priorities of the Group for the year, with a focus on strong financial performance and delivering the best experience for our customers. The Committee also agreed to reintroduce a carbon efficiency annual incentive measure for 2022, given the return of more normalised flying schedules and passenger volumes and the strategic importance of ESG and sustainability to the Group. The annual bonus for 2022 was therefore based on: 60 per cent Operating profit before exceptional items, 20 per cent customer NPS, 10 per cent carbon efficiency and 10 per cent personal objectives. Under those scorecard measures, the bonus outcome was 83.5 per cent of maximum. 50 per cent of this bonus will be deferred into shares for three years. Full details of achievement against targets are provided on page 170. 2020 performance share plan vesting The 2020 PSP award, our last award granted under the performance share plan before transitioning to the restricted share model in 2021, reached the end of its three-year performance period in December 2022. The targets for the 2020 PSP award were set prior to the onset of the COVID-19 pandemic and, as a result, all three measures (relative TSR, EPS and RoIC) fell short of the threshold level at which payments begin. Whilst the Committee recognised the significant progress made in recovering the business’ profitability and performance, it did not feel it was appropriate to apply any discretion and the full 2020 PSP award, set at 200 per cent of salary, will therefore lapse in full. Implementation of the policy in 2023 Base salary The Committee takes a thoughtful approach to CEO’s salary reviews, considering a wide range of factors including salary increases across the Group, shareholder and proxy agency views, the external environment and wider stakeholder experience. We have consistently shown restraint on salary increases in recent years, including implementing temporary salary reductions following the outbreak of COVID-19. As a result, there has been no change to the contractual salary for the CEO since he was appointed in September 2020 and 2022 was the first point at which the full contractual CEO salary of £820,000 was paid. The Committee is acutely aware of the importance of ensuring that the salary level for the IAG CEO is competitive in the context of a dynamic talent market in the geographies in which the Group operates and competes for talent, and in this context undertook a comprehensive review of the external market and wider market remuneration trends, whilst also taking into account the experience of employees. The Committee approved a salary increase for the IAG CEO of 4 per cent effective from 1 January 2023. This is below the average increase for the the wider workforce, which is more than 6 per cent. Annual incentive In 2023, IAG will continue to face significant uncertainty and volatility driven by external factors, as it continues to grow and recover business performance. In this context, the Committee have sought to ensure that the annual incentive plan continues to align with business priorities and reflect the underlying performance of the business. The Committee have decided that maximum annual incentive opportunity will remain at 200 per cent of salary for the IAG CEO in line with the policy, and targets will be based on financial, customer, and carbon efficiency together with personal and strategic objectives for the IAG CEO. The targets for 2023 will be fully disclosed in next year’s report. Restricted share awards As we continue our recovery, the Committee continues to believe that the restricted shares framework best ensures management focus on long-term sustainable performance and achieving our strategic goals, whilst aligning management experience with that of our shareholders. In line with IAG’s remuneration policy, a restricted share award of 150 per cent of salary will be granted to IAG CEO in 2023, the award will vest after three years subject to the satisfaction of the discretionary performance underpin and also be subject to a holding period of two years post vesting. Shareholder engagement I would like to take this opportunity to thank our shareholders for their support for our Directors’ Remuneration Report and the amendment to our Directors’ Remuneration Policy at the 2022 AGM. Although the Board was pleased to note the vote in support of the amendment, the Board acknowledges that a number of shareholders had concerns. Following my appointment as Chair of the Remuneration Committee, I met with a number of our major shareholders and their representatives to seek their feedback and perspectives. The meetings provided valuable insight which I have fed back to the Remuneration Committee and which we have taken into account as we have determined remuneration outcomes in 2022 and set our approach for 2023, to ensure that our remuneration approach at IAG continues to align interests between our senior leaders and the Group’s shareholders. We are not proposing any changes to our current Remuneration Policy and the Committee will seek to engage with shareholders in advance of presenting a new Directors’ Remuneration Policy at the 2024 AGM in line with the normal three-year cycle. This year the Remuneration Committee has again sought to take a balanced and responsible approach to executive pay, taking into account the experience of our employees, shareholders and key stakeholders in the period. I hope that our Director’s Remuneration Report is clear in explaining how our policy has been implemented in 2022 and that it receives your support at our 2023 AGM. Approved by the Board and signed on its behalf by Heather Ann McSharry Remuneration Committee Chair INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 159 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Remuneration at a glance IAG Chief Executive Officer Pay Element Purpose & Link to Strategy features Outcomes for 2022 Implementation in 2023 Fixed Remuneration Base Salary To attract and retain talent to help achieve our strategic objectives. Takes account of factors such as role, skills and contribution. First year since appointment in 2020 receiving full contractual salary of £820,000 with no increase in 2021 and 2022 (10% reduction in 2021 and 20% reduction in 2020). Taxable Benefits & Pension related Benefits Provides basic retirement and benefits which reflect local market practice. Variable Remuneration Annual Incentive Plan Incentivises annual corporate financial and non-financial performance and the delivery of role specific objectives. The deferred shares element aligns the interest of executives and shareholders and provides a retention tool. Long-Term Incentive (RSP) Incentivises long-term shareholder value creation, and retention. Shareholding Requirement Provides long-term alignment with shareholders. Pension at 12.5 per cent of salary, comparable to the rate applicable to the majority of the UK workforce. Benefits provided as per policy. For our 2022 bonus, our scorecard was weighted to the following measures: 60 per cent Operating Profit (pre-except.), 20 per cent customer NPS, 10 per cent carbon efficiency and 10 per cent personal objectives. Under those scorecard measures, the bonus outcome was 83.5 per cent of maximum, and thus the 2022 bonus amount of £ 1,369,000. 50 per cent deferred into shares for three years. The 2020 PSP award was the last award granted under the performance share plan before transitioning to the restricted share model in 2021. The targets for the 2020 PSP award were set prior to the onset of the COVID-19 pandemic and, as a result, all three measures (relative TSR, EPS and RoIC) fell short of the threshold level at which payments begin. The CEO of IAG is required to build up and maintain a shareholding of 350 per cent of base salary. From January 1, 2023: £852,800 (€1,001,528) (an increase of 4 per cent from 2022). First increase since appointment in 2020 and below the average increase for the majority of the wider workforce, which is more than 6 per cent Benefits to be provided as per policy and pension will remain unchanged. Maximum opportunity unchanged at 200 per cent of base salary. In line with IAG’s remuneration policy, a restricted share award of 150 per cent of salary will be granted to the IAG CEO in 2023, the award will vest after three years subject to the satisfaction of the discretionary performance underpin and also be subject to a holding period of two years post vesting. No change to shareholding requirements. As at 31 December 2022 the IAG CEO had a shareholding of 484 per cent of base salary. Malus & Clawback provisions apply to Annual Incentive and Long-Term Incentive awards and the Committee has discretion to adjust formulaic outcomes to reflect corporate performance and broader stakeholders experience. 160 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance 2022 performance and pay outcomes summary Business performance Key strategic highlights Key statistic • Returned to profitability with the ability to be even How we performed in 2022 better-placed to deliver our purpose • Capacity recovered to 78% of 2019 levels • Worked hard to transform our business, ensuring we are emerging stronger • Continued to build a sustainable business • Operating profit before exceptional items € 1,225 m (€ 4,195 m vly) • Net Debt €10,385 m and Total liquidity € 13,999 m (-€1 ,282 m and € 2,013 m vly) • Net Promoter Score (NPS) 18.4 (-13.8 vly) • Emissions intensity 83.5 gCO2/pkm (-11.8% vly) • SAF use (tonnes CO2 saved) 30,332 tonnes Performance outcomes Annual Incentive Plan 2020-2022 Performance Share Plan Threshold Target Stretch Threshold Target Stretch Financial (60%) Customer (20%) Carbon (10%) Strategic & Personal (10%) First Annual Incentive Award since 2019. rTSR (1/3) EPS (1/3) RoIC (1/3) The targets for the 2020 PSP award were set prior to the onset of the COVID-19 pandemic and, as a result, all three measures (relative TSR, EPS and RoIC) fell short of the threshold level at which payments begin. 83.5% Formulaic - Committee judgement no adjustments 83.5% Final Outcome (% of Maximum) This is the third consecutive year of zero vesting of long-term incentives. - Committee judgement no adjustments 0% Final Outcome (% of Maximum) IAG Chief Executive Officer remuneration history 2019 £1,093 (€1,243) £883 (€1,005) £1,222 (€1,390) £3,198 (€3,638) 2020 £963 (€1,085) £963 (€1,085) 2021 £1,110 (€1,286) £1,110 (€1,286) 2022 £1,208 (€1,419) £1,369 (€1,608) £2,577 (€3,026) Fixed Remuneration Annual Incentive Long-term incentive Remuneration scenario: proposed 2023 remuneration opportunity 2023 Minimum (fixed only) £994 (€1,168) £994 (€1,168) 2023 On-target 2023 Maximum £994 (€1,168) £853 (€1,002) £1,279 (€1,502) £3,126 (€3,672) £994 (€1,168) £1,706 (€2,003) £1,279 (€1,502) £3,979 (€4,673) Fixed Remuneration Annual Incentive Long-term incentive 1 The scenarios illustrated above include: the minimum remuneration receivable (fixed only), the remuneration receivable if the director performs in line with the Company’s expectations (on-target) and the maximum remuneration receivable achieving stretch targets (maximum). INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 161 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Alignment of IAG remuneration practices to Provision 40 of the UK Corporate Governance Code UK Corporate Governance Code – Provision 40 How we have achieved alignment Clarity Simplicity Risk Predictability Proportionality Alignment to culture Changes to the Policy were designed to improve both simplicity and transparency. Revisions in the areas of pensions, minimum shareholding and long-term incentive either simplified existing structures, such as the replacement of the PSP with the RSP, or introduced straightforward rules for new items, such as the post-employment shareholding requirement. This has improved the ability of participants, employees and shareholders to understand executive pay arrangements. Additionally, the Company continues to make more remuneration analysis and information available to both employees and shareholders, via both UK and Spanish disclosures. Our corporate governance structure provides for a crossover in Board Committee membership between the Remuneration Committee and the Audit and Compliance Committee. This ensures a joined-up view between emerging or crystallised risks and remuneration outcomes. The design of our policy also ensures independent control over remuneration outcomes, with all executive variable pay being awarded on a discretionary basis and subject to malus and clawback provisions. Our Policy identifies the maximum opportunity for each component of executive remuneration and also illustrates potential total remuneration outcomes in various performance scenarios. These disclosures provide transparency around overall opportunities. Our executive remuneration performance measures, targets and underpins are transparently disclosed where awards are made, detailing the relationship between the performance achieved and the delivery of our long-term strategy and the creation of sustainable shareholder value. The transparency of this approach, alongside the independent nature of executive remuneration decisions, supports proportionate remuneration outcomes relative to company and individual performance measures, as well as the wider performance environment. The selection and balance of financial and non-financial measures for both short- and long-term incentives is designed to reinforce the values and behaviours that support the delivery of long-term sustainable returns to shareholders. In particular, the RSP, and high overall proportion of deferred executive pay, enable a focus on transformation and long-term success. 162 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Remuneration report Directors’ Remuneration Policy Key elements of pay Executive directors The Company’s remuneration approach is to provide total remuneration outcomes that reflect the delivery of the business strategy, are competitive, and take into account each individual’s performance of their role in the Company’s work. The Committee receives regular updates on pay and conditions of the Group’s employees and takes this into account when considering executive directors’ remuneration. The current Directors’ Remuneration Policy The current Directors’ Remuneration Policy reflects recent regulatory and corporate governance framework changes. The Policy (including the amendment) is available on the company website which was approved by Shareholders on 16 June 2022 IAG – Directors Remuneration Policy (iairgroup.com). The Committee maintains an ongoing evaluation of the Policy to ensure its components, opportunities and implementation outcomes continue to achieve the Policy’s objectives. Introduction The Remuneration Committee takes responsibility for the preparation of the Report of the Remuneration Committee, which is approved by the Board. The Company’s current policy on directors’ remuneration was approved by shareholders at the Shareholders’ Meeting held on June 17, 2021, and amended at the 2022 Shareholders’ Meeting, following close consultation with major shareholders. 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 welcomed the opportunity provided by the Spanish CNMV allowing companies to prepare free-format reports. Therefore, for the fifth consecutive year, IAG is presenting a consolidated report responding to Spanish and UK disclosure requirements. This report will be accompanied by a duly completed document 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 and the CNMV’s respective websites. It is the Company’s intention once again to comply voluntarily with all reporting aspects of the UK legislation of 2018, The Companies (Miscellaneous Reporting) Regulations (SI 2018/860) and The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, and to follow UK standards best practice. In addition to the Remuneration Committee Chair’s statement, this Directors’ Remuneration Report contains the Annual Report on Remuneration, which covers the information on directors’ remuneration paid in the reported year. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 163 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Service contracts and exit payments policy Executive directors The following is a description of the key terms of the service contracts of executive directors. The contracts of executive directors are for an indefinite period. There are no express provisions in executives’ service contracts with the Company for compensation payable upon termination of those contracts, other than for payments in lieu of notice. Executive director Luis Gallego Date of contract September 8, 2020 Notice period 6 months – from/12 months – given The period of notice required from the executive is six months; the period of notice required from the Company is 12 months. Where the Company makes a payment in lieu of notice, a payment becomes payable only if, in the Company’s opinion, the executive has taken reasonable steps to find alternative paid work and then only in monthly instalments. The payments will comprise base salary only. The Company may reduce the sum payable in respect of any month by any amount earned by the executive (including salary and benefits) referable to work done in that month (for example, as a result of alternative paid work referred to above). In the event of an executive’s redundancy, compensation, whether in respect of a statutory redundancy payment or a payment in lieu of notice or damages for loss of office is capped at an amount equal to 12 months’ base salary. The Company will honour the contractual entitlements of a terminated director; however, the Company may terminate an executive’s service contract with immediate effect and without compensation on a number of grounds including where the executive is incapacitated for 130 days in any 12-month period, becomes bankrupt, fails to perform his or her duties to a reasonable standard, acts dishonestly, is guilty of misconduct or persistent breach of his or her duties, brings the Company into disrepute, is convicted of a criminal offence, is disqualified as a director, refuses to agree to the transfer of his or her service contract where there is a transfer of the business in which he or she is working or ceases to be eligible to work in Spain or the UK (as applicable). Under any of the Company’s share plans, save in respect of deferred Annual Incentive Awards (which will normally vest in full following cessation for any reason), if a director leaves, the Board, after considering the recommendation of the Remuneration Committee, may exercise its discretion (within the rules of the schemes) to grant good leaver status. This can be granted in certain circumstances including, for example (list not exhaustive) the director leaving for reasons of ill health, injury or disability, redundancy, retirement or death. Executive directors leaving with good leaver status will receive a pro rata amount of their PSP shares subject to the company performance conditions being met, and a pro rata amount of their RSP shares, subject to the underpin being met, in accordance with the plan rules. The proration is normally calculated according to what proportion of the performance period the executive director spent in company service. Normal vesting dates, holding periods, and post-cessation shareholding guidelines will normally continue to apply, other than in a limited number of exceptional circumstances in accordance with plan rules and/or at the discretion of the Board. If good leaver status is not granted to an executive director, all outstanding awards made to them will lapse. Executive directors leaving with good leaver status are eligible to receive a pro rata annual incentive payment for the period of the year actually worked, subject to the regular performance assessment and paid in the normal manner following year end. In the event of an executive director’s termination from the Company, they must not be employed by, or provide services to, a restricted business (i.e. an airline or travel business that competes with the Company) for a period of 12 months. 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 current Chairman’s and non-executive directors’ appointments are as follows: Non-executive director Javier Ferrán Heather Ann McSharry Giles Agutter Peggy Bruzelius Eva Castillo Margaret Ewing Maurice Lam Robin Phillips Emilio Saracho Nicola Shaw Date of the first appointment Date of last re-election June 20, 2019 December 31, 2020 September 8, 2020 December 31, 2020 December 31, 2020 June 20, 2019 June 17, 2021 September 8, 2020 June 16, 2016 January 1, 2018 June 16, 2022 June 16, 2022 June 16, 2022 June 16, 2022 June 16, 2022 June 16, 2022 June 16, 2022 June 16, 2022 June 16, 2022 June 16, 2022 164 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Annual Remuneration Report The Annual Remuneration Report sets out how the Directors’ Remuneration Policy (as approved by shareholders at the Shareholders’ Meeting on June 17, 2021 and amended at the Shareholders’ Meeting held on June 16, 2022) was and will be implemented in 2022 and 2023, respectively. The Remuneration Committee The Remuneration Committee is regulated by article 32 of the IAG Board Regulations and by its own Regulations approved on February 25, 2021. A copy of these Regulations is available on the Company website. Beyond executive directors, the Committee oversees the general application of the Remuneration Policy for the members of the IAG Management Committee (and occasionally considers remuneration matters related to managers and the broader workforce across the Group). Article 32 of the Board Regulations ensures that the Remuneration Committee shall be made up of no fewer than three independent non-executive directors, with the dedication, capacity and experience necessary to carry out their function. Heather Ann McSharry chairs the Committee and also holds Senior Independent Director responsibility. None of the Committee members has any personal financial interest, other than as a shareholder, in the matters to be decided. In accordance with the 2018 UK Code, the Remuneration Committee also has responsibility to review workforce remuneration and related policies and the alignment of incentives and rewards with culture. The Committee’s activities during the year In 2022, the Committee met eight times and discussed, amongst others, the following matters: Meeting January Agenda items discussed Proposal to amend the Remuneration Policy following the consultation with investors Review of the Board remuneration measures in the context of the COVID-19 pandemic 2021 Directors’ Remuneration Report and Non-Financial Information Statements Share ownership update: Review of executive holdings, share awards authority and dilution limits February (two meetings) Management Committee pay benchmarking review Approval of grants under the 2022 Executive Share Plan (ESP) Proposal from IAG CEO to not be considered for 2021 Annual Incentive Award 2021 Directors’ Remuneration Policy amendment – final proposal Review of the 2021 Annual Incentive Outturn Approval of the 2022 Annual Incentive Plan Approval of the 2021 Directors’ Remuneration Report Vesting outcome of the Performance Share Plan (PSP) 2019 award May Validated the report in relation to the proposal to amend the Directors’ Remuneration Policy July (two meetings) August October 2022 Annual Incentive Plan update Approval of share awards for senior executives and delegation of authority for future awards Review of market trends and feedback from investors after the 2022 AGM 2022 Annual Incentive Plan update IAG CEO compensation benchmarking review Approval of additional 2022 RSP grant for IAG CEO Approval of remuneration for a new Management Committee member Market update on executive remuneration trends IAG CEO 2022 base salary review Workforce remuneration update 2020 PSP outturn forecast Remuneration strategy for 2023 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 165 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Advisors to the Committee The Committee appointed Deloitte as its external advisor in September 2016. Deloitte reports directly to the Committee. The fees paid to Deloitte for advice provided to the Remuneration Committee during 2022 were £95,493 (€112,147), 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 advisory services to other parts of the Group in 2022. The Committee has reviewed the remuneration advice provided by Deloitte during the year and is comfortable that it has been objective and independent. In addition to Deloitte providing the Remuneration Committee with market updates on pay themes, the Committee also received market data and insights from other specialist consultants such as Aon, PwC and Willis Towers Watson in 2022. Consideration of shareholders’ views I would like to take this opportunity to thank our shareholders for their support for our Directors’ Remuneration Report and the amendment to our Directors’ Remuneration Policy at the 2022 AGM. Although the Board was pleased to note the 81% vote in support of the amendment, the Board acknowledges that a number of shareholders had concerns. As a result, I met with a number of our major shareholders and their representatives in 2022 to seek their feedback and perspectives. The meetings provided valuable insight which I have fed back to the Remuneration Committee, as the Committee and I seek to ensure that our remuneration approach at IAG continues to align interests between our senior leaders and the Group’s shareholders. The Company will engage in an extensive investor consultation exercise whenever there are any significant changes to the Remuneration Policy being proposed. Statement of voting The table below shows the consultative vote on the 2021 annual Directors’ Remuneration Report and the binding vote on the Directors’ Remuneration Policy Amendments at the 2022 Shareholders’ Meeting: 2021 Annual Directors’ Remuneration Report Number of votes cast For 2,048,314,538 1,905,882,463 Against 14,412,183 Abstentions 128,019,892 (100 per cent) (93.05 per cent) (0.70 per cent) (6.25 per cent) 2,048,314,538 1,525,324,299 364,183,944 158,806,295 2022 Directors’ Remuneration Policy Amendments (100 per cent) (74.47 per cent) (17.78 per cent) (7.75 per cent) 2,574,695,497 2,407,953,176 149,433,203 17,309,118 2021 Directors’ Remuneration Policy (100 per cent) (93.53 per cent) (5.80 per cent) (0.67 per cent) 166 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Single total figure of remuneration for the Executive Director The table below sets out the single total figure of remuneration breakdown for the IAG CEO, who was the only executive director during 2022. An explanation of how the figures are calculated follows the table. Base Salary Benefits Pension Total Fixed Annual Incentive Cash Deferred into shares 3 years Long-Term Incentive Total Variable Single Figure CEO: Luis Gallego £ '0001 € '0001 2022 820 285 103 1,208 1,369 685 685 0 1,369 2,577 2021 738 280 92 1,110 0 0 0 0 0 1,110 2022 963 334 121 1,418 1,608 804 804 0 1,608 3,026 2021 855 324 107 1,286 0 0 0 0 0 1,286 1 Remuneration is paid to the Executive Director in pound sterling and expressed in euro for information purposes only. Additional explanations in respect of the single total figure table for 2022 Only the current IAG CEO, Luis Gallego, served as an executive director in 2022. As the sole executive director, the IAG CEO has confirmed in writing that he has not received any other items in the nature of remuneration other than those already disclosed in the table above. Base salary The values shown represent the actual salary paid to the IAG CEO as an executive director for each performance year. For 2021, the IAG CEO served the full performance year as an executive director and had a COVID-19 related salary deduction of 10 per cent. For 2022, with the Group emerging from the pandemic, and the CEO having voluntarily given up over £150,000 in salary and pension allowances since assuming the IAG CEO role, it was agreed to stop the IAG CEO salary reduction from January 1. 2022 marked the first point at which the IAG CEO has received full contractual salary of £820,000 since appointment, demonstrating the significant length of time pay reductions had been in place. In our 2021 Directors' Remuneration Report, the Committee confirmed that the IAG CEO's salary review would be deferred to the second half of 2022 to enable the Committee to better understand the Group's recovery from the pandemic. Taking into account a number of factors the Committee decided not to adjust the CEO’s base pay for 2022. Taxable benefits Taxable benefits include the provision of a company car, a fuel allowance and private health insurances. As disclosed in our 2021 Director’s remuneration report, from January 2021 until December 2022 the Executive Director has been eligible for a transitionary allowance of £250,000 p.a. (gross), to reflect that as a result of his role as IAG CEO he and his family now live in the UK. This allowance has provided a two-year fixed period of transitionary support and has considered that the IAG CEO continues to personally maintain a base in Madrid given the Company’s significant operations and business in Spain. The value of the transitionary allowance is not included in the calculation of any pension, incentive or other benefit values. Payment of the transitionary allowance ceased in December 2022. Pension-related benefits Employer’s contribution to pension scheme and/or cash in lieu of pension contribution. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 167 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Annual Incentive Plan For our 2022 bonus, our scorecard was weighted to the following measures: 60 per cent Operating Profit (pre-except.), 20 per cent customer NPS, 10 per cent carbon efficiency and 10 per cent personal objectives. Under those scorecard measures, the bonus outcome was 83.5 per cent of maximum.The outcomes of the performance conditions which determined the award are described in detail in the Page 170. Under the current policy, 50 per cent of any Annual Incentive Award for executive directors is made in deferred shares under the Executive Share Plan. Under this plan, incentive award shares are deferred for three years from date of grant. For 2021, the IAG CEO confirmed to the Board that he did not wish to be considered for a 2021 Annual Incentive Award, waiving any 2021 incentive opportunity, therefore no annual incentives had been awarded to the IAG CEO for 2020 and 2021. Long-term incentive vesting This relates to the IAG 2020 PSP award based on performance measured to December 31, 2022. The targets for the 2020 PSP award were set prior to the onset of the COVID-19 pandemic and, as a result, all three measures (relative TSR, EPS and RoIC) fell short of the threshold level at which payments begin. Whilst the Committee recognised the significant progress made in recovering the business’ profitability and performance, it did not feel it was appropriate to apply any discretion and the full 2020 PSP award, set at 200% of salary, will therefore lapse in full. This is the third consecutive year of zero vesting of long-term incentives. Share price appreciation and depreciation The amount of remuneration attributable to share price appreciation is zero, as there was zero vesting of the IAG PSP 2020 award. The Committee has not exercised any discretion as a result of share price appreciation or depreciation for any of the remuneration in the above table. Life insurance The Company provides life insurance and accidental death cover for all executive directors. For the year ended December 31, 2022 the Company paid life insurance premium contributions of €14,493 (2021: €13,464). Exchange rate for 2022 For the year to December 31, 2022, €:£ exchange rate applied is 1.1744 (2021: 1.1587). 168 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Variable pay outcomes 2022 Annual Incentive Plan The IAG Annual Incentive Plan supports the business strategy through incentivising the delivery of identified priorities within the reporting period. The composition of measures selected reflect the most important priorities for the Group for the year to deliver long-term sustainable returns. For 2022, the Board at the beginning of the year, following a recommendation by the Committee, set the following measures: Weighting 60% Financial KPI Description IAG Operating profit (before exceptional items) 20% Customer Group Net Promoter Score (NPS) 10% IAG-specific carbon efficiency measure Group Grammes of CO2 per passenger kilometre (gCO2/ pKm) 10% Strategic and personal Recover capacity Recover profitability Transform IAG Growth in shareholder value Procurement People Sustainability Government affairs In 2021 we used a cash-based measure for the financial element of the annual incentive in order to support the protection of cash position during the pandemic. For 2022 it was considered Operating Profit was the most appropriate financial KPI in aligning shareholder interest with the Company NPS is used to gauge the loyalty of the Group’s customer relationships. It is calculated based on survey responses to the likelihood to recommend, by subtracting the percentage of customers who are ‘Detractors’ from the percentage of customers who are ‘Promoters’ With the return of more normalised flight and passenger volumes, we have reinstated a carbon efficiency measure, to further drive progress towards our Flightpath Net Zero 2050 commitment. This has measured the fuel efficiency of our flight operations, taking account of our network, aircraft mix and passenger load factors Ensure IAG is able to operate a full flying schedule as market restrictions ease Ensuring IAG delivers improved profitability and drives operating margin improvements as market restrictions ease Define and implement key projects which transform cost, customer experience and culture Define medium term strategic plan that creates shareholder value, strengthen’s IAG position in key markets and improves IAG’s capital position Leverage Group’s scale to drive right long term strategic partnerships and supplier value Build culture and capability to underpin the Group’s long term success, ensuring IAG can attract, retain and engage diverse talent Enable IAG to lead aviation industry on sustainability, and secure access to alternative fuels to support net zero ambitions Work with Governments, industry associations, and other stakeholders to ensure the right foundations are in place to enable IAG to deliver its strategic goals INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 169 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Under the policy, the IAG CEO has a maximum annual incentive opportunity of 200 per cent of contractual salary. The below table details the approved 2022 performance measures and the Board's assessment of both company and individual IAG CEO performance: Category Measure type Weighting Operating profit before exceptional items (€m) Financial measures Description of performance FY 2022 Threshold Target At which payments begin (20% pay-out) (50% pay-out) 319 637 Stretch Max pay-out (100% pay-out) 956 Performance delivered Payout % of maximum for each measure Weighted Payout % CEO incentive outcome (£’000) 60 per cent 1,225 100% 60% £984 During 2022 the Group was able to substantially restore its capacity by the end of the year, having operated a significantly reduced schedule in 2020 and 2021 due to the impact of the COVID-19 pandemic. As capacity was increasingly restored through the year the operating result improved, with the third quarter, which includes the airlines’ summer peak seasons, approaching levels of profitability seen in 2019. Fuel prices were significantly higher than in both the previous year and 2019 and the airline sector also experienced high supplier price inflation. Due to the strong demand, passenger unit revenues also rose above those in 2019, thus allowing the airlines to recover a substantial portion of the fuel price increase and other cost inflation. The net results was an operating profit before exceptional items for the year of €1,225 million, versus a target of €637million. 17.5 23.3 29.1 FY 2022 NPS Customer Description of performance 20 per cent 18.4 25% 5% £82 The outcome for 2022 was 18.4 vs a FY target of 23.3.The quick ramp up of air travel demand, a lack of staff to manage these volumes at airports as well as in some of our airlines, and operational issues impacted negatively our NPS. To mitigate this impact our airlines reduced their schedules to increase stability, undertook a vast recruitment process and re-trained colleagues to support where necessary. Positive impacts to our NPS came from enhancements to our customer proposition, particularly on our catering and on-board experience. 91.1 88.8 83.6 FY 2022 gCO2/pKm Carbon Description of performance 10 per cent 83.5 100% 10% £164 The outcome for 2022 was 83.5 vs a FY target of 88.8. IAG is targeting net zero emissions by 2050 across its Scope 1, 2, and 3 emissions. IAG’s interim targets are an 11 per cent improvement in fuel efficiency 2019-2025, a 20 per cent drop in net Scope 1 and 3 emissions 2019-30, and 10 per cent SAF in 2030. IAG is on track to deliver its 2025, 2030 and 2050 climate targets by carrying out emission reduction initiatives, working in collaboration with key stakeholders and proactively advocating for supportive government policy and technology development. Key measures to reduce emissions are fleet modernisation, sustainable aviation fuel (SAF), market-based measures including the UK and EU ETS and CORSIA, and carbon removals. Strategic and personal objectives Description of performance As described in the table in the previous page 10 per cent Low (0% to 40%) Good to High (45% to 65%) Exceptional (70% to 100%) Exceptional 85% 8.5% £139 The IAG CEO has led the group to profitability for the first time in three years and in ensuring the Group returns to 2019 levels of performance and profitability, with a clear plan and delivery against key transformation initiatives. This is a significant achievement particularly given the continued economic uncertainty and challenges faced across the year. The IAG CEO has also driven progress across the ESG agenda, increasing diversity and bench-strength of IAG’s senior leadership and making significant progress towards its 2025 carbon efficiency target. Total 100 per cent 83.5% £1,369 170 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance 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 Executive Share Plan). For all measures, 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. Formulaic Score Outcome 83.5% per cent of Maximum Remuneration Committee judgement – No adjustment Final scorecard outcome as per cent of Maximum Maximum bonus opportunity (per cent of base pay) Base pay (£’000) 2022 Annual Incentive Award (£’000 shown in single figure table) 83.5% X 200% X £820 = £ 1,369 € 1,608 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 171 REPORT OF THE REMUNERATION COMMITTEE CONTINUED IAG Performance Share Plan (PSP) award 2020 The IAG PSP award granted on March 6, 2020 was tested at the end of the performance period which began on January 1, 2020 and ended on December 31, 2022. The award for the current IAG CEO, who was not an executive director of the Group at the time of grant, was equivalent to 150 per cent of salary at the time of the award. One third of the award was subject to a TSR performance condition measured against the TSR performance of the STOXX Europe 600 Travel & Leisure index, one third subject to achievement of the Company’s adjusted EPS targets (diluted EPS, adjusted for exceptional items), and one third subject to RoIC. The definition of RoIC used remains consistent with the methodology described in the Company’s Annual Report and Accounts. 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 performance period. The outcomes of the performance conditions were as follows: Measure Threshold Target Maximum Outcome TSR performance compared to the TSR performance of the STOXX Europe 600 Travel & Leisure Index over the full three-year performance period (one-third weighting) IAG’s TSR performance equal to the index (25 per cent vests) Adjusted EPS. Measure is adjusted EPS in final year of the performance period, i.e. 2022 EPS (one-third weighting) 2022 EPS of 140 €cents (10 per cent vests) RoIC. Measure is RoIC in final year of the performance period, i.e. 2022 RoIC (one-third weighting) 2022 RoIC of 14 per cent (10 per cent vests) IAG’s TSR performance between index return and 8 per cent p.a. outperformance (straight line vesting between threshold and maximum) 2022 EPS between 140 €cents and 180 €cents (straight line vesting between threshold and maximum) 2021 RoIC between 14 per cent and 16 per cent (straight line vesting between threshold and maximum Vesting (as per cent award granted in 2020) 0 per cent IAG’s TSR performance exceeds index by 8 per cent p.a. (100 per cent vests) TSR achieved: -65.36 per cent Underperformed the index by 45 per cent 2022 EPS of 180 €cents (100 per cent vests) 5.6 €cents per share 0 per cent 2022 RoIC of 16 per cent (100 per cent vests) 4.6 per cent 0 per cent Details of any discretion exercised Overall outcome for executive director (IAG CEO) No discretion exercised by the Remuneration Committee/Board No value was realised by the IAG CEO following the nil vesting of the 2020 PSP award. 0 per cent 172 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Scheme interests awarded during the financial year 2022 Restricted Share Plan (RSP) The RSP was introduced from 2021 to increase the alignment of both interests and outcomes between the Group’s senior management and shareholders through the build-up and maintenance of senior management shareholdings and an increased focus on the long-term, sustainable performance of the Company. The simplified structure and transparency of the RSP in comparison to the Performance Share Plan, also provided a better basis to attract and retain senior management talent. A three-year vesting period and further two-year holding period applies to RSP awards for executive directors, with vesting being dependent upon a satisfactory review of the discretionary underpin by the Remuneration Committee. This assessment focuses on the Company’s overall performance during the vesting period, including financial and non-financial performance measures, as well as any material risk or regulatory failures identified and ensures any value delivered to executive directors is fair and appropriate in the context of business performance and shareholder experience. Malus and clawback provisions apply to RSP awards enabling the reduction of awards so far as nil value to further ensure that corporate or individual failure is not rewarded under the plan. For 2022, the Board of Directors of IAG proposed to amend the Directors' Remuneration Policy to increase the maximum opportunity under the Restricted Share Plan from 100 per cent of salary to 150 per cent of salary in respect of any financial year. The amendment was proposed to place more emphasis on the IAG CEO's remuneration package on sustained long-term performance and further align his long-term interests with our shareholders. This amendment to the 2021 Directors’ Remuneration Policy was proposed for the following reasons: • To ensure the Group is able to offer the IAG Chief Executive a fair and proportionate long-term incentive opportunity, reflective of the complexity of the Group, its strategy, and one that adequately recognises ongoing external challenges. • To provide a more commensurate RSP opportunity in light of the growing opportunities for talent in the external market. The IAG CEO’s existing arrangements are becoming increasingly uncompetitive compared to companies both inside and outside of the aviation industry. The Group competes for talent in a global market and recent evidence suggests that the rate of executive pay growth in mainland Europe and the United States has been faster than the United Kingdom, with the opportunity gap to the United States packages being a particular retention concern. • Since the start of the pandemic, the Group has lost a number of critical senior individuals to competitors in other sectors. Also, over the past year, the Group’s own executive recruitment experience has confirmed the rising market for executive pay, reducing the relative positioning of the IAG CEO’s total compensation compared to that of his executive team and increasing the compression in pay levels within the executive team. These factors highlight the challenges the Group faces in retaining its top talent essential to the Group’s transformation, as well as the important role that fair and competitive remuneration plays in this. • It is in IAG and its shareholders’ best interests to ensure the Group’s ability to retain talent within the Group and, in particular, the current IAG CEO. The current environment amplifies the need for the IAG CEO’s skills, capabilities and deep aviation experience. Over the past year, the Remuneration Committee has consulted extensively with IAG's largest shareholders, proxy advisors and shareholder representative organisations on the proposed amendment to the Directors’ Remuneration Policy. The Policy amendments were approved at the 2022 Shareholders’ meeting held on June 16, 2022, and and as a result the IAG CEO was granted an additional award under the RSP so that his total award opportunity in respect of financial year 2022 was 150 per cent of salary. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 173 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Details of 2022 RSP executive director award Type of award Company shares Basis of determination of the size of award Awards only made to consistently high-performing executives within key roles who have the potential to take on greater organisational responsibility and whom the Company wishes to retain for the long-term. Executive director award face value IAG CEO (Luis Gallego) – 150 per cent of base salary Date of grant 100 per cent March 21, 2022 Additional 50 per cent October 28, 2022 Grant price Vesting period Holding period Discretionary underpin description • The additional award was granted after shareholders’ approval and was made on the same terms as if it had been granted at the normal time in March 2022. This meant, notwithstanding the fall in share price since the March award, the IAG CEO did not benefit from “windfall gains” in relation to the additional award. £1.41 Three years: March 21, 2022 to March 20, 2025 Two years: March 21, 2025 to March 20, 2027 No performance measures are associated with the awards. Vesting will be contingent on the satisfaction of a discretionary underpin, normally assessed over three financial years commencing from the financial year in which the award was granted. In assessing the underpin, the Committee will consider the Company’s overall performance, including financial and non-financial performance measures over the course of the vesting period, as well as any material risk or regulatory failures identified. Financial performance may include elements such as revenue, profitability, cash generation, return on capital and benchmarked with comparable airlines. Non-financial performance may include a range of operational and strategic measures critical to the Company’s long-term sustainable success. This assessment will ensure any value delivered to executive directors is fair and appropriate in the context of the performance of the business and experience of our stakeholders and that corporate or individual failure is not rewarded. In the case of significant failure on the part of the Company or the individual, vesting may be reduced, including to nil. Full disclosure of the Remuneration Committee’s considerations in assessing the underpin will be disclosed in the relevant Directors’ Remuneration Report at the point of vesting. Total pension entitlements Luis Gallego is not a member of the Company’s pension scheme and the Company, therefore, did not pay any contributions in his time as an executive director during the reporting period (January 1, 2022 to December 31, 2022). He received cash in lieu of contributions of £102,500. This value is equivalent to 12.5 per cent of base salary paid during the performance period and is comparable to the rate for the majority of the UK workforce. Statement of directors’ shareholding and share interests In order that their interests are aligned with those of shareholders, executive directors are required to build up and maintain a minimum personal shareholding in the Company. Under the Group’s shareholding guidelines, the IAG CEO is required to build up and maintain a shareholding of 350 per cent of salary and other executive directors are required to build up and maintain a shareholding of 200 per cent of basic salary. In addition, executive directors are required to retain all shares received via incentive plans until 100 per cent of their shareholding requirement is attained. The Committee has reviewed the IAG CEO’s progress against the requirement and notes that he is compliant with the policy requirement. CEO, Luis Gallego Policy requirement 3.5 times salary Actual 4.84 times salary (1,192,376 shares) Shares which qualify towards the policy include shares already held by the executive, vested and exercised shares, vested and unexercised shares including those in the performance share plan holding period, vested shares in the restricted share plan holding period and unvested deferred annual incentive shares. 174 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance The table below summarises current executive directors’ interests as of December 31, 2022: Executive director Luis Gallego Shareholding requirement 350 per cent of salary Shares owned 403,834 Shares already vested, or in the holding period, from performance share plans Shares already vested from deferred annual incentive plans Vested shares from restricted share plan Unvested shares from deferred annual incentive plans 513,747 231,589 0 43,206 Total qualifying shares held1 1,192,376 (484 per cent of salary) 1 In accordance with the Policy, the share price used to calculate the percentage of salary guideline is either the share price on the date of award or on the date of vesting/exercise. On departure, executive directors will be required to hold the number of shares in line with their in-employment shareholding requirement (or the number of shares that they own at departure if lower) for two years from their date of termination from the Group. Shares will normally be retained in the nominee account administered by the Company to ensure this. External non-executive directorship The Company’s consent is required before an executive director can accept an external non-executive appointment and permission is only given in appropriate circumstances. The current executive director has no external non-executive appointments. IAG CEO remuneration history The table below shows the IAG CEO single total figure of remuneration for the latest ten-year rolling period: 2013 Willie Walsh 2014 2015 2016 2017 2018 2019 2020 Willie Walsh Luis Gallego Luis Gallego 2021 2022 IAG CEO – total single figure of remuneration Annual incentive payment as a percentage of the maximum 78.75 per cent of maximum 97.78 per cent of maximum 80.00 per cent of maximum 33.33 per cent of maximum 92.92 per cent of maximum 61.85 per cent of maximum 51.97 per cent of maximum £4,971,000 £6,390,000 £6,455,000 £2,462,000 £3,954,000 £3,030,000 £3,198,000 £662,000 £301,000 £1,110,000 No annual incentive payment Zero vesting of long–term incentives No annual incentive payment Zero vesting of long–term incentives No annual incentive payment Zero vesting of long–term incentives £2,577,000 83.5 per cent of maximum Zero vesting of long–term incentives Long-term incentive vesting as a percentage of the maximum 100 per cent of maximum 85.00 per cent of maximum 100.00 per cent of maximum 50.00 per cent of maximum 66.67 per cent of maximum 46.19 per cent of maximum 72.11 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. IAG’s total shareholder return (TSR) performance compared to the FTSE 100 The chart below shows the value by December 31, 2022 of a hypothetical £100 invested in IAG shares on listing compared with the value of £100 invested in the FTSE 100 index over the same period. The other points plotted are the values at intervening financial year- ends. 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. 500 400 300 200 100 0 Jan 2013 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019 Dec 2020 Dec 2021 Dec 2022 IAG FTSE 100 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 175 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Non-executive directors Non-executive directors are paid a flat fee each year, as per the following table. Role Non-executive Chairman Non-executive directors Additional fee for holding a Committee chairmanship Additional fee for Senior Independent Director Fee €645,000 €120,000 €20,000 €30,000 All non-executive directors agreed to a reduction in all types of fees received in order to preserve cash and maintain the Group’s competitive positioning during the pandemic. Between April 1, 2020 to December 31, 2020, a 20 per cent reduction applied to all fee types. Thereafter in 2021, the reduction was decreased to 10 per cent and applied for the full year. The fees in the table are the contractual rates and have remained the same since 2011. There are no proposed increases to non- executive director fees for 2023. Single total figure of remuneration for each non-executive director The fees shown in the following table reflect that for 2022, with the Group emerging from the pandemic, it was agreed from January 1, 2022 to stop the 10 per cent reduction applied to all fee types in 2021, and revert to contractual rates (shown in the table above). Director (€'000) Javier Ferrán1 Heather Ann McSharry2 Giles Agutter Peggy Bruzelius Eva Castillo Margaret Ewing Maurice Lam3 Robin Phillips Emilio Saracho Nicola Shaw Alberto Terol4 Antonio Vázquez5 Total (€’000) 2022 fees 2022 taxable benefits Total for year to December 31, 2022 2021 fees 2021 taxable benefits Total for year to December 31, 2021 645 147 120 120 120 140 120 120 120 140 79 - 5 6 0 0 2 3 12 4 11 12 17 - 650 153 120 120 122 143 132 124 131 152 96 - 573 108 108 108 108 126 58 108 108 123 153 11 4 0 4 0 0 0 2 0 7 0 9 7 577 108 112 108 108 126 60 108 115 123 162 18 1,871 72 1,943 1,692 33 1,725 1 Javier Ferrán was appointed Chairman on Antonio Vázquez’s retirement on January 7, 2021 and his January 2021 fees reflected a blend of non-executive director and chair fees. 2 Heather Ann McSharry was appointed Senior Independent Director and Remuneration Committee Chair in June 2022. 3 Maurice Lam joined the Board on June 17, 2021 and his fees and taxable benefits in 2021 reflect a part year of service. 4 Alberto Terol stepped down from the Board in June 2022 and his fees reflect a part year of service. 5 Antonio Vázquez retired from the Board during 2021 and received no fees in 2022. Additional explanations in respect of the single total figure table for each non-executive director Each non-executive 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. Taxable benefits Taxable benefits for non-executive directors relate to personal travel benefits. Exchange rates For the year to December 31, 2022, €:£ exchange rate applied is 1.1744 (2021: 1.1587). 176 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Directors’ interests in shares Javier Ferrán Luis Gallego Giles Agutter Peggy Bruzelius Eva Castillo Margaret Ewing Maurice Lam Heather Ann McSharry Robin Phillips Emilio Saracho Nicola Shaw Total Total shares and voting rights Percentage of capital 774,750 891,590 625 0 0 18,750 0 55,000 0 0 4,285 1,745,000 0.016 0.018 0.000 0.000 0.000 0.000 0.000 0.001 0.000 0.000 0.000 0.035 Value €8,000 €24,000 €15,000 €7,000 €24,000 €9,000 €17,000 €8,000 There have been no changes to the shareholdings set out above between December 31, 2022 and the date of this report. Payments to past directors Travel benefits were received during 2022 by the following former Board members: Former Board Member Antonio Vázquez Patrick Cescau Maria Fernanda Mejía Deborah Kerr Baroness Kingsmill Kieran Poynter Dame Marjorie Scardino James Lawrence INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 177 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Wider workforce In 2022 A key area of focus for the Committee over 2022 has been understanding the broader workforce experience in light of the current economic environment and cost-of-living crisis and supporting our wider workforce. Workforce experience highlights • Within IAG’s unique operating model, employee reward is owned and managed within each operating company, to enable them to deliver the right customer and employee experience. • Our employees have been central to our recovery and key to delivering for our customers. Operating companies continue to support our people through these challenging times and ensure our pay models are sustainable, fair and aligned to the Operating company’s competitiveness. • 89 per cent of employees are subject to collective bargaining agreements with 32 collective bargaining agreements across the Group, many of them reviewed in 2022. • The Committee have received regular updates on workforce experience and in particular the steps the operating companies have taken to support colleagues both in terms of support with cost of living challenges, and their overall wellbeing. With respect to workforce remuneration, each operating company has sought to reach collective agreements which best support colleagues whilst ensuring the business and pay remains competitive. This has included one off payments and contractual pay increases throughout the Group (for example, £1,000 payment made to eligible IAG Loyalty employees and a one-off payment of €1,700 to eligible employees at Aer Lingus). • During the COVID-19 pandemic a range of interventions were implemented to support colleagues, including the extensive use of job retention schemes to protect jobs and pay, with operating companies contributing an additional c.£150 million to top-up payments from government schemes. Engaging with employees • Board members also regularly engage with representative employee groups. There were twelve visits across the operating companies during 2022. The key themes from the engagement were shared with the Board in order to understand colleague experiences and to identify any areas for improvement. Further explanations of the Board engagement with employees is set out in the ‘Stakehoholders engagement’ section of the Corporate Governance report. Gender pay • Operating companies have implemented a range of initiatives to support gender equality including reviewing its recruitment processes to ensure diverse shortlists and interview panels, setting up mentoring and networking opportunities to women and providing educational programmes for girls and young women considering career paths in aviation. As markets re-opened and travel restriction eased, airlines built the capacity to meet increasing demands for travel. This included recruiting around 17,400 new colleagues across the Group, with the majority of new hires in Cabin Crew and Airport Operations. This changing resource profile has resulted at IAG group level, in a year-on-year reduction in the salary gap from 25% in 2021 to 12.6% in 2022. Remuneration decisions made by the Committee align with our strategy, our stakeholders’ interest in our delivery of long-term sustainable value and with the wider workforce in line with the principles set out in our policy. 178 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Alignment of Executive Director and workforce remuneration The Committee has oversight of workforce remuneration and related policies across the Group and takes this into account when setting remuneration for the IAG CEO and senior management. The table below summarises the remuneration structure for the wider workforce. IAG CEO Below board level 89 per cent of our employees are subject to collective bargaining agreements (CBA). Many of them were reviewed over the course of 2022, with the aim to create a stronger link to market alignment and to future business performance and to ensure that pay is both competitive and sustainable. Salary increase budgets for employees are determined by each operating company for each country. Salary increases reflect position against market, performance, skills, contribution and development in role. If we compare the 2022 base salary increases of the IAG CEO against the UK workforce in 2022, of the circa 22,000 employees present in both 2021 and 2022, the median salary increase awarded was 8 per cent of contractual base salary. Benefits are set by operating companies at a competitive level and are appropriate given local market practice. Pension arrangements reflect local market practices and requirements. For eligible employees Incentive plans were in place against objectives designed to focus on financial, customers, carbon efficiency and personal. Opportunities vary by role and outturns and payments against these plans were managed at a local level. Base Salary 2022 was the first year since appointment in 2020 receiving full contractual salary with no salary increases for 2021 or 2022 (10% reduction in 2021 and 20% reduction in 2020 following the outbreak of the pandemic). Salary increases as a percentage of salary are normally aligned with, or lower than, those of the wider workforce. Taxable Benefits Pension Annual Incentive Awards Benefit packages are broadly aligned with those of other employees who joined in the same country at the same time. Pension contribution of 12.5 per cent of salary in line with the rate applicable to the majority of the workforce in the country in which is based. The maximum opportunity in the incentive plan is 200 per cent of salary. At least 60 per cent and no more than 80 per cent of the annual incentive is subject to financial measures. The weighting on role-specific objectives will not exceed 25 per cent, and any remaining portion will be subject to measurable non-financial metrics (e.g., customer and an IAG-specific carbon efficiency measure, to further drive progress towards our Flightpath Net Zero 2050 commitment). 50 per cent of any bonus earned is deferred into shares for three years For 2021, the IAG CEO confirmed to the Board that he did not wish to be considered for a 2021 Annual Incentive Award, waiving any 2021 incentive opportunity, therefore no annual incentives had been awarded to the IAG CEO for 2020 and 2021. Long- term Incentives Maximum restricted share plan opportunity of 150 per cent of base salary and subject to the satisfaction of performance underpins. Restricted share awards granted to senior managers across the Group to incentivise long-term shareholder value creation. Awards are subject to a three-year vesting period followed by a two-year holding period. Also by exception, identified talent may participate where we believe the individual will achieve promotion to a senior management grade within the next 12-18 months, and whereby an award of long-term incentives is deemed critical to retention. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 179 REPORT OF THE REMUNERATION COMMITTEE CONTINUED CEO pay ratio The following table sets out IAG’s CEO pay ratio figures from 2019 to 2022. Year 2022 2021 2020 2019 CEO single figure (£‘000) 2,577 1,110 963 3,198 Method1 Option A Option A Option A Option A 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 59:1 29:1 34:1 109:1 45:1 21:1 23:1 72:1 29:1 14:1 15:1 49:1 The pay ratio figures in the above table are calculated using the following UK employee remuneration information: Year 20222 20213 20204 2019 UK employee pay Basic salary (£‘000) Total remuneration (£‘000) Basic salary (£‘000) Total remuneration (£‘000) Basic salary (£‘000) Total remuneration (£‘000) Basic salary (£‘000) Total remuneration (£‘000) 25th percentile pay 27.7 43.4 26.9 38.6 17.2 28.4 20.1 29.4 Median pay 40.9 57.1 39.7 53.4 28.6 42.8 32.3 44.2 75th percentile pay 62.4 90.5 60.6 80.7 45.2 63.9 46.5 64.7 1 The ratio continues to be calculated on the most statistically accurate basis, Option A. UK employee pay is based on the payroll records of 36,474 employees who were in the Group for the whole of or some of 2022. 2 To ensure the accuracy of these calculations, earnings data were collected directly from the UK payroll on a month-by-month basis. Any variable incentive elements in respect of 2022, payable to employees later in 2023, are modelled on an employee-by-employee basis against agreed frameworks. This approach enables fair and accurate comparison to the IAG CEO 2022 single total figure of remuneration. 3 To provide a fair and representative view to all remuneration received by UK employees, the 2021 basic salary and total remuneration figures include statutory and company top-up furlough payments. With the UK furlough scheme having ended in September 2021, this consideration is not relevant for 2022. 4 The 2020 UK employee remuneration figures excluded all types of furlough payment and were representative of earnings for time worked but were not representative of the full level of pay received by employees and their actual remuneration experience. The reduction in the ratio from 2019 demonstrates the continuing impact of the pandemic and is an accurate reflection of the contraction in IAG CEO’s pay, with current IAG CEO’s remuneration being around 81 per cent of 2019 levels. The increase in the UK employee remuneration in 2022 reflects: • Across our operating companies we have put in place a number of programmes to support our people through the current economic uncertainty. • Payments made to managers under the 2022 annual incentive plan. • Changes to the size and composition of the UK workforce between years, with pay for 29,744 employees being reported for 2021 and 36,474 for 2022. The change in IAG CEO remuneration between 2021 and 2022, is due to: • 2022 first year since appointment in 2020 receiving full contractual salary (with no increase in 2021 and 2022, 10% reduction in 2021 and 20% reduction in 2020). • As the Group emerges stronger from the pandemic, 2022 was the first year since 2019 that the IAG CEO received an Annual incentive award. The Committee is aware that the current ratio, whilst temporary, is an outlier amongst similar profile organisations. As the Group continues its recovery from the pandemic and IAG CEO’s long-term variable incentive begin to be payable against the generation of sustainable shareholder value, it is expected that the Group’s CEO pay ratio will increase to a more representative, pre-pandemic range. 180 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Change in directors’ remuneration compared to employees The table below shows a comparison of the change in year-on-year remuneration for directors of the Group, against the equivalent change for UK employees from 2020 to 2022. 2021 to 2022 2020 to 2021 2019 to 2020 Salary or fees value change from 2021 to 20221 13% 13% 36% 11% 11% 11% 11% 107% 11% 11% 14% (48%) 3% Taxable benefits value change from 2021 to 2022 3% 25% 100% (100%) 0% 100% 100% 500% 100% 57% 100% 89% 0% Annual incentive value change from 2021 to 2022 100% Salary or fees value change from 2020 to 20211 Taxable benefits value change from 2020 to 2021 Annual incentive value change from 2020 to 2021 0% 269% 436% – 315% 0% – 260% 100% – – 18% – 260% 6% 21% 20% 39% – – (100%) – 0% 17% (100%) (100%) 0% 131% 78% Director (€'000) Luis Gallego2 Javier Ferrán3 Heather Ann McSharry4,6 Giles Agutter5 Peggy Bruzelius6 Eva Castillo6 Margaret Ewing Maurice Lam7 Robin Phillips5 Emilio Saracho Nicola Shaw Alberto Terol8 All UK employees9,10 Salary or fees value change from 2019 to 2020 – 67% Taxable benefits value change from 2019 to 2020 – 100% Annual incentive value change from 2019 to 2020 – – – – – – – – – 67% 300% – – (15%) (15%) (6%) (11%) – – (67%) (94) (62%) 0% 1 The comparison of fees for all directors in respect of 2020 and 2021, reflects a 20 per cent COVID-19 related reduction operated between April 1, 2020 and December 31, 2020 and a 10 per cent reduction operated for the full year in 2021. 2 Luis Gallego: 2022 first year since appointment in 2020 receiving full contractual salary with no increase in 2021 and 2022 (10% reduction in 2021 and 20% reduction in 2020), and as the Group emerges stronger from the pandemic, 2022 was the first year since 2019 that the IAG CEO received an Annual incentive award. The comparison of 2020 vs 2021 reflects a part year of remuneration in 2020 versus a full year in 2021. 3 The uplift in fees for Javier Ferrán between 2020 and 2021 reflects his role as a non-executive director in 2020 and his assumption of the role of the Chairman from January 7, 2021, for the remainder of the reporting period. 4 The uplift in fees for Heather Ann between 2022 and 2021 reflect her appointment as Senior Independent Director and Remuneration Committee Chair since June 2022. 5 The comparison of 2020 vs 2021 remuneration for Luis Gallego, Giles Agutter and Robin Phillips reflects a part year of director service and remuneration in 2020 versus a full year of director service and remuneration in 2021. 6 Eva Castillo, Heather Ann McSharry, and Peggy Bruzelius were appointed as directors on December 31, 2020, but received no remuneration for 2020. 7 Maurice Lam the comparison of 2021 vs 2022 reflects a part year of director service in 2021 versus a full year in 2022. 8 Alberto Terol stepped down from the Board in June 2022 and his fees reflect a part year of service. 9 The All UK Employee 2021 and 2022 salary medians underlying the 3 per cent uplift in median salary are taken from UK employee earnings published in the 2022 CEO pay ratio section. 10 The reported change in the median value of all UK employee annual incentives from 2021 to 2022 (79 per cent) reflects the strong recovery of the Group in the year and the Group’s return to profitability (against the distribution of considerably reduced award values in previous years). INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 181 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Relative importance of spend on pay The table below shows, for 2022 and 2021, total remuneration costs, adjusted operating profit/(loss) and dividends for the Company. Total employee costs, IAG1 Total remuneration, directors (including non-executive directors) IAG operating profit/(loss), excluding exceptional items Dividend declared Dividend proposed 1 Total employee costs are before exceptional items. 2022 € 4,647,000,000 € 4,969,000 2021 € 3,031,000,000 € 3,011,000 € 1,225,000,000 € (2,970,000,000) – – – – Implementation of Remuneration Policy for 2023 The table below shows how the Remuneration Policy approved by shareholders at the 2021 Shareholders’ Meeting, and amended at the Shareholders’ Meeting in 2022, will be implemented in 2023, alongside a summary of key features: Pay element Purpose and link to strategy Operation of element Implementation in 2023 Executive directors Base salary Annual Incentive Plan To attract and retain talent to help achieve our strategic objectives. Takes account of factors such as role, skills and contribution. The positioning of base salaries is set with reference to factors such as the external market, as well as the individual’s skills and contribution. Basic salaries are reviewed annually, and normally take effect on January 1 each year. Annual Incentive award incentivises annual corporate financial and non-financial performance and the delivery of role-specific objectives. The deferred shares element aligns the interest of executives and shareholders and provides a retention tool. The Board, on a recommendation from the Remuneration Committee, sets the financial and non-financial targets that apply to the Annual Incentive Plan. These are set by reference to a number of factors, including the Business Plan (as approved by the Board), and the Group’s strategic focus. For the portion based on personal objectives, the Committee will consider the performance of each executive against their role- specific objectives. 50 per cent of the awards under the Annual Incentive Plan is deferred into shares vesting in three years. Malus and clawback provisions apply. From January 1, 2023: £852,800 (€1,001,528) (an increase of 4 per cent from 2022). First increase since appointment in 2020 and below the average increase for the majority of the wider workforce, which is more than 6 per cent. The maximum opportunity in the incentive plan is 200 per cent of salary. At least 60 per cent and no more than 80 per cent of the annual incentive is subject to financial measures. The weighting on role-specific objectives will not exceed 25 per cent, and any remaining portion will be subject to measurable non-financial metrics (e.g., customer and an IAG-specific carbon efficiency measure, to further drive progress towards our Flightpath Net Zero 2050 commitment). 182 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Pay element Purpose and link to strategy Operation of element Implementation in 2023 Restricted Share Plan Incentivises long-term shareholder value creation, and retention. No performance measures are associated with the awards. Vesting will be contingent on continuous employment and on the satisfaction of a discretionary underpin, normally assessed over three financial years commencing from the financial year in which the award was granted. Malus and clawback provisions apply. In line with IAG’s remuneration policy, a restricted share award of 150 per cent of salary will be granted to the IAG CEO in 2023, the award will vest after three years subject to the satisfaction of the discretionary performance underpin and also be subject to a holding period of two years post vesting. Ensuring a fair and proportionate long-term incentive opportunity, aligned with both external market and relative positioning of the IAG CEO’s total compensation compared to that of his executive team. Shareholding Requirement Provides long-term alignment with shareholders. Build and maintain a shareholding of 350 per cent of basic salary. No change to shareholding requirements. Taxable benefits and pension- related benefits Provides basic retirement and benefits which reflect local market practice. Non-executive directors Basic fees Fees take into account the level of responsibility, experience, abilities and dedication required. As at 31 December 2022 the CEO of IAG had a shareholding of 484 per cent of basic salary. Benefits to be provided as per policy and pension will remain unchanged. The IAG CEO’s eligibility to the transitionary allowance has ceased at the end of 2022. Non-executive director fees were last reviewed in 2017 and remain unchanged for 2023. The fees have remained the same since 2011. Post-cessation shareholding requirements for two years. Pension contribution will be in line with the rate applicable to the majority of the workforce in the country in which it is based. Taxable benefits include the provision of a company car, a fuel allowance and private health insurances. Fees are set with reference to market positioning. To acknowledge the key role of the Chair of the Board of Directors, fees are set separately for this role. There is also an additional fee for undertaking the role of Senior Independent Director, and also for holding a Committee chair position. There is no additional fee for Committee membership. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 183 REPORT OF THE REMUNERATION COMMITTEE CONTINUED Supplementary information — Directors’ share options and shares The following table details the nil-cost options over ordinary shares of the Company granted to the current IAG CEO under the IAG PSP as at December 31, 2022: Director Luis Gallego Total nil-cost options over ordinary shares Date of grant May 28, 2015 March 7, 2016 March 6, 2017 March 8, 2019 March 6, 2020 Number of options at January 1, 2022 131,242 98,001 174,504 245,114 538,805 1,187,666 Options exercised during the year Options lapsed during the year Options granted during the year Exercise price – – – – – – – – – – – – – – - 245,114 – 245,114 – – – – – – Exercisable from Expiry date 1/1/2020 31/12/2024 1/1/2021 31/12/2025 1/1/2022 31/12/2026 lapsed Number of options at December 31, 2022 131,242 98,001 174,504 0 1/1/2025 31/12/2029 538,805 942,552 The award granted on March 8, 2019 was tested at the end of the performance period. Threshold performance was not achieved for any measure and therefore the award lapsed in full. The performance conditions for the unvested 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 a comparator 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. Any vested awards are subject to an additional two-year holding period. The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the PSP awards was 2020: 459 pence; 2019: 567 pence; 2017: 546 pence; 2016: 541 pence; and 2015: 550 pence. The following table details the conditional share awards over ordinary shares granted under the Restricted Share Plan (RSP) to Executive Directors: Director Date of grant Number of conditional shares granted Vesting date Shares lapsed at vesting due to underpin Holding period expiry date Number of unvested conditional shares at December 31, 2022 Number of vested conditional shares at December 31, 2022 Luis Gallego June 23, 2021 414,954 June 23, 2024 – June 23, 2026 414,954 March 21, 2022 October 28, 2022 581,907 290,953 1,287,814 March 21, 2025 March 21, 2025 March 21, 2027 March 21, 2027 – - 581,907 290,953 1,287,814 Total conditional share awards (RSP) – – - RSP awards are subject to a discretionary underpin prior to vesting. This review, performed by the Remuneration Committee, considers the Company’s overall performance, including financial and non-financial performance measures, over the course of the vesting period, as well as any material risk or regulatory failures identified. In the event of a significant failure on the part of the Company or the executive director, malus and clawback provisions are available to the Remuneration Committee to reduce the vesting value, including to nil. The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the RSP awards was 2022: 141 pence (2021: 198 pence). 184 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Corporate Governance Incentive Award Deferral Plan (IADP) Under the current policy, 50 per cent of any Annual Incentive Award for executive directors is made in deferred shares under the Executive Share Plan. Under this plan, incentive award shares are deferred for three years from date of grant. The following table details the current Executive Director’s holdings of conditional awards over ordinary shares of the Company granted under the IAG IADP. Awards are shown for the performance periods ended December 31, 2018 and December 31, 2019. No award was made in respect of 2020 (in March 2021) following the decision to cancel the 2020 IAG Annual Incentive Plan. Additionally, no award was made for 2021 (March 2022), as the IAG’s CEO confirmed to the Board that he did not wish to be considered for a 2021 Annual Incentive Award, waiving any 2021 incentive opportunity. The impact of not making IADP grants to the IAG CEO for two years in succession has been a considerable reduction in unvested IADP shareholdings and the effectiveness of unvested IADP shares as a retention tool. Executive Director Luis Gallego Total Performance year award relates to1 2018 2019 Date of award March 8, 2019 March 6, 2020 Number of Shares at January 1, 2022 Awards released during the year 74,576 74,576 81,520 – 156,096 74,576 Date of vesting March 8, 2022 March 6, 2023 Awards lapsing during the year Awards made during the year – – – – – – Number of unvested shares at December 31, 2022 - 81,520 81,520 1 For the perfomance period ended December 31, 2022 the award is expected to be made March 2023. IADP awards already reflect performance delivered against a completed performance period, therefore awards are not subject to further performance conditions for vesting to occur. The terms and conditions of award for IADP grants do however require executive directors to be in employment with the Company at the time of vesting, or have left as a good leaver, to be eligible to receive the award. IADP awards are also subject to the policy’s malus and clawback provisions. The values attributed to the Company’s ordinary shares in accordance with the plan rules for IADP awards (relating to the previous year’s performance) were 2020 award: 459 pence; and 2019 award: 567 pence. The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the 2019 IADP award (relating to the 2018 performance year) was 567 pence. The share price on the date of the vesting of this award (March 21, 2022) was 140 pence. The monetary 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. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 185 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 Currency differences Total expenditure on operations Operating profit/(loss) Finance costs Finance income Net change in fair value of financial instruments Net financing credit/(charge) relating to pensions Net currency retranslation charges Other non-operating credits Total net non-operating costs Profit/(loss) before tax Tax Profit/(loss) after tax for the year Attributable to: Equity holders of the parent Non-controlling interest Basic earnings/(loss) per share (€ cents) Diluted earnings/(loss) per share (€ cents) Note 5 8 6 9 9 9 9 9 10 11 11 Year to December 31 2022 19,458 1,615 1,993 23,066 4,647 6,120 2,971 1,890 2,101 950 920 2,070 141 21,810 1,256 2021 5,835 1,673 947 8,455 3,013 1,781 1,308 923 1,085 758 434 1,932 (14) 11,220 (2,765) (1,017) (830) 52 81 26 (115) 132 (841) 415 16 431 431 – 431 8.7 6.1 13 89 (2) (82) 70 (742) (3,507) 574 (2,933) (2,933) – (2,933) (59.1) (59.1) 186 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements 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 Depreciation, amortisation and impairment Currency differences Total expenditure on operations Operating profit/(loss) Finance costs Finance income Net change in fair value of financial instruments Net financing credit/(charge) relating to pensions Net currency retranslation charges Other non-operating credits Total net non-operating costs Profit/(loss) before tax Tax Profit/(loss) after tax for the year Attributable to: Equity holders of the parent Non-controlling interest Basic earnings/(loss) per share (€ cents) Diluted earnings/(loss) per share (€ cents) € 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 Cost of hedging reclassified and reported in net profit 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 Fair value movements on cost of hedging Fair value movements on liabilities attributable to credit risk changes Remeasurements of post-employment benefit obligations Remeasurements of long-term employee-related provisions Total other comprehensive profit for the year, net of tax (1,017) (830) Profit/(loss) after tax for the year Year to December 31 Note 2022 2021 31 19 1,299 (1,233) (106) 38 (53) 2 173 (9) (6) 662 52 819 431 794 (81) 10 (12) (12) – 54 – (15) 1,400 25 2,163 (2,933) Total comprehensive profit/(loss) for the year 1,250 (770) Total comprehensive profit/(loss) is attributable to: Equity holders of the parent Non-controlling interest Items in the consolidated Statement of other comprehensive income above are disclosed net of tax. 31 1,250 – 1,250 (770) – (770) Year to December 31 Note 2022 19,458 1,615 1,993 23,066 4,647 6,120 2,971 1,890 2,101 950 920 2,070 141 21,810 1,256 52 81 26 (115) 132 (841) 415 16 431 431 – 431 8.7 6.1 5 8 6 9 9 9 9 9 10 11 11 2021 5,835 1,673 947 8,455 3,013 1,781 1,308 923 1,085 758 434 1,932 (14) 11,220 (2,765) 13 89 (2) (82) 70 (742) (3,507) 574 (2,933) (2,933) – (2,933) (59.1) (59.1) INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 187 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 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 Borrowings Employee benefit obligations Deferred tax liability Provisions Deferred revenue on ticket sales Derivative financial instruments Other long-term liabilities Current liabilities Borrowings Trade and other payables Deferred revenue on ticket sales Derivative financial instruments Current tax payable Provisions Total liabilities Total equity and liabilities 188 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Note December 31, 2022 December 31, 2021 13 17 18 19 32 28 10 20 16 20 20 10 28 21 21 29 29 31 25 32 10 26 23 28 24 25 22 23 28 10 26 18,346 3,556 43 55 2,334 81 1,282 362 17,161 3,239 40 31 1,775 77 1,282 250 26,059 23,855 19 353 1,330 1,226 72 645 403 9,196 13,244 39,303 497 7,770 (28) (6,223) 2,016 6 2,022 20 334 735 960 16 543 51 7,892 10,551 34,406 497 7,770 (24) (7,403) 840 6 846 17,141 17,084 217 – 2,652 326 84 200 285 – 2,267 391 47 208 20,620 20,282 2,843 5,209 7,318 387 8 896 16,661 37,281 39,303 2,526 3,712 6,161 126 21 732 13,278 33,560 34,406 Financial Statements 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 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 Borrowings Employee benefit obligations Deferred tax liability Provisions Deferred revenue on ticket sales Derivative financial instruments Other long-term liabilities Current liabilities Borrowings Trade and other payables Deferred revenue on ticket sales Derivative financial instruments Current tax payable Provisions Total liabilities Total equity and liabilities € million Cash flows from operating activities Operating profit/(loss) Depreciation, amortisation and impairment Movement in working capital Increase in trade receivables, inventories and other current assets Increase in trade and other payables and deferred revenue on ticket sales Payments related to restructuring Employer contributions to pension schemes Pension scheme service costs 26,059 23,855 Provisions and other non-cash movements Settlement of derivatives where hedge accounting has been discontinued Interest paid Interest received Tax (paid)/received 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 and investments (Increase)/decrease in other current interest-bearing deposits Payment to Globalia for convertible loan Other investing movements Net cash flows from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Settlement of derivative financial instruments Acquisition of treasury shares Other financing movements 17,141 17,084 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 20,620 20,282 Interest-bearing deposits maturing after more than three months Cash, cash equivalents and interest-bearing deposits Year to December 31 Note 2022 2021 6 26 32 25c 21 21 21 1,256 2,070 1,884 (914) 2,798 (81) (22) 17 627 – (824) 42 (134) 4,835 (3,875) 837 (351) (100) 26 (3,463) 1,436 (1,050) (1,455) 1,036 (23) – (56) 1,316 (12) 7,892 9,196 (2,765) 1,932 1,634 (351) 1,985 (161) (41) 26 305 (497) (640) 3 63 (141) (744) 544 91 – (72) (181) 4,817 (784) (1,481) (268) (24) (25) 2,235 1,913 205 5,774 7,892 403 51 9,599 7,943 For details on restricted cash balances refer to note 21 Cash, cash equivalents and current interest-bearing deposits. December 31, December 31, Note 2022 2021 13 17 18 19 32 28 10 20 16 20 20 10 28 21 21 29 29 31 25 32 10 26 23 28 24 25 22 23 28 10 26 18,346 3,556 43 55 2,334 81 1,282 362 19 353 1,330 1,226 72 645 403 9,196 13,244 39,303 497 7,770 (28) (6,223) 2,016 6 2,022 217 – 2,652 326 84 200 2,843 5,209 7,318 387 8 896 16,661 37,281 39,303 17,161 3,239 40 31 1,775 77 1,282 250 20 334 735 960 16 543 51 7,892 10,551 34,406 497 7,770 (24) (7,403) 840 6 846 285 – 2,267 391 47 208 2,526 3,712 6,161 126 21 732 13,278 33,560 34,406 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 189 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year to December 31, 2022 € million January 1, 2022 Issued share capital (note 29) 497 Share premium (note 29) 7,770 Treasury shares (note 29) (24) Other reserves (note 31) (1,673) Retained earnings (5,730) Total shareholders’ equity 840 Non- controlling interest (note 31) 6 Total equity 846 Profit for the year – – – – 431 431 – 431 Other comprehensive profit for the year Cash flow hedges reclassified and reported in net profit: Fuel and oil costs Currency differences Finance costs Discontinuance of hedge accounting Ineffectiveness recognised in other non- operating 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 Cost of hedging reclassified and reported in net profit Fair value movements on liabilities attributable to credit risk changes Currency translation differences Remeasurements of post-employment benefit obligations Remeasurements of long-term employee- related provisions Total comprehensive profit for the year Hedges reclassified and reported in property, plant and equipment Hedges reclassified and reported in sales in advance of carriage Hedges reclassified and reported in inventory Cost of share-based payments Vesting of share-based payment schemes Acquisition of treasury shares Redemption of convertible bond – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – December 31, 2022 497 7,770 – – – – – – – – – – – – – – – – – – 19 (23) – (28) (1,115) (90) 10 (22) (16) 1,472 2 (115) 38 (6) (53) – – 105 (65) 36 (58) – – – (62) – – – – – – – – – – – 662 52 1,145 – – – 39 (22) – 62 (1,115) (90) 10 (22) (16) 1,472 2 (115) 38 (6) (53) 662 52 1,250 (65) 36 (58) 39 (3) (23) – – – – – – – – – – – – – – – – – – – – – – (1,115) (90) 10 (22) (16) 1,472 2 (115) 38 (6) (53) 662 52 1,250 (65) 36 (58) 39 (3) (23) – (1,717) (4,506) 2,016 6 2,022 190 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements Other comprehensive profit for the year Cash flow hedges reclassified and reported in net profit: Fuel and oil costs Currency differences Finance costs Discontinuance of hedge accounting Ineffectiveness recognised in other non- operating 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 Cost of hedging reclassified and reported in net profit Fair value movements on liabilities attributable to credit risk changes Currency translation differences Remeasurements of post-employment benefit obligations Remeasurements of long-term employee- related provisions Total comprehensive profit for the year Hedges reclassified and reported in property, plant and equipment Hedges reclassified and reported in sales in advance of carriage Hedges reclassified and reported in inventory Cost of share-based payments Vesting of share-based payment schemes Acquisition of treasury shares Redemption of convertible bond – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (1,115) (90) 10 (22) (16) 1,472 2 (115) 38 (6) (53) – – 105 (65) 36 (58) – – – (62) – – – – – – – – – – – – – – – – – – 19 (23) – (28) – – – – – – – – – – – – – – 662 52 1,145 39 (22) – 62 (1,115) (90) 10 (22) (16) 1,472 2 (115) 38 (6) (53) 662 52 1,250 (65) 36 (58) 39 (3) (23) – December 31, 2022 497 7,770 (1,717) (4,506) 2,016 6 2,022 Total equity 846 431 (1,115) (90) 10 (22) (16) 1,472 2 (115) 38 (6) (53) 662 52 1,250 (65) 36 (58) 39 (3) (23) – 6 – – – – – – – – – – – – – – – – – – – – – – CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year to December 31, 2022 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year to December 31, 2021 € million January 1, 2022 Issued share capital (note 29) Share premium (note 29) Treasury shares (note 29) Other reserves (note 31) Retained earnings shareholders’ 497 7,770 (24) (1,673) (5,730) Total controlling Non- interest (note 31) equity 840 € million January 1, 2021 Issued share capital (note 29) 497 Share premium (note 29) 7,770 Treasury shares (note 29) (40) Other reserves (note 31) (2,420) Retained earnings (4,203) Total shareholders ’ equity 1,604 Non- controlling interest (note 31) 6 Total equity 1,610 Profit for the year – – – – 431 431 Loss for the year – – – – (2,933) (2,933) – (2,933) Other comprehensive loss for the year Cash flow hedges reclassified and reported in net profit: Passenger revenue Fuel and oil costs Currency differences Finance costs Discontinuance of hedge accounting Net change in fair value of cash flow hedges Net change in fair value of cost of hedging Cost of hedging reclassified and reported in net profit Fair value movements on liabilities attributable to credit risk changes Currency translation differences Remeasurements of post-employment benefit obligations Remeasurements of long-term employee- related provisions Total comprehensive loss 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 December 31, 2021 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 497 7,770 – – – – – – – – – – – – – – – 40 (24) (24) – – – – – – – – – – 18 (45) (15) 23 (62) 848 10 (12) (15) (12) 1,400 1,400 18 (45) (15) 23 (62) 848 10 (12) (15) (12) – – 25 738 (1,508) 9 – – – – 23 (42) – (1,673) (5,730) 25 (770) 9 23 (2) (24) 840 – – – – – – – – – – – – – – – – – 6 18 (45) (15) 23 (62) 848 10 (12) (15) (12) 1,400 25 (770) 9 23 (2) (24) 846 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 191 NOTES TO THE ACCOUNTS For the year to December 31, 2022 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 (hereinafter the ‘Company’) is a Spanish company registered in Madrid and was incorporated on December 17, 2009. The registered address of IAG is El Caserío, Zona industrial 2, Camino de La Muñoza s/n, 28042, Madrid, Spain. 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 the €825 million convertible bond due 2028, derivative financial instruments and other equity investments that are measured at fair value. The notes to the financial statements for the prior year include reclassifications that were made to conform to the current year presentation. The Group’s financial statements for the year to December 31, 2022 were authorised for issue, and approved by the Board of Directors on February 23, 2023. Going concern At December 31, 2022, the Group had total liquidity of €13,999 million (December 31, 2021: total liquidity of €11,986 million), comprising cash, cash equivalents and interest-bearing deposits of €9,599 million, €3,284 million of committed and undrawn general facilities and a further €1,116 million of committed and undrawn aircraft specific facilities. At December 31, 2022, the Group has no financial covenants associated with its loans and borrowings. In its assessment of going concern, the Group has modelled two scenarios referred to below as the Base Case and the Downside Case over the period to June 30, 2024 (the ‘going concern period’). The tenor of the going concern period encapsulates the seasonality of the Group’s operations. The Group’s three-year business plan, used in the creation of the Base Case, was prepared for and approved by the Board in December 2022. The business plan takes into account the Board’s and management’s views on the anticipated continued recovery from the COVID-19 pandemic and the wider economic and geopolitical environments on the Group’s businesses across the going concern period. The key inputs and assumptions underlying the Base Case include: • capacity recovery modelled by geographical region (and in certain regions, by key destinations) with capacity gradually increasing from 97 per cent in quarter 1 2023 (compared to the equivalent period in 2019) to pre-pandemic levels by the end of the going concern period; • passenger unit revenue per ASK is forecast to continue to remain above the levels obtained in 2019 throughout the going concern period, which is based on, amongst other assumptions, higher ticket prices to reflect both higher fuel prices and cost inflation; • the Group has assumed that the committed and undrawn general facilities of €3.3 billion will not be drawn over the going concern period. The availability of certain of these facilities reduces over time, with €3.2 billion being available to the Group at the end of the going concern period; • the Group has assumed that €1.0 billion of the committed and undrawn aircraft specific facilities of €1.1 billion would be available to be drawn over the going concern period if required, of which €0.6 billion, relating to the EETC financing structures and other specific asset securitised financing are expected to be utilised; • the Group has assumed that the €500 million bond that matures in July 2023 will not be refinanced; • of the capital commitments detailed in note 15, €4.4 billion is due to be paid over the going concern period; • in addition to the €0.6 billion of committed aircraft financing, the Group has forecast securing approximately 100 per cent, or €4.9 billion, of the aircraft financing required that is currently uncommitted, to align with the timing and payments for these aircraft deliveries. This loan to value assumption is consistent with the level of financing the Group has been able to achieve recently, including over the course of the COVID-19 pandemic to date; and • the acquisition of the remaining shares in Air Europa Holdings, that the Group does not currently own, shall receive the relevant approvals and complete during the going concern period. The Downside Case applies stress to the Base Case to model adverse commercial and operational impacts as the Group’s capacity recovers over the going concern period, represented by: reduced levels of capacity operated in each month, including reductions of at least 25 per cent for three months during 2023 to reflect the risk of more severe operational disruption; reduced passenger unit revenue per ASK reflective of general pricing pressure due to the current economic backdrop; and increased operational costs reflective of inflationary pressures. In the Downside Case, over the going concern period capacity would be ten per cent down when compared to the Base Case. The Downside Case assumes that €350 million of the €3,284 million of available general credit facilities are required to be drawn. The Directors consider the Downside Case to be a severe but plausible scenario. While not incorporated in the Downside Case, the Group has modelled the impact of further deteriorations in capacity operated and yield, as well as increases in the price of jet fuel by 20 per cent and a reduction in the forecast loan to value to 80 per cent of the uncommitted financing, but has also considered further mitigating actions, such as reducing operating and capital expenditure and deferring currently forecast early repayments of loans and borrowings. The Group expects to be able to continue to secure financing for future aircraft deliveries and in addition has further potential mitigating actions, including asset disposals, it would pursue in the event of adverse liquidity experience. 192 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS For the year to December 31, 2022 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 (hereinafter the ‘Company’) is a Spanish company registered in Madrid and was incorporated on December 17, 2009. The registered address of IAG is El Caserío, Zona industrial 2, Camino de La Muñoza s/n, 28042, Madrid, Spain. 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 the €825 million convertible bond due 2028, derivative financial instruments and other equity investments that are measured at fair value. The notes to the financial statements for the prior year include reclassifications that were made to conform The Group’s financial statements for the year to December 31, 2022 were authorised for issue, and approved by the Board of Directors on to the current year presentation. February 23, 2023. Going concern cash equivalents and interest-bearing deposits of €9,599 million, €3,284 million of committed and undrawn general facilities and a further €1,116 million of committed and undrawn aircraft specific facilities. At December 31, 2022, the Group has no financial covenants associated with its loans and borrowings. In its assessment of going concern, the Group has modelled two scenarios referred to below as the Base Case and the Downside Case over the period to June 30, 2024 (the ‘going concern period’). The tenor of the going concern period encapsulates the seasonality of the Group’s operations. The Group’s three-year business plan, used in the creation of the Base Case, was prepared for and approved by the Board in December 2022. The business plan takes into account the Board’s and management’s views on the anticipated continued recovery from the COVID-19 pandemic and the wider economic and geopolitical environments on the Group’s businesses across the going concern period. The key inputs and assumptions underlying the Base Case include: • capacity recovery modelled by geographical region (and in certain regions, by key destinations) with capacity gradually increasing from 97 per cent in quarter 1 2023 (compared to the equivalent period in 2019) to pre-pandemic levels by the end of the going concern period; • passenger unit revenue per ASK is forecast to continue to remain above the levels obtained in 2019 throughout the going concern period, which is based on, amongst other assumptions, higher ticket prices to reflect both higher fuel prices and cost inflation; • the Group has assumed that the committed and undrawn general facilities of €3.3 billion will not be drawn over the going concern period. The availability of certain of these facilities reduces over time, with €3.2 billion being available to the Group at the end of the going concern period; • the Group has assumed that €1.0 billion of the committed and undrawn aircraft specific facilities of €1.1 billion would be available to be drawn over the going concern period if required, of which €0.6 billion, relating to the EETC financing structures and other specific asset securitised financing are expected to be utilised; • the Group has assumed that the €500 million bond that matures in July 2023 will not be refinanced; • of the capital commitments detailed in note 15, €4.4 billion is due to be paid over the going concern period; • in addition to the €0.6 billion of committed aircraft financing, the Group has forecast securing approximately 100 per cent, or €4.9 billion, of the aircraft financing required that is currently uncommitted, to align with the timing and payments for these aircraft deliveries. This loan to value assumption is consistent with the level of financing the Group has been able to achieve recently, including over the course • the acquisition of the remaining shares in Air Europa Holdings, that the Group does not currently own, shall receive the relevant approvals of the COVID-19 pandemic to date; and and complete during the going concern period. The Downside Case applies stress to the Base Case to model adverse commercial and operational impacts as the Group’s capacity recovers over the going concern period, represented by: reduced levels of capacity operated in each month, including reductions of at least 25 per cent for three months during 2023 to reflect the risk of more severe operational disruption; reduced passenger unit revenue per ASK reflective of general pricing pressure due to the current economic backdrop; and increased operational costs reflective of inflationary pressures. In the Downside Case, over the going concern period capacity would be ten per cent down when compared to the Base Case. The Downside Case assumes that €350 million of the €3,284 million of available general credit facilities are required to be drawn. The Directors consider the Downside Case to be a severe but plausible scenario. While not incorporated in the Downside Case, the Group has modelled the impact of further deteriorations in capacity operated and yield, as well as increases in the price of jet fuel by 20 per cent and a reduction in the forecast loan to value to 80 per cent of the uncommitted financing, but has also considered further mitigating actions, such as reducing operating and capital expenditure and deferring currently forecast early repayments of loans and borrowings. The Group expects to be able to continue to secure financing for future aircraft deliveries and in addition has further potential mitigating actions, including asset disposals, it would pursue in the event of adverse liquidity experience. Having reviewed the Base Case, the Downside Case and additional sensitivities, the Directors have a reasonable expectation that the Group has sufficient liquidity to continue in operational existence over the going concern period and hence continue to adopt the going concern basis in preparing the consolidated financial statements for year to December 31, 2022. In adopting the going concern basis of accounting, the consolidated financial statements have been prepared without the inclusion of a material uncertainty, which has been removed since the Annual report and accounts 2021. The removal of the material uncertainty arises from the reduction in uncertainty over the going concern period due to both the continued recovery subsequent to the COVID-19 pandemic and the strength of the Group’s liquidity at December 31, 2022. 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, as at the acquisition date 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. At December 31, 2022, the Group had total liquidity of €13,999 million (December 31, 2021: total liquidity of €11,986 million), comprising cash, All intragroup account balances, including intragroup profits, are eliminated in preparing the consolidated financial statements. Unconsolidated structured entities The Group regularly uses sale and leaseback transactions to finance the acquisition of aircraft. In certain instances the Group will undertake several such sale and leaseback transactions at once through Enhanced Equipment Trust Certificates (EETCs). Under each of these financing structures, a company or companies (the EETC Issuer) are established to facilitate such financing on behalf of a number of unrelated investors. In certain of these financing structures, additional special purpose vehicles (the Lessor SPV) are established to provide additional financing from a number of further unrelated investors to the EETC Issuer. The proceeds from the issuance of the EETCs by the EETC Issuer, and where relevant the proceeds obtained from the Lessor SPV, are then used to purchase aircraft solely from the Group. The Group will then enter into fixed rate lease arrangements (which meet the recognition criteria of Asset financed liabilities) with the EETC Issuer, or where relevant the Lessor SPV, with payments made by the Group to the EETC Issuer, or the Lessor SPV, distributed, through a trust, to the aforementioned unrelated investors. The main purpose of the trust structure is to enhance the credit-worthiness of the Group’s debt obligations through certain bankruptcy protection provisions and liquidity facilities, and also to lower the Group’s total borrowing cost. The EETC Issuer and the Lessor SPV are established solely with the purpose of providing the asset-backed financing and upon maturity of such financing are expected to have no further activity. The relevant activities of the EETC Issuer and the Lessor SPV are restricted to pre- established financing agreements and the retention of the title of the associated financed aircraft. Accordingly, the Group has determined that each EETC Issuer and the Lessor SPVs are structured entities. Under the contractual terms of the financing structures, the Group has no exposure to losses in these entities, does not own any of the share capital of the EETC Issuer or the Lessor SPV, does not have any representation on the respective boards and has no ability to influence decision making. In addition to the above, such financial transactions expose the Group to no further significant financial or economic risks, such as no variability over time in interest rates. In considering the aforementioned facts, management has concluded that the Group does not have access to variable returns from the EETC Issuers and Lessor SPVs because its involvement is limited to the payment of principal and interest under the arrangement and, therefore, it does not control the EETC Issuers or the Lessor SPVs and as such does not consolidate them. Further information as to the financial impact of these financial transactions is given in note 25. 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 IAG Loyalty have a functional currency of pound sterling. The Group’s consolidated financial statements are presented in euros, which is the Group’s presentation currency. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 193 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued 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 are 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 Fleet All aircraft are stated at the fair value of the consideration given after taking account of manufacturers’ credits. Fleet assets owned or right of use (‘ROU’) assets 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 up to 5 per cent residual value for shorthaul aircraft and between 23 and 29 years (depending on aircraft) and up to 5 per cent residual value for longhaul aircraft. Right of use assets are depreciated over the shorter of the lease term and the aforementioned depreciation rates. Where the lease includes a purchase option, at the discretion of the Group, where it is expected that the purchase option will be exercised, the associated right of use asset is depreciated using the aforementioned depreciation rates to reflect the reasonably certain life of the aircraft, irrespective of the lease term. Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of 12 years and the remaining economic life of the aircraft, whether owned or leased. 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 overhaul. 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. b 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 four to 20 years. c Capitalisation of interest on progress payments Interest costs 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. d Liquidated damages Liquidated damages are recognised in the Income statement only to the extent that they relate to compensation for loss of income and/or incremental operating costs, when a contractual entitlement exists, the amounts can be reliably measured and the receipt is virtually certain. When liquidated damages do not relate to compensation for loss of income and/or incremental operating costs, the amounts are recorded as a reduction in the cost of the associated aircraft in the Balance sheet and depreciated over the life of the aircraft. e Leases The Group leases various aircraft, properties, equipment and other assets. The lease terms of these assets are consistent with the determined useful economic life of similar assets within property, plant and equipment. At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified tangible asset for a period in exchange for consideration. The Group has elected not to apply such consideration where the contract relates to an intangible asset, such as for landing rights or IT software, in which case payments associated with the contract are expensed as incurred. Leases are recognised as a ROU asset and a corresponding lease liability at the date at which the leased asset is available for use by the Group. 194 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued 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 are 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 Property, plant and equipment accordingly on a prospective basis. a Fleet All aircraft are stated at the fair value of the consideration given after taking account of manufacturers’ credits. Fleet assets owned or right of use (‘ROU’) assets 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 up to 5 per cent residual value for shorthaul aircraft and between 23 and 29 years (depending on aircraft) and up to 5 per cent residual value for longhaul aircraft. Right of use assets are depreciated over the shorter of the lease term and the aforementioned depreciation rates. Where the lease includes a purchase option, at the discretion of the Group, where it is expected that the purchase option will be exercised, the associated right of use asset is depreciated using the aforementioned depreciation rates to reflect the reasonably certain life of the aircraft, irrespective of the lease term. Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of 12 years and the remaining economic life of the aircraft, whether owned or leased. 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 overhaul. 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. b 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 four to 20 years. c Capitalisation of interest on progress payments Interest costs 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. d Liquidated damages Liquidated damages are recognised in the Income statement only to the extent that they relate to compensation for loss of income and/or incremental operating costs, when a contractual entitlement exists, the amounts can be reliably measured and the receipt is virtually certain. When liquidated damages do not relate to compensation for loss of income and/or incremental operating costs, the amounts are recorded as a reduction in the cost of the associated aircraft in the Balance sheet and depreciated over the life of the aircraft. e Leases Group. The Group leases various aircraft, properties, equipment and other assets. The lease terms of these assets are consistent with the determined useful economic life of similar assets within property, plant and equipment. At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified tangible asset for a period in exchange for consideration. The Group has elected not to apply such consideration where the contract relates to an intangible asset, such as for landing rights or IT software, in which case payments associated with the contract are expensed as incurred. Leases are recognised as a ROU asset and a corresponding lease liability at the date at which the leased asset is available for use by the Right of use assets At the lease commencement date a ROU asset is measured at cost comprising the following: the amount of the initial measurement of the lease liability; any lease payments made at or before the commencement date less any lease incentives received; and any initial direct costs. In addition, at the lease commencement date a ROU asset will incorporate unavoidable restoration costs, such as the removal of airline- specific branding and configuration, to return the asset to its original condition, for which a corresponding amount is recognised within Provisions. The ROU asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If ownership of the ROU asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. Lease liabilities Lease liabilities are initially measured at their present value, which includes the following lease payments: fixed payments (including in- substance fixed payments), less any lease incentives receivable; variable lease payments that are based on an index or a rate; amounts expected to be payable by the Group under residual value guarantees; the exercise price of a purchase option if the Group is reasonably certain to exercise that option; payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option; and payments to be made under reasonably certain extension options. Aircraft lease payments are discounted using the interest rate implicit in the lease. The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments and the unguaranteed residual value to be equal to the fair value of the leased asset and any initial indirect costs of the lessor. For aircraft leases these inputs are either observable in the contract or readily available from external market data. The initial direct costs of the lessor are considered to be immaterial. If the interest rate implicit in the lease cannot be determined, the Group entity’s incremental borrowing rate is used. Each lease payment is allocated between the principal and finance cost. The finance cost is charged to the Income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the lease liability for each period. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. The carrying amount of lease liabilities is remeasured if there is a modification of the lease contract, a re-assessment of the lease term (specifically in regard to assumptions regarding extension and termination options) and changes in variable lease payments that are based on an index or a rate. Amounts excluded from recognition as lease liabilities The Group has elected not to recognise ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less and those leases of low-value assets. Payments associated with short-term leases and leases of low-value assets are recognised on a straight line basis as an expense in the Income statement. Short-term leases are leases with a lease term of 12 months or less, that do not contain a purchase option. Low-value assets comprise IT equipment and small items of office furniture. The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is re-assessed and adjusted against the ROU asset. Extension options are included in a number of aircraft, property and equipment leases across the Group and are reflected in the lease payments where the Group is reasonably certain that it will exercise the option. The Group is also exposed to variable lease payments based on usage or revenue generated over a defined period. Such variable lease payments are expensed to the Income statement as incurred. Sale and leaseback transactions The Group regularly uses sale and lease transactions to finance the acquisition of aircraft. Each transaction is assessed as to whether it meets the criteria within IFRS 15 ‘Revenue from contracts with customers’ for a sale to have occurred. The principal criterion for assessing whether a sale has occurred or not, is whether the contract contains the option, at the discretion of the Group, to repurchase the aircraft over the lease term; with the existence of such a repurchase option resulting in a sale having been deemed not to have occurred; and if no such repurchase option exists, then a sale is deemed to have occurred. The following defines the accounting for such transactions: • if a sale is determined to have occurred, then the associated asset is de-recognised and a ROU asset and lease liability are recognised. The ROU asset recognised is based on the proportion of the previous carrying amount of the asset that is retained. Any gain or loss is restricted to the amount that relates to the rights that have been transferred to the counter-party to the transaction; and • where a sale is determined to have not occurred, the asset is retained on the balance sheet within Property, plant and equipment and an Asset financed liability recognised equal to the financing proceeds. Cash flow presentation – lease liabilities Lease payments are presented as follows in the Consolidated cash flow statement: • where the proceeds received from sale and leaseback transactions represent the fair value of the asset being transferred, the total proceeds are presented within cash flows from investing activities. Where the proceeds received from sale and leaseback transactions exceed the fair value of the asset being transferred, the element of the proceeds equivalent to the fair value of the asset being transferred is presented within investing activities and the amount of proceeds in excess of the fair value is presented within financing activities; • the repayments of the principal element of lease liabilities are presented within cash flows from financing activities; • the payments of the interest element of lease liabilities are included within cash flows from operating activities; and • the payments arising from variable elements of a lease, short-term leases and low-value assets are presented within cash flows from operating activities. Cash flow presentation – asset financed liabilities Payments associated with asset financed liabilities are presented as follows in the Consolidated cash flow statement: • the proceeds received asset financed liabilities are presented within cash flows from financing activities; • the repayments of the principal element of asset financed liabilities are presented within cash flows from financing activities; and • the payments of the interest element of asset financed liabilities are included within cash flows from operating activities. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 195 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued COVID-19 related rent concessions On May 28, 2020, the IASB issued ‘COVID-19 Related Rent Concessions – amendments to IFRS 16 Leases’. The EU subsequently adopted the amendment on October 9, 2020. The amendment provides a practical expedient for lessees, up to June 30, 2021, not to assess whether a COVID-19 related rent concession is a lease modification. On March 31, 2021, the IASB extended the period for the application of these concessions through to June 30, 2022. The EU subsequently adopted the amendment on August 31, 2021. The extended amendment is effective for annual reporting periods commencing on or after April 1, 2021 and the Group has elected to adopt this amendment for the year to December 31, 2022. Lessor accounting From time to time the Group will lease, to third parties, specific assets, including certain property, plant and equipment. On inception of the lease, the Group determines whether each lease is a finance lease or an operating lease. In order to make this determination, the Group assesses whether the lease transfers substantially all of the risks and rewards of ownership to the lessee. Factors in making this assessment include, but are not limited to, whether the lease term is for the major part of the economic life of the underlying asset and whether the underlying asset transfers to the lessee or the lessee has the option to purchase the underlying asset at the end of the lease. Where substantially all of the risks and rewards of ownership have been transferred, then the lease is recorded as a finance lease, otherwise it is recorded as an operating lease. 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 of the UK and the EU are amortised on a straight-line basis over a period not exceeding 20 years. Capitalised landing rights based within the UK and 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. f Software 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 ten years. g Emissions allowances Where an operating company purchases emissions allowances these amounts are recognised at cost and recorded within Intangible assets. As an operating company emits CO2 equivalent and builds up an obligation to the relevant authorities, a provision is recognised. Emissions allowances recorded within Intangible assets are not revalued or amortised but are tested for impairment whenever indicators exist that the carrying value may not be recoverable. For those obligations arising for which the operating company has purchased emission allowances to offset the emissions, the provision is recognised at the weighted average cost of the intangible asset. For those obligations arising for which the operating company has not yet purchased emission allowances to offset the emissions, the provision is recognised at the market price of the allowances required at the reporting date. As the provision is recognised, a corresponding amount is recorded in the Income statement within Fuel, oil costs and emission charges. The Group’s emissions obligation, recognised as a separate liability, is extinguished when the associated emission certificates are surrendered, which is typically within 12 months of the reporting date. From time to time the Group enters into sale and repurchase transactions for specified emission allowances. Such transactions do not meet the recognition criteria of a sale under IFRS 15 and accordingly the asset is retained on the balance sheet within Intangible assets and an Other financing liability recognised equal to the proceeds received. 196 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued COVID-19 related rent concessions On May 28, 2020, the IASB issued ‘COVID-19 Related Rent Concessions – amendments to IFRS 16 Leases’. The EU subsequently adopted the amendment on October 9, 2020. The amendment provides a practical expedient for lessees, up to June 30, 2021, not to assess whether a COVID-19 related rent concession is a lease modification. On March 31, 2021, the IASB extended the period for the application of these concessions through to June 30, 2022. The EU subsequently adopted the amendment on August 31, 2021. The extended amendment is effective for annual reporting periods commencing on or after April 1, 2021 and the Group has elected to adopt this amendment for the year to December 31, 2022. Lessor accounting Intangible assets a Goodwill recoverable. b Brands lease, the Group determines whether each lease is a finance lease or an operating lease. In order to make this determination, the Group assesses whether the lease transfers substantially all of the risks and rewards of ownership to the lessee. Factors in making this assessment include, but are not limited to, whether the lease term is for the major part of the economic life of the underlying asset and whether the underlying asset transfers to the lessee or the lessee has the option to purchase the underlying asset at the end of the lease. Where substantially all of the risks and rewards of ownership have been transferred, then the lease is recorded as a finance lease, otherwise it is recorded as an operating lease. 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 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. Landing rights acquired in a business combination are recognised at fair value at the acquisition date. Landing rights acquired from other Capitalised landing rights based outside of the UK and the EU are amortised on a straight-line basis over a period not exceeding 20 years. Capitalised landing rights based within the UK and 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 amortised d Landing rights airlines are capitalised at cost. e Contract-based intangibles over the remaining life of the contract. f Software over a period of up to ten years. g Emissions allowances 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 Where an operating company purchases emissions allowances these amounts are recognised at cost and recorded within Intangible assets. As an operating company emits CO2 equivalent and builds up an obligation to the relevant authorities, a provision is recognised. Emissions allowances recorded within Intangible assets are not revalued or amortised but are tested for impairment whenever indicators exist that the carrying value may not be recoverable. For those obligations arising for which the operating company has purchased emission allowances to offset the emissions, the provision is recognised at the weighted average cost of the intangible asset. For those obligations arising for which the operating company has not yet purchased emission allowances to offset the emissions, the provision is recognised at the market price of the allowances required at the reporting date. As the provision is recognised, a corresponding amount is recorded in the Income statement within Fuel, oil costs and emission charges. The Group’s emissions obligation, recognised as a separate liability, is extinguished when the associated emission certificates are surrendered, which is typically within 12 months of the reporting date. From time to time the Group enters into sale and repurchase transactions for specified emission allowances. Such transactions do not meet the recognition criteria of a sale under IFRS 15 and accordingly the asset is retained on the balance sheet within Intangible assets and an Other financing liability recognised equal to the proceeds received. From time to time the Group will lease, to third parties, specific assets, including certain property, plant and equipment. On inception of the b Intangible assets 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, including Right of use 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 Financial assets and liabilities Financial assets and financial liabilities are classified, upon initial recognition, as measured at amortised cost, at fair value through other comprehensive income (OCI), or fair value through profit or loss. Financial assets and financial liabilities are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets and financial liabilities. The classification of financial assets and financial liabilities at initial recognition depends on the financial assets’ and financial liabilities’ contractual cash flow characteristics and the Group’s business model for managing them. In order for a financial asset and financial liability to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest’ (SPPI) on the principal amount outstanding. A financial asset or financial liability that is not SPPI is classified and measured at fair value through profit or loss. This assessment is performed on an instrument by instrument basis. The Group’s business model for managing financial assets and financial liabilities establishes how it manages its financial assets and financial liabilities in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets and financial liabilities classified and measured at amortised cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows while financial assets and financial liabilities classified and measured at fair value through OCI are held within a business model with the objective of both holding to collect contractual cash flows and selling. Long term borrowings Long-term borrowings are recorded at amortised cost, including lease liabilities which contain interest rate swaps that are closely related to the underlying financing and as such are not accounted for as an embedded derivative. Convertible debt Convertible bonds are classified as either compound financial instruments or hybrid financial instruments depending on the settlement alternatives upon redemption. Where the bondholders exercise their equity conversion options and the Group has no alternative other than to settle the convertible bonds into a fixed number of ordinary shares of the Company, then the bonds are classified as a compound financial instrument. Where the Group has an alternative settlement mechanism to the convertible bonds that permits settlement in cash, then the convertible instrument is classified as a hybrid financial instrument. Convertible bonds that are classified as compound financial instruments consist 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 on an amortised cost basis using the effective interest method until extinguished on conversion or maturity of the bonds, and is recognised within Long-term 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 the equity portion of the convertible bond in Other reserves and is not subsequently remeasured. 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. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 197 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued Convertible bonds that are classified as hybrid financial instruments consist only of a liability component recognised within Long-term borrowings. At the date of issue, the entirety of the convertible bonds is accounted for at fair value with subsequent fair value gains or losses recorded within Long-term borrowings. The fair value of such financial instruments is obtained from their respective quoted prices in active markets, with the portion of the change in fair value attributable to changes in the credit risk of the convertible bonds recognised in Other comprehensive income and the portion of the change in fair value attributable to market conditions recognised in the Income statement within Finance costs. Issue costs associated with compound financial instruments 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. Issue costs associated with hybrid financial instruments are expensed immediately to the Income statement. 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 or a change in the structure of transaction changes its classification as an Other equity instrument. 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. Interest-bearing deposits Interest-bearing deposits, principally comprising funds held with banks and other financial institutions with contractual cash flows that are SPPI, and held in order to collect contractual cash flows, are carried at amortised cost using the effective interest method. Impairment of financial assets At each balance sheet date, the Group recognises provisions for expected credit losses on financial assets measured at amortised cost, based on either 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. When determining whether there has been a significant increase in credit risk since initial recognition and when estimating the expected credit loss, the Group considers reasonable and supportable information that is relevant and available. This includes both quantitative and qualitative information and analysis, based on the Group's historical experience and informed credit assessment, including forward-looking information. Such forward-looking information takes into consideration the forecast economic conditions expected to impact the outstanding balances at the balance sheet date. A financial asset is written off when there is no reasonable expectation of recovery, such as the customer having filed for liquidation. b 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. c Derivative and non-derivative financial instruments and hedging activities Derivative financial instruments, comprising interest rate swap derivatives, foreign exchange derivatives and fuel hedging derivatives (including options, swaps and forward contracts) 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 the Income statement. 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. When forward contracts are used to hedge forecast transactions, the Group generally designates only the spot component of the forward contract as the hedging instrument within a hedge relationship. Gains or losses arising on the change in fair value of the spot component are recognised within Other comprehensive income in the Cash flow hedge reserve within equity. The forward component of a forward contract is not designated within a hedge relationship, with the associated gains and losses on the forward component recorded within Other comprehensive income in the Cost of hedging reserve within equity until the underlying transaction affects the Income statement. To manage foreign exchange movements on foreign currency customer cash inflows (denominated in US dollars, euros and Japanese yen), certain non-derivative repayment instalments on foreign currency-denominated interest-bearing liabilities are designated as hedging instruments within a hedge relationship. Gains or losses arising from movements in foreign exchange rates are recognised within Other comprehensive income in the Cash flow hedge reserve within equity. Accumulated gains or losses within the cash flow hedge reserve are transferred to Sales in advance of carriage in the same period as the forecast transaction occurs or when hedge accounting is discontinued when the forecast transaction is no longer expected to occur, at which point amounts are immediately reclassified to Passenger revenue. 198 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued Convertible bonds that are classified as hybrid financial instruments consist only of a liability component recognised within Long-term borrowings. At the date of issue, the entirety of the convertible bonds is accounted for at fair value with subsequent fair value gains or losses recorded within Long-term borrowings. The fair value of such financial instruments is obtained from their respective quoted prices in active markets, with the portion of the change in fair value attributable to changes in the credit risk of the convertible bonds recognised in Other comprehensive income and the portion of the change in fair value attributable to market conditions recognised in the Income statement within Finance costs. Issue costs associated with compound financial instruments 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. Issue costs associated with hybrid financial instruments are expensed immediately to the Income statement. 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 or a change in the structure of transaction changes its classification as an Other equity instrument. 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. Interest-bearing deposits, principally comprising funds held with banks and other financial institutions with contractual cash flows that are SPPI, and held in order to collect contractual cash flows, are carried at amortised cost using the effective interest method. Interest-bearing deposits Impairment of financial assets At each balance sheet date, the Group recognises provisions for expected credit losses on financial assets measured at amortised cost, based on either 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. When determining whether there has been a significant increase in credit risk since initial recognition and when estimating the expected credit loss, the Group considers reasonable and supportable information that is relevant and available. This includes both quantitative and qualitative information and analysis, based on the Group's historical experience and informed credit assessment, including forward-looking information. Such forward-looking information takes into consideration the forecast economic conditions expected to impact the outstanding balances at the balance sheet date. A financial asset is written off when there is no reasonable expectation of recovery, such as the customer having filed for liquidation. b 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. c Derivative and non-derivative financial instruments and hedging activities Derivative financial instruments, comprising interest rate swap derivatives, foreign exchange derivatives and fuel hedging derivatives (including options, swaps and forward contracts) 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 the Income statement. 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. When forward contracts are used to hedge forecast transactions, the Group generally designates only the spot component of the forward contract as the hedging instrument within a hedge relationship. Gains or losses arising on the change in fair value of the spot component are recognised within Other comprehensive income in the Cash flow hedge reserve within equity. The forward component of a forward contract is not designated within a hedge relationship, with the associated gains and losses on the forward component recorded within Other comprehensive income in the Cost of hedging reserve within equity until the underlying transaction affects the Income statement. To manage foreign exchange movements on foreign currency customer cash inflows (denominated in US dollars, euros and Japanese yen), certain non-derivative repayment instalments on foreign currency-denominated interest-bearing liabilities are designated as hedging instruments within a hedge relationship. Gains or losses arising from movements in foreign exchange rates are recognised within Other comprehensive income in the Cash flow hedge reserve within equity. Accumulated gains or losses within the cash flow hedge reserve are transferred to Sales in advance of carriage in the same period as the forecast transaction occurs or when hedge accounting is discontinued when the forecast transaction is no longer expected to occur, at which point amounts are immediately reclassified to Passenger revenue. When a derivative is designated as a hedging instrument and that instrument expires, is sold or is restructured, if the initial forecast transaction is still expected to occur, any cumulative gain or loss remains in the cash flow hedge reserve until such time as the hedge item impacts the Income statement. Where there is a change in the risk management objective, then hedge accounting is discontinued and the associated cumulative gain or loss arising prior to the change in risk management objective remains in the cash flow hedge reserve until such time as the underlying hedged item impacts the Income statement had the risk management objective continued to have been met. Where a forecast transaction which was previously determined to be highly probable and for which hedge accounting applied, is no longer expected to occur, hedge accounting is discontinued and the cumulative gain or loss in the cash flow hedge reserve is immediately reclassified to the Income statement. Each operating company enters into foreign currency derivative contracts, that are not designated in a hedge relationship, in order to mitigate foreign exchange movements on financial liabilities designated in currencies other than the presentational currency of each operating company, including but not limited to, lease liabilities. Movements in the fair value of such derivatives are recognised in the Income statement in the period in which they occur and are presented within Net currency retranslation charges. 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. d Cash flow hedges Changes in the fair value of derivative financial instruments designated as in a hedge relationship of a highly probable expected future transaction are assessed for effectiveness and accordingly recorded in the Cash flow hedge reserve within equity. Hedge effectiveness Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments, to ensure that an economic relationship exists between the hedged item and hedging instrument. A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: (i) there is ‘an economic relationship’ between the hedged item and the hedging instrument; (ii) the effect of credit risk does not dominate the value changes that result from that economic relationship; and (iii) the hedge ratio is aligned with the requirements of the Group’s risk management strategy and in all instances is maintained at a ratio of 1:1. Sources of ineffectiveness include the following: • in hedges of fuel purchases, ineffectiveness may arise if the timing of the forecast transaction changes from what was originally estimated, or if there are changes in the credit risk of the Group or the derivative counterparty; • in hedges of foreign currency purchases, ineffectiveness may arise if the timing of the forecast transaction changes from what was originally estimated, or if there are changes in the credit risk of the Group or the derivative counterparty; and • in hedges of interest rate payments, ineffectiveness may arise if there are differences in the critical terms between the interest rate derivative instrument and the underlying hedged item, or if there are changes in the credit risk of the Group or the derivative counterparty. Ineffectiveness is recorded within the Income statement as Realised/unrealised (losses)/gains on derivatives not qualifying for hedge accounting and presented within Other non-operating charges. Reclassification adjustments Gains and losses accumulated in the Cash flow hedge reserve within equity are reclassified from the Cash flow hedge reserve when the hedged item affects the Income statement as follows: • where the forecast hedged item results in the recognition of expenses within the Income statement (such as the purchase of jet fuel for which both fuel and the associated foreign currency derivatives are designated as the hedging instrument), the accumulated gains and losses recorded in both the cash flow hedge reserve and the cost of hedging reserve are reclassified and included in the Income statement within the same caption as the hedged item is presented. Such reclassification occurs in the same period as the hedged item is recognised in the Income statement; • where the forecast hedged item results in the recognition of a non-financial asset (such as the purchase of aircraft for which foreign currency derivatives are designated as the hedging instrument or where the purchase of jet fuel gives rise to the recognition of fuel inventory in storage facilities), or a non-financial liability (such as the sales in advance of carriage for which both foreign currency derivatives and non-financial derivative instruments are designated as the hedging instrument), the accumulated gains and losses recorded within both the cash flow hedge reserve and the cost of hedging reserve are included in the initial cost of the asset and liability, respectively. These gains or losses are recorded in the Income statement as the non-financial asset and the non-financial liability affects the Income statement (which for aircraft is through Depreciation over the expected life of the aircraft, for fuel inventory through Fuel, oil costs and emission charges and for sales in advance of carriage through Passenger revenue when the flight is flown); and • where the forecast hedged items results in the recognition of a financial asset or liability (such as variable rate debt for which interest rate swaps are designated as the hedging instrument), the accumulated gains and losses recorded within the cash flow hedge reserve are reclassified to Interest expense within the Income statement at the same time as the interest expense arises on the hedged item. Further information on the risk management activities of the Group is given in note 28d. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 199 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued e Interest rate benchmark reform In 2020 the Group adopted the amendments to IFRS 9 and IFRS 7 relating to the interest rate benchmark reform Phase 1, (‘Phase 1’) and in 2021 the Group adopted the amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to the interest rate benchmark reform Phase 2 (‘Phase 2’). The Phase 1 amendments provide temporary relief from applying certain hedge accounting requirements to hedging relationships directly affected by Interbank Offered Rates (‘IBOR’) reform. The reliefs have the effect that IBOR reform does not cause hedge accounting to terminate prior to contracts being amended. Where transition to an alternative benchmark rate has taken place, the Group ceases to apply the Phase 1 amendments and instead applies the Phase 2 amendments. Hedge accounting Where the Group continues to apply the Phase 1 amendments, the following reliefs are applied: • when considering the highly probable requirement, the Group has assumed that those benchmark rates that need to be transitioned to an alternative benchmark rate, on which the Group’s hedged long-term borrowings are based, do not change as a result of IBOR reform; • in assessing whether the hedge is expected to be highly effective on a forward-looking basis the Group has assumed that those benchmark rates that need to be transitioned to an alternative benchmark rate, on which the cash flows of the hedged long-term borrowings and the interest rate swaps that hedge them are based, are not altered by IBOR reform; and • the Group has not recycled the cash flow hedge reserve relating to the period after the IBOR reform is expected to take effect. When the Group ceases to apply the Phase 1 amendments, the Group amends its hedge designation to reflect changes which are required by IBOR reform, but only to make one or more of the following changes: • designating an alternative benchmark rate (contractually or non-contractually specified) as the hedged risk; • amending the description of the hedged item, including the description of the designated portion of the cash flows being hedged; or • amending the description of the hedging instrument. The associated hedge documentation is updated to reflect these changes in designation by the end of the reporting period in which the changes are made. Such amendments do not give rise to the hedge relationship being discontinued. When the Group transitions to an alternative benchmark rate, the accumulated amounts within the cash flow hedge reserve are determined to be based on the alternative benchmark rate and no reclassification adjustments are made from the cash flow hedge reserve to the Income statement. Long-term borrowings and lease liabilities Phase 2 of the amendments requires that, for financial instruments measured using amortised cost measurement, changes to the basis for determining the contractual cash flows required by interest rate benchmark reform are reflected by adjusting their effective interest rate prospectively. No gain or loss is recognised upon transition to the new benchmark. The expedient is only applicable to direct changes that are required by interest rate benchmark reform. For lease liabilities where there is a change to the basis for determining the contractual cash flows, as a practical expedient the lease liability is remeasured by discounting the revised lease payments using a discount rate that reflects the change in the interest rate where the change is required by IBOR reform. Further information on the management of and uncertainty arising from interest rate reform is given in note 27i. No amounts have been recorded in the current or prior periods as a result of these amendments. 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, net of the relevant taxes, 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 IAS 19 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. 200 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued e Interest rate benchmark reform In 2020 the Group adopted the amendments to IFRS 9 and IFRS 7 relating to the interest rate benchmark reform Phase 1, (‘Phase 1’) and in 2021 the Group adopted the amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to the interest rate benchmark reform Phase 2 (‘Phase 2’). The Phase 1 amendments provide temporary relief from applying certain hedge accounting requirements to hedging relationships directly affected by Interbank Offered Rates (‘IBOR’) reform. The reliefs have the effect that IBOR reform does not cause hedge accounting to terminate prior to contracts being amended. Where transition to an alternative benchmark rate has taken place, the Group ceases to apply the Phase 1 amendments and instead applies the Phase 2 amendments. Hedge accounting Where the Group continues to apply the Phase 1 amendments, the following reliefs are applied: • when considering the highly probable requirement, the Group has assumed that those benchmark rates that need to be transitioned to an alternative benchmark rate, on which the Group’s hedged long-term borrowings are based, do not change as a result of IBOR reform; • in assessing whether the hedge is expected to be highly effective on a forward-looking basis the Group has assumed that those benchmark rates that need to be transitioned to an alternative benchmark rate, on which the cash flows of the hedged long-term borrowings and the interest rate swaps that hedge them are based, are not altered by IBOR reform; and the Group has not recycled the cash flow hedge reserve relating to the period after the IBOR reform is expected to take effect. When the Group ceases to apply the Phase 1 amendments, the Group amends its hedge designation to reflect changes which are required by IBOR reform, but only to make one or more of the following changes: • designating an alternative benchmark rate (contractually or non-contractually specified) as the hedged risk; • amending the description of the hedged item, including the description of the designated portion of the cash flows being hedged; or amending the description of the hedging instrument. The associated hedge documentation is updated to reflect these changes in designation by the end of the reporting period in which the changes are made. Such amendments do not give rise to the hedge relationship being discontinued. • • When the Group transitions to an alternative benchmark rate, the accumulated amounts within the cash flow hedge reserve are determined to be based on the alternative benchmark rate and no reclassification adjustments are made from the cash flow hedge reserve to the Income statement. Long-term borrowings and lease liabilities Phase 2 of the amendments requires that, for financial instruments measured using amortised cost measurement, changes to the basis for determining the contractual cash flows required by interest rate benchmark reform are reflected by adjusting their effective interest rate prospectively. No gain or loss is recognised upon transition to the new benchmark. The expedient is only applicable to direct changes that are required by interest rate benchmark reform. Further information on the management of and uncertainty arising from interest rate reform is given in note 27i. No amounts have been recorded in the current or prior periods as a result of these amendments. change is required by IBOR reform. 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, net of the relevant taxes, 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 IAS 19 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. 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 held in storage facilities. 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. For lease liabilities where there is a change to the basis for determining the contractual cash flows, as a practical expedient the lease liability is remeasured by discounting the revised lease payments using a discount rate that reflects the change in the interest rate where the 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 and where it is considered probable that an outflow of economic resources will be required to settle the obligation. Where it is not considered probable that there will be an outflow of economic resources required to settle the obligation, the Group does not recognise a provision, but discloses the matter as a contingent liability. The Group assesses whether each matter is probable of there being an outflow of economic resources to settle the obligation at each reporting date. 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. Restoration and handback provisions arising on inception of a lease are recognised as a provision with a corresponding amount recognised as part of the ROU asset. Any subsequent change in estimation relating to such costs are reflected in the ROU asset. Maintenance and handback provisions that occur through usage or through the passage of time are recognised as such activity occurs, with a corresponding expense recorded in the Income statement. Any subsequent change in estimation are recognised in the Income statement. The method for determining legal claims provisions is determined on a claim by claim basis. Where a claim includes a significant population of items, the weighted average provision is estimated by determining all potential outcomes and the probability of their occurrence. Where a claim relates to a single item, then the Group determines the associated provision by applying the most likely outcome giving consideration to alternative outcomes. Where an individual claim is significant, the disclosure of quantitative information is restricted to the extent that it does not prejudice the outcome of the claim. 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 effect of unwinding the discount rate is recognised as a finance cost in the Income statement. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 201 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued Revenue recognition Passenger revenue 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 either the customer has flown or, for flexible tickets, when unused ticket revenue is recognised or the ticket expires unused. At the time of expected travel, revenue is recognised in relation to flexible tickets where a customer can reschedule the date of intended travel, that are not expected to be used, a term referred to as ‘unused flexible tickets’. This revenue is recognised based on the terms and conditions of the ticket and analysis of historical experience. For these unused flexible tickets, revenue is recognised only when the risk of a significant reversal of revenue is remote based on the terms and conditions of the ticket and analysis of historical experience. The estimation regarding historical experience is updated at each reporting date. Where a flight is cancelled, the passenger is entitled to either compensation, a refund, changing to an alternative flight or the receipt of a voucher. Where compensation is issued to the customer, such payments are presented net within Passenger revenue against the original ticket purchased. Where the Group provides a refund to a customer, Deferred revenue on ticket sales is reduced and no amount is recorded within revenue. Where a voucher is issued it is retained within Deferred revenue on ticket sales until such time as it is redeemed for a flight or it expires, at which time it is recorded within Passenger revenue. The Group also recognises revenue by estimating the amount of vouchers that are not expected to be redeemed prior to expiry using analysis of historical experience. The estimation regarding historical experience is updated at each reporting date. The amount of such revenue recognised is constrained, where necessary, such that the risk of a significant reversal of revenue in the future is remote. Payments received in relation to certain ancillary services regarding passenger transportation, such as change fees, are not considered to be distinct from the performance obligation to provide the passenger flight. Payments relating to these ancillary services are recognised in Deferred revenue on ticket sales in current liabilities until the customer has flown. The Group considers whether it is an agent or a principal in relation to passenger 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. The Group acts as an agent where (i) it collects various taxes, duties and fees assessed on the sale of tickets to passengers and remits these to the relevant taxing authorities; and (ii) where it provides interline services to airline partners outside of the Group. Commissions earned in relation to agency services are recognised as revenue when the underlying goods or services have been transferred to the customer. In all other instances, the Group considers it acts as the principal in relation to passenger transportation services. Cargo revenue The Group has identified a single performance obligation in relation to cargo services and the associated revenue is measured at its standalone selling price and recognised on satisfaction of the performance obligation, which occurs on the fulfilment of the transportation service. Other revenue The Group has identified several performance obligations in relation to services that give rise to revenue being recognised within Other revenue. These services, their performance obligations and associated revenue recognition include: • the provision of maintenance services and overhaul services for engines and airframes, where the Group is engaged to enhance an asset while the customer retains control of the asset. Accordingly, the performance obligations are satisfied, and revenue recognised, over time. The Group estimates the proportion of the contract completed at the reporting date and recognises revenue based on the percentage of completion of the contract; • the provision of ground handling services, where the performance obligations are fulfilled when the services are provided; • the provision of holiday and hotel services, where the performance obligations are satisfied over time as the customer receives the benefit of the service; and brand and marketing activities, where the performance obligations are satisfied as the associated activities occur. • Customer loyalty programmes The Group operates four loyalty programmes: the British Airways Executive Club, Iberia Plus, Vueling Club and the Aer Lingus Aer Club. The customer loyalty programmes award travellers Avios to redeem for various rewards, primarily redemption travel, including flights, hotels and car hire. Avios are also sold to commercial partners to use in loyalty activity. Avios issuance When issued, the standalone selling price of an Avios is recorded within Deferred revenue on ticket sales in current liabilities until the customer redeems the Avios. The standalone selling price of Avios 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 Avios which are not expected to be redeemed, referred to as ‘breakage’, based on the results of modelling using historical experiences and expected future trends in customer behaviour, up until the reporting date. The amount of such revenue recognised is limited, where necessary, such that the risk of a significant reversal of revenue in the future is remote. Where the issuance of Avios arises from travel on the Group’s airlines, the consideration received from the customer may differ to the aggregation of the relative standalone selling prices. In such instances the allocation of the consideration to each performance obligation is undertaken on a proportional basis using the relative standalone selling prices. 202 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued Revenue recognition Passenger revenue expires unused. 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 either the customer has flown or, for flexible tickets, when unused ticket revenue is recognised or the ticket At the time of expected travel, revenue is recognised in relation to flexible tickets where a customer can reschedule the date of intended travel, that are not expected to be used, a term referred to as ‘unused flexible tickets’. This revenue is recognised based on the terms and conditions of the ticket and analysis of historical experience. For these unused flexible tickets, revenue is recognised only when the risk of a significant reversal of revenue is remote based on the terms and conditions of the ticket and analysis of historical experience. The estimation regarding historical experience is updated at each reporting date. Where a flight is cancelled, the passenger is entitled to either compensation, a refund, changing to an alternative flight or the receipt of a voucher. Where compensation is issued to the customer, such payments are presented net within Passenger revenue against the original ticket purchased. Where the Group provides a refund to a customer, Deferred revenue on ticket sales is reduced and no amount is recorded within revenue. Where a voucher is issued it is retained within Deferred revenue on ticket sales until such time as it is redeemed for a flight or it expires, at which time it is recorded within Passenger revenue. The Group also recognises revenue by estimating the amount of vouchers that are not expected to be redeemed prior to expiry using analysis of historical experience. The estimation regarding historical experience is updated at each reporting date. The amount of such revenue recognised is constrained, where necessary, such that the risk of a significant reversal of revenue in the future is remote. Payments received in relation to certain ancillary services regarding passenger transportation, such as change fees, are not considered to be distinct from the performance obligation to provide the passenger flight. Payments relating to these ancillary services are recognised in Deferred revenue on ticket sales in current liabilities until the customer has flown. The Group considers whether it is an agent or a principal in relation to passenger 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. The Group acts as an agent where (i) it collects various taxes, duties and fees assessed on the sale of tickets to passengers and remits these to the relevant taxing authorities; and (ii) where it provides interline services to airline partners outside of the Group. Commissions earned in relation to agency services are recognised as revenue when the underlying goods or services have been transferred to the customer. In all other instances, the Group considers it acts as the principal in relation to passenger transportation services. The Group has identified a single performance obligation in relation to cargo services and the associated revenue is measured at its standalone selling price and recognised on satisfaction of the performance obligation, which occurs on the fulfilment of the transportation Cargo revenue service. Other revenue The Group has identified several performance obligations in relation to services that give rise to revenue being recognised within Other revenue. These services, their performance obligations and associated revenue recognition include: • the provision of maintenance services and overhaul services for engines and airframes, where the Group is engaged to enhance an asset while the customer retains control of the asset. Accordingly, the performance obligations are satisfied, and revenue recognised, over time. The Group estimates the proportion of the contract completed at the reporting date and recognises revenue based on the percentage of completion of the contract; • the provision of ground handling services, where the performance obligations are fulfilled when the services are provided; the provision of holiday and hotel services, where the performance obligations are satisfied over time as the customer receives the brand and marketing activities, where the performance obligations are satisfied as the associated activities occur. • • benefit of the service; and Customer loyalty programmes The Group operates four loyalty programmes: the British Airways Executive Club, Iberia Plus, Vueling Club and the Aer Lingus Aer Club. The customer loyalty programmes award travellers Avios to redeem for various rewards, primarily redemption travel, including flights, hotels and car hire. Avios are also sold to commercial partners to use in loyalty activity. When issued, the standalone selling price of an Avios is recorded within Deferred revenue on ticket sales in current liabilities until the customer redeems the Avios. The standalone selling price of Avios 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 Avios which are not expected to be redeemed, referred to as ‘breakage’, based on the results of modelling using historical experiences and expected future trends in customer behaviour, up until the reporting date. The amount of such revenue recognised is limited, where necessary, such that the risk of a significant reversal of revenue in Avios issuance the future is remote. Where the issuance of Avios arises from travel on the Group’s airlines, the consideration received from the customer may differ to the aggregation of the relative standalone selling prices. In such instances the allocation of the consideration to each performance obligation is undertaken on a proportional basis using the relative standalone selling prices. The Group has contractual arrangements with non-Group airlines and non-air partners for the issuance and redemption of Avios, for which it has identified the following performance obligations: Companion vouchers Certain non-air partners issue their card holders with companion vouchers, which forms part of the variable consideration of the overall contract, depending on the level of expenditure by the card holders, for redemption on the airlines of the Group for the same flight and class of cabin as the underlying fare being purchased. The Group estimates the standalone selling price of the companion voucher performance obligation, using valuation techniques, by reference to the amount that a third party would be prepared to pay in an arm’s length transaction. Brand and marketing activities For both air and non-air partners, the Group licenses the Avios and the airline brands for certain activities, such as the creation of co- branded credit cards. In addition, the Group has certain contractual arrangements whereby it commits to provide marketing services to the members of the loyalty schemes on behalf of those partners. For the provision of both brand and marketing services, the partner receives benefits incremental to the issuance of Avios. The Group estimates the standalone selling price of the brand and marketing performance obligations, using valuation techniques, 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 use the brand. For brand services, as the Group considers that the partner has the right to use the brand, revenue is recognised as the brand service is provided and not over time. For marketing performance obligations, revenue is recognised as the marketing activities occur based on when the partner receives the benefit of those services. Upfront payments Where a partner makes an upfront payment to the Group which does not relate to any specific performance obligation, then the Group considers such payments as advance payments for future goods and services and the associated revenue is recognised as those goods and services are provided, as detailed above. In such instances the payment is allocated across all of the performance obligations over the contract term. The Group estimates the expected level of Avios to be issued over the contract term using experience, historical and expected future trends, and allocates the payments to the relevant performance obligations accordingly. At each reporting date, the Group updates its estimate of the number of Avios expected to be issued over the total contract term and recognises a cumulative catch-up adjustment where necessary. When a partner makes an upfront payment to the Group, the Group assesses whether such a payment is representative of a significant financing event. Where a significant financing component is identified, the Group estimates a market rate of interest that an arm’s length financial liability of similar size and tenor would yield. The Group recognises the imputed interest as a Finance expense in the Income statement. Other considerations The Group considers whether it is an agent or a principal in relation to the loyalty 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. In particular, the Group acts as an agent where customers redeem their Avios on interline partner flights outside of the Group, where the fees payable to the interline partner are presented net against the associated release of the Deferred revenue from ticket sales. Exceptional items Exceptional items are those that in management’s view need to be separately disclosed by virtue of their size or nature and where such presentation is relevant to an understanding of the Group’s financial performance. While management has defined a list of items and a quantitative threshold that would merit categorisation as exceptional that has been established through historical experience, the Group retains the flexibility to add additional items should their size or nature merit such presentation. The accounting policy in respect of exceptional items and classification of an item as exceptional is approved by the Board, through the Audit and Compliance Committee. The financial performance of the Group is monitored by the Management Committee and the Board on a pre-exceptional basis to enable comparison to prior reporting periods as well as to other selected companies, and also for making strategic, financial and operational decisions. The exceptional items recorded in the Income statement include, but are not limited to, items such as significant settlement agreements with the Group’s pension schemes; significant restructuring; the impact of business combination transactions that do not contribute to the ongoing results of the Group; significant discontinuance of hedge accounting; legal settlements; individually significant tax transactions; and the impact of the sale, disposal or impairment of an asset or investment in a business. Where exceptional items are separately disclosed, the resultant tax impact is additionally separately disclosed. Certain exceptional items may cover more than a single reporting period, such as significant restructuring events, but not more than two reporting periods. Further information is given in the Alternative performance measures section. Government grants Government grants are recognised where there is reasonable assurance that the grant will be received. Loans provided and/or guaranteed by governments that represent market rates of interest are recorded at the amount of the proceeds received and recognised within Borrowings. Those loans provided and/or guaranteed by governments that represent below market rates of interest are measured at inception at their fair value and recognised within Borrowings, with the differential to the proceeds received recorded within Deferred income and released to the relevant financial statement caption in the Income statement on a systematic basis. Grants that compensate the Group for expenses incurred are recognised in the Income statement in the relevant financial statement caption on a systematic basis in the periods in which the expenses are recognised. Critical accounting estimates, assumptions and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These 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. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 203 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued 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 At December 31, 2022 the Group recognised €2,334 million in respect of employee benefit assets (2021: €1,775 million) and €217 million in respect of employee benefit obligations (2021: €285 million). Further information on employee benefit obligations is disclosed in note 32. The cost of employee benefit obligations, employee leaving indemnities and other employee-related provisions is determined using the valuation requirements of IAS 19. These valuations involve making assumptions about discount rates, 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 note 32. The Group determines the assumptions to be adopted in discussion with qualified actuaries. Any difference between these assumptions and the actual outcome will impact future net assets and total comprehensive income. The sensitivity to changes in pension assumptions is disclosed in note 32. Under the Group’s Airways Pension Scheme (APS) and New Airways Pension Scheme (NAPS) defined benefit schemes, increases to pensions are based on the annual Government Pension Increase (Review) Orders, which since 2011 have been based on the Consumer Prices Index (CPI). Additionally, in APS there is provision for the Trustee to pay increases up to the level of the Retail Prices Index (RPI), subject to certain affordability tests. Historically market expectations for RPI could be derived by comparing the prices of UK Government fixed-interest and index-linked gilts, with CPI assessed by considering the Bank of England’s inflation target and comparison of the construction of the two inflation indices. In November 2020, the UK Government and UK Statistics Authority (UKSA) confirmed alignment of RPI with CPIH (a variant of CPI) from February 2030. In assessing RPI and CPI inflation from investment market data, allowance has been made for alignment of RPI with CPIH from 2030 and, therefore, effectively no gap between RPI and CPI inflation from that date. CPI inflation before 2030 is assumed to be 1 per cent per annum below RPI inflation. b Revenue recognition At December 31, 2022 the Group recognised €7,644 million (2021: €6,552 million) in respect of deferred revenue on ticket sales of which €2,630 million (2021: €2,820 million) related to customer loyalty programmes. Further information on deferred revenue from ticket sales is included in note 23. Passenger revenue Passenger revenue is recognised when the transportation service is provided. At the time of transportation, revenue is also recognised in respect of unused tickets and is estimated based on the terms and conditions of the tickets and historical experience. The Group considers that there is no reasonably possible change to unused ticket assumptions that would have a material impact on Passenger revenue recorded in the year. Historically, where a voucher has been issued to a customer in the event of a flight cancellation, the Group estimated, based on historical experience, the level of such vouchers not expected to be used prior to expiry and recognised revenue accordingly. During 2020 and 2021, due to the significant level of flight cancellations arising from COVID-19, the Group issued a greater volume of vouchers than it would have otherwise done so. In addition, given the uncertainty as to the timing of customers redeeming these vouchers, the Group was unable to estimate with a high degree of probability that there would not be a significant reversal of revenue in the future had it applied the historical expiry trends over the period of the pandemic. Accordingly, for the years ended December 31, 2020, and December 31, 2021, the Group did not recognise revenue arising from those vouchers issued due to COVID-19 related cancellations until either the voucher was redeemed or it expired. During 2022, while the recovery from COVID-19 has seen much lower levels of voucher issuance and high levels of voucher redemption, the Group’s operating companies’ voucher programmes have had limited voucher expiry in 2022, with the majority not expected until 2023 at the earliest. Accordingly, the Group has had insufficient historical expiry experience relating to vouchers issued during the pandemic and therefore has not applied any breakage to existing voucher liabilities as it cannot confirm that there would not be a subsequent significant reversal of revenue if it were to do so. Customer loyalty schemes Revenue associated with the issuance of Avios under customer loyalty programmes is based on the relative standalone selling prices of the related performance obligations (brand, marketing and Avios), determined using estimation techniques. The transaction price of brand and marketing services is determined using specific brand valuation methodologies. The transaction price of an Avios is determined as the price of the rewards against which they can be redeemed and is reduced to take account of the proportion of Avios that are not expected to be redeemed by customers. During 2020 and 2021, due to the significant restrictions imposed on the ability of customers to redeem Avios coupled with the disruption in the patterns of redemption caused by COVID-19, the Group considered that the trends experienced since the start of the COVID-19 pandemic were not reflective of the long-term expected patterns of redemption and accordingly, the Group was unable to determine with a high degree of probability that there would not be a significant reversal of revenue in the future had it applied the redemption trends over the period of the pandemic. Accordingly, for the years to December 31, 2020 and December 31, 2021, the Group continued to estimate the level of redemption activity based on pre-COVID-19 customer behaviour. While 2022 has seen all operating companies recover from the COVID-19 pandemic, there remains uncertainty as to whether recent redemption data is representative of long-term behavioural trends and accordingly the Group cannot confirm that there would not be a subsequent significant reversal of revenue if the level of redemption estimates were to be updated to reflect behaviours during the COVID-19 period. Accordingly, the Group continues to estimate the level of redemption activity based on pre-COVID-19 customer behaviour. The Group estimates the number of Avios not expected to be redeemed using statistical modelling based on historical experience and expected future trends in customer behaviour. A five percentage point increase in the assumption of Avios outstanding and not expected to be redeemed would result in an adjustment to Deferred revenue from ticket sales of €95 million, with an offsetting adjustment to increase revenue and operating profit recognised in the year. 204 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued 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 At December 31, 2022 the Group recognised €2,334 million in respect of employee benefit assets (2021: €1,775 million) and €217 million in respect of employee benefit obligations (2021: €285 million). Further information on employee benefit obligations is disclosed in note 32. The cost of employee benefit obligations, employee leaving indemnities and other employee-related provisions is determined using the valuation requirements of IAS 19. These valuations involve making assumptions about discount rates, 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 note 32. The Group determines the assumptions to be adopted in discussion with qualified actuaries. Any difference between these assumptions and the actual outcome will impact future net assets and total comprehensive income. The sensitivity to changes in pension assumptions is disclosed in note 32. Under the Group’s Airways Pension Scheme (APS) and New Airways Pension Scheme (NAPS) defined benefit schemes, increases to pensions are based on the annual Government Pension Increase (Review) Orders, which since 2011 have been based on the Consumer Prices Index (CPI). Additionally, in APS there is provision for the Trustee to pay increases up to the level of the Retail Prices Index (RPI), subject to certain affordability tests. Historically market expectations for RPI could be derived by comparing the prices of UK Government fixed-interest and index-linked gilts, with CPI assessed by considering the Bank of England’s inflation target and comparison of the construction of the two inflation indices. In November 2020, the UK Government and UK Statistics Authority (UKSA) confirmed alignment of RPI with CPIH (a variant of CPI) from February 2030. In assessing RPI and CPI inflation from investment market data, allowance has been made for alignment of RPI with CPIH from 2030 and, therefore, effectively no gap between RPI and CPI inflation from that date. CPI inflation before 2030 is assumed to be 1 per cent per annum below RPI inflation. b Revenue recognition included in note 23. Passenger revenue recorded in the year. At December 31, 2022 the Group recognised €7,644 million (2021: €6,552 million) in respect of deferred revenue on ticket sales of which €2,630 million (2021: €2,820 million) related to customer loyalty programmes. Further information on deferred revenue from ticket sales is Passenger revenue is recognised when the transportation service is provided. At the time of transportation, revenue is also recognised in respect of unused tickets and is estimated based on the terms and conditions of the tickets and historical experience. The Group considers that there is no reasonably possible change to unused ticket assumptions that would have a material impact on Passenger revenue Historically, where a voucher has been issued to a customer in the event of a flight cancellation, the Group estimated, based on historical experience, the level of such vouchers not expected to be used prior to expiry and recognised revenue accordingly. During 2020 and 2021, due to the significant level of flight cancellations arising from COVID-19, the Group issued a greater volume of vouchers than it would have otherwise done so. In addition, given the uncertainty as to the timing of customers redeeming these vouchers, the Group was unable to estimate with a high degree of probability that there would not be a significant reversal of revenue in the future had it applied the historical expiry trends over the period of the pandemic. Accordingly, for the years ended December 31, 2020, and December 31, 2021, the Group did not recognise revenue arising from those vouchers issued due to COVID-19 related cancellations until either the voucher was redeemed or it expired. During 2022, while the recovery from COVID-19 has seen much lower levels of voucher issuance and high levels of voucher redemption, the Group’s operating companies’ voucher programmes have had limited voucher expiry in 2022, with the majority not expected until 2023 at the earliest. Accordingly, the Group has had insufficient historical expiry experience relating to vouchers issued during the pandemic and therefore has not applied any breakage to existing voucher liabilities as it cannot confirm that there would not be a subsequent significant reversal of revenue if it were to do so. Customer loyalty schemes Revenue associated with the issuance of Avios under customer loyalty programmes is based on the relative standalone selling prices of the related performance obligations (brand, marketing and Avios), determined using estimation techniques. The transaction price of brand and marketing services is determined using specific brand valuation methodologies. The transaction price of an Avios is determined as the price of the rewards against which they can be redeemed and is reduced to take account of the proportion of Avios that are not expected to be redeemed by customers. During 2020 and 2021, due to the significant restrictions imposed on the ability of customers to redeem Avios coupled with the disruption in the patterns of redemption caused by COVID-19, the Group considered that the trends experienced since the start of the COVID-19 pandemic were not reflective of the long-term expected patterns of redemption and accordingly, the Group was unable to determine with a high degree of probability that there would not be a significant reversal of revenue in the future had it applied the redemption trends over the period of the pandemic. Accordingly, for the years to December 31, 2020 and December 31, 2021, the Group continued to estimate the level of redemption activity based on pre-COVID-19 customer behaviour. While 2022 has seen all operating companies recover from the COVID-19 pandemic, there remains uncertainty as to whether recent redemption data is representative of long-term behavioural trends and accordingly the Group cannot confirm that there would not be a subsequent significant reversal of revenue if the level of redemption estimates were to be updated to reflect behaviours during the COVID-19 period. Accordingly, the Group continues to estimate the level of redemption activity based on pre-COVID-19 customer behaviour. The Group estimates the number of Avios not expected to be redeemed using statistical modelling based on historical experience and expected future trends in customer behaviour. A five percentage point increase in the assumption of Avios outstanding and not expected to be redeemed would result in an adjustment to Deferred revenue from ticket sales of €95 million, with an offsetting adjustment to increase revenue and operating profit recognised in the year. c Income taxes At December 31, 2022 the Group recognised €1,282 million in respect of deferred tax assets (2021: €1,282 million). Further information on current and deferred tax is disclosed in note 10. 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. Where the Group determines that it is more likely than not that the tax authorities would accept the position taken in the tax return, amounts are recognised in the financial statements on that basis. Where the amount of tax payable or recoverable is uncertain, the Group recognises a liability based on either: the Group’s judgement of the most likely outcome; or, when there is a wide range of possible outcomes, a probability-weighted average approach. The Group recognises deferred 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 uses judgement, including the consideration of past and current operating performance and the future projections of performance laid out in the approved business plan in order to assess the probability of recoverability. In exercising this judgement, while there are no time restrictions on the utilisation of historic tax losses in the principal jurisdictions in which the Group operates, future cash flow projections are forecast for a period of up to ten years from the balance sheet date, which represents the period over which it is probable that future taxable profits will be available. At December 31, 2022, the Group had unrecognised deferred tax assets of €2,084 million relating to tax losses the Group does not reasonably expect to utilise. In applying the aforementioned judgement, had the Group extended the period of future cash flow projections indefinitely, then the amount of unrecognised deferred tax assets would have reduced by €1,608 million. Conversely, if the forecast profit before tax for each operating company was reduced by two percentage points over the forecast period, the amount of the unrecognised deferred tax asset relating to tax losses would increase by €11 million. d Impairment of non-financial assets At December 31, 2022 the Group recognised €2,423 million (2021: €2,439 million) in respect of intangible assets with an indefinite life, including goodwill. Further information on these assets is included in note 17. Goodwill and intangible assets with indefinite economic lives are tested, as part of the cash-generating units to which they relate, 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, which use a weighted average multi-scenario discounted cash flow model, which are then compared to the carrying amount of the associated cash-generating unit. In determining the carrying value of each cash generating unit, the Group allocates all associated operating tangible and intangible assets, including ROU assets. In addition the Group has allocated certain liabilities to the carrying value of each CGU where those liabilities are critical to the underlying operations of the cash-generating unit and in the event of a disposal of the cash-generating unit would be required to be transferred to the purchaser. Such liabilities include lease liabilities. The Group has applied judgement in the weighting of each scenario in the discounted cash flow model and these calculations require the use of estimates in the determination of key assumptions and sensitivities as disclosed in notes 4 and 17. The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. When such indicators are identified, then non-financial assets are tested for impairment. e Engineering and other aircraft costs At December 31, 2022, the Group recognised €2,400 million in respect of maintenance, restoration and handback provisions (2021: €1,832 million). Information on movements on the provision is disclosed in note 26. 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. Provisions for maintenance, restoration and handback are made based on the best estimate of the likely committed cash outflow. In determining this best estimate, the Group applies significant judgement as to the level of forecast costs expected to be incurred when the aircraft is returned to the lessor. The assumptions of this significant judgement include aircraft utilisation, expected maintenance intervals, future maintenance costs and the aircraft’s condition. The associated forecast costs are discounted to their present value. In 2021, the Group considered that there was no reasonably possible change to a single assumption that would have had a material impact on the provisions, however a combination of changes in multiple assumptions may have. In 2022, with the status of the macro-economic environment, the Group considers that a reasonable possible change in the inflation rate and discount rate assumptions of a 100 basis points increase would give rise to an increase of €51 million and a decrease of €68 million, respectively, when applied in isolation to one another. Judgements a Determining the lease term of contracts with renewal and termination options The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. Such judgement includes consideration of fleet plans which underpin approved business plans and historical experience regarding the extension of leases. After the commencement date, the Group re-assesses the lease term if there is a significant event or change in circumstances that affects the Group’s ability to exercise or not to exercise the option to renew or to terminate. Further information is given in note 14. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 205 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued b Determining whether the Group has significant influence over Air Europa Holdings The Group applies judgement in the determination as to whether it has the power with which to participate in the decision making of, and as a result significant influence over, Air Europa Holdings, S.L. (Air Europa Holdings). Such judgement includes the consideration as to the ability of the Group to: have representation on the board of Air Europa Holdings; participate in the policy-making processes, including participation in decisions regarding dividends and other distributions; the existence of material transactions between Air Europa Holdings and the Group; enable the interchange of management personnel and provide essential technical information. In forming its judgement, the Group notes that: it does not have the ability to have representation on the board of Air Europa Holdings; it does not have the ability to participate in the policy-making processes; has not entered into material transactions outside of the normal course of business; it does not have the ability to enable the interchange of management personnel and it does not have the ability to provide essential technical information. The Group has therefore concluded that it does not have significant influence over Air Europa Holdings. Accordingly, the Group accounts for its shareholding in Air Europa Holdings as an Other equity investment and measures it at fair value through Other comprehensive income. Had the Group concluded that it does have significant influence over Air Europa Holdings, then the shareholding would have been classified as an associate, measured at fair value on inception and subsequently measured using the equity method. At December 31, 2022, the fair value of its shareholding in Air Europa Holdings was €24 million. Further information is given in note 19. New standards, amendments and interpretations The following amendments and interpretations apply for the first time in 2022, but do not have a material impact on the consolidated financial statements of the Group: • property, plant and equipment: proceeds before intended use – amendments to IAS 16 effective for periods beginning on or after January 1, 2022; • reference to the Conceptual Framework – amendments to IFRS 3 effective for periods beginning on or after January 1, 2022; • onerous contracts – cost of fulfilling a contract – amendments to IAS 37 effective for periods beginning on or after January 1, 2022; and • annual improvements to IFRS standards 2018–2020 – effective for periods beginning on or after January 1, 2022. The IASB and IFRIC have issued the following standards, amendments and interpretations with an effective date after the year end of these financial statements which management believe could impact the Group in future periods. The Group has assessed the impact of these standards, amendments and interpretations and it is not expected that these will have a material effect on the reported income or net assets of the Group. Unless otherwise stated, the Group plans to adopt the following standards, interpretations and amendments on the date they become mandatory: • IFRS 17 Insurance contracts - effective for periods beginning on or after January 1, 2023; • definition of accounting estimate – amendments to IAS 8 effective for periods beginning on or after January 1, 2023; • disclosure of accounting policies – amendments to IAS 1 and IFRS Practice statement 2 effective for periods beginning on or after January 1, 2023; and • deferred tax related to assets and liabilities arising from a single transaction – amendments to IAS 12 effective for periods beginning on or after January 1, 2023. On October 31, 2022, the IASB issued the amendments to IAS 1 – classification of liabilities as current or non-current (the ‘Amendments’), effective for periods beginning on or after January 1, 2024. The Amendments will require the €825 million convertible bond that matures in 2028, which as at December 31, 2022, had a carrying value of €605 million, to be reclassified from a non-current liability to a current liability with the comparative presentation as at December 31, 2023 also reclassified. The Amendments require that where the conversion feature of a convertible instrument does not meet the recognition criteria for separate presentation within equity and where the associated bond holders have the irrevocable right to exercise the conversion feature within twelve months of the balance sheet date, that such convertible instruments be presented as current. Other than this reclassification, the Amendments will not have a material effect on the reported results or net assets of the Group. 3 Significant changes and transactions in the current reporting period The financial performance and position of the Group was affected by the following significant events and transactions in the year to December 31, 2022 as detailed below: • on March 4, 2022 Aer Lingus entered into a financing arrangement with the Ireland Strategic Investment Fund (ISIF), which subsequently increased the existing €150 million of facilities to €350 million and extended the maturity to March 2025. On December 13, 2022, Aer Lingus repaid €100 million of the €150 million it had previously drawn against this facility. At December 31, 2022, €300 million of undrawn facilities remains available for draw down; • on April 12, 2022, the Group entered into an asset-financing structure, under which five aircraft were financed. These transactions mature between 2032 and 2036. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the Iberia Pass Through Certificates, Series 2022-1, commonly referred to as EETCs. In doing so, the asset financing structure provides committed aircraft financing of €680 million; • on May 19, 2022, the Group entered into an agreement with Boeing to purchase 25 737-8200 and 25 737-10 aircraft, plus 100 options. The aircraft will be delivered between 2023 and 2027 and will be used for shorthaul fleet renewal. The fleet order was subsequently approved by shareholders on October 26, 2022; • on June 15, 2022, following approval from Sociedad Estatal de Participaciones Industriales (SEPI) (the Spanish state holding company that has a direct participation in Air Europa Holdings) and the Instituto de Crédito Oficial (ICO) in Spain, the Group entered into a financing arrangement with Globalia Corporación Empresarial, S,A, (‘Globalia’), whereby, the Group provided a €100 million seven-year unsecured loan. The loan was convertible for a period of two years from inception into a fixed number of the shares of Air Europa Holdings; 206 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 2 Significant accounting policies continued b Determining whether the Group has significant influence over Air Europa Holdings The Group applies judgement in the determination as to whether it has the power with which to participate in the decision making of, and as a result significant influence over, Air Europa Holdings, S.L. (Air Europa Holdings). Such judgement includes the consideration as to the ability of the Group to: have representation on the board of Air Europa Holdings; participate in the policy-making processes, including participation in decisions regarding dividends and other distributions; the existence of material transactions between Air Europa Holdings and the Group; enable the interchange of management personnel and provide essential technical information. In forming its judgement, the Group notes that: it does not have the ability to have representation on the board of Air Europa Holdings; it does not have the ability to participate in the policy-making processes; has not entered into material transactions outside of the normal course of business; it does not have the ability to enable the interchange of management personnel and it does not have the ability to provide essential technical information. The Group has therefore concluded that it does not have significant influence over Air Europa Accordingly, the Group accounts for its shareholding in Air Europa Holdings as an Other equity investment and measures it at fair value through Other comprehensive income. Had the Group concluded that it does have significant influence over Air Europa Holdings, then the shareholding would have been classified as an associate, measured at fair value on inception and subsequently measured using the equity method. At December 31, 2022, the fair value of its shareholding in Air Europa Holdings was €24 million. Further information is given in Holdings. note 19. New standards, amendments and interpretations The following amendments and interpretations apply for the first time in 2022, but do not have a material impact on the consolidated financial statements of the Group: January 1, 2022; • property, plant and equipment: proceeds before intended use – amendments to IAS 16 effective for periods beginning on or after • reference to the Conceptual Framework – amendments to IFRS 3 effective for periods beginning on or after January 1, 2022; • onerous contracts – cost of fulfilling a contract – amendments to IAS 37 effective for periods beginning on or after January 1, 2022; and • annual improvements to IFRS standards 2018–2020 – effective for periods beginning on or after January 1, 2022. The IASB and IFRIC have issued the following standards, amendments and interpretations with an effective date after the year end of these financial statements which management believe could impact the Group in future periods. The Group has assessed the impact of these standards, amendments and interpretations and it is not expected that these will have a material effect on the reported income or net assets of the Group. Unless otherwise stated, the Group plans to adopt the following standards, interpretations and amendments on the date they become mandatory: • IFRS 17 Insurance contracts - effective for periods beginning on or after January 1, 2023; • definition of accounting estimate – amendments to IAS 8 effective for periods beginning on or after January 1, 2023; • disclosure of accounting policies – amendments to IAS 1 and IFRS Practice statement 2 effective for periods beginning on or after • deferred tax related to assets and liabilities arising from a single transaction – amendments to IAS 12 effective for periods beginning on January 1, 2023; and or after January 1, 2023. On October 31, 2022, the IASB issued the amendments to IAS 1 – classification of liabilities as current or non-current (the ‘Amendments’), effective for periods beginning on or after January 1, 2024. The Amendments will require the €825 million convertible bond that matures in 2028, which as at December 31, 2022, had a carrying value of €605 million, to be reclassified from a non-current liability to a current liability with the comparative presentation as at December 31, 2023 also reclassified. The Amendments require that where the conversion feature of a convertible instrument does not meet the recognition criteria for separate presentation within equity and where the associated bond holders have the irrevocable right to exercise the conversion feature within twelve months of the balance sheet date, that such convertible instruments be presented as current. Other than this reclassification, the Amendments will not have a material effect on the reported results or net assets of the Group. 3 Significant changes and transactions in the current reporting period The financial performance and position of the Group was affected by the following significant events and transactions in the year to December 31, 2022 as detailed below: • on March 4, 2022 Aer Lingus entered into a financing arrangement with the Ireland Strategic Investment Fund (ISIF), which subsequently increased the existing €150 million of facilities to €350 million and extended the maturity to March 2025. On December 13, 2022, Aer Lingus repaid €100 million of the €150 million it had previously drawn against this facility. At December 31, 2022, €300 million of undrawn facilities remains available for draw down; • on April 12, 2022, the Group entered into an asset-financing structure, under which five aircraft were financed. These transactions mature between 2032 and 2036. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the Iberia Pass Through Certificates, Series 2022-1, commonly referred to as EETCs. In doing so, the asset financing structure provides committed • on May 19, 2022, the Group entered into an agreement with Boeing to purchase 25 737-8200 and 25 737-10 aircraft, plus 100 options. The aircraft will be delivered between 2023 and 2027 and will be used for shorthaul fleet renewal. The fleet order was subsequently approved aircraft financing of €680 million; by shareholders on October 26, 2022; • on June 15, 2022, following approval from Sociedad Estatal de Participaciones Industriales (SEPI) (the Spanish state holding company that has a direct participation in Air Europa Holdings) and the Instituto de Crédito Oficial (ICO) in Spain, the Group entered into a financing arrangement with Globalia Corporación Empresarial, S,A, (‘Globalia’), whereby, the Group provided a €100 million seven-year unsecured loan. The loan was convertible for a period of two years from inception into a fixed number of the shares of Air Europa Holdings; • in the first half of 2022, the Group converted 22 Airbus A320neos options into firm orders for 17 Airbus A320neos and five Airbus A321neos; • on July 28, 2022, IAG announced a further order for more fuel-efficient Airbus A320neo family aircraft, as part of its plan to meet climate commitments. The Group converted 12 Airbus A320neo/A321neo options into firm orders and ordered a further 25 Airbus A320neo/A321neo aircraft, with the option to purchase 50 additional aircraft. The firm orders will replace existing Airbus A320ceo family aircraft and are for delivery between 2025 and 2028; the split between A320neos and A321neos will be determined nearer to delivery. The fleet order was subsequently approved by shareholders on October 26, 2022; • on August 16, 2022, the Group exercised its exchange option and converted the €100 million loan it had made to Globalia into 20 per cent of the share capital of Air Europa Holdings, which has been recognised within Other equity instruments. The fair value of the loan immediately prior to conversion was €65 million, representing a reduction of €35 million from inception, which has been recorded within the Income statement. Upon converting the loan into share capital of Air Europa Holdings, the fair value of the investment was determined to be €22 million, with the difference between the fair value of the loan immediately prior to conversion and the fair value of the equity investment immediately after conversion, representing €43 million, being recorded as a loss within the Income statement. Further details regarding the investment in Air Europa Holdings are given in note 19; • on August 23, 2022, the Group extended its $1.755 billion secured Revolving Credit Facility accessible by British Airways, Iberia and Aer Lingus, previously due to mature on March 23, 2024, by a further 12 months to March 23, 2025; • on October 21, 2022, the Group entered into an asset-financing structure, under which four aircraft were financed. These transactions mature between 2032 and 2036. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the British Airways Pass Through Certificates, Series 2022-1, commonly referred to as EETCs. In doing so, the asset financing structure provides committed aircraft financing of €416 million; and • on November 17, 2022, the Group redeemed the convertible bond issued in November 2015 for its nominal value of €500 million. 4 Impact of climate change on financial reporting Significant transactions and critical accounting estimates, assumptions and judgements in the determination of the impact of climate change As a result of climate change the Group has designed and approved its Flightpath Net Zero climate strategy, which commits the Group to net zero emissions by 2050. While approved business plans currently have a duration of three years, the Flightpath Net Zero climate strategy impacts both the short, medium and long-term operations of the Group. The details regarding the inputs and assumptions used in the determination of the Flightpath Net Zero climate strategy include, but are not limited to, the following that are within the control of the Group: • the additional cost of the Group’s commitment to increasing the level of Sustainable Aviation Fuels (SAF) to ten per cent by 2030 and to seventy per cent by 2050; • the cost of incurring an increase in the level of carbon offsetting and carbon capture schemes; and • the impact of introducing more fuel-efficient aircraft and being able to operate these more efficiently. In addition to these inputs and measures within the control of management, Flightpath Net Zero includes assumptions pertaining to consumers, governments and regulators regarding the following: • the impact on passenger demand for air travel as a result of both passenger trends regarding climate change and government policies; • investment and policy regarding the development of SAF production facilities; • investment and improvements in air traffic management; and • the price of carbon through the EU, Swiss and UK Emissions Trading Schemes (ETS) and the UN Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The level of uncertainty regarding the impact of these factors increases over time. Accordingly, the Group has applied critical estimation and judgement in the evaluation of the impact of climate change regarding the recognition and measurement of assets and liabilities within the financial statements. Critical accounting estimates, assumptions and judgements – cash flow forecast estimation With the Flightpath Net Zero climate strategy assessing the impact over a long-term horizon to 2050, the level of estimation uncertainty in the determination of cash flow forecasts increases over time. For those assets and liabilities, where their recoverability is dependent on long-term cash flows, the following critical accounting estimates, assumptions and judgements, to the extent they can be reliably measured, have been applied: a Long-term fleet plans and useful economic lives The Group’s Flightpath Net Zero climate strategy has been developed in conjunction with the long-term fleet plans of each operating company. This includes the annual assessment of useful lives and the residual values of each aircraft type. During the course of 2020 as a result of the impact of COVID-19, the Group permanently stood down 82 aircraft (of which ten were subsequently stood back up), their associated engines and rotable inventories. These permanently stood down aircraft were older generation aircraft, that were less fuel efficient, more carbon intensive and more expensive to operate than more modern models. With the permanent standing down of these aircraft, coupled with the future committed delivery of 192 fuel efficient aircraft as detailed in note 15, the Group considers the existing fleet assets align with the long-term fleet plans to achieve its Flightpath Net Zero climate strategy. All aircraft in the fleet, and those due to be delivered in the future, have the capability to utilise SAF in their operations without impediment. Accordingly, no impairment has arisen in the current or prior year, nor have the useful lives and residual values of aircraft been amended, as a result of the Group’s decarbonisation plans. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 207 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 4 Impact of climate change on financial reporting continued b Impairment testing of the Group’s cash generating units The Group applies discounted cash flow models, for each cash generating unit, derived from the cash flow forecasts from the approved three-year business plans. The Group’s Flightpath Net Zero climate strategy is long-term in nature and includes commitments that will occur at differing points over this time horizon. To the extent that certain of those commitments occur over the short-term, then they have been incorporated into the three-year business plans. The Group adjusts the final year (being the third year) of these probability weighted cash flows to incorporate the impacts of climate change from the Group’s Flightpath Net Zero climate strategy that are expected to occur over the medium term. These adjustments are limited to those that: (i) the Group can reliably estimate at the reporting date; (ii) only relate to the Group’s existing asset base in its current condition; and (iii) incorporate legislation and regulation that is expected to be required to achieve the Group’s Flightpath Net Zero climate strategy, and which is sufficiently progressed at the reporting date. As a result, the Group’s impairment modelling incorporates the following aspects of the Group’s Flightpath Net Zero climate strategy through to 2030, after which time the level of uncertainty regarding timing and costing becomes insufficiently reliable to estimate: (i) an increase in the level of SAF consumption of 10 per cent of the overall fuel mix; (ii) forecast cost of carbon, including SAF, ETS allowances and CORSIA allowances (all derived from externally sourced or derived information); (iii) the removal of existing free ETS allowances issued by the EU member states, Switzerland and the UK; (iv) forecast kerosene taxes applied to jet fuel for all intra EU flight activity; and (v) assumptions regarding the ability of the Group to recover these incremental costs through increased ticket pricing. In preparing the impairment models, the Group cash flow projections are prepared on the basis of using the current fleet in its current condition. The Group excludes the estimated cash flows expected to arise from future restructuring unless already committed and assets not currently in use by the Group. In addition, for the avoidance of doubt, the Group’s impairment modelling excludes the following aspects of the Group’s Flightpath Net Zero climate strategy: (i) the expected transition to electric and hydrogen aircraft, as well as future technological developments to jet engines and airframes; (ii) any savings from the transition to more fuel efficient aircraft other than those either in the Group’s fleet or those committed orders due to be delivered over the business plan period; (iii) the benefit of the development of carbon capture technologies and enhanced carbon offsetting mechanisms; (iv) the required beneficial reforms to air traffic management regulation and legislation; and (v) the required government incentives and/or support across the supply chain. As detailed in note 17, the Group applies a long-term growth rate to these adjusted probability weighted cash flows, per CGU, and each of the long-term growth rates include a specific adjustment to reduce the rate to reflect the Group’s assumptions regarding the reduced demand and elasticity impact arising from climate change. These impacts are derived with reference to external market data, industry publications and internal analysis. Given the inherent uncertainty associated with the impact of climate change, the Group has applied additional sensitivities in note 17 to reflect a more adverse impact of climate change than currently expected. This has been captured through both the downward sensitivities of the long-term growth rates, ASKs, operating margins and the increased fuel price sensitivity. c Valuation of employee benefit scheme assets The Group’s employee benefit schemes are principally represented by the British Airways APS and NAPS schemes in the UK. The schemes are structured to make post-employment payments to members over the long term, with the Trustee having established both return seeking assets and liability matching assets that mature over the long-term to align with the forecast benefit payments. The assets of these schemes are invested predominantly in a diversified range of equities, bonds and property. The valuation of these assets ranges from those with quoted prices in active markets, where prices are readily and regularly available, through to those where the valuations are not based on observable market data, often requiring complex valuation models. The trustees of the schemes have integrated climate change considerations into their long-term decision making and reporting processes across all classes of assets, actively engaging with all fund and portfolio managers to ensure that where unobservable inputs are required into valuation models, that such valuation models incorporate long-term expectations regarding the impact of climate change. d Recoverability of deferred tax assets In determining the recoverable amounts of the Group’s deferred tax assets, the Group applies the future cash flow projections for a period of up to ten years derived from the approved three-year business plans. The Group applies a medium-term growth rate subsequent to the three-year business plans, specific to each operating company. In considering the impact of the Group’s Flightpath Net Zero climate strategy, management adjusts this medium-term growth rate, where applicable, to incorporate the assumed impacts on both revenue and costs to the Group. 208 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 4 Impact of climate change on financial reporting continued b Impairment testing of the Group’s cash generating units The Group applies discounted cash flow models, for each cash generating unit, derived from the cash flow forecasts from the approved three-year business plans. The Group’s Flightpath Net Zero climate strategy is long-term in nature and includes commitments that will occur at differing points over this time horizon. To the extent that certain of those commitments occur over the short-term, then they have been incorporated into the three-year business plans. The Group adjusts the final year (being the third year) of these probability weighted cash flows to incorporate the impacts of climate change from the Group’s Flightpath Net Zero climate strategy that are expected to occur over the medium term. These adjustments are limited to those that: (i) the Group can reliably estimate at the reporting date; (ii) only relate to the Group’s existing asset base in its current condition; and (iii) incorporate legislation and regulation that is expected to be required to achieve the Group’s Flightpath Net Zero climate strategy, and which is sufficiently progressed at the reporting date. As a result, the Group’s impairment modelling incorporates the following aspects of the Group’s Flightpath Net Zero climate strategy through to 2030, after which time the level of uncertainty regarding timing and costing becomes insufficiently reliable to estimate: (i) an increase in the level of SAF consumption of 10 per cent of the overall fuel mix; (ii) forecast cost of carbon, including SAF, ETS allowances and CORSIA allowances (all derived from externally sourced or derived information); (iii) the removal of existing free ETS allowances issued by the EU member states, Switzerland and the UK; (iv) forecast kerosene taxes applied to jet fuel for all intra EU flight activity; and (v) assumptions regarding the ability of the Group to recover these incremental costs through increased ticket pricing. In preparing the impairment models, the Group cash flow projections are prepared on the basis of using the current fleet in its current condition. The Group excludes the estimated cash flows expected to arise from future restructuring unless already committed and assets not currently in use by the Group. In addition, for the avoidance of doubt, the Group’s impairment modelling excludes the following aspects of the Group’s Flightpath Net Zero climate strategy: (i) the expected transition to electric and hydrogen aircraft, as well as future technological developments to jet engines and airframes; (ii) any savings from the transition to more fuel efficient aircraft other than those either in the Group’s fleet or those committed orders due to be delivered over the business plan period; (iii) the benefit of the development of carbon capture technologies and enhanced carbon offsetting mechanisms; (iv) the required beneficial reforms to air traffic management regulation and legislation; and (v) the required government incentives and/or support across the supply chain. As detailed in note 17, the Group applies a long-term growth rate to these adjusted probability weighted cash flows, per CGU, and each of the long-term growth rates include a specific adjustment to reduce the rate to reflect the Group’s assumptions regarding the reduced demand and elasticity impact arising from climate change. These impacts are derived with reference to external market data, industry publications and internal analysis. Given the inherent uncertainty associated with the impact of climate change, the Group has applied additional sensitivities in note 17 to reflect a more adverse impact of climate change than currently expected. This has been captured through both the downward sensitivities of the long-term growth rates, ASKs, operating margins and the increased fuel price sensitivity. c Valuation of employee benefit scheme assets The Group’s employee benefit schemes are principally represented by the British Airways APS and NAPS schemes in the UK. The schemes are structured to make post-employment payments to members over the long term, with the Trustee having established both return seeking assets and liability matching assets that mature over the long-term to align with the forecast benefit payments. The assets of these schemes are invested predominantly in a diversified range of equities, bonds and property. The valuation of these assets ranges from those with quoted prices in active markets, where prices are readily and regularly available, through to those where the valuations are not based on observable market data, often requiring complex valuation models. The trustees of the schemes have integrated climate change considerations into their long-term decision making and reporting processes across all classes of assets, actively engaging with all fund and portfolio managers to ensure that where unobservable inputs are required into valuation models, that such valuation models incorporate long-term expectations regarding the impact of climate change. d Recoverability of deferred tax assets In determining the recoverable amounts of the Group’s deferred tax assets, the Group applies the future cash flow projections for a period of up to ten years derived from the approved three-year business plans. The Group applies a medium-term growth rate subsequent to the three-year business plans, specific to each operating company. In considering the impact of the Group’s Flightpath Net Zero climate strategy, management adjusts this medium-term growth rate, where applicable, to incorporate the assumed impacts on both revenue and costs to the Group. e The price of carbon through the EU, Swiss and UK Emissions Trading Schemes The EU, Swiss and the UK’s ETS were established to reduce greenhouse gas emissions cost effectively. Under these schemes, companies, including the Group, are required to buy emission allowances, or are issued them under existing quotas. The Group is required to surrender these allowances to the relevant authorities annually dependent on the level of CO2 equivalent emitted within a 12-month period. Over time the level of available emission allowances decreases in order to reduce total emissions, which has the effect of increasing the price of such allowances. The Group expects that the future price of such allowances will continue to increase and that the free allocation of emission allowances will cease. Given the relative illiquid nature of the emission allowance market there is uncertainty as to the future pricing of such allowances. As detailed in note 2, the Group accounts for the purchase of allowances as an addition to Intangible assets, which are measured at amortised cost. In addition, as the Group emits CO2 equivalent as part of its flight operations, a provision is recorded to settle the obligation. For emissions for which the Group has already purchased allowances, the provision is valued at the weighted cost of those allowances. Where the level of emissions exceeds the amounts of allowances held, this deficit is measured at the market price of such allowances at the reporting date. At December 31, 2022, the Group has recorded ETS allowances within Intangibles assets of €407 million, representing sufficient allowances, by operating company, to settle its forecast obligations through to at least December 31, 2023. At December 31, 2022, the Group has recorded a provision for settling its 2022 emissions obligation of €132 million. 5 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, Aer Lingus and IAG Loyalty have been identified for financial reporting purposes as reportable operating segments. LEVEL is also an operating segment but does not exceed the quantitative thresholds to be reportable and management has concluded that there are currently no other reasons why LEVEL 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. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 209 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 5 Segment information continued For the year to December 31, 2022 € million Revenue Passenger revenue Cargo revenue Other revenue External revenue Inter-segment revenue Segment revenue Depreciation and amortisation charge Impairment reversal British Airways Iberia Vueling 2022 Aer Lingus IAG Loyalty Other Group companies1 Total 10,523 4,002 2,584 1,665 1,239 848 12,610 311 12,921 (1,272) – 284 799 – 14 5,085 2,598 426 5,511 (371) – – 2,598 (222) 8 80 10 1,755 14 1,769 (146) – 451 – 322 773 228 1,001 (8) – 233 19,458 12 – 245 378 623 (59) – 1,615 1,993 23,066 1,357 24,423 (2,078) 8 Operating profit/(loss) 362 382 195 45 282 (10) 1,256 Exceptional items2 23 – 8 – – – 31 Operating profit/(loss) before exceptional items 339 382 187 45 282 (10) 1,225 Net non-operating costs Profit before tax Total assets Total liabilities 23,788 9,200 3,177 (20,975) (9,005) (3,774) 1,946 (1,942) 3,303 (2,914) (2,111) 1,329 39,303 (37,281) (841) 415 Includes eliminations on total assets of €16,159 million and total liabilities of €5,755 million. 1 2 For details on exceptional items refer to the Alternative performance measures section. For the year to December 31, 2021 € million Revenue Passenger revenue Cargo revenue Other revenue External revenue Inter-segment revenue Segment revenue Depreciation and amortisation charge Impairment (charge)/reversal British Airways 2,607 1,268 314 4,189 129 4,318 (1,104) (30) Iberia Vueling Aer Lingus IAG Loyalty1 Other Group companies1,2 2021 1,707 333 443 2,483 301 2,784 (350) – 1,011 – 5 1,016 – 1,016 (240) 13 302 65 4 371 5 376 (140) – 180 – 181 361 77 438 (7) – 28 7 – 35 293 328 (74) – Total 5,835 1,673 947 8,455 805 9,260 (1,915) (17) Operating (loss)/profit (2,041) (220) (233) (338) 131 (64) (2,765) Exceptional items3 151 14 29 9 – 2 205 Operating (loss)/profit before exceptional items (2,192) (234) (262) (347) 131 (66) (2,970) Net non-operating costs4 Loss before tax Total assets Total liabilities 20,891 6,919 2,671 1,820 3,184 (1,079) 34,406 (18,795) (7,062) (3,364) (1,806) (3,009) 476 (33,560) (742) (3,507) 1 In 2022, based on size thresholds the Group determined that IAG Loyalty was a reportable segment and accordingly presented the financial information of the segment separately. The prior year segment note has been re-presented to align with the current year presentation. 2 Includes eliminations on total assets of €16,023 million and total liabilities of €5,833 million. 3 For details on exceptional items refer to the Alternative performance measures section. 4 Includes €75 million of exceptional items relating to the Air Europa Holdings termination settlement payment. 210 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements b Geographical analysis Revenue by area of original sale € million UK Spain USA Rest of world Assets by area December 31, 2022 € million UK Spain USA Rest of world December 31, 2021 € million UK Spain USA Rest of world Iberia Vueling Aer Lingus Loyalty1 companies1,2 Total Depreciation, amortisation and impairment of non-current assets: 6 Expenses by nature Operating result is arrived at after charging € million Depreciation charge on right of use assets Depreciation charge on owned assets Gain arising on de-designation of foreign exchange hedges recorded in Depreciation1 Impairment reversal on owned property, plant and equipment Amortisation and impairment of intangible assets Impairment (reversal)/charge on right of use assets Depreciation charge on other leasehold assets Year to December 31 2022 7,923 4,313 3,735 7,095 23,066 2021 2,435 2,189 931 2,900 8,455 Property, plant and equipment 12,026 5,082 47 1,191 18,346 Property, plant and equipment 11,544 4,404 76 1,137 17,161 Intangible assets 1,490 1,462 9 595 3,556 Intangible assets 1,317 1,333 13 576 3,239 2022 1,092 748 (29) – 218 (8) 49 2021 1,058 638 – (4) 178 20 42 2,070 1,932 Operating (loss)/profit (2,041) (220) (233) (338) 131 (64) (2,765) Cost of inventories: Exceptional items3 151 14 29 9 – 2 205 € million Cost of inventories recognised as an expense 2022 749 749 2021 1,038 1,038 1 Included in the Depreciation charge, not included within note 13 is a credit of €29 million relating to the de-designation of hedge accounting that had been applied to mitigate the foreign currency exposure on aircraft purchases. NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 5 Segment information continued For the year to December 31, 2022 € million Revenue Passenger revenue Cargo revenue Other revenue External revenue Inter-segment revenue Segment revenue Depreciation and amortisation charge Impairment reversal Iberia Vueling Lingus IAG Loyalty Other Group companies1 Total 2022 Aer 10,523 4,002 2,584 1,665 233 19,458 5,085 2,598 284 799 426 5,511 (371) – – 14 – 2,598 (222) 8 80 10 1,755 14 1,769 (146) – 451 – 322 773 228 1,001 (8) – 12 – 245 378 623 (59) – 1,615 1,993 23,066 1,357 24,423 (2,078) 8 Operating profit/(loss) 362 382 195 45 282 (10) 1,256 Exceptional items2 23 – 8 – – – 31 Operating profit/(loss) before exceptional items 339 382 187 45 282 (10) 1,225 23,788 9,200 3,177 (20,975) (9,005) (3,774) 1,946 (1,942) 3,303 (2,914) (2,111) 1,329 39,303 (37,281) (841) 415 1 Includes eliminations on total assets of €16,159 million and total liabilities of €5,755 million. 2 For details on exceptional items refer to the Alternative performance measures section. For the year to December 31, 2021 2021 IAG Other Group 1,707 333 443 2,483 301 2,784 (350) – 1,011 – 5 – 1,016 1,016 (240) 13 302 65 4 371 5 376 (140) – 180 – 181 361 77 438 (7) – 28 7 – 35 293 328 (74) – 5,835 1,673 947 8,455 805 9,260 (1,915) (17) Net non-operating costs Profit before tax Total assets Total liabilities € million Revenue Passenger revenue Cargo revenue Other revenue External revenue Inter-segment revenue Segment revenue Depreciation and amortisation charge Impairment (charge)/reversal British Airways 1,239 848 12,610 311 12,921 (1,272) – British Airways 2,607 1,268 314 4,189 129 4,318 (1,104) (30) Operating (loss)/profit before exceptional items (2,192) (234) (262) (347) 131 (66) (2,970) Net non-operating costs4 Loss before tax Total assets Total liabilities 20,891 6,919 2,671 1,820 3,184 (1,079) 34,406 (18,795) (7,062) (3,364) (1,806) (3,009) 476 (33,560) (742) (3,507) 1 In 2022, based on size thresholds the Group determined that IAG Loyalty was a reportable segment and accordingly presented the financial information of the segment separately. The prior year segment note has been re-presented to align with the current year presentation. 2 Includes eliminations on total assets of €16,023 million and total liabilities of €5,833 million. 3 For details on exceptional items refer to the Alternative performance measures section. 4 Includes €75 million of exceptional items relating to the Air Europa Holdings termination settlement payment. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 211 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 7 Auditor’s remuneration The fees for the year to December 31, 2022, 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, KPMG Auditores S.L., and by companies belonging to KPMG’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 audit and assurance services Services relating to working capital review 2022 6,378 2021 4,860 985 195 1,644 1,022 10,224 532 431 569 776 7,168 Fees payable to the Group's auditor for the audit of the Group's pension scheme during the year total €236 thousand (2021: €182 thousand). 8 Employee costs and numbers € million Wages and salaries Social security costs Costs related to pension scheme benefits Share-based payment charge 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: 2022 3,207 519 272 39 610 4,647 2021 2,135 307 232 23 316 3,013 In the air: Cabin crew Pilots On the ground: Airports Corporate Maintenance Senior executives 2022 December 31, 2022 2021 December 31, 2021 Average number of employees1 Number of employees Percentage of women Average number of employees1 Number of employees Percentage of women 19,801 7,340 22,278 7,864 13,798 11,741 6,908 212 15,087 13,819 6,775 221 59,800 66,044 70% 7% 38% 49% 8% 34% 44% 9,304 3,879 6,728 8,612 6,345 167 17,865 7,607 12,842 10,709 7,448 187 35,035 56,658 70% 6% 37% 52% 8% 33% 42% 1 The average number of employees excludes those employees who were on furlough, wage support and equivalent schemes, including the Temporary Redundancy Plan arrangements in Spain. For further details see note 34. The total average number of employees including these schemes is 61,192. The number of employees is based on actual headcount at December 31. The average manpower equivalent for 2022 was 59,505 (2021: 50,222), which includes employees on furlough, wage support and equivalent schemes, including Temporary Redundancy Plan arrangements in Spain. 212 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements The fees for the year to December 31, 2022, 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, KPMG Auditores S.L., and by companies belonging Fees payable to the Group's auditor for the audit of the Group's pension scheme during the year total €236 thousand (2021: €182 thousand). NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 7 Auditor’s remuneration to KPMG’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 audit and assurance services Services relating to working capital review 8 Employee costs and numbers € million Wages and salaries Social security costs Costs related to pension scheme benefits Share-based payment charge 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: In the air: Cabin crew Pilots On the ground: Airports Corporate Maintenance Senior executives 2022 December 31, 2022 2021 December 31, 2021 Average number of employees1 Number of employees Percentage of women Average number of employees1 Number of employees Percentage of women 19,801 7,340 22,278 7,864 13,798 11,741 6,908 212 15,087 13,819 6,775 221 70% 7% 38% 49% 8% 34% 44% 9,304 3,879 6,728 8,612 6,345 167 17,865 7,607 12,842 10,709 7,448 187 59,800 66,044 35,035 56,658 1 The average number of employees excludes those employees who were on furlough, wage support and equivalent schemes, including the Temporary Redundancy Plan arrangements in Spain. For further details see note 34. The total average number of employees including these schemes is 61,192. The number of employees is based on actual headcount at December 31. The average manpower equivalent for 2022 was 59,505 (2021: 50,222), which includes employees on furlough, wage support and equivalent schemes, including Temporary Redundancy Plan arrangements in Spain. 2022 6,378 2021 4,860 985 195 1,644 1,022 10,224 2022 3,207 519 272 39 610 4,647 532 431 569 776 7,168 2021 2,135 307 232 23 316 3,013 70% 6% 37% 52% 8% 33% 42% 9 Finance costs, income and other non-operating charges a Finance costs € million Interest expense on: Bank borrowings Asset financed liabilities Lease liabilities Bonds1 Provisions unwinding of discount Other borrowings1 Capitalised interest on progress payments Other finance costs 2022 2021 (191) (107) (464) (83) (43) (102) 11 (38) (1,017) (133) (65) (408) (63) (12) (90) 3 (62) (830) 1 The 2021 total finance costs include a reclassification of results to conform with the current basis of presentation. A charge of €63 million has been reclassified from Other borrowings to Bonds. There is no change to total finance costs. b Finance income € million Interest on other interest-bearing deposits Other finance income c Net change in fair value of financial instruments € million Net change in the fair value of convertible bond Net fair value losses on financial assets at fair value through profit or loss Net fair value losses on de-recognition of financial assets and recognition of other equity investment d Net financing credit/(charge) relating to pensions € million Net financing credit/(charge) relating to pensions e Other non-operating charges € million Gains on sale of property, plant and equipment and investments1 Charge related to equity investments (note 19) Share of profits in investments accounted for using the equity method (note 18) Realised gains on derivatives not qualifying for hedge accounting Unrealised (losses)/gains on derivatives not qualifying for hedge accounting Air Europa Holdings termination settlement payment 2022 51 1 52 2022 159 (35) (43) 81 2022 26 2022 22 (3) 5 190 (82) – 132 2021 5 8 13 2021 89 – – 89 2021 (2) 2021 59 – 2 37 47 (75) 70 1 2021 includes a gain of €24 million arising from the disposal of Compañía Auxiliar al Cargo Exprés, S.A. and Auxiliar Logística Aeroportuaria, S.A. The Group previously owned 75 per cent of the share capital of these companies and disposed of them during the fourth quarter of 2021. The disposal led to the de- recognition of €12 million of net assets from the consolidated financial statements of the Group. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 213 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 10 Tax a Tax credits/(charges) Tax credits/(charges) recognised in the Income statement, Other comprehensive income and directly in equity: Total 9 (4) 5 (23) 98 139 214 € 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 Rate change/rate differences Total deferred tax Total tax 2022 Income statement Other comprehensive income Recognised directly in equity Total Income statement 2021 Other comprehensive income Recognised directly in equity (6) (64) (70) (36) 105 17 86 16 – 3 3 (2) (60) (10) (72) (69) – – – – 5 – 5 5 (6) (61) (67) (38) 50 7 19 10 (9) 1 (23) 518 78 573 – 5 5 – (420) 61 (359) (1) – (1) – – – – (48) 574 (354) (1) 219 The current tax credit in Other comprehensive income relates to the fair value movements on the convertible bond of €2 million (2021: €5 million) and movements relating to employee benefit plans of €1 million (2021: €nil). Tax recognised directly in equity relates to cash flow hedges of €5 million (2021: €nil) and share-based payment schemes of €nil (2021: €1 million). Within tax in Other comprehensive income is a tax credit of €8 million (2021: tax charge of €123 million) that may be reclassified to the Income statement and a tax charge of €77 million (2021: tax charge of €231 million) that will not. b Current tax asset/(liability) € million Balance at January 1 Income statement Other comprehensive income Recognised directly in equity Cash Exchange movements and other Balance at December 31 Current tax asset Current tax liability Balance at December 31 2022 (5) (70) 3 – 134 2 64 72 (8) 64 2021 53 1 5 (1) (63) – (5) 16 (21) (5) 214 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements Tax credits/(charges) recognised in the Income statement, Other comprehensive income and directly in equity: 2022 Other Recognised 2021 Other Recognised Income comprehensive directly in Income comprehensive directly in statement income equity Total statement income equity Total (6) (64) (70) (36) 105 17 86 16 – 3 3 (2) (60) (10) (72) (69) – – – – 5 – 5 5 (6) (61) (67) (38) 50 7 19 10 (9) 1 (23) 518 78 573 – 5 5 – (420) 61 (359) (1) – (1) – – – – The current tax credit in Other comprehensive income relates to the fair value movements on the convertible bond of €2 million (2021: €5 million) and movements relating to employee benefit plans of €1 million (2021: €nil). Tax recognised directly in equity relates to cash flow hedges of €5 million (2021: €nil) and share-based payment schemes of €nil (2021: €1 (48) 574 (354) (1) 219 Total tax million). Within tax in Other comprehensive income is a tax credit of €8 million (2021: tax charge of €123 million) that may be reclassified to the Income statement and a tax charge of €77 million (2021: tax charge of €231 million) that will not. NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 10 Tax a Tax credits/(charges) € million Current tax Movement in respect of prior Movement in respect of current Total current tax Deferred tax Movement in respect of prior Movement in respect of current Rate change/rate differences Total deferred tax years year years year b Current tax asset/(liability) € million Balance at January 1 Income statement Other comprehensive income Recognised directly in equity Cash Exchange movements and other Balance at December 31 Current tax asset Current tax liability Balance at December 31 9 (4) 5 (23) 98 139 214 2021 53 1 5 (1) (63) – (5) 16 (21) (5) 2022 (5) (70) 3 – 134 2 64 72 (8) 64 c Deferred tax asset/(liability) € million Balance at January 1, 2022 Income statement Other comprehensive income2 Recognised directly in equity Exchange movements and other Fixed assets (477) (194) Right of use assets (220) 169 – – (9) – – 7 Balance at December 31, 2022 (680) (44) Balance at January 1, 2021 (589) (248) Income statement Other comprehensive income Recognised directly in equity Exchange movements and other 106 – – 67 – – 6 (39) Balance at December 31, 2021 (477) (220) Employee leaving indemnities and others 196 Lease liabilities 19 Employee benefit plans 62 Fair value gains/ losses1 57 Share- based payment schemes 11 Tax loss carried forward and tax credits 1,573 Other temporary differences 61 (9) – – (1) 9 21 (3) – – 1 19 19 (17) – (1) 197 194 9 (9) – 2 196 1 (12) – 3 54 298 (11) (237) – 12 62 – (46) 5 (19) (3) 195 (14) (133) – 9 57 6 – – – 87 3 – (27) 17 1,636 10 1,090 1 – – – 11 408 20 – 55 1,573 7 – – 28 96 64 10 – – (13) 61 Total 1,282 86 (72) 5 (19) 1,282 1,035 573 (359) – 33 1,282 1 Fair value gains/losses include both the Cash flow hedge reserve and the Cost of hedging reserve, of which the movement in relation to Other comprehensive income recognised in the Cash flow hedge reserve for 2022 was €68 million (refer to note 28d). 2 Movements in Other comprehensive income relating to post-employment benefit obligations increase the Group’s tax losses by €3 million (tax value) at December 31, 2022 (2021: €20 million) and have therefore been disclosed as tax loss carried forward and tax credits in the above table. € million Deferred tax asset Deferred tax liability Balance at December 31 2022 1,282 – 1,282 2021 1,282 – 1,282 The deferred tax assets mainly arise in Spain and the UK and are expected to reverse in full beyond one year. Recognition of the deferred tax assets is supported by the expected reversal of deferred tax liabilities in corresponding periods, and projections of operating performance laid out in the management approved business plans. d Reconciliation of the total tax charge in the Income statement The tax (charge)/credit is calculated at the domestic rates applicable to profits/(losses) in the country in which the profits/(losses) arise. The differences between the expected tax charge (2021: credit) and the actual tax credit (2021: credit) on the profit for the year to December 31, 2022 (2021: loss) are explained below: € million Accounting profit/(loss) before tax Weighted average tax (charge)/credit of the Group1 Unrecognised losses and deductible temporary differences arising in the year Disposal and write down of investments Effect of tax rate changes Prior year tax assets recognised Effect of lower tax rate in the Canary Islands Movement in respect of prior years Non-deductible expenses Other items Tax credit in the Income statement 2022 415 (102) (2) – 17 153 5 (42) (22) 9 16 2021 (3,507) 683 (193) 8 78 44 (23) (13) (15) 5 574 1 The expected tax credit is calculated by aggregating the expected tax (charges)/credits arising in each company in the Group and changes each year as tax rates and profit mix change. The 2022 corporate tax rates for the Group's main countries of operation are Spain 25% (2021: 25%), the UK 19% (2021: 19%) and Ireland 12.5% (2021: 12.5%). INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 215 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 10 Tax continued e Payroll-related taxes and UK Air Passenger Duty The Group was also subject to other taxes paid during the year which are as follows: € million Payroll related taxes UK Air Passenger Duty f Factors that may affect future tax charges Unrecognised deductible temporary differences and losses € million Income tax losses Spanish corporate income tax losses Openskies SASU trading losses UK trading losses Other trading losses Other losses and temporary differences Spanish deductible temporary differences UK capital losses Irish capital losses 2022 522 722 1,244 2021 310 204 514 2022 2021 1,596 405 72 11 1,993 390 72 3 2,084 2,458 481 343 17 841 648 361 17 1,026 None of the unrecognised temporary differences have an expiry date. Further information with regard to the sensitivity of the recoverability of deferred tax assets is given in note 2. Unrecognised temporary differences – investment in subsidiaries and associates No deferred tax liability has been recognised in respect of €823 million (2021: €617 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 to a material extent. Tax rate changes On March 3, 2021 the UK Chancellor of the Exchequer announced that legislation would be introduced in the Finance Bill 2021 to set the main rate of corporation tax at 25 per cent from April 2023. On May 24, 2021 the Finance Bill was substantively enacted, which has led to the remeasurement of deferred tax balances and will increase the Group's future current tax charge accordingly. As a result of the remeasurement of deferred tax balances in UK entities, a credit of €17 million (2021: €78 million credit) is recorded in the Income statement and a charge of €10 million (2021: €61 million credit) is recorded in Other comprehensive income. On October 8, 2021 Ireland announced that it would increase the rate of corporation tax for certain multinational businesses to 15 per cent with effect from 2023. This expected tax rate change has not been reflected in these results because it has not yet been substantively enacted. The effect of the proposed rate change is not expected to be material over the period of the management approved business plan. Tax policy developments The Group is monitoring the OECD’s proposed two-pillar solution to address the tax challenges arising from the digitalisation of the economy. This proposed reform to the international tax system addresses the geographical allocation of profits for the purposes of taxation and is designed to ensure that multinational enterprises will be subject to a minimum 15 per cent effective tax rate. On December 15, 2022, the Council of the European Union formally adopted the EU Pillar Two Directive. Member States are expected to transpose the Directive into national law by the end of 2023 and effective from 2024. The Group is continuing to assess the implications of the reform and these will be determined when the relevant legislation is finalised. g Tax-related contingent liabilities The Group has certain contingent liabilities that could be reliably estimated, across all taxes, at December 31, 2022 amounting to €110 million (December 31, 2021: €106 million). No material losses are likely to arise from such contingent liabilities. As such the Group does not consider it appropriate to make a provision for these amounts. Included in the tax related contingent liabilities are the following: Merger gain Following tax audits covering the period 2011 to 2014, the Spanish Tax Authorities issued a corporate income tax assessment to the Company regarding the merger in 2011 between British Airways and Iberia. The maximum exposure in this case is €98 million (December 31, 2021: €95 million), being the amount in the tax assessment with an estimate of the interest accrued on that assessment through to December 31, 2022. The Company appealed the assessment to the Tribunal Económico-Administrativo Central or ‘TEAC’ (Central Administrative Tax Tribunal). On October 23, 2019, the TEAC ruled in favour of the Spanish Tax Authorities. The Company subsequently appealed this ruling to the Audiencia Nacional (National High Court) on December 20, 2019, and on July 24, 2020 filed submissions in support of its case. The Company does not expect a hearing at the National High Court until late 2023 at the earliest. The Company disputes the technical merits of the assessment and ruling of the TEAC, both in terms of whether a gain arose and in terms of the quantum of any gain. The Company believes that it has strong arguments to support its appeals. The Company does not consider it appropriate to make a provision for these amounts and accordingly has classified this matter as a contingent liability. 216 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements e Payroll-related taxes and UK Air Passenger Duty The Group was also subject to other taxes paid during the year which are as follows: f Factors that may affect future tax charges Unrecognised deductible temporary differences and losses NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 10 Tax continued € million Payroll related taxes UK Air Passenger Duty € million Income tax losses Spanish corporate income tax losses Openskies SASU trading losses UK trading losses Other trading losses Other losses and temporary differences Spanish deductible temporary differences UK capital losses Irish capital losses 2022 522 722 1,244 1,596 405 72 11 481 343 17 841 2022 2021 2,084 2,458 2021 310 204 514 1,993 390 72 3 648 361 17 1,026 None of the unrecognised temporary differences have an expiry date. Further information with regard to the sensitivity of the recoverability of deferred tax assets is given in note 2. Unrecognised temporary differences – investment in subsidiaries and associates No deferred tax liability has been recognised in respect of €823 million (2021: €617 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 to a material extent. Tax rate changes On March 3, 2021 the UK Chancellor of the Exchequer announced that legislation would be introduced in the Finance Bill 2021 to set the main rate of corporation tax at 25 per cent from April 2023. On May 24, 2021 the Finance Bill was substantively enacted, which has led to the remeasurement of deferred tax balances and will increase the Group's future current tax charge accordingly. As a result of the remeasurement of deferred tax balances in UK entities, a credit of €17 million (2021: €78 million credit) is recorded in the Income statement and a charge of €10 million (2021: €61 million credit) is recorded in Other comprehensive income. On October 8, 2021 Ireland announced that it would increase the rate of corporation tax for certain multinational businesses to 15 per cent with effect from 2023. This expected tax rate change has not been reflected in these results because it has not yet been substantively enacted. The effect of the proposed rate change is not expected to be material over the period of the management approved business plan. Tax policy developments The Group is monitoring the OECD’s proposed two-pillar solution to address the tax challenges arising from the digitalisation of the economy. This proposed reform to the international tax system addresses the geographical allocation of profits for the purposes of taxation and is designed to ensure that multinational enterprises will be subject to a minimum 15 per cent effective tax rate. On December 15, 2022, the Council of the European Union formally adopted the EU Pillar Two Directive. Member States are expected to transpose the Directive into national law by the end of 2023 and effective from 2024. The Group is continuing to assess the implications of the reform and these will be determined when the relevant legislation is finalised. g Tax-related contingent liabilities The Group has certain contingent liabilities that could be reliably estimated, across all taxes, at December 31, 2022 amounting to €110 million (December 31, 2021: €106 million). No material losses are likely to arise from such contingent liabilities. As such the Group does not consider it appropriate to make a provision for these amounts. Included in the tax related contingent liabilities are the following: Following tax audits covering the period 2011 to 2014, the Spanish Tax Authorities issued a corporate income tax assessment to the Company regarding the merger in 2011 between British Airways and Iberia. The maximum exposure in this case is €98 million (December 31, 2021: €95 million), being the amount in the tax assessment with an estimate of the interest accrued on that assessment through to Merger gain December 31, 2022. The Company appealed the assessment to the Tribunal Económico-Administrativo Central or ‘TEAC’ (Central Administrative Tax Tribunal). On October 23, 2019, the TEAC ruled in favour of the Spanish Tax Authorities. The Company subsequently appealed this ruling to the Audiencia Nacional (National High Court) on December 20, 2019, and on July 24, 2020 filed submissions in support of its case. The Company does not expect a hearing at the National High Court until late 2023 at the earliest. The Company disputes the technical merits of the assessment and ruling of the TEAC, both in terms of whether a gain arose and in terms of the quantum of any gain. The Company believes that it has strong arguments to support its appeals. The Company does not consider it appropriate to make a provision for these amounts and accordingly has classified this matter as a contingent liability. IAG Loyalty VAT In the year ended December 31, 2022 and through to the date of this report, His Majesty’s Revenue and Customs (HMRC) has issued notices of VAT assessments for the 13 months ended March 2019 to Avios Group (AGL) Limited, a controlled undertaking of the Group trading as IAG Loyalty. At December 31, 2022 and through to the date of these financial statements HMRC’s enquiries into IAG Loyalty’s VAT position remain at an early stage. The Group has reviewed the position with its advisors and considers it has strong arguments to support its VAT accounting, including having received rulings previously from HMRC on the matter, and therefore does not consider it probable that an adverse ruling will eventuate. Given the above the Group does not consider it appropriate to record any provision. It is further not possible to estimate reliably any exposure that may arise from this matter until HMRC’s enquiries are further progressed. The Group expects further developments of these matters during the remainder of 2023. 11 Earnings per share € million Earnings/(losses) attributable to equity holders of the parent for basic earnings/(losses) per share Income statement impact of convertible bonds Diluted earnings/(losses) attributable to equity holders of the parent and diluted earnings/(losses) per share Weighted average number of ordinary shares in issue Weighted average number of ordinary shares in issue for diluted earnings/(losses) per share € cents Basic earnings/(losses) per share Diluted earnings/(losses) per share 2022 431 (104) 327 2021 (2,933) – (2,933) 2022 Number ‘000 4,958,420 2021 Number ‘000 4,963,945 5,344,152 4,963,945 2022 8.7 6.1 2021 (59.1) (59.1) The effect of the assumed conversion of the €825 million convertible bond 2028 and outstanding employee share schemes have a dilutive impact on the earnings per share for the year to December 31, 2022 due to the reported profit after tax for the year, but are antidilutive for the year to December 31, 2021 due to the reported loss after tax for the year, and therefore have not been included in the diluted loss per share calculation for 2021. For information relating to Adjusted earnings/(losses) per share refer to the Alternative performance measures section. 12 Dividends The Directors propose that no dividend be paid for the year to December 31, 2022 (2021: €nil). The future dividend capacity of the Group is dependent on the liquidity requirements and the distributable reserves of the Group’s main operating companies and their capacity to pay dividends to the Company, together with the Company’s distributable reserves and liquidity. Certain debt obligations place restrictions or conditions on the payment of dividends from the Group’s main operating companies to the Company, including a loan to British Airways partially guaranteed by UKEF and loans to Iberia and Vueling partially guaranteed by the Instituto de Crédito Oficial (ICO) in Spain; these loans can be repaid early without penalty at the election of each company. In Spain, Iberia and Vueling are not permitted to make dividend payments in the reporting period in which they are in receipt of Expedientes de Regulación Temporal de Empleo or ‘ERTE’ (Temporary Employment Regulation Records). British Airways agreed with the Trustee of its main UK defined benefit pension scheme (NAPS) as part of the triennial valuation as at March 31, 2021 that, subject to the over-funding protection mechanism, no dividends will be paid to IAG before December 31, 2023 and that any dividends paid to IAG from January 1, 2024 through to September 30, 2025, will trigger a pension contribution of 50 per cent of the amount of the dividend. Further details on the British Airways dividend restrictions agreed with NAPS are given in note 32a. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 217 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 13 Property, plant and equipment € million Cost Balance at January 1, 2021 Additions Modification of leases Disposals Reclassifications Transfers to Non-current assets held for sale (note 16) Exchange movements Balance at December 31, 2021 Additions Modification of leases Disposals Reclassifications Transfers to Non-current assets held for sale (note 16) Exchange movements December 31, 2022 Depreciation and impairment Balance at January 1, 2021 Depreciation charge for the year Impairment (reversal)/charge for the year1 Disposals Modification of leases Transfers to Non-current assets held for sale (note 16) Exchange movements Balance at December 31, 2021 Depreciation charge for the year Impairment reversal for the year1 Disposals Transfers to Non-current assets held for sale (note 16) Exchange movements December 31, 2022 Fleet Property Equipment Total 26,936 2,982 709 236 (3,035) (4) (111) 1,265 25,996 3,765 241 (1,700) (4) (44) (552) 27,702 11,571 1,500 (3) (2,699) – (91) 602 10,880 1,642 (8) (857) (25) (247) 11,385 38 (2) (74) – – 181 3,125 61 129 (406) – – (73) 2,836 154 19 (63) – – 81 1,473 168 – (403) – (32) 1,206 1,501 37 (26) (135) (1) – 74 1,450 101 – (120) – – (31) 1,400 84 – 31,419 784 208 (3,244) (5) (111) 1,520 30,571 3,927 370 (2,226) (4) (44) (656) 31,938 13,888 1,738 16 (105) (2,867) (14) – 57 1,057 79 – (107) – (28) 1,001 (14) (91) 740 13,410 1,889 (8) (1,367) (25) (307) 13,592 1,282 1,035 1 For details regarding the impairment reversal on fleet assets refer to the Alternative performance measures section. For details regarding the operating segment in which the impairment (reversal)/charge arose, refer to note 5. Net book values December 31, 2022 December 31, 2021 Analysis at December 31, 2022 Owned Right of use assets (note 14) Progress payments Assets not in current use Property, plant and equipment Analysis at December 31, 2021 Owned Right of use assets (note 14) Progress payments Assets not in current use Property, plant and equipment 16,317 15,116 1,630 1,652 399 393 18,346 17,161 7,242 7,993 1,071 11 16,317 5,736 8,626 748 6 15,116 833 684 113 – 1,630 916 640 96 – 1,652 338 20 40 1 399 330 37 26 – 393 8,413 8,697 1,224 12 18,346 6,982 9,303 870 6 17,161 218 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 13 Property, plant and equipment Transfers to Non-current assets held for sale (note 16) Impairment (reversal)/charge for the year1 Disposals Modification of leases Transfers to Non-current assets held for sale (note 16) Transfers to Non-current assets held for sale (note 16) € million Cost Balance at January 1, 2021 Additions Modification of leases Disposals Reclassifications Exchange movements Balance at December 31, 2021 Additions Modification of leases Disposals Reclassifications Exchange movements December 31, 2022 Depreciation and impairment Balance at January 1, 2021 Depreciation charge for the year Exchange movements Balance at December 31, 2021 Depreciation charge for the year Impairment reversal for the year1 Disposals Exchange movements December 31, 2022 Net book values December 31, 2022 December 31, 2021 Analysis at December 31, 2022 Owned Right of use assets (note 14) Progress payments Assets not in current use Property, plant and equipment Analysis at December 31, 2021 Owned Right of use assets (note 14) Progress payments Assets not in current use Property, plant and equipment Fleet Property Equipment Total 26,936 2,982 709 236 (3,035) (4) (111) 1,265 25,996 3,765 241 (1,700) (4) (44) (552) 27,702 11,571 1,500 (3) (2,699) – (91) 602 10,880 1,642 (8) (857) (25) (247) 11,385 7,242 7,993 1,071 11 16,317 5,736 8,626 748 6 15,116 1,282 1,035 (105) (2,867) 38 (2) (74) – – 181 3,125 61 129 (406) – – (73) 2,836 154 19 (63) – – 81 1,473 168 (403) – – (32) 1,206 833 684 113 – 1,630 916 640 96 – 1,652 1,501 37 (26) (135) (1) – 74 1,450 101 (120) – – – (31) 1,400 84 – (14) – 57 1,057 79 – (107) – (28) 1,001 338 20 40 1 399 330 37 26 – 393 31,419 784 208 (3,244) (5) (111) 1,520 30,571 3,927 370 (2,226) (4) (44) (656) 31,938 13,888 1,738 16 (14) (91) 740 13,410 1,889 (8) (1,367) (25) (307) 13,592 8,413 8,697 1,224 12 18,346 6,982 9,303 870 6 17,161 16,317 15,116 1,630 1,652 399 393 18,346 17,161 1 For details regarding the impairment reversal on fleet assets refer to the Alternative performance measures section. For details regarding the operating segment in which the impairment (reversal)/charge arose, refer to note 5. Transfers to Non-current assets held for sale (note 16) At December 31, 2022, bank and other loans of the Group are secured on owned fleet assets with a net book value of €3,931 million (2021: €3,081 million). 14 Leases a Amounts recognised in the Consolidated balance sheet Property, plant and equipment includes the following amounts relating to right of use assets: The net book value of property comprises: € million Freehold Right of use assets (note 14) Long leasehold improvements with a contractual life in excess of 50 years Short leasehold improvements with a contractual life of less than 50 years Property 2022 469 684 301 176 1,630 2021 495 640 311 206 1,652 € million Cost Balance at January 1, 2021 Additions Modifications of leases Disposals Reclassifications1 Exchange movements December 31, 2021 Additions Modification of leases Disposals Reclassifications1 Exchange movements December 31, 2022 Depreciation and impairment Balance at January 1, 2021 Depreciation charge for the year Impairment charge for the year2 Disposals Modification of leases Reclassifications1 Exchange movements December 31, 2021 Depreciation charge for the year Impairment reversal for the year2 Disposals Reclassifications1 Exchange movements December 31, 2022 Net book value December 31, 2022 December 31, 2021 Fleet Property Equipment Total 14,008 893 240 236 (72) (759) 565 14,218 586 241 (214) (849) (232) 13,750 4,884 963 4 (71) – (394) 206 5,592 991 (8) (191) (528) (99) 5,757 7,993 8,626 15 (2) (12) – 55 949 28 129 (171) – (24) 911 198 87 16 (4) – – 12 309 93 – (170) – (5) 227 684 640 99 – (26) (1) – 2 74 1 – (2) (24) – 49 43 8 – (1) (14) – 1 37 8 – (1) (14) (1) 29 20 37 15,000 255 208 (85) (759) 622 15,241 615 370 (387) (873) (256) 14,710 5,125 1,058 20 (76) (14) (394) 219 5,938 1,092 (8) (362) (542) (105) 6,013 8,697 9,303 1 Amounts with a net book value of €331 million (2021: €365 million) were reclassified from ROU assets to Owned Property, plant and equipment at the cessation of the respective leases. The assets reclassified relate to leases with purchase options that were grandfathered as ROU assets upon transition to IFRS 16, for which the Group had been depreciating over the expected useful life of the aircraft, incorporating the purchase option. 2 For details regarding the impairment (reversal)/charge on fleet assets refer to the Alternative performance measures section. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 219 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 14 Leases continued Interest-bearing long-term borrowings includes the following amount relating to lease liabilities: € million January 1 Additions Modifications of leases Repayments Interest expense Disposals Exchange movements December 31 Current Non-current b Amounts recognised in the Consolidated income statement € million Amounts not included in the measurement of lease liabilities Variable lease payments Expenses relating to short-term leases Amounts expensed as a result of the recognition of ROU assets and lease liabilities Interest expense on lease liabilities Gains/(losses) arising from sale and leaseback transactions Depreciation charge for the year Impairment (reversal)/charge for the year 2022 9,637 639 378 (1,886) 464 (28) 415 9,619 1,766 7,853 2021 10,024 310 208 (1,855) 400 (8) 558 9,637 1,521 8,116 2022 2021 2 39 464 1 1,092 (8) 1 26 400 (6) 1,058 20 During 2020 the IASB issued ‘COVID-19 related rent concessions – amendment to IFRS 16 Leases’ to provide a practical expedient to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions for those lease modifications arising as a direct result of COVID-19. During 2021, the IASB extended the period for the application of the practical expedient. The Group has applied this practical expedient to all such modifications in the preparation of the consolidated financial statements. The net impact on the Income statement for 2022 was €nil (2021: credit of €8 million) reflecting the changes to lease payments that arose from such concessions. c Amounts recognised in the Consolidated cash flow statement € million Cash flows arising from transactions giving rise to lease liabilities Total cash outflows arising from lease liabilities – aircraft Total cash outflows arising from lease liabilities – other Total cash inflows arising from sale and leaseback transactions – aircraft Cash flows arising from transactions that do not give rise to the recognition of lease liabilities Total cash outflows arising from short-term leases, low-value assets and variable lease payments Total cash outflows arising from asset financed liabilities 2022 20211 1,699 178 718 41 292 1,711 137 213 27 209 1 During 2022, the Group has re-presented cash flow amounts to disclose amounts arising from all contractual leases as opposed to only those that give rise to right of use assets and lease liabilities. The Group is not exposed to future cash outflows as at December 31, 2022 and December 31, 2021, for which no amount has been recognised in relation to leases not yet commenced to which the Group is committed. d Maturity profile of the lease liabilities The maturity profile of the lease liabilities is disclosed in note 27f. e Extension options The Group has certain leases which contain extension options exercisable by the Group prior to the non-cancellable contract period. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility. The Group assesses at lease commencement whether it is reasonably certain to exercise the extension options. The Group is exposed to future cash outflows (on an undiscounted basis) at December 31, 2022, for which no amount has been recognised, for potential extension options of €945 million (2021: €795 million) due to it not being reasonably certain that these leases will be extended. 220 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 14 Leases continued Interest-bearing long-term borrowings includes the following amount relating to lease liabilities: € million January 1 Additions Modifications of leases Repayments Interest expense Disposals Exchange movements December 31 Current Non-current € million 2022 9,637 639 378 (1,886) 464 (28) 415 9,619 1,766 7,853 2 39 464 1 1,092 (8) 2021 10,024 310 208 (1,855) 400 (8) 558 9,637 1,521 8,116 1 26 400 (6) 1,058 20 2022 20211 1,699 178 718 41 292 1,711 137 213 27 209 b Amounts recognised in the Consolidated income statement Amounts expensed as a result of the recognition of ROU assets and lease liabilities Amounts not included in the measurement of lease liabilities Variable lease payments Expenses relating to short-term leases Interest expense on lease liabilities Gains/(losses) arising from sale and leaseback transactions Depreciation charge for the year Impairment (reversal)/charge for the year During 2020 the IASB issued ‘COVID-19 related rent concessions – amendment to IFRS 16 Leases’ to provide a practical expedient to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions for those lease modifications arising as a direct result of COVID-19. During 2021, the IASB extended the period for the application of the practical expedient. The Group has applied this practical expedient to all such modifications in the preparation of the consolidated financial statements. The net impact on the Income statement for 2022 was €nil (2021: credit of €8 million) reflecting the changes to lease payments that arose from such concessions. € million Cash flows arising from transactions giving rise to lease liabilities Total cash outflows arising from lease liabilities – aircraft Total cash outflows arising from lease liabilities – other Total cash inflows arising from sale and leaseback transactions – aircraft Cash flows arising from transactions that do not give rise to the recognition of lease liabilities Total cash outflows arising from short-term leases, low-value assets and variable lease payments Total cash outflows arising from asset financed liabilities 1 During 2022, the Group has re-presented cash flow amounts to disclose amounts arising from all contractual leases as opposed to only those that give rise to right of use assets and lease liabilities. The Group is not exposed to future cash outflows as at December 31, 2022 and December 31, 2021, for which no amount has been recognised in relation to leases not yet commenced to which the Group is committed. d Maturity profile of the lease liabilities The maturity profile of the lease liabilities is disclosed in note 27f. e Extension options The Group has certain leases which contain extension options exercisable by the Group prior to the non-cancellable contract period. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility. The Group assesses at lease commencement whether it is reasonably certain to exercise the extension options. The Group is exposed to future cash outflows (on an undiscounted basis) at December 31, 2022, for which no amount has been recognised, for potential extension options of €945 million (2021: €795 million) due to it not being reasonably certain that these leases will be extended. f Lessor accounting The Group leases out certain of its property, plant and equipment. The Group has classified those leases that transfer substantially all of the risks and rewards of ownership to the lessee as finance leases and those leases that do not transfer substantially all of the risks and rewards of ownership to the lessee as operating leases. Finance leases Rental income from finance leases recognised by the Group in 2022 was €4 million (2021: €nil). Rental income is recorded within Property, IT and other within the Income statement. The following table sets out a maturity analysis of finance lease receipts, showing the undiscounted lease receipts to be received after the reporting date: € million Within one year One to two years Two to five years More than five years Total 2022 2 6 – – 8 2021 4 5 2 – 11 2022 2021 15 Capital expenditure commitments Capital expenditure authorised and contracted but not provided for in the accounts, including outstanding aircraft commitments, at December 31, 2022 amounted to €13,749 million (December 31, 2021: €10,911 million). The outstanding aircraft commitments including the expected delivery timeframes, totalling €13,484 million (2021: €10,813 million), are as follows: Aircraft future deliveries at December 31 Airbus A320 (from 2023 to 2028) Airbus A321 (from 2023 to 2028) Airbus A321 XLR (from 2024 to 2026) Airbus A350-900 (from 2023 to 2030) Airbus A350-1000 (from 2023 to 2024) Boeing 777-9 (from 2026 to 2028) Boeing 787-10 (from 2023 to 2024) Boeing 737-8200 (from 2024 to 2025) Boeing 737-10 (from 2026 to 2027) Total 20221 45 46 14 7 5 18 7 25 25 192 20211 22 20 14 16 10 18 10 – – 110 c Amounts recognised in the Consolidated cash flow statement 1 Capital commitments exclude options to purchase additional aircraft. In May 2022, the Group agreed to purchase 25 Boeing 737-8200 and 25 737-10 aircraft, with 100 options to purchase further such aircraft. In addition, in July 2022, the Group agreed to exercise its option over 12 Airbus A320neos/A321neos and to purchase 25 Airbus A320neos/A321neos with 50 options to purchase further such aircraft. The determination of the split between A320neos and A321neos will be made closer to delivery. Both of these agreements were subject to shareholder approval and were subsequently approved at the Extraordinary General Meeting of the Company on October 26, 2022. The majority of these commitments are denominated in US dollars translated at the closing exchange rate at the reporting date and include escalation clauses dependent on the timing of aircraft deliveries. Under the terms of the committed purchase agreements, the Group is required to make periodic advance payments towards the purchase price, with the commitments above stated net of advance payments that have been made at the reporting date. The Group has certain rights to defer aircraft deliveries and to cancel commitments in the event of significant delays to aircraft deliveries caused by the aircraft manufacturers. No such rights had been exercised as at December 31, 2022. 16 Non-current assets held for sale As at December 31, 2022, the non-current assets held for sale of €19 million represented two Airbus A321 aircraft. No gain or loss was recognised on classification as non-current assets held for sale. These aircraft were presented within the British Airways segment and are expected to exit the business during 2023. As at December 31, 2021, the non-current assets held for sale of €20 million represented three Airbus A321 aircraft. No gain or loss was recognised on classification as non-current assets held for sale. These aircraft are presented within the Aer Lingus segment and exited the business during 2022. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 221 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 17 Intangible assets and impairment review Balance at December 31, 2021 596 451 253 1,605 1,674 a Intangible assets € million Cost Balance at January 1, 2021 Additions Disposals Exchange movements Additions Disposals Exchange movements December 31, 2022 Amortisation and impairment Balance at January 1, 2021 Amortisation charge for the year Disposals Exchange movements Balance at December 31, 2021 Amortisation charge for the year Disposals Exchange movements December 31, 2022 Net book values December 31, 2022 December 31, 2021 Goodwill Brand Customer loyalty programmes Landing rights1 Software ETS assets2 Other2 Total 593 451 253 1,555 1,474 – – 3 – – – – – – – (6) 56 149 (19) 70 – – (1) – – – – – – 14 (6) (25) 218 (52) (34) 595 451 253 1,588 1,806 249 – – – 249 – – – 249 346 347 – – – – – – – – – – – – – – – – – – 132 6 – 4 836 167 (13) 42 142 1,032 6 – (2) 146 210 (50) (23) 1,169 637 642 451 451 253 253 1,442 1,463 76 33 (49) 2 62 360 (9) (6) 407 – – – – – – – – – 85 4,487 1 – 1 183 (74) 132 87 4,728 1 – – 593 (67) (66) 88 5,188 62 5 – (1) 66 2 – – 1,279 178 (13) 45 1,489 218 (50) (25) 68 1,632 407 62 20 21 3,556 3,239 1 The net book value includes non-UK and non-EU based landing rights of €69 million (2021: €75 million) that have a definite life. The remaining average life of these landing rights is 13 years. 2 During 2022 the Group separated the ETS assets from Other intangible assets. This change resulted in an amount of €76 million and €62 million recorded within ETS assets at January 1, 2021 and January 1, 2022, respectively. There was no net change in total intangible assets. 222 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 17 Intangible assets and impairment review a Intangible assets Balance at December 31, 2021 596 451 253 1,605 1,674 87 4,728 Goodwill Brand programmes Software Other2 Total Customer loyalty Landing rights1 Balance at January 1, 2021 593 451 253 1,555 1,474 85 4,487 € million Cost Additions Disposals Additions Disposals Exchange movements Exchange movements December 31, 2022 Amortisation and impairment Balance at January 1, 2021 Amortisation charge for the year Disposals Exchange movements Amortisation charge for the year Disposals Exchange movements December 31, 2022 Net book values December 31, 2022 December 31, 2021 595 451 253 1,588 1,806 88 5,188 – – – – – – – – – – – – – – – – (6) 56 14 (6) (25) 132 6 – 4 6 – (2) 146 ETS assets2 76 33 (49) 2 62 360 (9) (6) 407 – – – – – – – – – 149 (19) 70 218 (52) (34) 836 167 (13) 42 210 (50) (23) 1,169 637 642 1 – 1 1 – – 62 5 – (1) 66 2 – – 183 (74) 132 593 (67) (66) 1,279 178 (13) 45 1,489 218 (50) (25) 68 1,632 – – – – – – – – – – – – – – – – – 3 – – (1) – – – – – – 249 249 346 347 1 The net book value includes non-UK and non-EU based landing rights of €69 million (2021: €75 million) that have a definite life. The remaining average life of these landing rights is 13 years. 2 During 2022 the Group separated the ETS assets from Other intangible assets. This change resulted in an amount of €76 million and €62 million recorded within ETS assets at January 1, 2021 and January 1, 2022, respectively. There was no net change in total intangible assets. 451 451 253 253 1,442 1,463 407 62 20 21 3,556 3,239 Balance at December 31, 2021 249 142 1,032 b Impairment review The carrying amounts of intangible assets with indefinite life and goodwill allocated to cash generating units (CGUs) of the Group are: € million 2022 Iberia January 1 and December 31, 2022 British Airways January 1, 2022 Additions Disposals Exchange movements December 31, 2022 Vueling January 1 and December 31, 2022 Aer Lingus January 1 and December 31, 2022 IAG Loyalty January 1 and December 31, 2022 Goodwill Landing rights Customer loyalty programmes Brand – 423 306 47 – – (1) 46 809 14 (6) (23) 794 – – – – – 28 94 35 272 62 110 – – – – – – – – Total 729 856 14 (6) (24) 840 157 444 – – – 253 253 December 31, 2022 346 1,373 451 253 2,423 € million 2021 Iberia January 1 and December 31, 2021 British Airways January 1, 2021 Disposals Exchange movements December 31, 2021 Vueling January 1 and December 31, 2021 Aer Lingus January 1 and December 31, 2021 IAG Loyalty January 1 and December 31, 2021 Goodwill Landing rights Customer loyalty programmes Brand – 423 306 44 – 3 47 763 (6) 52 809 – – – – 28 94 35 272 62 110 – – – – – – – Total 729 807 (6) 55 856 157 444 – – – 253 253 December 31, 2021 347 1,388 451 253 2,439 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 223 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 17 Intangible assets and impairment review continued Basis for calculating recoverable amount The recoverable amounts of the Group’s CGUs have been measured based on their value-in-use, which utilises a weighted average multi- scenario discounted cash flow model. The details of these scenarios are given in the going concern section of note 2, with a weighting of 70 per cent to the Base Case and 30 per cent to the Downside Case. Cash flow projections are based on the business plans approved by the relevant operating companies covering a three-year period. Cash flows extrapolated beyond the three-year period are projected to increase based on long-term growth rates. Cash flow projections are discounted using each CGU’s pre-tax discount rate. Annually the relevant operating companies prepare and approve three-year business plans, and the Board approved the Group three-year business plan in the fourth quarter of the year. Adjustments have been made to the final year of the business plan cash flows to incorporate the impacts of climate change that the Group can reliably estimate at the reporting date. However, given the long-term nature of the Group’s sustainability commitments, there are other aspects of these commitments that cannot be reliably estimated and accordingly have been excluded from the value-in-use calculations (refer to note 4). The business plan cash flows used in the value-in-use calculations also reflect all restructuring of the business where relevant that has been approved by the Board and which can be executed by management under existing labour agreements. Key assumptions The value-in-use calculations for each CGU reflect the ongoing uncertainty of the future implications of COVID-19 and the wider economic and geopolitical environments, including updated projected cash flows for activity from 2023 through to the end of 2025. For each of the Group’s CGUs the key assumptions used in the value-in-use calculations are as follows: Per cent Operating margin1 ASKs as a proportion of 20191,2 Long-term growth rate Pre-tax discount rate Per cent Operating margin1 ASKs as a proportion of 20191,2 Long-term growth rate Pre-tax discount rate British Airways 5-13 90-105 1.7 10.4 British Airways 3-13 75-103 1.9 11.8 Iberia 5-10 92-107 1.5 11.2 Iberia 2-12 77-100 1.7 11.4 2022 Vueling 0-10 113-123 1.4 12.8 2021 Vueling 2-11 97-119 1.6 11.1 Aer Lingus 4-12 102-127 1.6 10.1 IAG Loyalty 23-25 n/a 1.7 13.4 Aer Lingus 0-14 IAG Loyalty 22-24 84-115 1.7 10.1 n/a 1.6 12.0 1 ASKs as a proportion of 2019 and operating margin are both stated as the weighted average derived from the multi-scenario discounted cash flow model. 2 In prior periods the Group applied the average ASK growth per annum as a key assumption. Given the impact of COVID-19, the Group has presented ASKs as a proportion of the level of ASKs achieved in 2019, prior to the application of the terminal value calculation. Jet fuel price ($ per MT) 2022 2021 Within 12 months 867 690 1-2 years 809 673 2-3 years 780 659 3 years and thereafter 780 659 Forecast ASKs reflect the range of ASKs as a percentage of the 2019 actual ASKs over the forecast period, 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, considering a number of data points: (i) industry publications; (ii) forecast weighted average exposure in each primary market using gross domestic product (GDP); and (iii) internal analysis regarding the long-term changes in consumer preferences and the effects on demand from the increased costs to the Group of climate change. The calculation of the long- term growth rate utilises a Base Case and a Downside Case growth rate, which is then weighted on the same basis as the cash flows detailed above of 70 per cent to the Base Case and 30 per cent to the Downside Case. The terminal value cash flows and long-term growth rate incorporate the impacts of climate change insofar as they can be determined (note 4). The airlines’ network plans are reviewed annually as part of the three-year business plan preparation 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 derived from both market data and industry gearing levels derived from comparable companies. 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. Jet fuel price assumptions are derived from forward price curves in the fourth quarter of each year and sourced externally. The cash flow forecasts reflect these price increases after taking into consideration the level of fuel derivatives and their associated prices that the Group has in place. As detailed above, the Group adjusts the final year of the three-year business plans to incorporate the medium-term impacts of climate change from the Group’s Flightpath Net Zero climate strategy. These adjustments include the following key assumptions: (i) a 10 per cent level of SAF consumption out of the overall fuel mix with an assumed price of €2,275 per metric tonne; (ii) a kerosene tax of €325 per metric tonne on all intra-EU flights; (iii) for costs of carbon, prices of €130, €130, €175 and €25 for EU ETS allowances, Swiss ETS allowances, UK ETS allowances and CORSIA allowances, respectively, per tonne of CO2 equivalents emitted; and (iv) the removal of all free ETS and CORSIA allowances. 224 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 17 Intangible assets and impairment review continued Basis for calculating recoverable amount The recoverable amounts of the Group’s CGUs have been measured based on their value-in-use, which utilises a weighted average multi- scenario discounted cash flow model. The details of these scenarios are given in the going concern section of note 2, with a weighting of 70 per cent to the Base Case and 30 per cent to the Downside Case. Cash flow projections are based on the business plans approved by the relevant operating companies covering a three-year period. Cash flows extrapolated beyond the three-year period are projected to increase based on long-term growth rates. Cash flow projections are discounted using each CGU’s pre-tax discount rate. Annually the relevant operating companies prepare and approve three-year business plans, and the Board approved the Group three-year business plan in the fourth quarter of the year. Adjustments have been made to the final year of the business plan cash flows to incorporate the impacts of climate change that the Group can reliably estimate at the reporting date. However, given the long-term nature of the Group’s sustainability commitments, there are other aspects of these commitments that cannot be reliably estimated and accordingly have been excluded from the value-in-use calculations (refer to note 4). The business plan cash flows used in the value-in-use calculations also reflect all restructuring of the business where relevant that has been approved by the Board and which can be executed by management The value-in-use calculations for each CGU reflect the ongoing uncertainty of the future implications of COVID-19 and the wider economic and geopolitical environments, including updated projected cash flows for activity from 2023 through to the end of 2025. For each of the Group’s CGUs the key assumptions used in the value-in-use calculations are as follows: under existing labour agreements. Key assumptions Per cent Operating margin1 ASKs as a proportion of 20191,2 Long-term growth rate Pre-tax discount rate Per cent Operating margin1 ASKs as a proportion of 20191,2 Long-term growth rate Pre-tax discount rate Jet fuel price ($ per MT) 2022 2021 British Airways 5-13 90-105 1.7 10.4 British Airways 3-13 75-103 1.9 11.8 Iberia 5-10 1.5 11.2 Iberia 2-12 77-100 1.7 11.4 2022 Vueling Aer Lingus IAG Loyalty 0-10 4-12 23-25 92-107 113-123 102-127 1.4 12.8 1.6 10.1 n/a 1.7 13.4 22-24 n/a 1.6 12.0 2021 2-11 97-119 1.6 11.1 0-14 84-115 1.7 10.1 Within 12 months 867 690 1-2 years 2-3 years 809 673 780 659 3 years and thereafter 780 659 1 ASKs as a proportion of 2019 and operating margin are both stated as the weighted average derived from the multi-scenario discounted cash flow model. 2 In prior periods the Group applied the average ASK growth per annum as a key assumption. Given the impact of COVID-19, the Group has presented ASKs as a proportion of the level of ASKs achieved in 2019, prior to the application of the terminal value calculation. Forecast ASKs reflect the range of ASKs as a percentage of the 2019 actual ASKs over the forecast period, 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, considering a number of data points: (i) industry publications; (ii) forecast weighted average exposure in each primary market using gross domestic product (GDP); and (iii) internal analysis regarding the long-term changes in consumer preferences and the effects on demand from the increased costs to the Group of climate change. The calculation of the long- term growth rate utilises a Base Case and a Downside Case growth rate, which is then weighted on the same basis as the cash flows detailed above of 70 per cent to the Base Case and 30 per cent to the Downside Case. The terminal value cash flows and long-term growth rate incorporate the impacts of climate change insofar as they can be determined (note 4). The airlines’ network plans are reviewed annually as part of the three-year business plan preparation 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 derived from both market data and industry gearing levels derived from comparable companies. 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 Jet fuel price assumptions are derived from forward price curves in the fourth quarter of each year and sourced externally. The cash flow forecasts reflect these price increases after taking into consideration the level of fuel derivatives and their associated prices that the Group of future tax flows. has in place. As detailed above, the Group adjusts the final year of the three-year business plans to incorporate the medium-term impacts of climate change from the Group’s Flightpath Net Zero climate strategy. These adjustments include the following key assumptions: (i) a 10 per cent level of SAF consumption out of the overall fuel mix with an assumed price of €2,275 per metric tonne; (ii) a kerosene tax of €325 per metric tonne on all intra-EU flights; (iii) for costs of carbon, prices of €130, €130, €175 and €25 for EU ETS allowances, Swiss ETS allowances, UK ETS allowances and CORSIA allowances, respectively, per tonne of CO2 equivalents emitted; and (iv) the removal of all free ETS and CORSIA allowances. Summary of results At December 31, 2022 management reviewed the recoverable amount of each of the CGUs and concluded the recoverable amounts exceeded the carrying values. Reasonable possible changes in key assumptions, both individually and in combination, have been considered for each CGU, where applicable, which include reducing the operating margin by 2 percentage points in each year, ASKs by 5 percentage points in each year, long-term growth rates in the terminal value calculation to zero, increasing pre-tax discount rates by 2.5 percentage points, changing the weighting of the Base Case and the Downside Case to be 100 per cent weighted towards the Downside Case and increasing the fuel price (both jet fuel and SAF) by 45 per cent with no assumed cost recovery. Given the inherent uncertainty associated with the impact of climate change, these sensitivities represent a reasonably possible greater impact of climate change on the CGUs than that included in the impairment models. For the British Airways, Iberia, Vueling and Aer Lingus CGUs, while the recoverable amounts are estimated to exceed the carrying amounts by €15,432 million, €3,213 million, €1,606 million and €1,407 million, respectively, the recoverable amounts would be below the carrying amounts when applying reasonable possible changes, over the forecast period, in assumptions in each of the following scenarios: • British Airways: (i) if ASKs had been five per cent lower combined with a fuel price increase without cost recovery of 22 per cent; and (ii) if the fuel price had been 27 per cent higher without cost recovery; • Iberia: (i) if ASKs had been five per cent lower combined with a fuel price increase without cost recovery of 20 per cent; and (ii) if the fuel price had been 27 per cent higher without cost recovery; • Vueling: (i) if ASKs had been five per cent lower combined with a fuel price increase without cost recovery of 15 per cent; and (ii) if the fuel price had been 20 per cent higher without cost recovery; and • Aer Lingus: (i) if ASKs had been five per cent lower combined with a fuel price increase without cost recovery of 7 per cent; and (ii) if the fuel price had been 14 per cent higher without cost recovery. For the remainder of the reasonably possible changes in key assumptions applied to the British Airways, Iberia, Vueling and Aer Lingus CGUs and for all the reasonably possible changes in key assumptions applied to the IAG Loyalty CGU, no impairment arises. Vueling Aer Lingus IAG Loyalty The Group’s subsidiaries at December 31, 2022 are listed in the Group investments section. 18 Investments a Investments in subsidiaries 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. The total non-controlling interest at December 31, 2022 is €6 million (2021: €6 million). b Investments in associates and joint ventures 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 Additions Share of retained profits Dividends received Exchange movements 2022 148 (104) 89 5 2022 40 – 5 (2) – 43 2021 115 (85) 64 2 2021 29 9 2 (1) 1 40 At December 31, 2022 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, 2022 and December 31, 2021 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. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 225 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 19 Other equity investments Other equity investments include the following: € million Unlisted securities 2022 55 55 2021 31 31 The charge relating to Other equity investments was €3 million (2021: €nil). Investment in Air Europa Holdings On June 15, 2022, the Group entered into a financing arrangement with Globalia Corporación Empresarial, S,A, (‘Globalia’), whereby, the Group provided a €100 million seven-year unsecured loan, which was convertible for a period of two years from inception into a fixed number of the shares of Air Europa Holdings, S.L. (‘Air Europa Holdings’). The loan was accounted for at fair value through the Income statement and recorded as an Other non-current financial asset. In determining the fair value of the financing arrangement, the Group utilised the income approach, whereby, the financing arrangement was valued using observable market data by which to determine an interest rate that a market participant would require to provide a loan with the same tenor and amount. This interest rate was then used to discount back the existing contractual cash flows to derive the fair value. On August 16, 2022, the Group exercised its exchange option with Globalia and converted the Other non-current financial asset into an Other equity investment. Immediately prior to exercising the exchange option, the fair value of the Other non-current financial asset was €65 million, representing a decrease from inception of €35 million, which has been recorded within Net change in fair value of financial instruments in the Income statement (see note 9c). The Group determined the fair value of the investment in Air Europa Holdings using both the market approach and the income approach, whereby the Group used both observable market data and unobservable inputs. The fair value was determined on the stand-alone basis of Air Europa Holdings without consideration of potential synergies that could be obtained if the Group were able to obtain control over the operations of Air Europa Holdings. The results of these valuation approaches resulted in a fair value of €22 million, representing a difference of €43 million from the fair value of the Other non-current financial asset prior to exercising the option. This loss, which derives from the de- recognition of the loan to Globalia prior to the recognition of the investment in Air Europa Holdings, was recorded within Net change in fair value of financial instruments in the Income statement (see note 9c). At December 31, 2022, the fair value of the investment in Air Europa Holdings was €24 million, representing an increase of €2 million since August 16, 2022, which has been recorded within Other comprehensive income. 20 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 receivables Other current receivables Amounts falling due after one year Prepayments and accrued income Other non-trade receivables Other receivables due after one year Movements in the provision for expected credit loss were as follows: € million At beginning of year Provided during the year Released during the year Receivables written off during the year Exchange movements Trade receivables are generally non-interest-bearing and on 30 days terms (2021: 30 days). 2022 2021 1,444 (114) 1,330 870 356 1,226 337 25 362 2022 115 10 (1) (9) (1) 114 850 (115) 735 764 196 960 248 2 250 2021 125 8 (11) (10) 3 115 226 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 19 Other equity investments Other equity investments include the following: € million Unlisted securities 2022 55 55 2021 31 31 The charge relating to Other equity investments was €3 million (2021: €nil). Investment in Air Europa Holdings On June 15, 2022, the Group entered into a financing arrangement with Globalia Corporación Empresarial, S,A, (‘Globalia’), whereby, the Group provided a €100 million seven-year unsecured loan, which was convertible for a period of two years from inception into a fixed number of the shares of Air Europa Holdings, S.L. (‘Air Europa Holdings’). The loan was accounted for at fair value through the Income statement and recorded as an Other non-current financial asset. In determining the fair value of the financing arrangement, the Group utilised the income approach, whereby, the financing arrangement was valued using observable market data by which to determine an interest rate that a market participant would require to provide a loan with the same tenor and amount. This interest rate was then used to discount back the existing contractual cash flows to derive the fair value. Other equity investment. statement (see note 9c). On August 16, 2022, the Group exercised its exchange option with Globalia and converted the Other non-current financial asset into an Immediately prior to exercising the exchange option, the fair value of the Other non-current financial asset was €65 million, representing a decrease from inception of €35 million, which has been recorded within Net change in fair value of financial instruments in the Income The Group determined the fair value of the investment in Air Europa Holdings using both the market approach and the income approach, whereby the Group used both observable market data and unobservable inputs. The fair value was determined on the stand-alone basis of Air Europa Holdings without consideration of potential synergies that could be obtained if the Group were able to obtain control over the operations of Air Europa Holdings. The results of these valuation approaches resulted in a fair value of €22 million, representing a difference of €43 million from the fair value of the Other non-current financial asset prior to exercising the option. This loss, which derives from the de- recognition of the loan to Globalia prior to the recognition of the investment in Air Europa Holdings, was recorded within Net change in fair value of financial instruments in the Income statement (see note 9c). At December 31, 2022, the fair value of the investment in Air Europa Holdings was €24 million, representing an increase of €2 million since August 16, 2022, which has been recorded within Other comprehensive income. 20 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 receivables Other current receivables Amounts falling due after one year Prepayments and accrued income Other non-trade receivables Other receivables due after one year € million At beginning of year Provided during the year Released during the year Receivables written off during the year Exchange movements Movements in the provision for expected credit loss were as follows: Trade receivables are generally non-interest-bearing and on 30 days terms (2021: 30 days). 2022 2021 1,444 (114) 1,330 870 356 1,226 337 25 362 2022 115 10 (1) (9) (1) 114 850 (115) 735 764 196 960 248 2 250 2021 125 8 (11) (10) 3 115 The credit risk exposure on the Group's trade receivables is set out below: December 31, 2022 € million Trade receivables Expected credit loss rate Provision for expected credit loss December 31, 2021 € million Trade receivables Expected credit loss rate Provision for expected credit loss Current 719 0.3% 2 Current 498 0.2% 1 <30 days 509 30-180 days 91 180-365 days 25 > 365 days 100 0.1% – 1.1% 1 44.0% 100.0% 11 100 <30 days 132 30-180 days 94 180-365 days 10 > 365 days 116 0.1% – 1.1% 1 20.0% 95.7% 2 111 21 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 Current interest-bearing deposits maturing after three months Cash, cash equivalents and other interest-bearing deposits 2022 3,286 5,910 9,196 403 9,599 2021 2,569 5,323 7,892 51 7,943 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, 2022 the Group had no outstanding bank overdrafts (2021: €nil). Current interest-bearing deposits have maturities in excess of three months and typically within 12 months of the reporting date and earn interest based on the market rates available at the time the deposit was made. At December 31, 2022 Aer Lingus held €33 million of restricted cash (2021: €35 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, other loans and asset financed liabilities Lease liabilities Cash and cash equivalents Current interest-bearing deposits € million Bank, other loans and asset financed liabilities Lease liabilities Cash and cash equivalents Current interest-bearing deposits Balance at January 1, 2022 9,973 9,637 (7,892) (51) Cash flows 386 (1,455) (1,316) (351) 11,667 (2,736) Balance at January 1, 2021 5,655 10,024 (5,774) (143) 9,762 Cash flows 4,033 (1,481) (1,913) 91 730 Exchange movements 103 New leases and modifications – Other items (97) Balance at December 31, 2022 10,365 415 12 (1) 529 1,017 – – 5 – – 1,017 (92) 9,619 (9,196) (403) 10,385 Exchange movements 261 New leases and modifications – Other items 24 Balance at December 31, 2021 9,973 559 (205) 1 616 518 – – 518 17 – – 41 9,637 (7,892) (51) 11,667 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 227 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 22 Trade and other payables € million Trade creditors1 Other creditors Other taxation and social security Accruals and deferred income 2022 2,969 1,244 228 768 5,209 2021 2,068 898 176 570 3,712 1 Trade creditors includes €48 million (2021: €89 million) due to suppliers that have signed up to supply chain financing programmes offered by a number of partner financial institutions. Under these programmes either or both: (i) the suppliers can elect on an invoice-by-invoice basis to receive a discounted early payment from the partner financial institutions rather than being paid in line with the agreed payment terms; and/or (ii) the Group elects on an invoice-by- invoice basis for the partner financial institution to pay the supplier in line with the agreed payment terms and the Group enters into payment terms with the partner financial institution of up to 150 days with interest incurred at 2.5 per cent. The Group assesses the arrangement against indicators to assess if liabilities which suppliers have transferred to the partner financial institutions under the supplier financing programmes continue to meet the definition of trade creditors or should be classified as borrowings. The cash flows arising from such arrangements are reported within cash flows from operating activities or within cash flows from financing activities, in the Consolidated cash flow statement, depending on whether the associated liabilities meet the definition of trade creditors or as borrowings. At December 31, 2022 these liabilities met the criteria of Trade creditors and are excluded from the Net debt table in note 21a. 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 2022 34 33 53 2022 6,676 264 2021 34 32 78 2021 3,945 147 Information on invoices paid in a period shorter than the maximum period established in the late payment regulations – Spanish Group companies Total payments made (€ million) Percentage share of total payments to suppliers Number of invoices paid (thousand) Percentage share of total number of invoices paid 2022 5,111 77% 110 48% 2021 2,623 71% 63 48% 228 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 22 Trade and other payables € million Trade creditors1 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 companies Total payments made (€ million) Percentage share of total payments to suppliers Number of invoices paid (thousand) Percentage share of total number of invoices paid 1 Trade creditors includes €48 million (2021: €89 million) due to suppliers that have signed up to supply chain financing programmes offered by a number of partner financial institutions. Under these programmes either or both: (i) the suppliers can elect on an invoice-by-invoice basis to receive a discounted early payment from the partner financial institutions rather than being paid in line with the agreed payment terms; and/or (ii) the Group elects on an invoice-by- invoice basis for the partner financial institution to pay the supplier in line with the agreed payment terms and the Group enters into payment terms with the partner financial institution of up to 150 days with interest incurred at 2.5 per cent. The Group assesses the arrangement against indicators to assess if liabilities which suppliers have transferred to the partner financial institutions under the supplier financing programmes continue to meet the definition of trade creditors or should be classified as borrowings. The cash flows arising from such arrangements are reported within cash flows from operating activities or within cash flows from financing activities, in the Consolidated cash flow statement, depending on whether the associated liabilities meet the definition of trade creditors or as borrowings. At December 31, 2022 these liabilities met the criteria of Trade creditors and are excluded from the Net debt table in note 21a. Information on invoices paid in a period shorter than the maximum period established in the late payment regulations – Spanish Group 2022 2,969 1,244 228 768 5,209 2021 2,068 898 176 570 3,712 2022 34 33 53 2022 6,676 264 2022 5,111 77% 110 48% 2021 34 32 78 2021 3,945 147 2021 2,623 71% 63 48% 23 Deferred revenue on ticket sales € million Balance at January 1, 2022 Cash received from customers1 Revenue recognised in the Income statement2, 3 Changes in estimates Financing charge recognised in the Income statement Loyalty points issued to customers4 Exchange movements Balance at December 31, 20225, 6 Analysis: Current Non-current € million Balance at January 1, 2021 Cash received from customers1 Revenue recognised in the Income statement2, 3 Financing charge recognised in the Income statement Loyalty points issued to customers4 Exchange movements Balance at December 31, 20215, 6 Analysis: Current Non-current Customer loyalty programmes 2,820 – (780) (21) 21 662 (72) Sales in advance of carriage 3,732 21,000 (19,708) – – 82 (92) Total 6,552 21,000 (20,488) (21) 21 744 (164) 2,630 5,014 7,644 2,304 326 2,630 5,014 – 5,014 7,318 326 7,644 Customer loyalty programmes 2,725 – (524) 37 407 175 Sales in advance of carriage 2,405 7,689 (6,518) – 40 116 Total 5,130 7,689 (7,042) 37 447 291 2,820 3,732 6,552 2,429 391 2,820 3,732 – 3,732 6,161 391 6,552 1 Cash received from customers is net of refunds. 2 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. 3 Included within revenue recognised in the Income statement during 2022 is an amount of €2,183 million previously held as deferred revenue at January 1, 2022 (recognised during 2021 and previously held as deferred revenue at January 1, 2021: €780 million). 4 Included within loyalty points issued to customers at December 31, 2022 is an amount of €82 million (December 31, 2021: €40 million) classified within Sales in advance of carriage representing the cash component of the consideration paid by customers, where such consideration comprises both cash and the redemption of Avios. 5 Included within Deferred revenue on ticket sales at December 31, 2022 is an amount of €911 million (December 31, 2021: €1,400 million) relating to unredeemed vouchers (including associated taxes). 6 In the year to December 31, 2022, the Group recognised €266 million (2021: €154 million) within Other revenue related to performance obligations associated with brand and marketing services recognised on the issuance of Avios for both air and non-air partners. The unsatisfied performance obligation under the Group’s customer loyalty programmes that is classified as non-current was €326 million at December 31, 2022. Of this amount, €317 million is expected to be recognised as revenue in 1 to 5 years from the reporting date and €9 million thereafter. Deferred revenue relating to customer loyalty programmes consists primarily of revenue allocated to performance obligations associated with Avios. Avios 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. While Avios do not have an expiry date and can be redeemed at any time in the future, a customer’s membership account is closed if there is a period of 36 months of inactivity in terms of both issuances and redemptions. 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, however, with the significant disruption caused by the COVID-19 pandemic during 2020 and 2021, the Group extended the expiry period up to 24 months after the planned travel date, depending on the operating company. During the course of 2022 with the disruption caused by the COVID-19 pandemic significantly reduced, flexible fare tickets now typically expire within 12 months after the planned travel date. In addition, the significant disruption caused by the COVID-19 pandemic led to a number of flight cancellations during both 2020 and 2021, which entitled the customer to either a refund or the issuance of a voucher for future redemption. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 229 2022 147 53 200 2021 121 87 208 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 24 Other long-term liabilities € million Non-current trade creditors Accruals and deferred income 25 Long-term borrowings a Total borrowings € million Bank and other loans Asset financed liabilities Lease liabilities Other financing liabilities1 Current 822 255 1,766 – 2022 Non-current 5,724 3,564 7,853 – Total 6,546 3,819 9,619 – 2021 Current Non-current 6,724 761 171 1,521 73 2,244 8,116 – Total 7,485 2,415 9,637 73 19,610 Interest-bearing long-term borrowings 2,843 17,141 19,984 2,526 17,084 1 Other financing liabilities recognised in 2021 included sale and repurchase agreements with regard to emission allowances and represent the amount the Group repurchased during 2022. Long-term borrowings of the Group amounting to €3,962 million (December 31, 2021: €2,434 million) are secured on owned fleet assets with a net book value of €3,931 million (December 31, 2021: €2,938 million). Asset financed liabilities are all secured on the associated aircraft or other property, plant and equipment. b Bank and other loans € million Floating rate pound sterling term loan guaranteed by UK Export Finance (UKEF)1 Floating rate Instituto de Crédito Oficial (ICO) guaranteed loans2 €700 million fixed rate 3.75 per cent unsecured bond 20293 €825 million fixed rate 1.125 per cent convertible bond 20284 €500 million fixed rate 2.75 per cent unsecured bond 20253 €500 million fixed rate 0.50 per cent bond 20235 €500 million fixed rate 1.50 per cent bond 20275 Floating rate euro mortgage loans secured on aircraft6 Fixed rate unsecured US dollar mortgage loan7 Fixed rate unsecured bonds8 Ireland Strategic Investment Fund (ISIF) facility9 Fixed rate unsecured euro loans with the Spanish State (Department of Industry)10 €500 million fixed rate 0.625 per cent convertible bond 202211 Fixed rate Chinese yuan mortgage loans secured on aircraft12 Less: current instalments due on bank and other loans 2022 2,315 1,070 717 605 509 501 499 143 71 56 50 10 – – 6,546 (822) 5,724 2021 2,358 1,095 710 757 508 499 498 171 85 138 149 15 491 11 7,485 (761) 6,724 1 On February 22, 2021, British Airways entered into a floating rate five-year term loan Export Development Guarantee Facility of €2.3 billion (£2.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. On November 1, 2021, British Airways entered into a further 5 year term loan Export Development Guarantee Facility of €1.1 billion (£1.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. The further facility had not been drawn as at December 31, 2022. The loan contains a number of non-financial covenants to protect the position of the banks involved, including restrictions on the upstreaming of cash to the rest of the IAG companies. 2 On April 30, 2020, Iberia and Vueling entered into floating rate syndicated financing agreements of €750 million and €260 million respectively. The loans are repayable from 2023 to 2026. The ICO in Spain guarantees 70 per cent of the value of loans. The loans contain a number of non-financial covenants to protect the position of the banks involved, including restrictions on the upstreaming of cash to the rest of the IAG companies. 3 On March 25, 2021, the Group issued two tranches of senior unsecured bonds for an aggregate principal amount of €1.2 billion, €500 million due March 25, 2025 and €700 million due March 25, 2029. The bonds bear a fixed rate of interest of 2.75 per cent and 3.75 per cent per annum, payable in arrears, respectively. The bonds were issued at 100 per cent of their principal amount, respectively, and, unless previously redeemed or purchased and cancelled, will be redeemed at 100 per cent of their principal amount on their respective maturity dates. 4 A senior unsecured bond convertible into ordinary shares of IAG was issued by the Group on May 11, 2021; €825 million fixed rate 1.125 per cent raising net proceeds of €818 million and due in 2028. The Group holds an option to redeem the convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The bond contains dividend protection and a total of 244,850,715 options at inception and at December 31, 2022 and 2021 to convert into ordinary shares of IAG. The Group also holds an option to redeem the convertible bond, in full or in part, in cash in the event that bondholders exercise their right to convert the bond into ordinary shares of IAG. See further details below. 5 In July 2019, the Group issued two tranches of senior unsecured bonds for an aggregate principal amount of €1 billion, €500 million due July 4, 2023 and €500 million due July 4, 2027. The bonds bear a fixed rate of interest of 0.5 per cent and 1.5 per cent per annum annually payable in arrears, respectively. The bonds were issued at 99.417 per cent and 98.803 per cent of their principal amount, respectively, and, unless previously redeemed or purchased and cancelled, will be redeemed at 100 per cent of their principal amount on their respective maturity dates. 6 Floating rate euro mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 2.1 and 3.6 per cent. The loans are repayable between 2024 and 2027. 230 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 24 Other long-term liabilities € million Non-current trade creditors Accruals and deferred income 25 Long-term borrowings a Total borrowings € million Bank and other loans Asset financed liabilities Lease liabilities Other financing liabilities1 2022 Current Non-current 5,724 3,564 7,853 – Total 6,546 3,819 9,619 – 2021 Current Non-current 761 171 1,521 73 6,724 2,244 8,116 – 822 255 1,766 – 2,843 Interest-bearing long-term borrowings 17,141 19,984 2,526 17,084 1 Other financing liabilities recognised in 2021 included sale and repurchase agreements with regard to emission allowances and represent the amount the Group repurchased during 2022. Long-term borrowings of the Group amounting to €3,962 million (December 31, 2021: €2,434 million) are secured on owned fleet assets with a net book value of €3,931 million (December 31, 2021: €2,938 million). Asset financed liabilities are all secured on the associated aircraft or other property, plant and equipment. b Bank and other loans € million Floating rate pound sterling term loan guaranteed by UK Export Finance (UKEF)1 Floating rate Instituto de Crédito Oficial (ICO) guaranteed loans2 €700 million fixed rate 3.75 per cent unsecured bond 20293 €825 million fixed rate 1.125 per cent convertible bond 20284 €500 million fixed rate 2.75 per cent unsecured bond 20253 €500 million fixed rate 0.50 per cent bond 20235 €500 million fixed rate 1.50 per cent bond 20275 Floating rate euro mortgage loans secured on aircraft6 Fixed rate unsecured US dollar mortgage loan7 Fixed rate unsecured bonds8 Ireland Strategic Investment Fund (ISIF) facility9 Fixed rate unsecured euro loans with the Spanish State (Department of Industry)10 €500 million fixed rate 0.625 per cent convertible bond 202211 Fixed rate Chinese yuan mortgage loans secured on aircraft12 Less: current instalments due on bank and other loans 2022 147 53 200 2021 121 87 208 Total 7,485 2,415 9,637 73 19,610 2021 2,358 1,095 710 757 508 499 498 171 85 138 149 15 491 11 7,485 (761) 6,724 2022 2,315 1,070 717 605 509 501 499 143 71 56 50 10 – – 6,546 (822) 5,724 1 On February 22, 2021, British Airways entered into a floating rate five-year term loan Export Development Guarantee Facility of €2.3 billion (£2.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. On November 1, 2021, British Airways entered into a further 5 year term loan Export Development Guarantee Facility of €1.1 billion (£1.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. The further facility had not been drawn as at December 31, 2022. The loan contains a number of non-financial covenants to protect the position of the banks involved, including restrictions on the upstreaming of cash to the rest of the IAG companies. 2 On April 30, 2020, Iberia and Vueling entered into floating rate syndicated financing agreements of €750 million and €260 million respectively. The loans are repayable from 2023 to 2026. The ICO in Spain guarantees 70 per cent of the value of loans. The loans contain a number of non-financial covenants to protect the position of the banks involved, including restrictions on the upstreaming of cash to the rest of the IAG companies. 3 On March 25, 2021, the Group issued two tranches of senior unsecured bonds for an aggregate principal amount of €1.2 billion, €500 million due March 25, 2025 and €700 million due March 25, 2029. The bonds bear a fixed rate of interest of 2.75 per cent and 3.75 per cent per annum, payable in arrears, respectively. The bonds were issued at 100 per cent of their principal amount, respectively, and, unless previously redeemed or purchased and cancelled, will be redeemed at 100 per cent of their principal amount on their respective maturity dates. 4 A senior unsecured bond convertible into ordinary shares of IAG was issued by the Group on May 11, 2021; €825 million fixed rate 1.125 per cent raising net proceeds of €818 million and due in 2028. The Group holds an option to redeem the convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The bond contains dividend protection and a total of 244,850,715 options at inception and at December 31, 2022 and 2021 to convert into ordinary shares of IAG. The Group also holds an option to redeem the convertible bond, in full or in part, in cash in the event that bondholders exercise their right to convert the bond into ordinary shares of IAG. See further details below. 5 In July 2019, the Group issued two tranches of senior unsecured bonds for an aggregate principal amount of €1 billion, €500 million due July 4, 2023 and €500 million due July 4, 2027. The bonds bear a fixed rate of interest of 0.5 per cent and 1.5 per cent per annum annually payable in arrears, respectively. The bonds were issued at 99.417 per cent and 98.803 per cent of their principal amount, respectively, and, unless previously redeemed or purchased and cancelled, will be redeemed at 100 per cent of their principal amount on their respective maturity dates. 6 Floating rate euro mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 2.1 and 3.6 per cent. The loans are repayable between 2024 and 2027. 7 Fixed rate unsecured US dollar mortgage loan bearing interest between 1.38 to 2.86 per cent. The loan is repayable between 2023 and 2026. 8 Total of €200 million fixed rate unsecured bonds between 3.75 to 4.93 per cent coupon repayable between 2023 and 2027. 9 On December 23, 2020, Aer Lingus entered into a floating rate financing agreement with the Ireland Strategic Investment Fund (ISIF) for €75 million. On March 27, 2021, Aer Lingus entered into a further floating rate financing agreement with the ISIF for an additional €75 million. On March 4, 2022, Aer Lingus entered into a financing arrangement with ISIF, which subsequently extinguished the existing €150 million of facilities and replaced them with a €350 million facility that matures in March 2025. On December 13, 2022, Aer Lingus early repaid €100 million of the ISIF facility, with the €100 million being available to draw again over the tenor of the facility. The facility is secured on specific landing rights. At December 31, 2022, €300 million of this facility remained undrawn. 10 Fixed rate unsecured euro loans with the Spanish State (Department of Industry) bear nil interest and are repayable between 2023 and 2028. 11 Senior unsecured bond convertible into ordinary shares of IAG was issued by the Group in November 2015; €500 million fixed rate 0.625 per cent raising net proceeds of €494 million and due in 2022. The Group held an option to redeem the convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The Group redeemed the bond at maturity in November 2022 with no conversion into ordinary shares. 12 Fixed rate Chinese yuan mortgage loans, secured on specific aircraft assets of the Group were repaid in the fourth quarter of 2022. In addition, on March 23, 2021, the Group entered into a three-year US dollar secured Revolving Credit Facility accessible by British Airways, Iberia and Aer Lingus. On August 23, 2022, the Group extended the term of the Revolving Credit Facility by an additional 12 months through to March 2025. The amount available under the facility is $1.755 billion. As at December 31, 2022 no amounts had been drawn under the facility (2021: nil). While the Group does not forecast drawing down on the Revolving Credit Facility, should it do so, the resultant debt would be secured against specific landing rights and aircraft in the respective operating companies. Details of the 2028 convertible bond The €825 million convertible bond issued in 2021 provides bondholders with dividend protection and includes a total of 244,850,715 options at inception and at December 31, 2022 to convert into ordinary shares of IAG. The Group holds an option to redeem the convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The Group also holds an option to redeem the convertible bond, in full or in part, in cash in the event that bondholders exercise their right to convert the bond into ordinary shares of IAG. The convertible bond is recorded at its fair value, which at December 31, 2022 was €605 million (2021: €756 million), representing a decrease of €151 million since January 1, 2022. Of this decrease, the charge recorded in Other comprehensive income arising from credit risk of the convertible bonds was €8 million and a credit recorded within Finance costs in the Income statement attributable to changes in market conditions of €159 million. Transactions with unconsolidated entities On April 12, 2022, the Group entered into an asset-financing structure, under which five aircraft were financed. These transactions mature between 2032 and 2036. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the Iberia Pass Through Certificates, Series 2022-1, commonly referred to as Enhanced Equipment Trust Certificates (EETCs). In doing so the Group recognised €680 million of Asset financed liabilities. On October 21, 2022, the Group entered into an asset-financing structure, under which four aircraft were financed. These transactions mature between 2032 and 2036. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the British Airways Pass Through Certificates, Series 2022-1. In doing so the Group recognised €159 million of Asset financed liabilities. In July 2021, the Group entered into an asset-financing structure, under which seven aircraft were financed. These transactions mature between 2031 and 2035. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the British Airways Pass Through Certificates, Series 2021-1. In doing so the Group recognised €204 million of Asset financed liabilities. In the fourth quarter of 2020, the Group entered into an asset-financing structure, under which nine aircraft were financed. These transactions mature between 2028 and 2032. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the British Airways Pass Through Certificates, Series 2020-1. In doing so the Group recognised €472 million of Asset financed liabilities. In the third quarter of 2019, the Group entered into an asset-financing structure, under which eight aircraft were financed, with the transactions maturing between 2029 and 2034. This arrangement was transacted through an unconsolidated structured entity, which in turn issued the British Airways Pass Through Certificates, Series 2019-1. In doing so the Group recognised €725 million of Asset financed liabilities. As at December 31, 2022, Asset financed liabilities include cumulative amounts of €2,983 million (2021: €1,489 million) and the associated assets recorded within Property, plant and equipment include cumulative amounts of €3,400 million (2021: €3,029 million) associated with transactions with unconsolidated structured entities having issued EETCs. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 231 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 25 Long-term borrowings continued c Reconciliation of movements of liabilities to cash flows arising from financing activities € million Balance at January 1, 2022 Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Settlement of derivative financial instruments1 Total changes from financing cash flows Interest paid Interest expense New leases and lease modifications Fair value movements Other non-cash movements Exchange movements Balance at December 31, 2022 € million Balance at January 1, 2021 Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Settlement of derivative financial instruments1 Total changes from financing cash flows Interest paid Interest expense New leases and lease modifications Fair value movements Other non-cash movements Exchange movements Balance at December 31, 2021 Bank, other loans and asset financed liabilities 9,973 1,436 (1,050) – – 386 (334) 377 – (151) 11 103 Lease liabilities 9,637 – – (1,455) – (1,455) (422) 464 1,017 – (37) 415 10,365 9,619 Bank, other loans and asset financed liabilities 5,655 4,817 (784) – – 4,033 (212) 307 – (69) (2) 261 9,973 Lease liabilities 10,024 – – (1,481) – (1,481) (367) 393 518 – (9) 559 9,637 Derivatives to mitigate volatility in financial liabilities (136) – – – 1,029 1,029 – – – (990) – 26 (71) Derivatives to mitigate volatility in financial liabilities 429 – – – (268) (268) (26) – – (286) 15 – Total 19,474 1,436 (1,050) (1,455) 1,029 (40) (756) 841 1,017 (1,141) (26) 544 19,913 Total 16,108 4,817 (784) (1,481) (268) 2,284 (605) 700 518 (355) 4 820 (136) 19,474 1 Gain of €1,036 million (2021: loss of €268 million) relating to derivatives not designated in hedge relationships and reported within Net cash flows from financing activities in the Cash flow statement, and a loss of €7 million (2021: €nil) relating to interest rate derivatives designated in hedge relationships and reported within Net cash flows from operating activities. 232 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 25 Long-term borrowings continued c Reconciliation of movements of liabilities to cash flows arising from financing activities d Total loans, asset financed liabilities, other financing liabilities and lease liabilities Million Loans Bank: US dollar Euro Pound sterling Chinese yuan Fixed rate bonds: Euro Asset financed liabilities US dollar Euro Japanese yen Other financing liabilities Euro Lease liabilities US dollar Euro Japanese yen Pound sterling Total interest-bearing borrowings € million Balance at January 1, 2022 Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Settlement of derivative financial instruments1 Total changes from financing cash flows Interest paid Interest expense New leases and lease modifications Fair value movements Other non-cash movements Exchange movements Balance at December 31, 2022 € million Balance at January 1, 2021 Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Settlement of derivative financial instruments1 Total changes from financing cash flows Interest paid Interest expense New leases and lease modifications Fair value movements Other non-cash movements Exchange movements Balance at December 31, 2021 Bank, other loans and asset financed liabilities 9,973 1,436 (1,050) – – 386 (334) 377 – (151) 11 103 5,655 4,817 (784) – – 4,033 (212) 307 – (69) (2) 261 9,973 Derivatives to mitigate volatility in financial liabilities (136) – – – – – – – 1,029 1,029 (990) 26 (71) – – – (268) (268) (26) (286) – – 15 – Lease liabilities 9,637 – – – (1,455) (1,455) (422) 464 1,017 – (37) 415 Lease liabilities 10,024 – – – (1,481) (1,481) (367) 393 518 – (9) 559 9,637 10,365 9,619 Bank, other loans and asset financed liabilities Derivatives to mitigate volatility in financial liabilities 429 Total 19,474 1,436 (1,050) (1,455) 1,029 (40) (756) 841 1,017 (1,141) (26) 544 19,913 Total 16,108 4,817 (784) (1,481) (268) 2,284 (605) 700 518 (355) 4 820 1 Gain of €1,036 million (2021: loss of €268 million) relating to derivatives not designated in hedge relationships and reported within Net cash flows from financing activities in the Cash flow statement, and a loss of €7 million (2021: €nil) relating to interest rate derivatives designated in hedge relationships and reported within Net cash flows from operating activities. (136) 19,474 2022 2021 $75 €1,273 £2,026 - €3,659 $98 €1,430 £2,003 CNY 78 €3,883 €2,887 €2,887 €3,602 €3,602 $3,285 €542 ¥25,748 €3,819 $2,192 €408 ¥8,226 €2,415 - - €73 €73 $7,621 €1,239 $7,709 €1,547 ¥71,994 ¥75,450 £620 €9,619 £569 €9,637 €19,984 €19,610 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 233 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 26 Provisions € million Net book value January 1, 20221 Provisions recorded during the year Reclassifications Utilised during the year Release of unused amounts Unwinding of discount Remeasurements Exchange differences Net book value December 31, 2022 2,400 Analysis: Current Non-current 508 1,892 2,400 Restoration and handback provisions 1,832 Restructuring provisions 274 Employee leaving indemnities and other employee related provisions 720 Legal claims and contractual disputes provisions 90 ETS provisions1 9 Other provisions1 74 596 (15) (167) (42) 38 27 131 14 – (81) (12) – – (1) 194 112 82 194 74 – (32) (24) 5 (69) (1) 673 70 603 673 47 – (2) (45) – – (1) 89 66 23 89 134 – (10) – – – (1) 132 132 – 132 Total 2,999 896 (15) (323) (137) 43 (42) 127 31 – (31) (14) – – – 60 3,548 8 52 60 896 2,652 3,548 1 During 2022 the Group has separated the ETS provision from Other provisions. This change resulted in an amount of €9 million recorded within ETS provisions at January 1, 2022. There was no net change in total provisions. 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 lease. The provision also includes an amount relating to leased land and buildings where restoration costs are contractually required at the end of the lease. Such costs are capitalised within ROU assets. The provision is long-term in nature, typically covering the leased asset term, which for aircraft is up to 12 years. Included within the release of unused restoration and handback provisions is an amount of €7 million relating to the reversal of contractual lease provisions, which represent the estimation of the cost to fulfil the handback conditions associated with the leased aircraft that had been permanently stood down and impaired during the year to December 31, 2020, which have subsequently been stood back up with a resultant impairment reversal during the year to December 31, 2022. The provisions are determined by discounting the future cash flows using pre-tax risk free rates specific to the tenor of the provision and the currency in which it arises. The unwinding of the discounting of the provisions is recorded as a finance cost in the Income statement (refer to note 9a). Remeasurements arising from changes in estimates relating to the effects of both discounting and inflation are recorded in the Income statement to the extent they relate to avoidable provisions or recorded as an adjustment to the right of use asset (see note 14) for those unavoidable provisions. Where amounts are finalised and the uncertainty relating to these provisions removed, the associated liability is reclassified to either current or non-current Other creditors, dependent on the expecting timing of settlement. Restructuring provisions The restructuring provision includes provisions for voluntary redundancies including the collective redundancy programme for Iberia's Transformation Plan implemented prior to 2022, 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 3.2 per cent. The payments related to this provision will continue over the next 7 years. At December 31, 2022, €185 million of this provision related to collective redundancy programmes (2021: €270 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 (both pilots and cabin crew) who the Group expects to still be in employment by the age of 60, at which point the individuals will have the option of continuing full time employment, being placed on reserve and retaining their employment relationship until reaching the statutory retirement age (referred to as ‘active’), or alternatively taking early retirement (referred to as ‘inactive’). The Group is required to remunerate these employees until they reach the statutory retirement age. In determining the provision to be recognised for the proportion of employees that will elect to be inactive, the Group estimates a number of financial assumptions, including, but not limited to: (i) medium to long-term salary growth and inflation; (ii) the discount rate to apply; (iii) the rate of public social security growth; (iv) mortality rates; and (vi) staff turnover. 234 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 26 Provisions € million Net book value January 1, 20221 1,832 274 720 Restoration and handback provisions Restructuring provisions indemnities Legal claims Employee leaving and other employee related provisions and contractual disputes provisions ETS Other provisions1 provisions1 Provisions recorded during the year Reclassifications Utilised during the year Release of unused amounts Unwinding of discount Remeasurements Exchange differences Analysis: Current Non-current 596 (15) (167) (42) 38 27 131 508 1,892 2,400 14 – (81) (12) – – (1) 194 112 82 194 74 – (32) (24) 5 (69) (1) 673 70 603 673 90 47 – (2) (45) – – (1) 89 66 23 89 9 134 (10) – – – – (1) 132 132 – 132 74 31 – (31) (14) – – – 8 52 60 Total 2,999 896 (15) (323) (137) 43 (42) 127 896 2,652 3,548 Net book value December 31, 2022 2,400 60 3,548 1 During 2022 the Group has separated the ETS provision from Other provisions. This change resulted in an amount of €9 million recorded within ETS provisions at January 1, 2022. There was no net change in total provisions. 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 lease. The provision also includes an amount relating to leased land and buildings where restoration costs are contractually required at the end of the lease. Such costs are capitalised within ROU assets. The provision is long-term in nature, typically covering the leased asset term, which for aircraft is up to 12 years. Included within the release of unused restoration and handback provisions is an amount of €7 million relating to the reversal of contractual lease provisions, which represent the estimation of the cost to fulfil the handback conditions associated with the leased aircraft that had been permanently stood down and impaired during the year to December 31, 2020, which have subsequently been stood back up with a resultant impairment reversal during the year to December 31, 2022. The provisions are determined by discounting the future cash flows using pre-tax risk free rates specific to the tenor of the provision and the currency in which it arises. The unwinding of the discounting of the provisions is recorded as a finance cost in the Income statement Remeasurements arising from changes in estimates relating to the effects of both discounting and inflation are recorded in the Income statement to the extent they relate to avoidable provisions or recorded as an adjustment to the right of use asset (see note 14) for those Where amounts are finalised and the uncertainty relating to these provisions removed, the associated liability is reclassified to either current or non-current Other creditors, dependent on the expecting timing of settlement. (refer to note 9a). unavoidable provisions. Restructuring provisions The restructuring provision includes provisions for voluntary redundancies including the collective redundancy programme for Iberia's Transformation Plan implemented prior to 2022, 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 3.2 per cent. The payments related to this provision will continue over the next 7 years. At December 31, 2022, €185 million of this provision related to collective redundancy programmes (2021: €270 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 (both pilots and cabin crew) who the Group expects to still be in employment by the age of 60, at which point the individuals will have the option of continuing full time employment, being placed on reserve and retaining their employment relationship until reaching the statutory retirement age (referred to as ‘active’), or alternatively taking early retirement (referred to as ‘inactive’). The Group is required to remunerate these employees until they reach the statutory retirement age. In determining the provision to be recognised for the proportion of employees that will elect to be inactive, the Group estimates a number of financial assumptions, including, but not limited to: (i) medium to long-term salary growth and inflation; (ii) the discount rate to apply; (iii) the rate of public social security growth; (iv) mortality rates; and (vi) staff turnover. The provision was re-assessed at December 31, 2022 with the use of independent actuaries using the projected unit credit method, based on a discount rate consistent with the iBoxx index of 3.72 per cent for active employees and 3.50 per cent for inactive employees (2021: iBoxx index of 0.91 per cent and 0.00 per cent, respectively), the PERM/F-2000P mortality tables, and assuming contractual salary increases of up to 6.1 per cent in 2023 and 2.0 per cent in 2024 and then 2.0 per cent per annum thereafter derived from increases in the Consumer Price Index (CPI). At December 31, 2022, there were a total of 4,827 flight crew (December 31, 2021: 4,533) eligible for making such elections when they reach the age of 60. At December 31, 2022, there were 426 employees having reached the age of 60 who had elected to become inactive (December 31, 2021: 333). In addition, at December 31, 2022 the average length of employment of the eligible flight crew was 18 years (December 31, 2021: 20 years). This is mainly a long-term provision. Remeasurements in the valuation of this provision are recorded in Other comprehensive income. The amount relating to this provision was €611 million at December 31, 2022 (2021: €644 million). Legal claims and contractual disputes provisions Legal claims and contractual disputes provisions include: • amounts for multi-party claims from groups of employees on a number of matters related to their employment, including claims for additional holiday pay and for age discrimination; • amounts related to ongoing contractual disputes arising from the Group’s operations; 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 settle the remaining claims and fines is subject to uncertainty. ETS provisions ETS provisions relate to the Emissions Trading Scheme for CO2 equivalent emitted on flights within the EU, Switzerland and the United Kingdom and due to be settled in the year subsequent to the reporting date. See note 4 for further information. 27 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), credit risk and liquidity risk. The principal impacts of these on the financial statements are discussed below: a Fuel price risk The Group is exposed to fuel price risk. In order to mitigate such risk, under the Group’s fuel price risk management strategy a variety of over the counter derivative instruments are entered into. The Group strategy is to hedge a proportion of fuel consumption up to two years within the approved hedging profile. The following table demonstrates the sensitivity of the Group’s principal foreign exchange exposure to a reasonable possible change in the fuel price, based on current market volatility, with all other variables held constant on the result before tax and equity1. The sensitivity analysis has been performed on fuel derivatives (both those designated in hedge relationships and those not designated in hedge relationships) at the reporting date only and is not reflective of the impact had the sensitised rates been applied through the duration of the years to December 31, 2022 and 2021. Increase/(decrease) in fuel price per cent 45 (45) 2022 Effect on result before tax € million – – Effect on equity € million 1,402 (1,200) Increase/(decrease) in fuel price per cent 30 (30) 2021 Effect on result before tax € million – – Effect on equity € million 834 (520) 1 The sensitivity analysis on equity excludes the sensitivity amounts recognised in the result before tax. During 2022, following a substantial recovery in the global price of crude oil and jet fuel, which continues to be impacted by geopolitical events in Ukraine, the fair value of such net asset derivative instruments was €87 million at December 31, 2022, representing a decrease of €201 million since January 1, 2022. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 235 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 27 Financial risk management objectives and policies continued b Foreign currency risk The Group is exposed to foreign currency risk on revenue, purchases and borrowings that are denominated in a currency other than the functional currency of the Group (the euro). The currencies in which these transactions are denominated are primarily US dollar and pound sterling. The Group has a number of strategies to hedge foreign currency risk including hedging a proportion of its foreign currency sales and purchases for up to three years. The following table demonstrates the sensitivity of the Group’s principal foreign exchange exposure to a reasonable possible change in the US dollar, pound sterling and Japanese yen exchange rates, based on current market volatility, with all other variables held constant on the result before tax and equity1. The sensitivity analysis has been performed on interest-bearing liabilities, lease liabilities and derivatives (both those designated in hedge relationships and those not designated in hedge relationships) denominated in foreign currencies at the reporting date only and is not reflective of the impact had the sensitised rates been applied through the duration of the years to December 31, 2022 and 2021. Strengthening/ (weakening) in US dollar rate per cent 20 Effect on result before tax € million 904 Effect on equity € million 1,299 Strengthening/ (weakening) in pound sterling rate per cent 20 Effect on result before tax € million (20) Strengthening/ (weakening) in Japanese yen rate per cent 20 Effect on result before tax € million (58) Effect on equity € million 241 (20) (922) (1,161) (20) 18 (241) 10 (10) 255 (260) 523 (481) 10 (10) (10) 10 134 (134) (20) 10 (10) 58 (17) 17 Effect on equity € million (70) 70 (41) 41 2022 2021 1 The sensitivity analysis on equity, excludes the sensitivity amounts recognised in the result before tax. At December 31, 2022, the fair value of foreign currency net asset derivative instruments was €108 million, representing a decrease of €77 million since January 1, 2022. These comprise both derivatives designated in hedge relationships and those derivatives that are not designated into a hedge relationship at inception. Those derivatives not designated in a hedge relationship on inception have their mark-to- market movements recorded directly in the Income statement and recognised within Net currency retranslation (charges)/credits. c Interest rate risk The Group is exposed to changes in interest rates on debt and on cash deposits. In order to mitigate the interest rate risk, the Group’s policies allow a variety of over the counter derivative instruments to be entered into. The following table demonstrates the sensitivity of the Group’s interest rate exposure to a reasonable possible change in the US dollar, euro and sterling interest rates, based on expectations regarding forward rate movements, on the result before tax and equity1. The sensitivity analysis has been performed on interest rate derivatives (both those designated in hedge relationships and those not designated in hedge relationships) at the reporting date only and is not reflective of the impact had the sensitised rates been applied through the duration of the years to December 31, 2022 and 2021. Strengthening/ (weakening) in US interest rate Basis points 150 Effect on result before tax € million – Strengthening/ (weakening) in euro interest rate Basis points 150 Effect on result before tax € million 5 Effect on equity € million 6 (150) 50 (50) – – – (7) – – (150) 50 (50) (4) 3 (3) Strengthening/ (weakening) in sterling interest rate Basis points 150 Effect on result before tax € million (35) Effect on equity € million – (150) 50 (50) 35 (2) 2 – – – Effect on equity € million 17 (17) 10 (9) 2022 2021 1 The sensitivity analysis on equity excludes the sensitivity amounts recognised in the result before tax. For details regarding the Group’s management of interest rate benchmark reform, refer to note 27i. d Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Group has policies and procedures to monitor the risk by assigning limits to each counterparty by underlying exposure and by operating company and by only entering into transactions with counterparties with a very low credit risk. At each period end, the Group assesses the effect of counterparties’ and the Group’s own credit risk on the fair value of derivatives and any ineffectiveness arising is immediately recognised in the Income statement within Other non-operating expenses. 236 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 27 Financial risk management objectives and policies continued e Counterparty risk b Foreign currency risk The Group is exposed to foreign currency risk on revenue, purchases and borrowings that are denominated in a currency other than the functional currency of the Group (the euro). The currencies in which these transactions are denominated are primarily US dollar and pound sterling. The Group has a number of strategies to hedge foreign currency risk including hedging a proportion of its foreign currency sales and purchases for up to three years. The following table demonstrates the sensitivity of the Group’s principal foreign exchange exposure to a reasonable possible change in the US dollar, pound sterling and Japanese yen exchange rates, based on current market volatility, with all other variables held constant on the result before tax and equity1. The sensitivity analysis has been performed on interest-bearing liabilities, lease liabilities and derivatives (both those designated in hedge relationships and those not designated in hedge relationships) denominated in foreign currencies at the reporting date only and is not reflective of the impact had the sensitised rates been applied through the duration of the years to December 31, 2022 and 2021. Strengthening/ (weakening) in Effect on result Effect on pound result Effect on Strengthening/ (weakening) in Effect on Strengthening/ (weakening) in Japanese yen Effect on result Effect on US dollar rate before tax equity sterling rate before tax per cent € million € million per cent € million equity € million rate before tax per cent € million equity € million 20 (20) 10 (10) 904 (922) 255 (260) 1,299 (1,161) 523 (481) 20 (20) 10 (10) (20) 18 (10) 10 241 (241) 134 (134) 20 (20) 10 (10) (58) 58 (17) 17 (70) 70 (41) 41 1 The sensitivity analysis on equity, excludes the sensitivity amounts recognised in the result before tax. At December 31, 2022, the fair value of foreign currency net asset derivative instruments was €108 million, representing a decrease of €77 million since January 1, 2022. These comprise both derivatives designated in hedge relationships and those derivatives that are not designated into a hedge relationship at inception. Those derivatives not designated in a hedge relationship on inception have their mark-to- market movements recorded directly in the Income statement and recognised within Net currency retranslation (charges)/credits. c Interest rate risk The Group is exposed to changes in interest rates on debt and on cash deposits. In order to mitigate the interest rate risk, the Group’s policies allow a variety of over the counter derivative instruments to be entered into. The following table demonstrates the sensitivity of the Group’s interest rate exposure to a reasonable possible change in the US dollar, euro and sterling interest rates, based on expectations regarding forward rate movements, on the result before tax and equity1. The sensitivity analysis has been performed on interest rate derivatives (both those designated in hedge relationships and those not designated in hedge relationships) at the reporting date only and is not reflective of the impact had the sensitised rates been applied through the duration of the years to December 31, 2022 and 2021. Strengthening/ (weakening) in US interest Effect on result Effect on Strengthening/ (weakening) in euro interest Effect on result Effect on sterling interest Effect on result Effect on rate before tax equity rate before tax Basis points € million € million Basis points € million equity € million rate before tax Basis points € million equity € million Strengthening/ (weakening) in 150 (150) 50 (50) – – – – 6 (7) – – 150 (150) 50 (50) 5 (4) 3 (3) 17 (17) 10 (9) 150 (150) 50 (50) (35) 35 (2) 2 – – – – 2022 2021 2022 2021 1 The sensitivity analysis on equity excludes the sensitivity amounts recognised in the result before tax. For details regarding the Group’s management of interest rate benchmark reform, refer to note 27i. d Credit risk very low credit risk. Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Group has policies and procedures to monitor the risk by assigning limits to each counterparty by underlying exposure and by operating company and by only entering into transactions with counterparties with a At each period end, the Group assesses the effect of counterparties’ and the Group’s own credit risk on the fair value of derivatives and any ineffectiveness arising is immediately recognised in the Income statement within Other non-operating expenses. The Group is exposed to the non-performance by its counterparties in respect of financial assets receivable. The Group has policies and procedures to monitor the risk by assigning limits to each counterparty by underlying exposure and by operating company. The underlying exposures are monitored on a daily basis and the overall exposure limit by counterparty is periodically reviewed by using available market information. The financial assets recognised in the financial statements, net of impairment losses (if any), represent the Group's maximum exposure to credit risk, without taking into account any guarantees in place or other credit enhancements. At December 31, 2022 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 f Liquidity risk Mark-to-market of treasury controlled financial instruments allocated by geography 2022 51% 2021 44% 1% 20% 27% 1% – 18% 34% 4% The Group invests cash in interest-bearing accounts, time deposits and money market funds, choosing instruments with appropriate maturities or liquidity to retain sufficient headroom to readily generate cash inflows required to manage liquidity risk. The Group has also committed revolving credit facilities. At December 31, 2022 the Group had undrawn overdraft facilities of €53 million (2021: €53 million). The Group held the following undrawn general and committed aircraft financing facilities: Million General facilities1 Euro facilities expiring between January and March 2023 US dollar facility expiring November 2023 Euro facility expiring March 2025 US dollar facility expiring March 2025 Pound sterling facility expiring November 2025 Committed aircraft facilities US dollar facilities expiring between February and September 20232 US dollar facility expiring April 20232 US dollar facilities expiring between October 2023 and March 20243 Million General facilities1 Euro facilities expiring between January and July 2022 Euro facilities expiring March 2023 US dollar facility expiring May 2022 US dollar facility expiring March 2024 Pound sterling facility expiring November 2025 Committed aircraft facilities US dollar facility expiring September 20222 US dollar facilities expiring March 20243 2022 Currency € equivalent €87 $50 €300 $1,755 £1,000 $386 $273 $525 87 47 300 1,654 1,143 3,231 364 257 495 1,116 2021 Currency € equivalent €27 €60 $50 $1,755 £1,000 $635 $635 27 60 44 1,556 1,177 2,864 563 563 1,126 1 The general facilities can be drawn at any time at the discretion of the Group subject to the provision of up to three days’ notice of the intended utilisation, depending on the facility. 2 The aircraft facilities maturing in 2023 are available for specific committed aircraft deliveries. 3 The aircraft facilities maturing between October 2023 and March 2024 (2021: maturing in March 2024) are available for specific committed aircraft deliveries and require the Group to give three months’ notice to the counterparty of its intention to utilise the facilities. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 237 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 27 Financial risk management objectives and policies continued The following table analyses 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: Asset financing liabilities Lease liabilities 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, 2022 € million Interest-bearing loans and borrowings: Asset financing liabilities Lease liabilities Fixed rate borrowings Floating rate borrowings Other financing liabilities 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, 2021 Within 6 months 6-12 months 1-2 years 2-5 years More than 5 years Total 2022 (196) (955) (64) (227) (5,209) 42 245 122 (4) (185) (42) (190) (1,050) (523) (146) – 9 195 62 (1) (121) (59) (374) (2,120) (78) (455) (200) 12 46 13 (1) (68) (10) (1,081) (3,374) (1,242) (3,191) – 9 – – (3) – – (2,823) (5,295) (757) – – – – – – – – (4,664) (12,794) (2,664) (4,019) (5,409) 72 486 197 (9) (374) (111) (6,473) (1,824) (3,235) (8,882) (8,875) (29,289) Within 6 months 6-12 months (122) (920) (151) (129) (73) (3,712) – 227 157 (12) (67) (14) (116) (854) (529) (285) – – 1 52 129 (10) (38) (13) 1-2 years (230) (1,814) (578) (428) – (208) 2 46 48 (7) (33) (18) 2-5 years More than 5 years Total 2021 (678) (3,839) (690) (3,368) (1,714) (5,524) (2,094) (16) – – 3 1 – (3) (6) – – – – – – – – – (2,860) (12,951) (4,042) (4,226) (73) (3,920) 6 326 334 (32) (144) (45) (4,816) (1,663) (3,220) (8,580) (9,348) (27,627) 238 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements The following table analyses 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. Within 6 months 6-12 months 1-2 years 2-5 More than 5 years years Total 2022 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 € million Interest-bearing loans and borrowings: Asset financing liabilities Lease liabilities 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, 2022 € million Interest-bearing loans and borrowings: Asset financing liabilities Lease liabilities Fixed rate borrowings Floating rate borrowings Other financing liabilities 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, 2021 (6,473) (1,824) (3,235) (8,882) (8,875) (29,289) Within 6 months 6-12 months 2-5 More than 5 years years Total 2021 (196) (955) (64) (227) (5,209) 42 245 122 (4) (185) (42) (122) (920) (151) (129) (73) (3,712) – 227 157 (12) (67) (14) (190) (1,050) (523) (146) – 9 195 62 (1) (121) (59) (116) (854) (529) (285) – – 1 52 129 (10) (38) (13) (374) (2,120) (78) (455) (200) 12 46 13 (1) (68) (10) 1-2 years (230) (1,814) (578) (428) – (208) 2 46 48 (7) (33) (18) (1,081) (3,374) (1,242) (3,191) (2,823) (5,295) (757) (678) (3,839) (690) (3,368) (1,714) (5,524) (2,094) (16) – 9 – – (3) – – – – 3 1 – (3) (6) – (4,664) (12,794) (2,664) (4,019) (5,409) 72 486 197 (9) (374) (111) (2,860) (12,951) (4,042) (4,226) (73) (3,920) 6 326 334 (32) (144) (45) – – – – – – – – – – – – – – – – (4,816) (1,663) (3,220) (8,580) (9,348) (27,627) 27 Financial risk management objectives and policies continued g Offsetting financial assets and liabilities 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. The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements. December 31, 2022 € million Financial assets Derivative financial assets Financial liabilities Derivative financial liabilities Gross amounts set off in the Balance sheet1 Net amounts of financial instruments in the Balance sheet Related amounts not offset in the Balance sheet1 Gross value of financial instruments Net amount 760 (34) 726 (5) 721 505 (34) 471 5 476 1 The Group has pledged cash and cash equivalents as collateral against certain of its derivative financial liabilities. As December 31, 2022, the Group recognised €nil of collateral (2021: €nil) offset in the balance sheet and €5 million (2021: €30 million) not offset in the Balance sheet. December 31, 2021 € million Financial assets Derivative financial assets Financial liabilities Derivative financial liabilities h Capital risk management Gross amounts set off in the Balance sheet Net amounts of financial instruments in the Balance sheet Related amounts not offset in the Balance sheet Gross value of financial instruments Net amount 628 (8) 620 (30) 590 181 (8) 173 30 203 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 net debt to EBITDA before exceptional items ratio. For the year to December 31, 2022, the net debt to EBITDA before exceptional items was 3.1 times (2021: minus 11.5 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 going concern section in note 2. i Managing interest rate benchmark reform and associated risks Overview A reform of major interest rate benchmarks is being undertaken globally, including the replacement of certain interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as ‘IBOR reform’). The Group has exposures to IBORs on its financial instruments that are expected to mature subsequent to December 31, 2022, and as such will be replaced as part of these market-wide initiatives. The Group anticipates that IBOR reform will impact its risk management and hedge accounting. During 2020 the Group established an IBOR transition working group and project plan, led by Group Treasury. This project has and continues to consider the required changes to systems, processes, risk management and valuation models, as well as managing any accounting and tax implications. During the course of 2022, the Group, and the counterparties to the financial instruments, have transitioned the majority of such instruments to an alternative benchmark rate and in order to enable such transitions, changes to systems, processes and models have been implemented. Those financial instruments that have not transitioned at December 31, 2022 relate to those with a US dollar LIBOR component, which is not expected to convert to an alternative risk-free rate until mid-2023, subject to further consultation. Reforms to the Euro Interbank Offered Rate (EURIBOR) methodology to enable it to meet the criteria of a risk-free rate were completed in 2019. As such the Group expects to continue to utilise financial instruments with a EURIBOR component without transitioning to an alternative benchmark rate. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 239 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 27 Financial risk management objectives and policies continued Derivative and non-derivative financial instruments and hedge accounting While the Group has transitioned a number of its derivative and non-derivative financial instruments to an alternative benchmark rate, certain interest rate swap derivative financial instruments and non-derivative financial instruments continue to have their floating legs indexed to US dollar LIBOR. For derivative financial instruments there is no uncertainty associated with IBOR reform as at December 31, 2022, as such instruments either mature prior to the date of withdrawal of the US dollar LIBOR, or where maturity is subsequent to the date of withdrawal of the US dollar LIBOR, the final pricing date for such instruments is prior to the date of withdrawal. Accordingly, the Group does not intend to transition such instruments to an alternative benchmark and these derivatives continue to be recognised as hedging instruments in hedge relationships, with the hedged item being those non-derivative financial instruments indexed to US dollar LIBOR. Non-derivative financial instruments predominantly relate to those lease liabilities with a US dollar LIBOR component. The Group has such leases with a limited number of counterparties for which the Group expects to transition to an alternative benchmark by June 30, 2023. The table below provides an overview of the IBOR-related exposures as at December 31, 2022. Non-derivative financial instruments are presented on the basis of their carrying values, while derivative financial instruments are presented on the basis of their nominal amounts. € million US dollar LIBOR 28 Financial instruments a Financial assets and liabilities by category Non- derivative financial instruments – carrying value 461 Derivative financial instruments – nominal amount 305 The detail of the Group’s financial instruments at December 31, 2022 and December 31, 2021 by nature and classification for measurement purposes is as follows: December 31, 2022 € 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 Lease liabilities Interest-bearing long-term borrowings Derivative financial instruments Other long-term liabilities Current liabilities Lease liabilities Current portion of long-term borrowings Trade and other payables Derivative financial instruments Financial assets Fair value through Other comprehensive income Amortised cost Fair value through Income statement Non-financial assets Total carrying amount by balance sheet item – – 180 1,330 308 – 403 9,196 55 – – – – – – – – 81 – – – 645 – – – – 182 – 918 – – – 55 81 362 1,330 1,226 645 403 9,196 Financial liabilities Fair value through Other comprehensive income Amortised cost Fair value through Income statement Non-financial liabilities Total carrying amount by balance sheet item 7,853 8,692 – 131 1,766 1,068 4,898 – – – – – – – – – – 596 84 – – 9 – 387 – – – 69 – – 311 – 7,853 9,288 84 200 1,766 1,077 5,209 387 240 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 27 Financial risk management objectives and policies continued Derivative and non-derivative financial instruments and hedge accounting While the Group has transitioned a number of its derivative and non-derivative financial instruments to an alternative benchmark rate, certain interest rate swap derivative financial instruments and non-derivative financial instruments continue to have their floating legs indexed to US dollar LIBOR. For derivative financial instruments there is no uncertainty associated with IBOR reform as at December 31, 2022, as such instruments either mature prior to the date of withdrawal of the US dollar LIBOR, or where maturity is subsequent to the date of withdrawal of the US dollar LIBOR, the final pricing date for such instruments is prior to the date of withdrawal. Accordingly, the Group does not intend to transition such instruments to an alternative benchmark and these derivatives continue to be recognised as hedging instruments in hedge relationships, with the hedged item being those non-derivative financial instruments indexed to US dollar LIBOR. Non-derivative financial instruments predominantly relate to those lease liabilities with a US dollar LIBOR component. The Group has such leases with a limited number of counterparties for which the Group expects to transition to an alternative benchmark by June 30, 2023. The table below provides an overview of the IBOR-related exposures as at December 31, 2022. Non-derivative financial instruments are presented on the basis of their carrying values, while derivative financial instruments are presented on the basis of their nominal amounts. The detail of the Group’s financial instruments at December 31, 2022 and December 31, 2021 by nature and classification for measurement Financial assets Fair value through Other comprehensive Amortised cost income Income statement Non-financial assets Fair value through Total carrying amount by balance sheet item € million US dollar LIBOR 28 Financial instruments a Financial assets and liabilities by category purposes is as follows: December 31, 2022 € 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 Lease liabilities Interest-bearing long-term borrowings Derivative financial instruments Other long-term liabilities Current liabilities Lease liabilities Current portion of long-term borrowings Trade and other payables Derivative financial instruments – – 180 1,330 308 – 403 9,196 7,853 8,692 – 131 1,766 1,068 4,898 – instruments – instruments – Non- derivative financial carrying value 461 Derivative financial nominal amount 305 182 918 – – – – – – – – – 69 – – 311 – 55 81 362 1,330 1,226 645 403 9,196 Total 7,853 9,288 84 200 1,766 1,077 5,209 387 55 – – – – – – – – – – – – – – – – 81 – 645 – – – – – 596 84 – – 9 – 387 Financial liabilities Fair value through Other comprehensive income Amortised cost Fair value through Income statement Non-financial liabilities carrying amount by balance sheet item December 31, 2021 € 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 Lease liabilities Interest-bearing long-term borrowings Derivative financial instruments Other long-term liabilities Current liabilities Lease liabilities Current portion of long-term borrowings Trade and other payables Derivative financial instruments Financial assets Fair value through Other comprehensive income Amortised cost Fair value through Income statement Non-financial assets Total carrying amount by balance sheet item – – 126 735 363 – 51 7,892 31 – 10 – – – – – – 77 – – – 543 – – – – 114 – 597 – – – 31 77 250 735 960 543 51 7,892 Financial liabilities Fair value through Other comprehensive income Amortised cost Fair value through Income statement Non-financial liabilities Total carrying amount by balance sheet item 8,116 8,220 – 132 1,521 996 3,506 – – – – – – – – – – 748 47 – – 9 – 126 – – – 76 – – 206 – 8,116 8,968 47 208 1,521 1,005 3,712 126 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: 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. The fair value of financial liabilities and financial assets incorporates own credit risk and counterparty credit risk, respectively. 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 instruments are measured based on the market value of instruments with similar terms and conditions using forward pricing models, which include forward exchange rates, forward interest rates, forward fuel curves and corresponding volatility surface data at the reporting date. The fair value of derivative financial assets and liabilities are determined as follows, incorporating adjustments for own credit risk and counterparty credit risk: • commodity reference contracts including swaps and options transactions, referenced to (i) CIF NWE cargoes jet fuel; (ii) ICE Gasoil; (iii) ICE Brent; (iv) ICE Gasoil Brent crack; (v) Jet Differential and (vi) Jet fuel Brent crack - the mark-to-market valuation prices are determined by reference to current forward curve and standard option pricing valuation models, values are discounted to the reporting date based on the corresponding interest rate; • currency forward and option contracts – by reference to current forward prices and standard option pricing valuation models, values are discounted to the reporting date based on the corresponding interest rate; and • interest rate swap contracts – by discounting the future cash flows of the swap contracts at market interest rate valued with the current forward curve. 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. The fair value of the Group’s interest-bearing borrowings is adjusted for own credit risk. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 241 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 28 Financial instruments continued Level 3: Inputs for the asset or liability that are not based on observable market data. The principal method of such valuation is performed using a valuation model that considers the present value of the dividend cash flows expected to be generated by the associated assets. For the methodology in the determination of the fair value of the investment in Air Europa Holdings, refer to note 19. 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, 2022 are as follows: € million Financial assets Other equity investments Other non-current financial assets Derivative financial assets: Interest rate swaps1 Foreign exchange contracts1 Fuel derivatives1 Financial liabilities Interest-bearing loans and borrowings: Asset financed liabilities Fixed rate borrowings Floating rate borrowings Derivative financial liabilities: Interest rate derivatives2 Foreign exchange contracts2 Fuel derivatives2 Level 1 Level 2 Level 3 Total Fair value – – – – – – 2,538 – – – – – 20 66 467 193 2,925 72 3,419 6 386 79 55 – – – – – – – – – – 55 20 66 467 193 2,925 2,610 3,419 6 386 79 1 Current portion of derivative financial assets is €645 million. 2 Current portion of derivative financial liabilities is €387 million. The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2021 are set out below: € million Financial assets Other equity investments Derivative financial assets: Interest rate swaps1 Foreign exchange contracts1 Fuel derivatives1 Financial liabilities Interest-bearing loans and borrowings: Asset financed liabilities Fixed rate borrowings Floating rate borrowings Other financing liabilities Derivative financial liabilities: Interest rate derivatives2 Foreign exchange contracts2 Fuel derivatives2 Level 1 Level 2 Level 3 Total Fair value – – – – – 3,492 – – – – – – 5 314 301 2,583 265 3,622 73 31 129 13 31 – – – – – – – – – – 31 5 314 301 2,583 3,757 3,622 73 31 129 13 Carrying value Total 55 31 66 467 193 3,819 2,967 3,579 6 386 79 Carrying value Total 31 5 314 301 2,415 3,863 3,622 73 31 129 13 1 Current portion of derivative financial assets is €543 million. 2 Current portion of derivative financial liabilities is €126 million. On June 15, 2022, the Group entered into a financing arrangement with Globalia, which was classified as a Level 2 financial asset. On August 16, 2022, the Group exercised the conversion option within the financing arrangement leading to the de-recognition of the Level 2 financial asset and the recognition of an Other equity investment in Air Europa Holdings, which was recorded as an addition to a Level 3 financial asset. Refer to note 19 for further details. There have been no other transfers between levels of the fair value hierarchy during the year. Financial assets, other equity instruments, financial liabilities and derivative financial assets and liabilities are all measured at fair value in the consolidated financial statements. Interest-bearing borrowings, with the exception of the €825 million convertible bond due 2028 which is measured at fair value, are measured at amortised cost. 242 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 28 Financial instruments continued Level 3: Inputs for the asset or liability that are not based on observable market data. The principal method of such valuation is performed using a valuation model that considers the present value of the dividend cash flows expected to be generated by the associated assets. For the methodology in the determination of the fair value of the investment in Air Europa Holdings, refer to note 19. 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, 2022 are as follows: Level 1 Level 2 Level 3 Total Fair value c Level 3 financial assets reconciliation The following table summarises key movements in Level 3 financial assets: € million Opening balance for the year Addition of Air Europa Holdings Additions - other Losses recognised in Income statement Gains recognised in Other comprehensive income Closing balance for the year 2022 31 22 2 (2) 2 55 2021 29 – 2 – – 31 55 d Hedges For details regarding the valuation of Air Europa Holdings, refer to note 19. Cash flow hedges At December 31, 2022 the Group’s principal risk management activities that were hedging future forecast transactions were: • foreign exchange contracts, hedging foreign currency exchange risk on cash inflows and certain operational payments. Remeasurement gains and losses on the derivatives are (i) recognised in equity and transferred to the Income statement, where the hedged item is recorded directly in the Income statement, to the same caption as the underlying hedged item is classified; (ii) recognised in equity and transferred to the Balance sheet, where the hedged item is a non-financial asset or liability, are recorded to the Balance sheet to the same caption as the hedged item is recognised; and (iii) recognised in equity and transferred to the Income statement, where the hedged item is a financial asset or liability, at the same time as the financial asset or liability is recorded in the Income statement. Reclassification gains and losses on derivatives, arising from the discontinuance of hedge accounting, are recognised in the Income statement when the future transaction is no longer expected to occur and recorded in the relevant Income statement caption to which the hedged item is classified; • forward crude, gas oil and jet kerosene derivative contracts, hedging price risk on fuel expenditure. Remeasurement gains and losses on the derivatives are (i) recognised in equity and transferred to the Income statement within Fuel, oil costs and emissions charges to match against the related fuel cash outflow, where the underlying hedged item does not give rise to the recognition of fuel inventory; and (ii) recognised in equity and transferred to the Balance sheet within Inventory, where the underlying hedged item is fuel inventory. Gains and losses recorded within Inventory are recognised in the Income statement when the underlying fuel inventory is consumed, within Fuel, oil costs and emission charges. Reclassification gains and losses on derivatives, arising from the discontinuance of hedge accounting, are recognised in the Income statement within Fuel, oil costs and emissions charges when the future transaction is no longer expected to occur; • interest rate contracts, hedging interest rate risk on floating rate debt and certain operational payments. Remeasurement gains and losses on the derivatives are recognised in equity and transferred to the Income statement within Interest expense; and • future loan repayments denominated in foreign currency are designated in a hedge relationship hedging foreign exchange fluctuations on revenue cash inflows. Remeasurement gains and losses on the associated loans are recognised in equity and transferred to the Balance sheet, where the hedged item is a non-financial asset or liability when the loan repayments are made (generally in instalments over the life of the loan). The amounts included in equity are summarised below: (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, 2 Related deferred tax charge/(credit) Total amount included within equity 1 The carrying value of derivative instruments recognised in assets and liabilities is analysed in parts a and b above. 2 Relates to previously terminated hedge relationships for which the underlying forecast transactions remain expected to occur. 2022 87 (178) (127) (46) 213 (51) 20 (31) 2021 98 25 (276) 58 247 152 (24) 128 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 243 € million Financial assets Other equity investments Other non-current financial assets Derivative financial assets: Interest rate swaps1 Foreign exchange contracts1 Fuel derivatives1 Financial liabilities Interest-bearing loans and borrowings: Asset financed liabilities Fixed rate borrowings Floating rate borrowings Derivative financial liabilities: Interest rate derivatives2 Foreign exchange contracts2 Fuel derivatives2 € million Financial assets Other equity investments Derivative financial assets: Interest rate swaps1 Foreign exchange contracts1 Fuel derivatives1 Financial liabilities Interest-bearing loans and borrowings: Asset financed liabilities Fixed rate borrowings Floating rate borrowings Other financing liabilities Derivative financial liabilities: Interest rate derivatives2 Foreign exchange contracts2 Fuel derivatives2 – – – – – – – – – – – – – – – – – – – – 2,538 3,492 – 20 66 467 193 2,925 72 3,419 6 386 79 – 5 314 301 2,583 265 3,622 73 31 129 13 Carrying value Total 55 31 66 467 193 3,819 2,967 3,579 6 386 79 Carrying value Total 31 5 314 301 2,415 3,863 3,622 73 31 129 13 – – – – – – – – – – – – – – – – – – – – 31 55 20 66 467 193 2,925 2,610 3,419 6 386 79 31 5 314 301 2,583 3,757 3,622 73 31 129 13 1 Current portion of derivative financial assets is €645 million. 2 Current portion of derivative financial liabilities is €387 million. The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2021 are set out below: Level 1 Level 2 Level 3 Total Fair value 1 Current portion of derivative financial assets is €543 million. 2 Current portion of derivative financial liabilities is €126 million. On June 15, 2022, the Group entered into a financing arrangement with Globalia, which was classified as a Level 2 financial asset. On August 16, 2022, the Group exercised the conversion option within the financing arrangement leading to the de-recognition of the Level 2 financial asset and the recognition of an Other equity investment in Air Europa Holdings, which was recorded as an addition to a Level 3 financial asset. Refer to note 19 for further details. There have been no other transfers between levels of the fair value hierarchy during the year. Financial assets, other equity instruments, financial liabilities and derivative financial assets and liabilities are all measured at fair value in the consolidated financial statements. Interest-bearing borrowings, with the exception of the €825 million convertible bond due 2028 which is measured at fair value, are measured at amortised cost. NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 28 Financial instruments continued The notional amounts of significant financial instruments used as cash flow hedging instruments are set out below, with the prior period presentation amended to reflect the current presentation: 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 Foreign exchange contracts to hedge future revenue and expenditure from euros to pound sterling1 Fuel commodity price contracts to hedge future US dollar fuel expenditure2 Interest rate contracts to hedge future interest expenditure3 Average hedge rate Hedge range Within 1 year 1-2 years 2-5 years 5+ years Total December 31, 2022 1.23 1.05 to 1.45 3,582 1,355 1.08 0.91 to 1.26 2,578 1,318 – – 1.23 1.00 to 1.42 371 406 458 718 416 to 2,200 2,935 331 – 1.04 (0.03) to 3.13 2,360 504 238 – – 14 – 9 4,937 3,896 1,249 3,266 3,111 1 Expenditure includes both operating and capital expenditure. 2 Notional amounts of fuel commodity price hedging instruments represent 5.4 million metric tonnes of jet fuel equivalent and the hedge range is expressed as the US dollar price per metric tonne, which for those products typically priced in barrels, has been determined using a conversion factor of 7.88. 3 The hedge range for interest rate contracts is expressed as a percentage. 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 Foreign exchange contracts to hedge future revenue and expenditure from euros to pound sterling1 Fuel commodity price contracts to hedge future US dollar fuel expenditure2 Interest rate contracts to hedge future interest expenditure3 Average hedge rate Hedge range Within 1 year 1-2 years 2-5 years 5+ years Total December 31, 2021 1.31 1.15 to 1.45 2,606 1,030 42 1.18 1.08 to 1.32 1,632 735 26 – – 3,678 2,393 1.23 1.08 to 1.42 396 334 543 166 1,439 649 395 to 737 2,386 826 – – 3,212 1.40 (0.03) to 3.13 3,099 1,080 738 60 4,977 1 Expenditure includes both operating and capital expenditure. 2 Notional amounts of fuel commodity price hedging instruments represent 5.8 million metric tonnes of jet fuel equivalent and the hedge range is expressed as the US dollar price per metric tonne, which for those products typically priced in barrels, has been determined using a conversion factor of 7.88. 3 The hedge range for interest rate contracts is expressed as a percentage. Amounts recognised in the Income statement For the year to December 31, 2022 (€ million) Foreign exchange contracts to hedge future revenue and expenditure Crude, gas oil and jet kerosene derivative contracts Derivatives used to hedge interest rates Loan repayments to hedge future revenue Instruments for which hedge accounting no longer applies Related deferred tax Total movements recorded in the cash flow hedge reserve Discontinuance Recycling to Total Other reclassified to Ineffectiveness1 accounting Statement movements of hedge the Income recognised comprehensive income2 the Balance sheet Fair value movements recognised in Amounts – 19 – – – 19 29 228 257 (525) – – – – 1,299 (12) – – 29 1,515 1,318 (12) – – 1,563 (330) (1,249) (95) (1) (1,870) 398 1,233 (1,472) 43 66 – (7) 75 (1) 74 – (27) 1 Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge accounting within non-operating items. 2 Amounts recognised in Other comprehensive income represent gains and losses on the hedging instrument. 244 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements For the year to December 31, 2021 (€ million) Foreign exchange contracts to hedge future revenue and expenditure Crude, gas oil and jet kerosene derivative contracts Derivatives used to hedge interest rates Loan repayments to hedge future revenue Instruments for which hedge accounting no longer applies Related deferred tax Total movements recorded in the cash flow hedge reserve Amounts recognised in the Income statement Ineffectiveness1 Discontinuance of hedge accounting Recycling to the Income Statement Total recognised movements Fair value movements recognised in Other comprehensive income2 Amounts reclassified to the Balance sheet – (1) – – – (1) 4 73 – – – 77 39 88 (29) (15) (54) 29 43 160 (29) (15) (54) 105 (24) (178) (737) 21 (120) – (1,014) 166 81 (848) (24) – – – – (24) 3 (21) 1 Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge accounting within non-operating items. 2 Amounts recognised in Other comprehensive income represent gains and losses on the hedging instrument. The losses associated with the discontinuance of hedge accounting recognised in the Income statement and the subsequent fair value movements of those derivative instruments recorded in the Income statement through to the earlier of the reporting date and the maturity date of the derivative are set out below: € million Gains associated with the discontinuance of hedge accounting recognised in the Income statement Fair value movements subsequently recorded in the Income statement Total effect of discontinuance of hedge accounting in the Income statement The Group has no significant fair value hedges at December 31, 2022 and 2021. 2022 (29) – (29) 2021 (77) (82) (159) 1.18 1.08 to 1.32 1,632 735 26 29 Share capital, share premium and treasury shares 1.23 1.08 to 1.42 396 334 543 166 1,439 649 395 to 737 2,386 826 – – 3,212 Allotted, called up and fully paid December 31, 2021: Ordinary shares of €0.10 each December 31, 2022: Ordinary shares of €0.10 each a Treasury shares Number of shares '000s 4,971,476 Ordinary share capital € million 497 4,971,476 497 Share premium € million 7,770 7,770 The treasury shares balance consists of shares held directly by the Group. During the year to December 31, 2022, the Group purchased 15.0 million shares at a weighted average share price of €1.51 per share totalling €23 million, which are held as Treasury shares. A total of 8.1 million shares (2021: 5.4 million) were issued to employees during the year as a result of vesting of employee share schemes. At December 31, 2022 the Group held 17.1 million shares (2021: 10.2 million) which represented 0.34 per cent (2021: 0.20 per cent) of the issued share capital of the Company. NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 28 Financial instruments continued The notional amounts of significant financial instruments used as cash flow hedging instruments are set out below, with the prior period presentation amended to reflect the current presentation: Notional principal amounts (€ million) Average hedge rate Within 1 year Hedge range 1-2 years 2-5 years 5+ years 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 sterling1 Foreign exchange contracts to hedge future revenue and expenditure from euros to pound Fuel commodity price contracts to hedge future US dollar fuel expenditure2 Interest rate contracts to hedge future interest 1.23 1.05 to 1.45 3,582 1,355 1.08 0.91 to 1.26 2,578 1,318 1.23 1.00 to 1.42 371 406 458 718 416 to 2,200 2,935 331 – – – expenditure3 1.04 (0.03) to 3.13 2,360 504 238 1 Expenditure includes both operating and capital expenditure. 2 Notional amounts of fuel commodity price hedging instruments represent 5.4 million metric tonnes of jet fuel equivalent and the hedge range is expressed as the US dollar price per metric tonne, which for those products typically priced in barrels, has been determined using a conversion factor of 7.88. 3 The hedge range for interest rate contracts is expressed as a percentage. Notional principal amounts (€ million) Average hedge rate Within 1 year Hedge range 1-2 years 2-5 years 5+ years 1.31 1.15 to 1.45 2,606 1,030 42 December 31, Total 2022 4,937 3,896 1,249 3,266 3,111 December 31, Total 2021 3,678 2,393 – – 14 – 9 – – 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 sterling1 Foreign exchange contracts to hedge future revenue and expenditure from euros to pound Fuel commodity price contracts to hedge future US dollar fuel expenditure2 Interest rate contracts to hedge future interest expenditure3 1.40 (0.03) to 3.13 3,099 1,080 738 60 4,977 1 Expenditure includes both operating and capital expenditure. 2 Notional amounts of fuel commodity price hedging instruments represent 5.8 million metric tonnes of jet fuel equivalent and the hedge range is expressed as the US dollar price per metric tonne, which for those products typically priced in barrels, has been determined using a conversion factor of 7.88. 3 The hedge range for interest rate contracts is expressed as a percentage. Amounts recognised in the Income statement For the year to December 31, 2022 (€ million) Foreign exchange contracts to hedge future revenue and expenditure Crude, gas oil and jet kerosene derivative contracts Derivatives used to hedge interest rates Loan repayments to hedge future revenue Instruments for which hedge accounting no longer applies Related deferred tax Total movements recorded in the cash flow hedge reserve Discontinuance Recycling to Total Other reclassified to of hedge the Income recognised comprehensive the Balance Ineffectiveness1 accounting Statement movements income2 sheet 29 228 257 (525) – 19 – – – 19 – – – – 1,299 (12) – – 29 1,515 Fair value movements recognised in Amounts 1,318 (12) – – 1,563 (330) (1,249) (95) (1) (1,870) 398 1,233 (1,472) – (27) 43 66 – (7) 75 (1) 74 1 Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge accounting within non-operating items. 2 Amounts recognised in Other comprehensive income represent gains and losses on the hedging instrument. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 245 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 30 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 an option price and share award plans whereby shares are issued to employees at no cost, subject to the achievement by the Group of specified performance targets. 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. Since 2015, awards have been made as nil-cost options, with a two- year holding period following the three-year performance period, before options can be exercised. All awards since 2015 have three independent performance measures with equal weighting: Total Shareholder Return (TSR) relative to the STOXX Europe 600 Travel and Leisure Index (for 2020 awards) or MSCI European Transportation Index (for prior to 2020 awards), earnings per share, and Return on Invested Capital. b IAG Restricted Share Plan During 2021, the Group revised its approach to long-term incentives, replacing the existing PSP with a Restricted Share Plan (RSP) proposal under the new Executive Share Plan approved by shareholders in June 2021. The RSP was introduced to increase the alignment of both interests and outcomes between the Group’s senior management and shareholders through the build-up and maintenance of senior management shareholdings and an increased focus on the long-term, sustainable performance of the Group. Awards have been made as nil-cost options, with a two-year holding period following the three-year performance period, before options vest. There are no performance measures associated with the awards, although approval at the end of the vesting period will be at the discretion of the Remuneration Committee, considering the Group’s overall performance, including financial and non-financial performance measures over the course of the vesting period, as well as any material risk or regulatory failures identified. c IAG Full Potential Incentive Plan During 2021, the Group launched the new Full Potential Incentive Plan (FPIP), which is granted to key individuals involved in the delivery of a series of transformation projects that will enable the Group to deliver business success over the medium to long term. The awards have been made as nil-cost options, vesting in 2025 and dependent on stretch performance targets for 2024 and the approval of the Board. d 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. e Share-based payment schemes summary Performance Share Plan Restricted Share Plan Full Potential Incentive Plan Incentive Award Deferral Plan Outstanding at January 1, 2022 ‘000s 24,706 16,198 27,879 5,359 74,142 Granted number ‘000s – 26,796 2,386 111 Lapsed number ‘000s 5,273 1,911 2,560 96 29,293 9,840 Vested number ‘000s 3,094 749 – 2,963 6,806 Outstanding at December 31, 2022 ‘000s 16,339 Exercisable December 31, 2022 ‘000s 3,683 40,334 27,705 2,411 86,789 – – – 3,683 The weighted average share price at the date of exercise of options exercised during the year to December 31, 2022 was £1.35 (2021: £1.78). The Group recognised a share-based payment charge of €39 million for the year to December 31, 2022 (2021: €23 million). 246 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 30 Share-based payments The Group operates share-based payment schemes as part of the total remuneration package provided to employees. These schemes For the year to December 31, 2022 31 Other reserves and non-controlling interests comprise both share option schemes where employees acquire shares at an option price and share award plans whereby shares are issued to employees at no cost, subject to the achievement by the Group of specified performance targets. 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. Since 2015, awards have been made as nil-cost options, with a two- year holding period following the three-year performance period, before options can be exercised. All awards since 2015 have three independent performance measures with equal weighting: Total Shareholder Return (TSR) relative to the STOXX Europe 600 Travel and Leisure Index (for 2020 awards) or MSCI European Transportation Index (for prior to 2020 awards), earnings per share, and Return on Invested Capital. b IAG Restricted Share Plan During 2021, the Group revised its approach to long-term incentives, replacing the existing PSP with a Restricted Share Plan (RSP) proposal under the new Executive Share Plan approved by shareholders in June 2021. The RSP was introduced to increase the alignment of both interests and outcomes between the Group’s senior management and shareholders through the build-up and maintenance of senior management shareholdings and an increased focus on the long-term, sustainable performance of the Group. Awards have been made as nil-cost options, with a two-year holding period following the three-year performance period, before options vest. There are no performance measures associated with the awards, although approval at the end of the vesting period will be at the discretion of the Remuneration Committee, considering the Group’s overall performance, including financial and non-financial performance measures over the course of the vesting period, as well as any material risk or regulatory failures identified. c IAG Full Potential Incentive Plan During 2021, the Group launched the new Full Potential Incentive Plan (FPIP), which is granted to key individuals involved in the delivery of a series of transformation projects that will enable the Group to deliver business success over the medium to long term. The awards have been made as nil-cost options, vesting in 2025 and dependent on stretch performance targets for 2024 and the approval of the Board. d 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. e Share-based payment schemes summary Performance Share Plan Restricted Share Plan Full Potential Incentive Plan Incentive Award Deferral Plan Outstanding at January 1, 2022 ‘000s 24,706 16,198 27,879 5,359 74,142 Outstanding at December Exercisable December 31, Granted number ‘000s – 26,796 2,386 111 Lapsed number ‘000s 5,273 1,911 2,560 96 29,293 9,840 Vested number ‘000s 3,094 749 – 2,963 6,806 31, 2022 ‘000s 16,339 40,334 27,705 2,411 86,789 2022 ‘000s 3,683 – – – 3,683 The weighted average share price at the date of exercise of options exercised during the year to December 31, 2022 was £1.35 (2021: £1.78). The Group recognised a share-based payment charge of €39 million for the year to December 31, 2022 (2021: €23 million). € million January 1, 2022 Other comprehensive income for the year Cash flow hedges reclassified and reported in net profit: Fuel and oil costs Currency differences Finance costs Discontinuance of hedge accounting Ineffectiveness recognised in other non-operating costs Net change in fair value of cash flow hedges Net change in fair value of other equity investments Net change in fair value of cost of hedging Cost of hedging reclassified and reported in net profit Fair value movements on liabilities attributable to credit risk changes Currency translation differences Hedges reclassified and reported in property, plant and equipment Hedges reclassified and reported in sales in advance of carriage Hedges reclassified and reported in inventory Redemption of convertible bond December 31, 2022 Unrealised gains and losses1 (94) Cost of hedging reserve2 24 Currency translation3 (65) Other reserves Equity portion of convertible bond4 62 Merger reserve5 (2,467) Capital reserves6 867 Total other reserves (1,673) Non- controlling interest 6 (1,115) (90) 10 (22) (16) 1,472 2 – – (6) – (51) 35 (58) – 67 – – – – – – – (115) 38 – – (14) 1 – – – – – – – – – – – – (53) – – – – – – – – – – – – – – – – – – (62) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (1,115) (90) 10 (22) (16) 1,472 2 (115) 38 (6) (53) (65) 36 (58) (62) (66) (118) – (2,467) 867 (1,717) – – – – – – – – – – – – – – – 6 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 247 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 31 Other reserves and non-controlling interests continued € million January 1, 2021 Other comprehensive income for the year Cash flow hedges reclassified and reported in net loss: Passenger revenue Fuel and oil costs Currency differences Finance costs Discontinuance of hedge accounting Net change in fair value of cash flow hedges Net change in fair value of cost of hedging Cost of hedging reclassified and reported in net profit Fair value movements on liabilities attributable to credit risk changes Currency translation differences Hedges reclassified and reported in property, plant and equipment December 31, 2021 Unrealised gains and losses1 (867) Cost of hedging reserve2 38 Currency translation3 (53) Other reserves Equity portion of convertible bond4 62 Merger reserve5 (2,467) Redeemed capital reserve6 867 Total other reserves (2,420) Non- controlling interest 6 18 (45) (15) 23 (62) 848 – – (15) – 21 (94) – – – – – – 10 (12) – – (12) 24 – – – – – – – – – (12) – (65) – – – – – – – – – – – 62 – – – – – – – – – – – – – – – – – – – – – – 18 (45) (15) 23 (62) 848 10 (12) (15) (12) 9 (2,467) 867 (1,673) – – – – – – – – – – 6 1 The unrealised gains and losses reserve records fair value changes on equity investments and the portion of the amounts on hedging instruments in cash flow hedges that are determined to be effective hedges. The amounts at December 31, 2022 that relate to the fair value changes on equity instruments and to the cash flow hedge reserve were €11 million credit and €56 million credit, respectively. 2 The cost of hedging reserve records, amongst others, changes on the time value of options. 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 is affected by the fluctuations in the pound sterling to euro foreign exchange translation rate. 4 At December 31, 2021 the equity portion of convertible bond reserve represented the equity portion of the €500 million fixed rate 0.625 per cent convertible bond that matured in 2022. During 2022 the Group redeemed the €500 million convertible bond with no conversion into ordinary shares. On redemption, an amount of €62 million was transferred to Retained earnings. 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 Capital reserves include a Redeemed capital reserve of €70 million (2021: €70 million) associated with the decrease in share capital relating to cancelled shares and a Share capital reduction reserve of €797 million (2021: €797 million) associated with a reduction in the nominal value of the Company’s share capital (note 29). 248 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 € million January 1, 2021 Other comprehensive income for the year Cash flow hedges reclassified and reported in net loss: Passenger revenue Fuel and oil costs Currency differences Finance costs Discontinuance of hedge accounting Net change in fair value of cash flow hedges hedging Net change in fair value of cost of Cost of hedging reclassified and reported in net profit Fair value movements on liabilities attributable to credit risk changes Currency translation differences Hedges reclassified and reported in property, plant and equipment December 31, 2021 Unrealised gains and losses1 (867) Cost of hedging reserve2 38 Currency convertible translation3 (53) bond4 62 Merger reserve5 (2,467) capital Total other controlling reserve6 reserves interest 867 (2,420) 6 Redeemed Non- Other reserves Equity portion of 18 (45) (15) 23 (62) 848 – – (15) – 21 (94) – – – – – – 10 (12) – – (12) 24 – – – – – – – – – (12) – (65) – – – – – – – – – – – 62 – – – – – – – – – – – – – – – – – – – – – – 18 (45) (15) 23 (62) 848 10 (12) (15) (12) 9 – – – – – – – – – – 6 (2,467) 867 (1,673) 1 The unrealised gains and losses reserve records fair value changes on equity investments and the portion of the amounts on hedging instruments in cash flow hedges that are determined to be effective hedges. The amounts at December 31, 2022 that relate to the fair value changes on equity instruments and to the cash flow hedge reserve were €11 million credit and €56 million credit, respectively. 2 The cost of hedging reserve records, amongst others, changes on the time value of options. 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 is affected by the fluctuations in the pound sterling to euro foreign exchange translation rate. 4 At December 31, 2021 the equity portion of convertible bond reserve represented the equity portion of the €500 million fixed rate 0.625 per cent convertible bond that matured in 2022. During 2022 the Group redeemed the €500 million convertible bond with no conversion into ordinary shares. On redemption, an amount of €62 million was transferred to Retained earnings. 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 Capital reserves include a Redeemed capital reserve of €70 million (2021: €70 million) associated with the decrease in share capital relating to cancelled shares and a Share capital reduction reserve of €797 million (2021: €797 million) associated with a reduction in the nominal value of the Company’s share capital (note 29). 31 Other reserves and non-controlling interests continued 32 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 26). Defined contribution schemes The Group operates a number of defined contribution schemes for its employees. Costs recognised in respect of defined contribution pension plans in Spain, UK and Ireland for the year to December 31, 2022 were €251 million (2021: €200 million). Defined benefit schemes 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. APS has been closed to new members since 1984, but remains open to future accrual. 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. NAPS has been closed to new members since 2003 and closed to future accrual since 2018. Following closure, members’ deferred pensions are increased annually by inflation up to five per cent per annum (measured using the Government’s annual Pension Increase (Review) Orders, which since 2011 have been based on CPI). APS and NAPS are governed by separate Trustee Boards. Although APS and NAPS have separate Trustee Boards, certain aspects of the business of the two schemes are common. APS and NAPS have developed certain joint working groups that are attended by the Trustee Board members of each scheme although each Trustee Board reaches its decisions independently. There are 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. Triennially, the Trustees of APS and NAPS undertake actuarial valuations, which are subsequently agreed with British Airways to determine the cash contributions and any deficit payment plans through to the next valuation date, as well as ensuring that the schemes have sufficient funds available to meet future benefit payments to members. These actuarial valuations are prepared using the principles set out in UK Pension legislation. This differs from the IAS 19 ‘Employee benefits’ valuation, which is used for deriving the Income statement and Balance sheet positions and uses a best-estimate approach overall. The different purpose and principles lead to different assumptions being used, and therefore a different estimate for the liabilities and funding levels. During 2022, the triennial valuations, as at March 31, 2021, were finalised for APS and NAPS which resulted in a technical surplus of €343 million (£295 million) for APS and a technical deficit of €1,887 million (£1,650 million) for NAPS. The actuarial valuations performed for APS and NAPS are different to the valuation performed as at December 31, 2022 under IAS 19 ‘Employee Benefits’ mainly due to timing differences of the measurement dates and to the specific scheme assumptions in the actuarial valuation performed as at March 31, 2021 compared with IAS 19 requirements used in the accounting valuation assumptions as at the reporting date. The triennial actuarial valuation of neither APS and NAPS is updated outside of the triennial valuations, making comparability between the scheme liabilities applying the principles set out in the UK Pension legislation and the requirements of IAS 19 not possible. The principal difference relates to the discount rate applied, which under the triennial actuarial valuation, aligns with a prudent estimate of the future investment returns on the assets of the respective schemes, whereas, under IAS 19, the rates are based on high quality corporate bond yields, regardless of how the assets are invested. The triennial valuation as at March 31, 2021 for NAPS supersedes the previous agreements reached in 2020 and 2021 between British Airways and the Trustee of NAPS relating to the deferral of deficit contributions. The deferred deficit contributions have been incorporated into the deficit payment plan agreed as part of the triennial valuation as at March 31, 2021. As part of the triennial valuation as at March 31, 2021 for NAPS, British Airways has agreed to provide certain property assets as security, which will remain in place until September 30, 2028. Other plans British Airways also operates post-retirement schemes in a number of jurisdictions outside of the UK. The principal scheme is the British Airways Plc Pension Plan (USA) based in the United States and referred to as the ‘US Plan’. The US Plan is considered to be a defined benefit scheme and is closed to new members and to future accrual. The majority of British Airways’ other plans are fully funded, but there are also a number of unfunded plans, for which the Group meets the benefit payment obligations as they fall due. In addition, Aer Lingus operates certain defined benefit plans, both funded and unfunded. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 249 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 32 Employee benefit obligations continued Risk associated with the defined benefit schemes The defined benefit schemes expose the Group to a range of risks, with the following being the most significant: • asset volatility risk - the scheme obligations are calculated using a discount rate set with reference to high quality corporate bond yields. If scheme assets underperform this yield, this will reduce the surplus / increase the deficit, depending on the scheme. Certain of the schemes hold a significant proportion of equities, which are expected to outperform corporate bonds in the long term while creating volatility and risk in the short term; • longevity risk – the majority of the scheme obligations are to provide benefits over the life of the scheme members. An increase in life expectancy will result in a corresponding increase in the defined benefit obligation; • interest rate risk - a decrease in interest rates will increase plan liabilities, although this will be partially offset by an increase in the value of certain of the scheme assets; • inflation risk – a significant proportion of the scheme obligations are linked to inflation, such that any increase in inflation will cause an increase in the obligations. While certain of the scheme assets are indexed to inflation, any expected increase in the scheme assets from inflation would be disproportionately lower than the increase in the scheme obligations; and • currency risk – a number of scheme assets are denominated in currencies other than the pound sterling. Weakening of those currencies, or strengthening of the pound sterling, in the long term, will have the effect of reducing the value of scheme assets. a Cash payments and funding arrangements Cash payments in respect to pension obligations comprise normal employer contributions by the Group and deficit contributions based on the agreed deficit payment plan with NAPS. Total payments for the year to December 31, 2022 net of service costs made by the Group were €20 million (2021: €38 million) being the employer contributions of €22 million (2021: €41 million) less the current service cost of €2 million (2021: €3 million) (note 32b,c). Future funding arrangements Pension contributions for APS and NAPS were determined by actuarial valuations made at March 31, 2021, using assumptions and methodologies agreed between the Group and Trustee of each scheme. In total, the Group expects to pay €1 million in employer contributions to APS and NAPS in 2023. The following graph provides the undiscounted benefit payments to be made by the Trustees of APS and NAPS over the remaining expected duration of the schemes: Projected benefit payments from the reporting date (€ million, unaudited) 900 800 700 600 500 400 300 200 100 0 3 2 0 2 8 2 0 2 3 3 0 2 8 3 0 2 3 4 0 2 8 4 0 2 3 5 0 2 8 5 0 2 3 6 0 2 8 6 0 2 3 7 0 2 7 7 0 2 3 8 0 2 8 8 0 2 APS NAPS The amounts and timing of these projected benefit payments are subject to the aforementioned risks to the schemes. Deficit contributions At the date of the actuarial valuation, the actuarial deficit of NAPS amounted to €1,887 million. In order to address the deficit in the scheme, the Group has also committed to deficit contribution payments through to June 30, 2023, amounting to approximately €58 million per year, increasing by €58 million each year up to June 30, 2026 and subsequently capped at €257 million per year through to May 31, 2032. The deficit contribution plan includes an over-funding protection mechanism, based on the triennial valuation methodology for measuring the deficit, whereby deficit contributions are suspended if the funding position reaches 100 per cent, with a mechanism for contributions to resume if the contribution level subsequently falls below 100 per cent, or until such point as the scheme funding level reaches 100 per cent. During the year ended and as at December 31, 2022, given the funding level of the scheme, the NAPS funding position exceeded 100 per cent and accordingly deficit contributions were suspended. At December 31, 2022, the valuation of the funding level incorporates significant forward-looking assumptions, such that the Group currently does not expect to make further deficit contributions. Given the long-term nature of the NAPS scheme, these assumptions are subject to uncertainty and there can be no guarantee that deficit contributions will not resume in the future or that additional deficit contributions will not need to be incorporated into future triennial actuarial valuations. At December 31, 2022, had the over-funding protection mechanism not been applied, then the asset ceiling adjustment (as detailed in note 32c) would have been €661 million higher. At December 31, 2022, the Group is committed to the following undiscounted deficit payments, which are deductible for tax purposes at the statutory rate of tax: 250 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 32 Employee benefit obligations continued Risk associated with the defined benefit schemes The defined benefit schemes expose the Group to a range of risks, with the following being the most significant: • asset volatility risk - the scheme obligations are calculated using a discount rate set with reference to high quality corporate bond yields. If scheme assets underperform this yield, this will reduce the surplus / increase the deficit, depending on the scheme. Certain of the schemes hold a significant proportion of equities, which are expected to outperform corporate bonds in the long term while creating volatility and risk in the short term; • longevity risk – the majority of the scheme obligations are to provide benefits over the life of the scheme members. An increase in life expectancy will result in a corresponding increase in the defined benefit obligation; • interest rate risk - a decrease in interest rates will increase plan liabilities, although this will be partially offset by an increase in the value of certain of the scheme assets; • inflation risk – a significant proportion of the scheme obligations are linked to inflation, such that any increase in inflation will cause an increase in the obligations. While certain of the scheme assets are indexed to inflation, any expected increase in the scheme assets from inflation would be disproportionately lower than the increase in the scheme obligations; and • currency risk – a number of scheme assets are denominated in currencies other than the pound sterling. Weakening of those currencies, or strengthening of the pound sterling, in the long term, will have the effect of reducing the value of scheme assets. a Cash payments and funding arrangements Cash payments in respect to pension obligations comprise normal employer contributions by the Group and deficit contributions based on the agreed deficit payment plan with NAPS. Total payments for the year to December 31, 2022 net of service costs made by the Group were €20 million (2021: €38 million) being the employer contributions of €22 million (2021: €41 million) less the current service cost of €2 million (2021: €3 million) (note 32b,c). Future funding arrangements Pension contributions for APS and NAPS were determined by actuarial valuations made at March 31, 2021, using assumptions and methodologies agreed between the Group and Trustee of each scheme. In total, the Group expects to pay €1 million in employer contributions to APS and NAPS in 2023. The following graph provides the undiscounted benefit payments to be made by the Trustees of APS and NAPS over the remaining expected duration of the schemes: Projected benefit payments from the reporting date (€ million, unaudited) The amounts and timing of these projected benefit payments are subject to the aforementioned risks to the schemes. Deficit contributions At the date of the actuarial valuation, the actuarial deficit of NAPS amounted to €1,887 million. In order to address the deficit in the scheme, the Group has also committed to deficit contribution payments through to June 30, 2023, amounting to approximately €58 million per year, increasing by €58 million each year up to June 30, 2026 and subsequently capped at €257 million per year through to May 31, 2032. The deficit contribution plan includes an over-funding protection mechanism, based on the triennial valuation methodology for measuring the deficit, whereby deficit contributions are suspended if the funding position reaches 100 per cent, with a mechanism for contributions to resume if the contribution level subsequently falls below 100 per cent, or until such point as the scheme funding level reaches 100 per cent. During the year ended and as at December 31, 2022, given the funding level of the scheme, the NAPS funding position exceeded 100 per cent and accordingly deficit contributions were suspended. At December 31, 2022, the valuation of the funding level incorporates significant forward-looking assumptions, such that the Group currently does not expect to make further deficit contributions. Given the long-term nature of the NAPS scheme, these assumptions are subject to uncertainty and there can be no guarantee that deficit contributions will not resume in the future or that additional deficit contributions will not need to be incorporated into future triennial actuarial valuations. At December 31, 2022, had the over-funding protection mechanism not been applied, then the asset ceiling adjustment (as detailed in note 32c) would have been €661 million higher. At December 31, 2022, the Group is committed to the following undiscounted deficit payments, which are deductible for tax purposes at the statutory rate of tax: € million Within 12 months 1-2 years 2-5 years Greater than 5 years Total expected deficit payments NAPS1 – Other schemes 49 – – – – 44 44 – 137 1 Committed deficit contributions for NAPS are stated after the effect of the over-funding protection mechanism. Deficit payments in respect of local arrangements outside of the UK have been determined in accordance with local practice. Under the triennial valuation of NAPS as at March 31, 2021, in the period up to December 31, 2023, no dividend payment is permitted from British Airways to IAG. In the period from January 1 to December 31, 2024, any dividends paid by British Airways will be matched by contributions to NAPS of 50 per cent of the value of dividends paid. In the period from January 1 to September 30, 2025, any dividend payment from British Airways to IAG that exceeds 50 per cent of the pre-exceptional profit after tax in each financial year will require additional payments to be made to NAPS if the scheme is not at least 100 per cent funded. All dividend restrictions cease from October 1, 2025, onwards. British Airways must maintain a minimum cash level of €1,829 million (£1,600 million) as at the date of the declaration of any dividends as well as immediately following the payment of any dividends to IAG and the associated matching contributions to NAPS. The amount of any deficit contributions and dividend matching contributions in a single financial year is limited to €343 million (£300 million). b Employee benefit scheme amounts recognised in the financial statements i Amounts recognised on the Balance sheet € million Scheme assets at fair value1 Present value of scheme liabilities1 Net pension asset/(liability) Effect of the asset ceiling2 Other employee benefit obligations December 31, 2022 Represented by: Employee benefit asset Employee benefit obligation Net employee benefit asset3 € million Scheme assets at fair value1 Present value of scheme liabilities1 Net pension asset/(liability) Effect of the asset ceiling2 Other employee benefit obligations December 31, 2021 Represented by: Employee benefit asset Employee benefit obligation Net employee benefit obligation3 APS 6,283 2022 NAPS 17,029 (6,052) (13,692) 231 (80) – 151 3,337 (1,168) – 2,169 APS 8,869 2021 NAPS 25,055 (8,333) (22,583) 536 (186) – 350 2,472 (1,061) – 1,411 Other 356 (548) (192) – (11) (203) Other 446 (706) (260) – (11) (271) Total 23,668 (20,292) 3,376 (1,248) (11) 2,117 2,334 (217) 2,117 Total 34,370 (31,622) 2,748 (1,247) (11) 1,490 1,775 (285) 1,490 1 Includes Additional Voluntary Contributions (AVCs), which the Trustees hold as assets to secure additional benefits on a defined contribution basis for those members who elect to make such AVCs. At December 31, 2022, such assets were €320 million (2021: €391 million) with a corresponding amount recorded in the scheme liabilities. 2 APS and NAPS have an accounting surplus under IAS 19, 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 arising on both the net pension asset and the future contractual minimum funding requirements. 3 The net deferred tax asset recognised on the net employee benefit asset (2021: asset) was €54 million at December 31, 2022 (2021: €62 million). The defined benefit obligation includes €21 million (2021: €25 million) arising from unfunded plans. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 251 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 32 Employee benefit obligations continued ii Amounts recognised in the Income statement Pension costs charged to operating result are: € million Defined benefit plans: Current service cost Administrative expenses Defined contribution plans Pension costs recorded as employee costs € million Interest income on scheme assets Interest expense on scheme liabilities Interest expense on asset ceiling Net financing (credit)/charge relating to pensions iii Amounts recognised in the Statement of other comprehensive income € million Return on plan assets excluding interest income Remeasurement of plan liabilities from changes in financial assumptions1 Remeasurement of plan liabilities from changes in demographic assumptions1 Remeasurement of experience losses Remeasurement of the APS and NAPS asset ceilings Exchange movements Pension remeasurements charged to Other comprehensive income Deferred tax arising on pension remeasurements Pension remeasurements charged to Other comprehensive income, net of tax 2022 2021 2 19 21 251 272 2022 (633) 584 23 (26) 2022 9,360 (10,476) (202) 627 14 6 (671) 9 (662) 3 29 32 200 232 2021 (432) 425 9 2 2021 (2,495) 95 (49) 427 419 (14) (1,617) 217 (1,400) 1 The prior year figures include a reclassification between remeasurements of plan liabilities from changes in financial assumptions to remeasurement of plan liabilities from changes in demographic assumptions to align with the current year presentation. There is no change in the total pension remeasurements charged to Other comprehensive income. c Fair value of scheme assets Investment strategies i 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, longevity 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. Longevity risk is managed through the use of buy-in insurance contracts, asset swaps and longevity swaps. Along with existing contracts with Rothesay Life (as detailed in note 32c(iii)), APS is 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 basis). The strategic benchmark for asset allocations differentiates between ‘return seeking assets’ and ‘liability matching assets’ depending on the maturity of each scheme. At December 31, 2022, the benchmark for NAPS was 31 per cent (2021: 37 per cent) in return seeking assets and 69 per cent (2021: 63 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 their investment managers to work within. APS no longer has a ‘strategic benchmark’ as instead, APS now runs off its liquidation portfolio to a liability matching portfolio of bonds and cash. The actual asset allocation for APS at December 31, 2022 was 1 per cent (2021: 1 per cent) in return seeking assets and 99 per cent (2021: 99 per cent) in liability matching investments. NAPS uses Liability Driven Investments (LDIs) to effectively hedge volatility in the scheme liabilities. This is achieved through direct bond holdings as opposed to the use of derivatives and as such leverage is low. Accordingly, as at December 31, 2022, NAPS has not been required to raise additional cash or liquidate existing assets in order to fund derivative positions. 252 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements 2022 2021 2 19 21 251 272 2022 (633) 584 23 (26) 2022 9,360 (10,476) (202) 627 14 6 (671) 9 (662) 3 29 32 200 232 2021 (432) 425 9 2 2021 (2,495) 95 (49) 427 419 (14) (1,617) 217 (1,400) NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 32 Employee benefit obligations continued ii Amounts recognised in the Income statement Pension costs charged to operating result are: € million Defined benefit plans: Current service cost Administrative expenses Defined contribution plans Pension costs recorded as employee costs € million Interest income on scheme assets Interest expense on scheme liabilities Interest expense on asset ceiling Net financing (credit)/charge relating to pensions iii Amounts recognised in the Statement of other comprehensive income € million Return on plan assets excluding interest income Remeasurement of plan liabilities from changes in financial assumptions1 Remeasurement of plan liabilities from changes in demographic assumptions1 Remeasurement of experience losses Remeasurement of the APS and NAPS asset ceilings Exchange movements Pension remeasurements charged to Other comprehensive income Deferred tax arising on pension remeasurements Pension remeasurements charged to Other comprehensive income, net of tax charged to Other comprehensive income. c Fair value of scheme assets i Investment strategies 1 The prior year figures include a reclassification between remeasurements of plan liabilities from changes in financial assumptions to remeasurement of plan liabilities from changes in demographic assumptions to align with the current year presentation. There is no change in the total pension remeasurements 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, longevity 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. Longevity risk is managed through the use of buy-in insurance contracts, asset swaps and longevity swaps. Along with existing contracts with Rothesay Life (as detailed in note 32c(iii)), APS is 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 basis). The strategic benchmark for asset allocations differentiates between ‘return seeking assets’ and ‘liability matching assets’ depending on the maturity of each scheme. At December 31, 2022, the benchmark for NAPS was 31 per cent (2021: 37 per cent) in return seeking assets and 69 per cent (2021: 63 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 their investment managers to work within. APS no longer has a ‘strategic benchmark’ as instead, APS now runs off its liquidation portfolio to a liability matching portfolio of bonds and cash. The actual asset allocation for APS at December 31, 2022 was 1 per cent (2021: 1 per cent) in return seeking assets and 99 per cent (2021: 99 per cent) in liability matching investments. NAPS uses Liability Driven Investments (LDIs) to effectively hedge volatility in the scheme liabilities. This is achieved through direct bond holdings as opposed to the use of derivatives and as such leverage is low. Accordingly, as at December 31, 2022, NAPS has not been required to raise additional cash or liquidate existing assets in order to fund derivative positions. ii Movement in 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 Administrative expenses Return on plan assets excluding interest income Employer contributions1 Employee contributions Benefits paid Exchange movements December 31 2022 34,370 633 (13) (9,360) 22 6 (1,301) (689) 23,668 2021 31,185 432 (21) 2,495 41 13 (1,930) 2,155 34,370 1 Includes employer contributions to APS of €1 million (2021: €1 million) and to NAPS of €nil (2021: €nil) of which deficit-funding payments represented €nil for APS (2021: €nil) and €nil for NAPS (2021: €nil). iii Composition of scheme assets Scheme assets held by the Group at December 31 comprise: € million Return seeking investments Listed equities – UK Listed equities – Rest of world Private equities Properties Alternative investments Liability matching investments Government issued fixed bonds Government issued index-linked bonds Asset and longevity swaps1 Insurance contract1 Other Cash and cash equivalents Derivative financial instruments Other investments Total scheme assets APS NAPS Other Total 2021 2022 8 1 38 2 41 90 790 860 1,114 3,356 6,120 117 (47) 3 73 6,283 125 883 1,518 2,124 1,837 6,487 4,390 7,225 – – 11,615 563 (1,650) 14 (1,073) 17,029 6 163 10 16 3 198 99 8 – 36 143 4 9 2 15 139 1,047 1,566 2,142 1,881 6,775 5,279 8,093 1,114 3,392 17,878 684 (1,688) 19 (985) 356 23,668 224 4,441 1,643 2,481 1,925 10,714 10,681 8,511 1,716 4,662 25,570 1,139 (3,135) 82 (1,914) 34,370 1 The prior year scheme asset balances split between Asset and longevity swaps and Insurance contracts have been updated to reflect the current year presentation. There is no change in total scheme assets. The fair values of the Group’s scheme assets, which are not derived from quoted prices on active markets, are determined depending on the nature of the inputs used in determining the fair values (see note 28b for further details) and using the following methods and assumptions: • private equities are valued at fair value based on the most recent transaction price or third-party net asset, revenue or earnings-based valuations that generally result in the use of significant unobservable inputs. The dates of these valuations typically precede the reporting date and have been adjusted for any cash movements between the date of the valuation and the reporting date. Typically, the valuation approach and inputs for these investments are not updated through to the reporting date unless there are indications of significant market movements. • properties are valued based on an analysis of recent market transactions supported by market knowledge derived from third-party professional valuers that generally result in the use of significant unobservable inputs. • alternative investments fair values, which predominantly include holdings in investment and infrastructure funds are determined based on the most recent available valuations applying the Net Asset Value methodology and issued by fund administrators or investment managers and adjusted for any cash movements having occurred from the date of the valuation to the reporting date. The dates of these valuations typically precede the reporting date and have been adjusted for any cash movements between the date of the valuation and the reporting date. Typically, the valuation approach and inputs for these investments are not updated through to the reporting date unless there are indications of significant market movements. • other investments predominantly includes: interest receivable on bonds; dividends from listed and private equities that have been declared but not received at the balance sheet date; receivables from the sale of assets for which the proceeds have not been collected at the balance sheet date; and payables for the purchase of assets which have not been settled at the balance sheet date. • asset and longevity swaps - APS has a contract with Rothesay Life, entered into in 2010 and extended in 2013, which covers 25 per cent (2021: 25 per cent) of the pensioner liabilities for an agreed list of members. Under the contract, to reduce the risk of long-term longevity risk, Rothesay Life makes benefit payments monthly in respect of the agreed list of members in return for the contractual return receivable on a portfolio of assets (made up of quoted government debt) held by the scheme and the contractual payments made by APS to Rothesay Life on the longevity swaps. The Group holds the portfolio of assets at their fair value, with the government debt held at their quoted market price and the swaps accounted for at their estimated discounted future cash flows. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 253 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 32 Employee benefit obligations continued During 2011, APS entered into a longevity swap with Rothesay Life, which covers an additional 21 per cent (2021: 21 per cent) of the pensioner liabilities for the same agreed list of members as the 2010 contract. Under the longevity swap, to reduce the risk of long-term longevity risk, APS makes a fixed payment to Rothesay Life each month reflecting the prevailing mortality assumptions at the inception of the contract, and Rothesay Life make a monthly payment to APS reflecting the actual monthly benefit payments to members. The cash flows are settled net each month. If pensioners live longer than expected at inception of the longevity swap, Rothesay Life will make payments to the scheme to offset the additional cost of paying pensioners and if pensioners do not live as long as expected, then the scheme will make payments to Rothesay Life. The Group holds the longevity swap at fair value, determined at the estimated discounted future cash flows. • insurance contract - During 2018 the Trustee of APS secured a buy-in contract with Legal & General. The buy-in contract covers all members in receipt of pensions from APS at March 31, 2018, excluding dependent children, receiving a pension at that date and members in receipt of equivalent pension only benefits, who were 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. iv Effect of the asset ceiling In measuring the valuation of the net defined benefit asset for each scheme, the Group limits such measurement to the lower of the surplus in each scheme and the respective asset ceiling. The asset ceiling represents the present value of the economic benefits available in the form of a refund or a reduction in future contributions after they are paid into the plan. The Group has determined that the recoverability of such surpluses, including minimum funding requirements, will be subject to withholding taxes in the UK, payable by the Trustee, of 35 per cent. The future committed NAPS deficit contributions, as detailed in note 32a, are treated as minimum funding requirements under IAS 19 and are not recognised as part of the scheme assets or liabilities. The Group has determined that upon the wind up of the scheme, that if the scheme is in surplus, including the incorporation of the minimum funding requirements, then the surplus will be available as a refund or a reduction in future contributions after they are paid into the scheme. The recovery of such amounts are subject to UK withholding tax payable by the Trustee. In measuring the recoverability of the surplus for each scheme, the Group limits such measurement to the lower of the surplus in each scheme and the respective asset ceiling. The asset ceiling represents the present value of the economic benefits available upon wind up of the scheme, less the application of withholding taxes in the UK, payable by the Trustee, at 35 per cent. 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 Remeasurements Exchange movements December 31 d Present value of scheme liabilities 2022 1,247 23 14 (36) 1,248 i Movement in 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 Interest expense Remeasurements - financial assumptions1, 2 Remeasurements - demographic assumptions2 Remeasurements of experience losses Benefits paid Employee contributions Exchange movements December 31 2022 31,622 2 584 (10,476) (202) 627 (1,301) 6 (570) 20,292 2021 761 9 419 58 1,247 2021 30,556 3 425 95 (49) 427 (1,930) 13 2,082 31,622 1 Included in the remeasurements from financial assumptions is an amount of €10,299 million (2021: reduction of €1,866 million) that reduces the scheme liabilities relating to changes in the discount rates and €177 million (2021: increase of €1,961 million) that reduces the scheme liabilities relating to changes in inflation rates. 2 The prior year figures include a reclassification between remeasurements of plan liabilities from changes in financial assumptions to remeasurement of plan liabilities from changes in demographic assumptions to align with the current year presentation. There is no change in total scheme liabilities. 254 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 32 Employee benefit obligations continued During 2011, APS entered into a longevity swap with Rothesay Life, which covers an additional 21 per cent (2021: 21 per cent) of the pensioner liabilities for the same agreed list of members as the 2010 contract. Under the longevity swap, to reduce the risk of long-term longevity risk, APS makes a fixed payment to Rothesay Life each month reflecting the prevailing mortality assumptions at the inception of the contract, and Rothesay Life make a monthly payment to APS reflecting the actual monthly benefit payments to members. The cash flows are settled net each month. If pensioners live longer than expected at inception of the longevity swap, Rothesay Life will make payments to the scheme to offset the additional cost of paying pensioners and if pensioners do not live as long as expected, then the scheme will make payments to Rothesay Life. The Group holds the longevity swap at fair value, determined at the estimated discounted future cash flows. • insurance contract - During 2018 the Trustee of APS secured a buy-in contract with Legal & General. The buy-in contract covers all members in receipt of pensions from APS at March 31, 2018, excluding dependent children, receiving a pension at that date and members in receipt of equivalent pension only benefits, who were 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. iv Effect of the asset ceiling In measuring the valuation of the net defined benefit asset for each scheme, the Group limits such measurement to the lower of the surplus in each scheme and the respective asset ceiling. The asset ceiling represents the present value of the economic benefits available in the form of a refund or a reduction in future contributions after they are paid into the plan. The Group has determined that the recoverability of such surpluses, including minimum funding requirements, will be subject to withholding taxes in the UK, payable by the Trustee, of 35 per cent. The future committed NAPS deficit contributions, as detailed in note 32a, are treated as minimum funding requirements under IAS 19 and are not recognised as part of the scheme assets or liabilities. The Group has determined that upon the wind up of the scheme, that if the scheme is in surplus, including the incorporation of the minimum funding requirements, then the surplus will be available as a refund or a reduction in future contributions after they are paid into the scheme. The recovery of such amounts are subject to UK withholding tax payable by the Trustee. In measuring the recoverability of the surplus for each scheme, the Group limits such measurement to the lower of the surplus in each scheme and the respective asset ceiling. The asset ceiling represents the present value of the economic benefits available upon wind up of the scheme, less the application of withholding taxes in the UK, payable by the Trustee, at 35 per cent. 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: d Present value of scheme liabilities i Movement in 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 Interest expense Remeasurements Exchange movements December 31 € million January 1 Current service cost Interest expense Benefits paid Employee contributions Exchange movements December 31 inflation rates. Remeasurements - financial assumptions1, 2 Remeasurements - demographic assumptions2 Remeasurements of experience losses 2022 1,247 23 14 (36) 1,248 2022 31,622 2 584 (10,476) (202) 627 (1,301) 6 (570) 20,292 2021 761 9 419 58 1,247 2021 30,556 3 425 95 (49) 427 (1,930) 13 2,082 31,622 1 Included in the remeasurements from financial assumptions is an amount of €10,299 million (2021: reduction of €1,866 million) that reduces the scheme liabilities relating to changes in the discount rates and €177 million (2021: increase of €1,961 million) that reduces the scheme liabilities relating to changes in 2 The prior year figures include a reclassification between remeasurements of plan liabilities from changes in financial assumptions to remeasurement of plan liabilities from changes in demographic assumptions to align with the current year presentation. There is no change in total scheme liabilities. Scheme liability assumptions ii The principal assumptions used for the purposes of the IAS 19 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 2022 NAPS 4.80 Other schemes4 0.8-7.2 – 2.0-6.0 2.80 3.20 2.80 0.3-3.0 2.2-3.1 2.0-2.6 APS 4.85 3.40 3.40 3.40 2.80 2021 NAPS 1.90 Other schemes4 0.3-6.5 – 2.0-6.0 2.85 3.30 2.85 2.0-3.0 1.8-2.5 1.8-2.5 APS 1.80 3.55 3.55 3.55 2.95 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, which reflects inflationary increases, is assumed to be in line with increases in RPI. 3 It has been assumed that the rate of increase of pensions in payment, which reflects inflationary increases, will be in line with CPI for NAPS and RPI for APS as at December 31, 2022. 4 The rate of increase in healthcare costs for schemes based in the United States is based on medical trend rates of 6.25 per cent grading down to 5.00 per cent over five years (2021: 6.00 per cent to 5.00 per cent over five years). 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 2022 2021 27.9 29.1 29.3 31.5 28.1 29.9 29.5 31.9 For APS, the base mortality tables are based on the Agreed Valuation Basis (AVB) as agreed between British Airways and the trustees of APS. For NAPS, the base mortality tables are based on the most recent model published by the UK actuarial profession’s Continuous Mortality Investigation (CMI), being their 2021 model. These standard mortality tables, for both APS and NAPS, incorporate adjustments specific to the demographics of scheme members, including a long-term improvement parameter of 1.00 per cent per annum (2021: 1.25 per cent). Allowance has been made with regard to the long-term uncertainty arising from the effects of COVID-19. For schemes in the United States, mortality rates were based on the MP-2021 mortality tables incorporating adjustments for the long-term impact COVID-19 is expected to have on mortality. At December 31, 2022, the weighted-average duration of the defined benefit obligation was 10 years for APS (2021: 12 years) and 15 years for NAPS (2021: 19 years). The weighted average duration of the defined benefit obligations was 3 to 19 years for other schemes (2021: 11 to 23 years). The weighted average duration represents a single figure for the average number of years over which the employee benefit liability discounted cash flows is extinguished and is highly dependent on movements in the aforementioned discount rates, such that with an increase in the discount rates experienced in 2022, the weighted-average duration for both schemes has reduced. iii Sensitivity analysis Reasonably possible changes at the reporting date to significant valuation assumptions, holding other assumptions constant, would have affected the present value of scheme liabilities by the amounts shown: € million Discount rate (decrease of 50 basis points)1 Future pension growth (increase of 50 basis points)1 Future mortality rate (one year increase in life expectancy) Increase in scheme liabilities APS 286 252 286 NAPS 983 949 354 Other schemes 34 5 24 1 Sensitivities smaller than those disclosed can be approximately interpolated from those sensitivities above. 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. 33 Contingent liabilities There are a number of legal and regulatory proceedings against the Group in a number of jurisdictions which at December 31, 2022, where they could be reliably estimated, amounted to €11 million (December 31, 2021: €22 million). The Group does not consider it probable that there will be an outflow of economic resources with regard to these proceedings and accordingly no provisions have been recorded. Contingent liabilities associated with income taxes, deferred taxes and indirect taxes are presented in note 10. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 255 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 34 Government grants and assistance The Group has availed itself of government grants and assistance as follows: The Coronavirus Job Retention Scheme (CJRS) – recognised net within Employee costs The CJRS was implemented by the Government of the United Kingdom from March 1, 2020 to August 30, 2020, where those employees designated as being ‘furloughed workers’ were eligible to have 80 per cent of their wage costs paid up to a maximum of £2,500 per month. From September 1, 2020 to September 30, 2020, the level of eligibility reduced to 70 per cent of wage costs and up to a maximum of £2,197.50 per month. From October 1, 2020 to October 31, 2020, the level of eligibility reduced to 60 per cent of wage costs and up to a maximum of £1,875 per month. Following the introduction of further lockdown restrictions in the United Kingdom in November 2020, the CJRS was extended from November 1, 2020 to November 30, 2020 and then further to March 31, 2021 and then further again to September 30, 2021 with the level of eligibility increased to 80 per cent of wage costs and a maximum of £2,500 per month through to the end of June 2021. From July 1, 2021 the eligibility decreased down each month to 60 per cent of wage costs and a maximum of £1,875 per month by September 30, 2021, at which time the CJRS ended. Such costs were paid by the Government to the Group in arrears. The Group was obliged to continue to pay the associated social security costs and employer pension contributions. The Temporary Wage Subsidy Scheme (TWSS) and the Employment Wage Subsidy Scheme (EWSS) – recognised net within Employee costs The TWSS was implemented by the government of Ireland from March 1, 2020 to August 30, 2020, where those employees designated as being furloughed workers were eligible to have 85 per cent of their wage costs paid up to a maximum of €410 per week. This scheme was replaced with the EWSS from September 1, 2020 and ran through to April, 2022. For those qualifying employees (earning less than €1,462 per week), the government reimbursed wage costs up to a maximum of €203 per week. Such costs were paid by the government to the Group in arrears. The total amount of the relief received under the CJRS, the TWSS and the EWSS by the Group during 2022 amounted to €11 million (2021: €286 million). Temporary Redundancy Plan (ERTE) – no recognition in the financial statements of the Group The ERTE was implemented by the government of Spain from March 1, 2020 and ran through to February 28, 2022. Under this plan, employment was temporarily suspended and those designated employees were paid directly by the government and there was no remittance made to the Group. The Group was obliged to continue to pay the associated social security costs. Had those designated employees not been temporarily suspended during 2022, the Group would have incurred further employee costs of €3 million (2021: €269 million). The Ireland Strategic Investment Fund (ISIF) – recognised within Long-term borrowings On December 23, 2020, Aer Lingus entered into a financing arrangement for €75 million. On March 27, 2021, Aer Lingus entered into a further financing arrangement to extend the total amount to €150 million. On March 4, 2022, Aer Lingus entered into a financing arrangement with ISIF, which subsequently extinguished the existing €150 million of facilities and replaced them with a €350 million facility that matures in March 2025. On December 13, 2022, Aer Lingus repaid €100 million of this financing arrangement with the amount repaid available to be redrawn through to March 2025. The facility is secured on specific landing rights. At December 31, 2022 €300 million of the facility remained undrawn. The UK Export Finance (UKEF) – recognised within Long-term borrowings On February 22, 2021, British Airways entered into a 5-year term loan Export Development Guarantee Facility of €2.3 billion (£2.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. The facility is unsecured. On November 1, 2021, British Airways entered into a further 5-year term loan Export Development Guarantee Facility of €1.1 billion (£1.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. The facility is unsecured. At December 31, 2022 the facility remained undrawn. 256 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 34 Government grants and assistance The Group has availed itself of government grants and assistance as follows: The Coronavirus Job Retention Scheme (CJRS) – recognised net within Employee costs The CJRS was implemented by the Government of the United Kingdom from March 1, 2020 to August 30, 2020, where those employees designated as being ‘furloughed workers’ were eligible to have 80 per cent of their wage costs paid up to a maximum of £2,500 per month. From September 1, 2020 to September 30, 2020, the level of eligibility reduced to 70 per cent of wage costs and up to a maximum of £2,197.50 per month. From October 1, 2020 to October 31, 2020, the level of eligibility reduced to 60 per cent of wage costs and up to a maximum of £1,875 per month. Following the introduction of further lockdown restrictions in the United Kingdom in November 2020, the CJRS was extended from November 1, 2020 to November 30, 2020 and then further to March 31, 2021 and then further again to September 30, 2021 with the level of eligibility increased to 80 per cent of wage costs and a maximum of £2,500 per month through to the end of June 2021. From July 1, 2021 the eligibility decreased down each month to 60 per cent of wage costs and a maximum of £1,875 per month by September 30, 2021, at which time the CJRS ended. Such costs were paid by the Government to the Group in arrears. The Group was obliged to continue to pay the associated social security costs and employer pension contributions. The Temporary Wage Subsidy Scheme (TWSS) and the Employment Wage Subsidy Scheme (EWSS) – recognised net within The TWSS was implemented by the government of Ireland from March 1, 2020 to August 30, 2020, where those employees designated as being furloughed workers were eligible to have 85 per cent of their wage costs paid up to a maximum of €410 per week. This scheme was replaced with the EWSS from September 1, 2020 and ran through to April, 2022. For those qualifying employees (earning less than €1,462 per week), the government reimbursed wage costs up to a maximum of €203 per week. Such costs were paid by the government to the The total amount of the relief received under the CJRS, the TWSS and the EWSS by the Group during 2022 amounted to €11 million (2021: Employee costs Group in arrears. €286 million). Temporary Redundancy Plan (ERTE) – no recognition in the financial statements of the Group The ERTE was implemented by the government of Spain from March 1, 2020 and ran through to February 28, 2022. Under this plan, employment was temporarily suspended and those designated employees were paid directly by the government and there was no remittance made to the Group. The Group was obliged to continue to pay the associated social security costs. Had those designated employees not been temporarily suspended during 2022, the Group would have incurred further employee costs of €3 million (2021: €269 million). The Ireland Strategic Investment Fund (ISIF) – recognised within Long-term borrowings On December 23, 2020, Aer Lingus entered into a financing arrangement for €75 million. On March 27, 2021, Aer Lingus entered into a further financing arrangement to extend the total amount to €150 million. On March 4, 2022, Aer Lingus entered into a financing arrangement with ISIF, which subsequently extinguished the existing €150 million of facilities and replaced them with a €350 million facility that matures in March 2025. On December 13, 2022, Aer Lingus repaid €100 million of this financing arrangement with the amount repaid available to be redrawn through to March 2025. The facility is secured on specific landing rights. At December 31, 2022 €300 million of the facility remained undrawn. The UK Export Finance (UKEF) – recognised within Long-term borrowings On November 1, 2021, British Airways entered into a further 5-year term loan Export Development Guarantee Facility of €1.1 billion (£1.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. The facility is unsecured. At December 31, 2022 the facility remained undrawn. 35 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 2022 2021 5 141 61 113 1 25 – 26 6 16 49 69 1 5 3 2 1 Sales to associates: Consisted primarily of sales for airline related services to Dunwoody Airline Services (Holding) Limited (Dunwoody) of €4 million (2021: €5 million) and €1 million (2021: €1 million) to Serpista, S.A. and Multiservicios Aeroportuarios. 2 Sales to and purchases from significant shareholders related to interline services with Qatar Airways. 3 Purchases from associates: Consisted primarily of €35 million of airport auxiliary services purchased from Multiservicios Aeroportuarios, S.A. (2021: €33 million), €14 million of handling services provided by Dunwoody (2021: €8 million) and €13 million of maintenance services received from Serpista, S.A. (2021: €8 million). 4 Amounts owed by associates: Consisted primarily of €1 million of services provided to Multiservicios Aeroportuarios, Serpista, Dunwoody and Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A. (2021: €1 million). 5 Amounts owed by and to significant shareholders related to Qatar Airways. 6 Amounts owed to associates: €nil (2021: €3 million). During the year to December 31, 2022 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 €2 million (2021: €6 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. During the course of 2022, the Group renewed its loyalty currency exchange agreement with Qatar Airways, where Avios could be exchanged for points within the Qatar Airways’ loyalty programme, the Privilege Club. In addition, in renewing the agreement, IAG Loyalty licensed the Avios brand name for use within the Privilege Club. During the course of 2022, the Group provided a long-term shareholder loan of €12 million ($14 million) to LanzaJet, Inc., a company which specialises in the generation of Sustainable Aviation Fuels of which the Group has a 16.7 per cent equity interest, classified as an associate and presented within Investments accounted for using the equity method in the Balance sheet. On February 22, 2021, British Airways entered into a 5-year term loan Export Development Guarantee Facility of €2.3 billion (£2.0 billion) underwritten by a syndicate of banks, with 80 per cent of the principal guaranteed by UKEF. The facility is unsecured. For the year to December 31, 2022, the Group has not made any provision for expected credit loss arising relating to amounts owed by related parties (2021: €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, 2022, the only significant shareholder of the Group was Qatar Airways. At December 31, 2022 the Group had cash deposit balances with shareholders holding a participation of between 3 to 5 per cent, of €nil (2021: €nil). INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 257 NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 35 Related party transactions continued Board of Directors and Management Committee remuneration Compensation received by the Group’s Board of Directors and Management Committee, in 2022 and 2021 is as follows: € million Base salary, fees and benefits Board of Directors Short-term benefits Share-based payments Management Committee Short-term benefits Share-based payments Year to December 31 2022 2021 4 1 15 2 3 – 11 1 For the year to December 31, 2022 the Board of Directors includes remuneration for one Executive Director (December 31, 2021: one Executive Director). The Management Committee includes remuneration for 14 members (December 31, 2021: 14 members). The Company provides life insurance for the Executive Director and all members of the Management Committee. For the year to December 31, 2022 the Company's obligation was €38,000 (2021: €35,000). At December 31, 2022 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating to the current members of the Management Committee totalled €5 million (2021: €9 million). No loan or credit transactions were outstanding with Directors or officers of the Group at December 31, 2022 (2021: €nil). 36 Post balance sheet events On February 23, 2023, the Group entered into an agreement to acquire the remaining eighty per cent of the share capital of Air Europa Holdings that it had not previously owned. On successful completion of the transaction, 54,064,575 ordinary shares of the Company (which represented €100 million at the date of the agreement) will be transferred to and €100 million in cash will be paid to Globalia, with a further €100 million paid on both the first and second anniversary of completion. In addition, the Group has agreed to pay a break-fee to Globalia of €50 million should: (i) the relevant approvals, detailed below, not be forthcoming within 24 months of entering into the agreement; or (ii) the Group terminates the agreement at any time prior to completion. The acquisition is conditional on Globalia receiving approval from the syndicated banks that provide the loan agreements that are partially guaranteed by the Instituto de Crédito Oficial (ICO) and Sociedad Estatal de Participaciones Industriales (SEPI) in Spain. The acquisition is also subject to approval by relevant competition authorities. Until the completion of these approvals, the acquisition does not meet the recognition criteria under IFRS 3 Business combinations, and no accounting has been made for the transaction in these consolidated financial statements. The execution of the agreement has not impacted the fair value of the 20 per cent shareholding in Air Europa Holdings as detailed in note 19. The fair value of the non-controlling equity interest in Air Europa Holdings will be remeasured to reflect the transaction price upon successful completion of the transaction. 258 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements NOTES TO THE ACCOUNTS CONTINUED For the year to December 31, 2022 35 Related party transactions continued Board of Directors and Management Committee remuneration Compensation received by the Group’s Board of Directors and Management Committee, in 2022 and 2021 is as follows: € million Base salary, fees and benefits Board of Directors Short-term benefits Share-based payments Management Committee Short-term benefits Share-based payments Year to December 31 2022 2021 4 1 15 2 3 – 11 1 For the year to December 31, 2022 the Board of Directors includes remuneration for one Executive Director (December 31, 2021: one Executive Director). The Management Committee includes remuneration for 14 members (December 31, 2021: 14 members). The Company provides life insurance for the Executive Director and all members of the Management Committee. For the year to December 31, 2022 the Company's obligation was €38,000 (2021: €35,000). At December 31, 2022 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating to the current members of the Management Committee totalled €5 million (2021: €9 million). No loan or credit transactions were outstanding with Directors or officers of the Group at December 31, 2022 (2021: €nil). 36 Post balance sheet events On February 23, 2023, the Group entered into an agreement to acquire the remaining eighty per cent of the share capital of Air Europa Holdings that it had not previously owned. On successful completion of the transaction, 54,064,575 ordinary shares of the Company (which represented €100 million at the date of the agreement) will be transferred to and €100 million in cash will be paid to Globalia, with a further €100 million paid on both the first and second anniversary of completion. In addition, the Group has agreed to pay a break-fee to Globalia of €50 million should: (i) the relevant approvals, detailed below, not be forthcoming within 24 months of entering into the agreement; or (ii) the Group terminates the agreement at any time prior to completion. The acquisition is conditional on Globalia receiving approval from the syndicated banks that provide the loan agreements that are partially guaranteed by the Instituto de Crédito Oficial (ICO) and Sociedad Estatal de Participaciones Industriales (SEPI) in Spain. The acquisition is also subject to approval by relevant competition authorities. Until the completion of these approvals, the acquisition does not meet the recognition criteria under IFRS 3 Business combinations, and no accounting has been made for the transaction in these consolidated financial statements. The execution of the agreement has not impacted the fair value of the 20 per cent shareholding in Air Europa Holdings as detailed in note 19. The fair value of the non-controlling equity interest in Air Europa Holdings will be remeasured to reflect the transaction price upon successful completion of the transaction. 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. These measures are not defined under International Financial Reporting Standards (IFRS), should be considered in addition to IFRS measurements, may differ to definitions given by regulatory bodies applicable to the Group and may differ to similarly titled measures presented by other companies. They 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’. During 2022, other than enhancing the definition and reconciliation associated with the net debt to EBITDA before exceptional items detailed in note e, the Group has made no changes to its pre-existing disclosures and treatments of APMs compared to those disclosed in the Annual Report and Accounts for the year to December 31, 2021. The impact of and the recovery from the COVID-19 pandemic has significantly changed the basis on which the Board, Management Committee and external parties monitor the performance of the Group. In this regard measures relating to Levered free cash flow, Net debt to EBITDA before exceptional items and Return on capital employed do not provide the level of meaningful additional information that they have done in the past. However, the Group continues to present these APMs for consistency and they will become more prominent and relevant subsequent to the recovery from the COVID-19 pandemic. The definition of each APM, together with a reconciliation to the nearest measure prepared in accordance with IFRS is presented below. a Profit/(loss) after tax before exceptional items Exceptional items are those that in the Board’s and management’s view need to be separately disclosed by virtue of their size or incidence to supplement the understanding of the entity’s financial performance. The Management Committee of the Group uses financial performance on a pre-exceptional basis to evaluate operating performance and to make strategic, financial and operational decisions, and externally because it is widely used by security analysts and investors in evaluating the performance of the Group between reporting periods and against other companies. Exceptional items in the year to December 31, 2022 and 2021 include: significant changes in the long-term fleet plans that result in the reversal of impairment of fleet assets, legal re-imbursements, significant discontinuation of hedge accounting, and reversal of significant restructuring events recorded in prior reporting periods. The table below reconciles the statutory Income statement to the Income statement before exceptional items of the Group: € million Passenger revenue3 Cargo revenue Other revenue Total revenue Employee costs4 Fuel, oil costs and emissions charges3 Handling, catering and other operating costs Landing fees and en-route charges Engineering and other aircraft costs5 Property, IT and other costs1 Selling costs Depreciation, amortisation and impairment2 Currency differences Total expenditure on operations Operating profit/(loss) Finance costs Finance income Net change in fair value of financial instruments Net financing credit/(charge) relating to pensions Net currency retranslation charges Other non-operating credits6 Total net non-operating costs Profit/(loss) before tax Tax Profit/(loss) after tax for the year Statutory 2022 Exceptional items Before exceptional items 2022 Statutory 2021 Exceptional items Before exceptional items 2021 Year to December 31 19,458 1,615 1,993 23,066 4,647 6,120 2,971 1,890 2,101 950 920 2,070 141 21,810 1,256 (1,017) 52 81 26 (115) 132 (841) 415 16 431 – – – – – – – – – (23) – (8) – (31) 31 – – – – – – – 31 (2) 29 19,458 1,615 1,993 23,066 4,647 6,120 2,971 1,890 2,101 973 920 2,078 141 21,841 1,225 5,835 1,673 947 8,455 3,013 1,781 1,308 923 1,085 758 434 1,932 (14) 5 – – 5 (18) (154) – – (7) – – (21) – 5,830 1,673 947 8,450 3,031 1,935 1,308 923 1,092 758 434 1,953 (14) 11,220 (2,765) (200) 205 11,420 (2,970) (1,017) (830) 52 81 26 (115) 132 (841) 384 18 402 13 89 (2) (82) 70 (742) (3,507) 574 (2,933) – – – – – (75) (75) 130 (25) 105 (830) 13 89 (2) (82) 145 (667) (3,637) 599 (3,038) INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 259 ALTERNATIVE PERFORMANCE MEASURES CONTINUED The rationale for each exceptional item is given below. 1 Partial reversal of historical fine The exceptional credit of €23 million for the year to December 31, 2022 relates to the partial reversal of the fine, plus accrued interest, initially issued by the European Commission, in 2010, to British Airways regarding its involvement in cartel activity in the air cargo sector and that had been recognised as an exceptional charge. The exceptional credit has been recorded within Property, IT and other costs in the Income statement with no resultant tax charge arising. The cash inflow associated with the partial reversal of the fine was recognised during 2022. 2 Impairment reversal of fleet and associated assets The exceptional impairment reversal of €8 million for the year to December 31, 2022 relates to six Airbus A320s in Vueling, previously stood down in the fourth quarter of 2020 and subsequently stood up in the second and third quarters of 2022. The exceptional impairment reversal was recorded within Right of use assets on the Balance sheet and within Depreciation, amortisation and impairment in the Income statement. The exceptional impairment reversal of €21 million, recorded in 2021, includes an amount of €14 million relating to the reversal of aircraft impairment and an amount of €7 million relating to the reversal of engine impairment. The aircraft impairment reversal relates to four Airbus A320 aircraft in Vueling, previously permanently stood down in the fourth quarter of 2020, being stood up in the third quarter of 2021. The engine impairment reversal relates to certain engines which had been fully impaired during 2020 having been leased to a third party in the fourth quarter of 2021. Of the exceptional impairment reversal, €8 million was recorded within Property, plant and equipment relating to owned aircraft and €12 million was recorded within Right of use assets relating to leased aircraft. The exceptional impairment reversal is recorded within Depreciation, amortisation and impairment in the Income statement. There is no cash flow impact and there has been a tax charge of €2 million on the recognition of the impairment reversal (2021: charge of €1 million). In the year to December 31, 2021: 3 Discontinuation of hedge accounting The exceptional credit of €159 million, recorded in 2021, arose from a combination of the discontinuance of hedge accounting in the year to December 31, 2021 and the fair value movement on those relationships where hedge accounting was discontinued in the year to December 31, 2020, but for which the underlying hedging instrument had not matured at January 1, 2021. This was represented by credit of €162 million relating to fuel derivatives and an expense of €8 million related to the associated fuel foreign currency derivatives. The credit to Passenger revenue of €5 million relates to the discontinuation of hedge accounting of the associated foreign currency derivatives on forecast revenue. The cash outflow impact associated with the discontinuance of hedge accounting was €nil in the year to December 31, 2022 (2021: €338 million). The related tax charge in 2021 was €26 million. 4 Restructuring costs The exceptional credit of €18 million, recorded in 2021, relates to the reversal of restructuring provisions that have been released unutilised. There was no cash flow impact relating to the exceptional restructuring credit in 2021 and the related tax charge was €3 million. 5 Engineering and other aircraft costs The exceptional credit of €7 million, recorded in 2021, relates to the reversal of contractual lease provisions for those aircraft in Vueling that were stood up during 2021, where the estimated costs to fulfil the hand back conditions will be recognised over the remaining operating activity of the aircraft. The exceptional credit was recorded within Engineering and other aircraft costs. There was no cash flow impact relating to the exceptional credit in 2021 and there was no tax impact on the recognition of this credit. 6 Air Europa Holdings termination agreement The exceptional charge of €75 million, recorded in 2021, represents the amount agreed with Globalia to terminate the agreements signed on November 4, 2019 and January 20, 2021 under which Iberia had agreed to acquire the issued share capital of Air Europa Holdings. The exceptional charge was recorded within Other non-operating charges in the Income statement and was settled prior to December 31, 2021. The related tax credit was €5 million. The Group recognised the cash outflow impact of the termination agreement in 2021. The table below provides a reconciliation of the statutory to pre-exceptional condensed alternative income statement by operating segment for the years to December 31, 2022 and 2021: British Airways (£) British Airways (€) Year to December 31, 2022 Iberia Vueling Aer Lingus y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i 9,215 1,060 755 11,030 – – – – 9,215 10,790 1,060 1,245 755 886 11,030 12,921 – – – – 10,790 4,042 1,245 886 347 1,122 12,921 5,511 2,100 – 2,100 2,464 – 2,464 1,161 2,929 – 2,929 3,432 – 3,432 1,313 1,084 – 1,084 1,272 – 1,272 371 4,595 (19) 4,614 5,391 (23) 5,414 2,284 10,708 (19) 10,727 12,559 (23) 12,582 5,129 322 19 303 362 23 339 382 – – – – – – – – – – 4,042 2,584 347 1,122 – 14 5,511 2,598 1,161 370 1,313 739 – – – – – – 2,584 1,679 – 14 80 10 2,598 1,769 370 393 739 539 371 206 (8) 214 146 2,284 1,088 – 1,088 646 5,129 2,403 (8) 2,411 1,724 382 195 8 187 45 – – – – – – – – – – € million Passenger revenue Cargo revenue Other revenue Total revenue Employee costs Fuel, oil costs and emissions charges Depreciation, amortisation and impairment Other operating costs Total expenditure on operations Operating profit Operating margin (%) 2.9% 2.7% 6.9% 6.9% 7.5% 7.2% 2.6% l a n o i t p e c x e e r o f e B s m e t i 1,679 80 10 1,769 393 539 146 646 1,724 45 2.6% 260 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements ALTERNATIVE PERFORMANCE MEASURES CONTINUED The rationale for each exceptional item is given below. 1 Partial reversal of historical fine The exceptional credit of €23 million for the year to December 31, 2022 relates to the partial reversal of the fine, plus accrued interest, initially issued by the European Commission, in 2010, to British Airways regarding its involvement in cartel activity in the air cargo sector and that had been recognised as an exceptional charge. The exceptional credit has been recorded within Property, IT and other costs in the Income statement with no resultant tax charge arising. The cash inflow associated with the partial reversal of the fine was recognised during 2022. 2 Impairment reversal of fleet and associated assets The exceptional impairment reversal of €8 million for the year to December 31, 2022 relates to six Airbus A320s in Vueling, previously stood down in the fourth quarter of 2020 and subsequently stood up in the second and third quarters of 2022. The exceptional impairment reversal was recorded within Right of use assets on the Balance sheet and within Depreciation, amortisation and impairment in the Income statement. The exceptional impairment reversal of €21 million, recorded in 2021, includes an amount of €14 million relating to the reversal of aircraft impairment and an amount of €7 million relating to the reversal of engine impairment. The aircraft impairment reversal relates to four Airbus A320 aircraft in Vueling, previously permanently stood down in the fourth quarter of 2020, being stood up in the third quarter of 2021. The engine impairment reversal relates to certain engines which had been fully impaired during 2020 having been leased to a third party in the fourth quarter of 2021. Of the exceptional impairment reversal, €8 million was recorded within Property, plant and equipment relating to owned aircraft and €12 million was recorded within Right of use assets relating to leased aircraft. The exceptional impairment reversal is recorded within Depreciation, amortisation and impairment in the Income statement. There is no cash flow impact and there has been a tax charge of €2 million on the recognition of the impairment reversal (2021: charge of €1 million). In the year to December 31, 2021: 3 Discontinuation of hedge accounting The exceptional credit of €159 million, recorded in 2021, arose from a combination of the discontinuance of hedge accounting in the year to December 31, 2021 and the fair value movement on those relationships where hedge accounting was discontinued in the year to December 31, 2020, but for which the underlying hedging instrument had not matured at January 1, 2021. This was represented by credit of €162 million relating to fuel derivatives and an expense of €8 million related to the associated fuel foreign currency derivatives. The credit to Passenger revenue of €5 million relates to the discontinuation of hedge accounting of the associated foreign currency derivatives on forecast revenue. The cash outflow impact associated with the discontinuance of hedge accounting was €nil in the year to December 31, 2022 (2021: €338 million). The related tax charge in 2021 was €26 million. 4 Restructuring costs 5 Engineering and other aircraft costs was no tax impact on the recognition of this credit. 6 Air Europa Holdings termination agreement The exceptional credit of €18 million, recorded in 2021, relates to the reversal of restructuring provisions that have been released unutilised. There was no cash flow impact relating to the exceptional restructuring credit in 2021 and the related tax charge was €3 million. The exceptional credit of €7 million, recorded in 2021, relates to the reversal of contractual lease provisions for those aircraft in Vueling that were stood up during 2021, where the estimated costs to fulfil the hand back conditions will be recognised over the remaining operating activity of the aircraft. The exceptional credit was recorded within Engineering and other aircraft costs. There was no cash flow impact relating to the exceptional credit in 2021 and there The exceptional charge of €75 million, recorded in 2021, represents the amount agreed with Globalia to terminate the agreements signed on November 4, 2019 and January 20, 2021 under which Iberia had agreed to acquire the issued share capital of Air Europa Holdings. The exceptional charge was recorded within Other non-operating charges in the Income statement and was settled prior to December 31, 2021. The related tax credit was €5 million. The Group recognised the cash outflow impact of the termination agreement in 2021. The table below provides a reconciliation of the statutory to pre-exceptional condensed alternative income statement by operating segment for the years to December 31, 2022 and 2021: British Airways (£) British Airways (€) Iberia Vueling Aer Lingus Year to December 31, 2022 y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i 9,215 1,060 755 11,030 – – – – 9,215 10,790 10,790 4,042 4,042 2,584 2,584 1,679 1,060 1,245 755 886 1,245 886 347 1,122 347 1,122 – 14 80 10 11,030 12,921 12,921 5,511 5,511 2,598 2,598 1,769 – – – – 2,100 – 2,100 2,464 – 2,464 1,161 1,161 370 370 393 2,929 – 2,929 3,432 – 3,432 1,313 1,313 739 739 539 y r o t u t a t S – 14 – – – – – – 1,084 – 1,084 1,272 – 1,272 371 371 206 (8) 214 146 4,595 (19) 4,614 5,391 (23) 5,414 2,284 2,284 1,088 – 1,088 646 10,708 (19) 10,727 12,559 (23) 12,582 5,129 5,129 2,403 (8) 2,411 1,724 322 19 303 362 23 339 382 382 195 8 187 45 Operating margin (%) 2.9% 2.7% 6.9% 6.9% 7.5% 7.2% 2.6% € million Passenger revenue Cargo revenue Other revenue Total revenue Employee costs Fuel, oil costs and emissions charges Depreciation, amortisation and impairment Other operating costs Total expenditure on operations Operating profit l a n o i t p e c x e e r o f e B s m e t i 1,679 80 10 1,769 393 539 146 646 1,724 45 2.6% – – – – – – – – – – – – – – – – – – – – € million Passenger revenue Other revenue Total revenue Employee costs Depreciation, amortisation and impairment Other operating costs Total expenditure on operations Operating profit Operating margin (%) Year to December 31, 2022 IAG Loyalty (£) IAG Loyalty (€) y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i 569 274 843 50 7 546 603 240 – – – – – – – – 569 274 676 325 843 1,001 50 7 546 603 240 56 8 655 719 282 28.4% 28.4% – – – – – – – – 676 325 1,001 56 8 655 719 282 € million Passenger revenue Cargo revenue Other revenue Total revenue Year to December 31, 2021 British Airways (£) British Airways (€) l a n o i t p e c x E s m e t i y r o t u t a t S l a n o i t p e c x e e r o f e B s m e t i l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S Iberia l a n o i t p e c x E s m e t i y r o t u t a t S l a n o i t p e c x e e r o f e B s m e t i Vueling Aer Lingus l a n o i t p e c x E s m e t i y r o t u t a t S l a n o i t p e c x e e r o f e B s m e t i l a n o i t p e c x E s m e t i y r o t u t a t S l a n o i t p e c x e e r o f e B s m e t i 2,321 1,097 281 3,699 5 – – 5 2,316 2,715 6 2,709 1,724 1,097 1,275 281 328 – – 1,275 394 328 666 – – – 1,724 1,011 394 666 – 5 3,694 4,318 6 4,312 2,784 – 2,784 1,016 – – – – 1,011 307 (1) 308 – 5 65 4 – – 65 4 1,016 376 (1) 377 Employee costs 1,471 (11) 1,482 1,708 (13) 1,721 723 (5) Fuel, oil costs and emissions charges 830 (109) 939 967 (125) 1,092 519 (9) 728 528 200 – 200 180 – 198 (9) 207 89 (10) Depreciation, amortisation and impairment Other operating costs Total expenditure on operations Operating loss Operating margin (%) € million Passenger revenue Other revenue Total revenue Employee costs Depreciation, amortisation and impairment Other operating costs Total expenditure on operations Operating profit Operating margin (%) 180 99 140 305 724 979 (6) 985 1,134 (7) 1,141 350 2,188 – 2,188 2,550 – 2,550 1,412 – – 350 1,412 227 (13) 240 624 (7) 631 140 305 – – 5,468 (126) 5,594 6,359 (145) 6,504 3,004 (14) 3,018 1,249 (29) 1,278 714 (10) (1,769) 131 (1,900) (2,041) 151 (2,192) (220) 14 (234) (233) 29 (262) (338) 9 (347) (47.8)% (51.4)% (7.9)% (8.4)% (23.0)% (25.8)% (90.0)% (92.1)% Year to December 31, 2021 IAG Loyalty (£) IAG Loyalty (€) y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i y r o t u t a t S l a n o i t p e c x E s m e t i l a n o i t p e c x e e r o f e B s m e t i 215 162 377 33 6 225 264 113 – – – – – – – – 215 162 377 33 6 225 264 113 252 186 438 37 7 263 307 131 29.9% 29.9% – – – – – – – – 252 186 438 37 7 263 307 131 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 261 ALTERNATIVE PERFORMANCE MEASURES CONTINUED b Adjusted earnings/(loss) per share (KPI) Adjusted 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 Profit/(loss) after tax attributable to equity holders of the parent Exceptional items Profit/(loss) after tax attributable to equity holders of the parent before exceptional items Income statement impact of convertible bonds Adjusted profit/(loss) Note a a 2022 431 29 402 (104) 298 Weighted average number of shares used for basic earnings/(loss) per share Weighted average number of shares used for diluted earnings/(loss) per share 11 11 4,958 5,344 Basic earnings/(loss) per share (€ cents) Basic earnings/(loss) per share before exceptional items (€ cents) Adjusted earnings/(loss) per share before exceptional items (€ cents) c Airline non-fuel costs per ASK 8.7 8.1 5.6 2021 (2,933) 105 (3,038) – (3,038) 4,964 4,964 (59.1) (61.2) (61.2) The Group monitors airline unit costs (per ASK, a standard airline measure of capacity) as a means of tracking operating efficiency of the core airline business. As fuel costs can vary with commodity prices, the Group monitors fuel and non-fuel costs individually. Within non-fuel costs are the costs associated with generating Other revenue, which typically do not represent the costs of transporting passengers or cargo and instead represent the costs of handling and maintenance for other airlines, non-flight products in BA Holidays and costs associated with other miscellaneous non-flight revenue streams. Airline non-fuel costs per ASK is defined as total operating expenditure before exceptional items, less fuel, oil costs and emission charges and less non-flight specific costs divided by total available seat kilometres (ASKs), and is shown on a constant currency basis (abbreviated to ‘ccy’). € million Total expenditure on operations (Add)/less: exceptional items in operating expenditure Less: fuel, oil costs and emission charges Non-fuel costs Less: Non-flight specific costs Airline non-fuel costs Note a a a 2022 Reported 21,810 ccy adjustment (1,104) (31) 6,120 15,721 1,716 14,005 (505) (599) (84) (515) 2022 ccy 20,706 (31) 5,615 15,122 1,632 13,490 2021 11,220 (200) 1,935 9,485 815 8,670 ASKs (millions) 263,592 263,592 121,965 Airline non-fuel unit costs per ASK (€ cents) 5.31 5.12 7.11 d Levered free cash flow (KPI) Levered free cash flow represents the cash generated, and the financing raised, by the businesses before shareholder returns and is defined as the net increase in cash and cash equivalents taken from the Cash flow statement, adjusting for movements in Current interest-bearing deposits and adding back the cash outflows associated with dividends paid and the acquisition of treasury shares. The Group believes that this measure is useful to the users of the financial statements in understanding the cash generating ability of the Group that is available to return to shareholders, to improve leverage and/or to undertake inorganic growth opportunities. € million Net Increase in cash and cash equivalents Less: Decrease in other current interest-bearing deposits Levered free cash flow 2022 1,316 351 1,667 2021 1,913 (91) 1,822 262 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements ALTERNATIVE PERFORMANCE MEASURES CONTINUED Adjusted 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. Profit/(loss) after tax attributable to equity holders of the parent € million Exceptional items Note a a Profit/(loss) after tax attributable to equity holders of the parent before exceptional items Income statement impact of convertible bonds Adjusted profit/(loss) Weighted average number of shares used for basic earnings/(loss) per share Weighted average number of shares used for diluted earnings/(loss) per share 11 11 4,958 5,344 2022 431 29 402 (104) 298 8.7 8.1 5.6 2021 (2,933) 105 (3,038) – (3,038) 4,964 4,964 (59.1) (61.2) (61.2) Basic earnings/(loss) per share (€ cents) Basic earnings/(loss) per share before exceptional items (€ cents) Adjusted earnings/(loss) per share before exceptional items (€ cents) c Airline non-fuel costs per ASK The Group monitors airline unit costs (per ASK, a standard airline measure of capacity) as a means of tracking operating efficiency of the core airline business. As fuel costs can vary with commodity prices, the Group monitors fuel and non-fuel costs individually. Within non-fuel costs are the costs associated with generating Other revenue, which typically do not represent the costs of transporting passengers or cargo and instead represent the costs of handling and maintenance for other airlines, non-flight products in BA Holidays and costs associated with other miscellaneous non-flight revenue streams. Airline non-fuel costs per ASK is defined as total operating expenditure before exceptional items, less fuel, oil costs and emission charges and less non-flight specific costs divided by total available seat kilometres (ASKs), and is shown on a constant currency basis (abbreviated to ‘ccy’). € million Total expenditure on operations (Add)/less: exceptional items in operating expenditure Less: fuel, oil costs and emission charges Non-fuel costs Less: Non-flight specific costs Airline non-fuel costs Note Reported adjustment 2022 ccy 2022 ccy (1,104) 20,706 a a a 21,810 (31) 6,120 15,721 1,716 14,005 (505) (599) (84) (515) (31) 5,615 15,122 1,632 13,490 2021 11,220 (200) 1,935 9,485 815 8,670 ASKs (millions) 263,592 263,592 121,965 Airline non-fuel unit costs per ASK (€ cents) 5.31 5.12 7.11 d Levered free cash flow (KPI) Levered free cash flow represents the cash generated, and the financing raised, by the businesses before shareholder returns and is defined as the net increase in cash and cash equivalents taken from the Cash flow statement, adjusting for movements in Current interest-bearing deposits and adding back the cash outflows associated with dividends paid and the acquisition of treasury shares. The Group believes that this measure is useful to the users of the financial statements in understanding the cash generating ability of the Group that is available to return to shareholders, to improve leverage and/or to undertake inorganic growth opportunities. € million Net Increase in cash and cash equivalents Less: Decrease in other current interest-bearing deposits Levered free cash flow 2022 1,316 351 1,667 2021 1,913 (91) 1,822 b Adjusted earnings/(loss) per share (KPI) e Net debt to EBITDA before exceptional items (KPI) To supplement total borrowings as presented in accordance with IFRS, the Group reviews net debt to EBITDA before exceptional items to assess its level of net debt in comparison to the underlying earnings generated by the Group in order to evaluate the underlying business performance of the Group. This measure is used to monitor the Group’s leverage and to assess financial headroom against internal and external security analyst and investor benchmarks. During 2022 the Group has amended the name of the APM to clarify that the EBITDA element is before exceptional items, however the determination of the calculation of the APM has not changed. Net debt is defined as long-term borrowings (both current and non-current), less cash, cash equivalents and current interest-bearing deposits. Net debt excludes supply chain financing arrangements which are classified within trade payables (note 22). EBITDA before exceptional items is defined as operating result before exceptional items, interest, taxation, depreciation, amortisation and impairment. The Group believes that this additional measure, which is used internally to assess the Group’s financial capacity, is useful to the users of the financial statements in helping them to see how the Group’s financial capacity has changed over the year. It is a measure of the profitability of the Group and of the core operating cash flows generated by the business model. € million Interest-bearing long-term borrowings Less: Cash and cash equivalents Less: Other current interest-bearing deposits Net debt Operating profit/(loss) Add: Depreciation, amortisation and impairment EBITDA Add: Exceptional items (excluding those reported within Depreciation, amortisation and impairment) EBITDA before exceptional items Net debt to EBITDA before exceptional items f Return on invested capital (KPI) Note 25 21 21 a a a 2022 19,984 (9,196) (403) 10,385 1,256 2,070 3,326 (23) 3,303 2021 19,610 (7,892) (51) 11,667 (2,765) 1,932 (833) (184) (1,017) 3.1 (11.5) The Group monitors return on invested capital (RoIC) as it gives an indication of the Group’s capital efficiency relative to the capital invested as well as the ability to fund growth and to pay dividends. RoIC is defined as EBITDA before exceptional items, less fleet depreciation adjusted for inflation, depreciation of other property, plant and equipment, and amortisation of software intangibles, divided by average invested capital and is expressed as a percentage. Invested capital is defined as the average of property, plant and equipment and software intangible assets over a 12-month period between the opening and closing net book values. The fleet aspect of property, plant and equipment is inflated over the average age of the fleet to approximate the replacement cost of the associated assets. € million EBITDA before exceptional items Less: Fleet depreciation multiplied by inflation adjustment Less: Other property, plant and equipment depreciation Less: Software intangible amortisation Invested capital Average fleet value2 Less: Average progress payments3 Fleet book value less progress payments Inflation adjustment4 Average net book value of other property, plant and equipment5 Average net book value of software intangible assets6 Total invested capital Return on Invested Capital Note e 13 13 13 17 20221 3,303 (1,944) (247) (210) 902 15,717 (910) 14,807 1.18 17,435 2,037 640 20,112 4.5 % 2021 (1,017) (1,777) (257) (167) (3,218) 15,241 (729) 14,512 1.16 16,893 2,106 640 19,639 (16.4)% 1 The 2022 RoIC calculation excludes the effect of the €29 million credit recorded in Depreciation, amortisation and impairment in the Income statement relating to the de-designation of hedge accounting (refer to note 6). 2 The average net book value of aircraft is calculated from an amount of €15,116 million at December 31, 2021 and €16,317 million at December 31, 2022. 3 The average net book value of progress payments is calculated from an amount of €748 million at December 31, 2021 and €1,071 million at December 31, 2022. 4 Presented to two decimal places and calculated using a 1.5 per cent inflation (December 31, 2021: 1.5 per cent inflation) rate over the weighted average age of the fleet at December 31, 2022: 11.3 years (December 31, 2021: 10.6 years). 5 The average net book value of other property, plant and equipment is calculated from an amount of €2,045 million at December 31, 2021 and €2,029 million at December 31, 2022. 6 The average net book value of software intangible assets is calculated from an amount of €642 million at December 31, 2021 and €637 million at December 31, 2022. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 263 ALTERNATIVE PERFORMANCE MEASURES CONTINUED g Results on a constant currency basis Movements in foreign exchange rates impact the Group’s financial results. The Group reviews the results, including revenue and operating costs at constant rates of exchange. The Group calculates these financial measures at constant rates of exchange based on a retranslation, at prior year exchange rates, of the current year’s results of the Group. Although the Group does not believe that these measures are a substitute for IFRS measures, the Group does believe that such results excluding the impact of currency fluctuations year-on-year provide additional useful information to investors regarding the Group’s operating performance on a constant currency basis. Accordingly, the financial measures at constant currency within the discussion of the Group Financial review should be read in conjunction with the information provided in the Group financial statements. The following table represents the main average and closing exchange rates for the reporting periods. Where 2022 figures are stated at a constant currency basis, they have applied the 2021 rates stated below: Foreign exchange rates Pound sterling to euro Euro to US dollar Pound sterling to US dollar h Liquidity Weighted average Closing 2022 1.17 1.05 1.23 2021 1.15 1.20 1.38 2022 1.14 1.06 1.21 2021 1.18 1.13 1.33 The Board and the Management Committee monitor liquidity in order to assess the resilience of the Group to adverse events and uncertainty and develop funding initiatives to maintain this resilience. Liquidity is used by analysts, investors and other users of the financial statements as a measure to the financial health and resilience of the Group. Liquidity is defined as Cash and cash equivalents plus Current interest-bearing deposits, plus Committed general undrawn facilities and committed aircraft undrawn facilities. € million Cash and cash equivalents Current interest-bearing deposits Committed general undrawn facilities Committed aircraft undrawn facilities Overdrafts and other facilities Total liquidity Note 21 21 27f 27f 27f 2022 9,196 403 3,231 1,116 53 13,999 2021 7,892 51 2,864 1,126 53 11,986 264 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Financial Statements GROUP INVESTMENTS Subsidiaries British Airways Name and address 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 Euroflyer Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB BA European Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB BA Excepted Group Life Scheme Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB BA Healthcare Trust Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB BA Holdco 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, 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 Holdings B.V. Strawinskylaan 3105, Atrium, Amsterdam, 1077ZX 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 Midland Airways Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB British Midland Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB Flyline Tele Sales & Services GmbH Hermann Koehl-Strasse 3, 28199, Bremen Gatwick Ground Services Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB 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 British Mediterranean Airways Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB Avios Group (AGL) Limited* Waterside, PO Box 365, Harmondsworth, UB7 0GB Principal activity Country of Incorporation Percentage of equity owned Holding company England Call centre India Airline operations England Airline operations England Holding company England Life insurance England Healthcare England Holding company England Dormant England Dormant Jersey Dormant England Holding company England Dormant England Aircraft leasing England Holding company England Aircraft maintenance England Aircraft financing Jersey Holding company Netherlands Tour operator England Aircraft maintenance England Aircraft leasing England Aircraft maintenance England Trustee company England Former airline England Dormant England Call centre Germany Ground services England Transport England Insurance Bermuda Call centre England Former airline England Management of airline loyalty programmes England 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 86%1 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 265 265 GROUP INVESTMENTS CONTINUED 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 Iberia LAE México SA de CV Xochicalco 174, Col. Narvarte, Alcaldía Benito Juárez, Mexico City, 03020 Iberia Líneas Aéreas de España, S.A. Operadora* Calle Martínez Villergas 49, Madrid, 28027 Iberia México, S.A.* Calle Montes Urales 424, Colonia Lomas de Chapultepec V, Mexico City, 11000 Iberia Operadora UK Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB Iberia Tecnología, S.A.* Calle Martínez Villergas 49, Madrid, 28027 Iberia Desarrollo Barcelona, S.L.* Avenida de les Garrigues 38-44, Edificio B, El Prat de Llobregat, Barcelona, 08220 Avios Group (AGL) Limited* Waterside, PO Box 365, Harmondsworth, UB7 0GB Aer Lingus Name and address Aer Lingus (Ireland) Limited Dublin Airport, Dublin Aer Lingus 2009 DCS Trustee Limited Dublin Airport, Dublin Aer Lingus Beachey Limited Penthouse Suite, Analyst House, Peel Road, IM1 4LZ Aer Lingus Group DAC* Dublin Airport, Dublin Aer Lingus Limited* Dublin Airport, Dublin Aer Lingus (UK) Limited Aer Lingus Base, Belfast City Airport, Sydenham Bypass, Belfast, Co. Antrim, BT3 9JH ALG Trustee Limited 33-37 Athol Street, Douglas, IM1 1LB Dirnan Insurance Company Limited Canon’s Court, 22 Victoria Street, Hamilton, HM 12 Santain Developments Limited Dublin Airport, Dublin IAG Loyalty Name and address Avios South Africa Proprietary Limited Block C, 1 Marignane Drive, Bonaero Park, Gauteng, 1619 IAG Loyalty Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB IAG Loyalty Retail Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB IAG Cargo Name and address Cargo Innovations Limited Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, Middlesex, TW6 2JS Zenda Group Limited Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, Middlesex, TW6 2JS 266 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 266 Principal activity Provision of human resources support to fellow group companies Trustee Country of incorporation Republic of Ireland Republic of Ireland Principal activity Airline operations Cargo transport Merchandise storage, security and custody services Airline operations and maintenance Storage and custody services Country of incorporation Percentage of equity owned Spain Spain Mexico 100% 100% 100% Spain 100%2 Mexico 100% Dormant England Aircraft maintenance Airport infrastructure development Management of airline loyalty programmes 100%1 100% 75% Spain Spain England 14%1 Percentage of equity owned 100% 100% 100% 100%3 100% 100% 100% 100% 100% Percentage of equity owned 100% 100% 100% Percentage of equity owned Dormant Isle of Man Holding company Airline operations Airline operations Republic of Ireland Republic of Ireland Northern Ireland Trustee Isle of Man Insurance Bermuda Dormant Republic of Ireland Principal activity Country of incorporation Dormant South Africa Dormant England Retail services England Principal activity Country of Incorporation Dormant England 100% Dormant England 100% Financial Statements Vueling Name and address Yellow Handling, S.L.U Carrer de Catalunya 83 Viladecans, Barcelona 08840 Vueling Airlines, S.A.* Carrer de Catalunya 83 Viladecans, Barcelona 08840 LEVEL Name and address FLYLEVEL UK Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB Openskies SASU 3 Rue le Corbusier, Rungis, 94150 International Consolidated Airlines Group, S.A. Name and address AERL Holding Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB British Airways Plc* 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 Country of incorporation Spain Percentage of equity owned 100% Principal activity Ground handling services Airline operations Spain 99.5% Principal activity Country of incorporation Airline operations England Airline operations France Principal activity Country of incorporation Holding company England Percentage of equity owned 100% 100% Percentage of equity owned 100% Airline operations England 100%4 Airline operations Spain 100% IAG Cargo Limited* Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, TW6 2JS Air freight operations England 100% IAG Connect Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB IAG GBS Limited* Waterside, PO Box 365, Harmondsworth, UB7 0GB IAG GBS Poland sp z.o.o.* Ul. Opolska 114, Krakow, 31-323 IB Opco Holding, S.L. Calle Martínez Villergas 49, Madrid, 28027 Veloz Holdco, S.L.U. Carrer de Catalunya 83 Viladecans, Barcelona 08840 * Principal subsidiaries Inflight eCommerce platform IT, finance, procurement services IT, finance, procurement services Holding company Holding company Republic of Ireland England Poland Spain Spain 100% 100% 100% 100%2 100% 1 The Group holds 100% of both the nominal share capital and economic rights in Avios Group (AGL) Limited, held directly by British Airways Plc, which owns 86% and Iberia Operadora UK Limited which owns 14%. 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. 3 The Group holds 49.75% of the total number of voting rights and the majority of the economic rights in Aer Lingus Group DAC. The remaining voting rights, representing 50.25 per cent, correspond to a trust established for implementing the Aer Lingus nationality structure. 4 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, are held by a trust established for the purposes of implementing the British Airways nationality structure. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 267 267 GROUP INVESTMENTS CONTINUED Associates Name and address Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A. Avenida de Vantroi y Final, Jose Martí Airport, Havana Empresa Logística de Carga Aérea, S.A. Carretera de Wajay km 1 ½, Jose Martí Airport, Havana Multiservicios Aeroportuarios, S.A. Avenida de Manoteras 46, 2ª planta, Madrid, 28050 Dunwoody Airline Services Limited Building 552 Shoreham Road East, London Heathrow Airport, Hounslow, TW6 3UA Serpista, S.A. Calle Cardenal Marcelo Spínola 10, Madrid, 28016 Air Miles España, S.A. Avenida de Bruselas 20, Alcobendas, Madrid, 28108 Inloyalty by Travel Club, S.L.U. Avenida de Bruselas 20, Alcobendas, Madrid, 28108 Viajes Ame, S.A. Avenida de Bruselas 20, Alcobendas, Madrid, 28108 DeepAir Solutions Limited Flat 10, 28 Cranley Gardens, London, SW7 3DD LanzaJet 520 Lake Cook Road, Suite 680, Deerfield, Illinois, 60015 Joint ventures Name and address Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. Calle de O’Donnell 12, Madrid, 28009 Other equity investments The Group’s principal other equity investments are as follows: Country of Incorporation Cuba Percentage of equity owned 50% Cuba 50% Spain England Spain Spain Spain Spain England USA 49% 40% 39% 26.7% 26.7% 26.7% 23% 16.7% Country of incorporation Spain Percentage of equity owned 50.5% Name and address Air Europa Holdings S.L.1 Carretera Arenal - Llucmajor, km 21.5 Llucmajor, 07620 Servicios de Instrucción de Vuelo, S.L. Camino de la Muñoza s/n, El Caserío, Iberia Zona Industrial 2, Madrid, 28042 The Airline Group Limited 5th Floor, Brettenham House South, Lancaster Place, London, WC2N 7EN Travel Quinto Centenario, S.A. Calle Alemanes 3, Sevilla, 41004 Country of Incorporation Percentage of equity owned Shareholder’s funds (million) Profit/(loss) before tax (million) Currency Spain 20% EUR Spain 19.9% EUR 24 73 England 16.7% GBP 208 Spain 10% EUR – 2 – – (1) – (28) – 4 – 18 i6 Group Limited Farnborough Airport, Ively Road, Farnborough, Hampshire, GU14 6XA England 7.4% GBP NAYAKJV1, S.L. C/ d’Osona, 2, El Prat de Llobregat, 08820 Monese Limited Eagle House 163 City Road, London, EC1V 1NR Spain 5% EUR England 4.8% GBP 1 The Shareholder funds and result before tax of Air Europa Holdings S.L. represent the data for the year to December 31, 2021 and are prepared under Spanish GAAP. The Group does not have access to any financial information 268 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 268 Financial Statements 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 23, 2023, the directors of International Consolidated Airlines Group, S.A. state that, to the best of their knowledge, the individual and consolidated financial statements for the year to December 31, 2022, prepared in accordance with the applicable set of accounting standards and in single electronic format, 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 23, 2023 Javier Ferrán Larraz Chairman Luis Gallego Martín Chief Executive Officer Giles Agutter Peggy Bruzelius Eva Castillo Sanz Margaret Ewing Maurice Lam Heather Ann McSharry Robin Phillips Emilio Saracho Rodríguez de Torres Lucy Nicola Shaw INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 269 INDEPENDENT AUDITORS' REPORT 270 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 IINNSSTTRRUUCCTTIIOONNSS FFiillll iinn tthhee ddaattaa iinn ssqquuaarree bbrraacckkeettss.. DDeelleettee // iinnsseerrtt tthhee rreeqquuiirreedd tteexxttss.. TToo aavvooiidd ffoorrmmaattttiinngg pprroobblleemmss,, uussee tthhee ssttyylleess ccrreeaatteedd:: CCttrrll ++ 00 == NNoorrmmaall tteexxtt CCttrrll ++ 11 == BBoolldd cchhaarraacctteerrss CCttrrll ++ 44 == TTaabblleess CCttrrll ++ 99 == NNuummbbeerriinngg aanndd bbuulllleettss CCttrrll ++ 77 == TTiittllee ((iinnsseerrtt aa ttaabb aatt tthhee eenndd ttoo mmaakkee aa lliinnee)) RREEMMOOVVEE TTHHIISS FFRRAAMMEE Auditor’s Report on International Consolidated Airlines Group, S.A. and Subsidiaries ((TTooggeetthheerr wwiitthh tthhee ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss aanndd ccoonnssoolliiddaatteedd mmaannaaggeemmeenntt rreeppoorrtt ooff IInntteerrnnaattiioonnaall CCoonnssoolliiddaatteedd AAiirrlliinneess GGrroouupp,, SS..AA.. aanndd ssuubbssiiddiiaarriieess ffoorr tthhee yyeeaarr eennddeedd 3311..1122..2222)) KPMG Auditores, S.L. Edificio Torre de Cristal Paseo de la Castellana, 259C 28046 Madrid Independent Auditor's Report on the Consolidated Financial statements To the shareholders of International Consolidated Airlines Group, S.A. commissioned by management REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS Opinion We have audited the consolidated financial statements of International Consolidated Airlines Group, S.A. (the Parent) and subsidiaries (together the “Group”) which comprise the consolidated balance sheet at 31 December 2022 and the consolidated income statement, consolidated statement of other comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and consolidated notes. In our opinion, the accompanying consolidated financial statements give a true and fair view, in all material respects, of the consolidated equity and consolidated financial position of the Group at 31 December 2022 and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and other provisions of the financial reporting framework applicable in Spain. Basis for Opinion We conducted our audit in accordance with prevailing legislation regulating the audit of accounts in Spain. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial statements section of our report. We are independent of the Group in accordance with the ethical requirements, including those regarding independence, that are relevant to our audit of the consolidated financial statements pursuant to the legislation regulating the audit of accounts in Spain. We have not provided any non-audit services, nor have any situations or circumstances arisen which, under the aforementioned regulations, have affected the required independence such that this has been compromised. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. KPMG Auditores S.L., a limited liability Spanish company and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Paseo de la Castellana, 259C 28046 Madrid On the Spanish Official Register of Auditors (“ROAC”) with No. S0702, and the Spanish Institute of Registered Auditors’ list of companies with No. 10. Reg. Mer Madrid, T. 11.961, F. 90, Sec. 8, H. M -188.007, Inscrip. 9 N.I.F. B-78510153 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 271 INDEPENDENT AUDITORS' REPORT 272 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 2 GGooiinngg CCoonncceerrnn SSeeee nnoottee 22 ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, rreeffeerr ffuurrtthheerr ttoo aaccccoouunnttiinngg ppoolliiccyy aanndd ffiinnaanncciiaall ddiisscclloossuurreess.. Key audit matter How the matter was addressed in our audit Note 2 to the accompanying consolidated financial statements, explains how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group. That judgement is based on an evaluation of the inherent risks to the Group’s business plan prepared by Group Management, and approved by the Board, and how those risks might affect the Group’s financial resources or ability to continue operations over the going concern period to 30 June 2024 from the date of approval of the financial statements, in particular as the Group continues its recovery from the COVID-19 pandemic and its cash flows are impacted by the wider economic and geopolitical environments affecting the Group business. The risks most likely to adversely affect the Group’s available financial resources over this period were: • reduced levels of capacity, reduced passenger-unit revenue due to pricing pressures as a result of the current economic outlook; • increased operational costs reflective of inflationary pressures; and • the Group’s ability to securing approximately 100 percent of the aircraft financing required that is currently uncommitted, to align with the timing and payments for these aircraft deliveries. In these circumstances, we consider the risk associated with the Board of Directors' assessment of the application of the going concern basis to be a key audit matter because of the significant judgements required, as well as the inherent uncertainty in the elaboration of the business plans and cash flow projections and also the impact that such an assessment could have on the consolidated financial statements. We considered whether these risks could plausibly affect the liquidity in the going concern period by assessing the directors’ sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of severe, but plausible, adverse effects that could arise from these risks individually and collectively. Our procedures included: - FFuunnddiinngg aasssseessssmmeenntt:: Assessing the financing arrangements currently in place and the actions taken by Group to maintain liquidity and the headroom throughout the going concern assessment period. - KKeeyy ddeeppeennddeennccyy aasssseessssmmeenntt:: Using our knowledge of the business and the audit work performed on the areas such as revenue, operating costs, and pensions to identify critical factors within the Group’s financial forecasts and in our assessment of the severe-but-plausible downside scenario. - SSeennssiittiivviittyy aannaallyyssiiss: Considering sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of plausible (but not unrealistic) adverse effects that could arise from these risks individually and collectively. - BBeenncchhmmaarrkkiinngg aassssuummppttiioonnss:: Critically assessing the key assumptions in the Group’s financial forecasts in relation to specific risks with reference to market trends (ASKs, PRASKs, fuel prices), third-party economic and industry forecasts, the Group’s recovery pattern versus industry expectations, and the Group’s ability to raise finance throughout the pandemic period, as well as our findings in relation to the work performed on other areas of the audit. - HHiissttoorriiccaall ccoommppaarriissoonnss: Assessing the Directors’ track record of forecasts vs. actual cashflows by analysing actual monthly results since January 2022 and actual results for the three years preceding the pandemic (i.e., 2017 to 2019). - AAsssseessssiinngg ccoonnssiisstteennccyy:: Evaluating the achievability of the actions the Directors consider they would take to improve the position should the risks materialise, which included mitigation actions to reduce operating and capital expenditure, and asset disposal. - AAsssseessssiinngg ttrraannssppaarreennccyy: Considering whether the going concern disclosure in note 2 to the financial statements gives a full and accurate description of the directors’ assessment of going concern, including the identified risks, dependencies, and related sensitivities. 3 RReeccoovveerraabbiilliittyy ooff pprrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt aanndd iinnttaannggiibbllee aasssseettss,, iinncclluuddiinngg ggooooddwwiillll ((€€2211,,990022 mmiilllliioonn;; 22002211:: €€2200,,440000 mmiilllliioonn)) SSeeee nnootteess 1133 aanndd 1177 ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, rreeffeerr ffuurrtthheerr ttoo aaccccoouunnttiinngg ppoolliiccyy aanndd ffiinnaanncciiaall ddiisscclloossuurreess.. Key audit matter How the matter was addressed in our audit FFoorreeccaasstt--bbaasseedd aasssseessssmmeenntt Our procedures included: Property, plant and equipment, intangible assets and goodwill are significant and at risk of not being recoverable due to continuing economic uncertainty following the effects of the COVID-19 pandemic, its impact on the aviation industry, and current economic outlook and pressures. The estimated recoverable amount of the Group’s cash generating units (“CGUs”) to which property, plant and equipment, and intangible assets including goodwill are allocated is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. Changes in the key assumptions in cash flow forecasts can have a material impact on the available headroom and so whether any impairment is required. The most significant assumptions are: revenue growth and operating profit margins recovery, available seat kilometres (“ASK”) used to predict capacity levels; fuel prices, impact of climate change, long-term growth rate and discount rate. Based on the headroom available the risk is specifically associated with British Airways, Iberia and Aer Lingus CGUs. The effect of these matters is that, as part of our risk assessment, we determined that the value in use of the British Airways, Iberia and Aer Lingus CGUs has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount, which is the reason why we have considered it a key matter of our audit. The financial statements (note 17b) disclose the sensitivity estimated by the Group. - BBeenncchhmmaarrkkiinngg aassssuummppttiioonnss: Evaluating assumptions applied, including forecast revenue growth and operating profit margins recovery, ASK, and fuel prices and comparing to externally derived data. We also assessed, how the impact of the climate change risk has been incorporated into the forecasts, discount rates applied and long-term growth rates, including the impact of the cost of sustainable aviation fuel (SAF) on the cost base, demand and the Group’s ability to recover the additional costs. - BBeenncchhmmaarrkkiinngg aassssuummppttiioonnss:: With the assistance of our valuation specialists, assessing the methodology applied by the Group to derive its discount rates and the basis for the calculation of the key components such as debt/equity ratio, risk free rates and market risk premium. - SSeennssiittiivviittyy aannaallyyssiiss: Re-performing the Directors’ breakeven analysis on the key assumptions, together with performing our own sensitivities based on industry analyses and forecast assumptions to assess their impact on the headroom. - CCoommppaarriinngg vvaalluuaattiioonnss:: Comparing the sum of the discounted cash flows to the Group’s market capitalisation, including the analysis of the implied trading multiples, to assess the reasonableness of those cashflows. - MMeetthhooddoollooggyy iimmpplleemmeennttaattiioonn: Assessing mathematical accuracy of the model and whether the calculation has been prepared in accordance with IAS 36. - AAsssseessssiinngg ccoonnssiisstteennccyy:: Assessing the consistency with the forecasts used in impairment testing with those applied for going concern assessment and deferred tax recoverability assessment - AAsssseessssiinngg ttrraannssppaarreennccyy: Assessing whether the Group’s disclosures about the sensitivity of the outcome of the impairment aasssseessssmmeenntt to changes in key assumptions reflected the risks inherent in the recoverable amount of property, plant and equipment and intangible assets, including goodwill. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 273 INDEPENDENT AUDITORS' REPORT 274 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 4 VVaalluuaattiioonn ooff tthhee ggrroossss ddeeffiinneedd bbeenneeffiitt ppeennssiioonn oobblliiggaattiioonn ((DDBBOO)) ((€€1199,,774444mmbbiilllliioonn;; 22002211:: €€3300,,991166 mmiilllliioonn)) SSeeee nnoottee 3322 ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, rreeffeerr ffuurrtthheerr ttoo aaccccoouunnttiinngg ppoolliiccyy aanndd ffiinnaanncciiaall ddiisscclloossuurreess.. Key audit matter How the matter was addressed in our audit SSuubbjjeeccttiivvee vvaalluuaattiioonn Significant estimates are made in determining the key assumptions used in valuing the Group's gross defined benefit pension scheme obligations. When making these assumptions the directors take independent actuarial advice relating to their appropriateness. A small change in assumptions and estimates can have a material financial impact on the Group’s gross defined benefit pension obligations. The significant risk relates to New Airways Pension Scheme and Airways Pension Scheme which represent 97.3% (2021: 97.8%) of pension scheme obligations. The most significant assumptions are discount rate, inflation rate and mortality/life expectancy. The effect of these matters is that, as part of our risk assessment, we determined that the gross defined benefit pension scheme obligations have a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements, and possibly many times that amount, which is the reason why we have considered it a key matter of our audit. The financial statements (note 32) disclose the sensitivity estimated by the Group. Our procedures included: - BBeenncchhmmaarrkkiinngg aassssuummppttiioonnss: Challenging, with the support of our own actuarial specialists, the key assumptions applied, being the discount rate, inflation rate and mortality/life expectancy against externally derived data in the context of market practice and the macroeconomic uncertainties. - AAssssuummppttiioonnss aasssseessssmmeenntt:: Evaluating the experience analysis from the schemes’ triennial reviews and considering the implications over the accounting estimate and demographic assumptions. - AAsssseessssiinngg ttrraannssppaarreennccyy: Considering the adequacy of the Group’s disclosures in respect of the sensitivity of the deficit to these assumptions. CCuussttoommeerr llooyyaallttyy pprrooggrraammmmeess -- rreevveennuuee rreeccooggnniittiioonn ffoorr ddeeffeerrrreedd rreevveennuuee lliiaabbiilliittiieess ((€€22,,663300 mmiilllliioonn;; 22002211:: €€22,,882200 mmiilllliioonn]] SSeeee nnoottee 2233 ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, rreeffeerr ffuurrtthheerr ttoo ppaaggee aaccccoouunnttiinngg ppoolliiccyy aanndd ffiinnaanncciiaall ddiisscclloossuurreess.. Key audit matter How the matter was addressed in our audit SSuubbjjeeccttiivvee eessttiimmaattee Significant estimates are made in determining the assumptions applied in calculating the number of Avios not expected to be redeemed (breakage). Relatively small changes in these assumptions could result in significant adjustments to revenue and deferred revenue. The effect of these matters is that, as part of our risk assessment, we determined that deferred revenue liabilities arising on customer loyalty programs have a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, which is the reason why we have considered it a key matter of our audit. The financial statements (note 23) disclose the sensitivity estimated by the Group Our procedures included: - CCoonnttrrooll ddeessiiggnn:: Testing the design and implementation of controls around customer loyalty revenue recognition and estimation of breakage. - AAsssseessssiinngg pprriinncciipplleess:: Assessing the application of the Group’s accounting policies in determining customer loyalty revenues by reference to the revenue accounting standard. - MMeetthhooddoollooggyy iimmpplleemmeennttaattiioonn:: With the assistance of our own actuarial specialists, assessing the methods applied to estimate future redemption and breakage rates in the Group’s statistical model. - AAssssuummppttiioonnss aasssseessssmmeenntt:: Assessing the future customer behaviour assumptions in light of past experience and considering changes in the loyalty schemes, including changes to customer redemption offerings. - RRee--ppeerrffoorrmmaannccee:: With the application of our Data Analytics techniques, reconciling the Avios activity back to the operational systems and investigating material variances. - TTeessttss ooff ddeettaaiill:: On a sample basis, testing the value of an Avios derived by the Group to defer revenues when Avios are initially issued. Agreeing the balance sheet reconciliation to income statement movements, issuances and redemption data and the closing deferred revenue position. - TTeessttss ooff ddeettaaiill:: For the most significant Avios Issuance Partners (including credit card issuers), comparing the amount of Avios issued per the Group’s accounting records with the amounts as per confirmations that we obtained directly from the Partners. - AAsssseessssiinngg ttrraannssppaarreennccyy:: Assessing the Group’s disclosures in respect of revenue, including over the key judgements and estimation uncertainty and the associated sensitivity disclosures. 5 AAccccoouunnttiinngg ffoorr aaiirrccrraafftt mmaaiinntteennaannccee,, rreessttoorraattiioonn aanndd hhaannddbbaacckk ccoossttss ((lliiaabbiilliittiieess ooff €€22,,440000 mmiilllliioonn;; 22002211:: €€11,,883322 mmiilllliioonn)) SSeeee nnoottee 2266 ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, rreeffeerr ffuurrtthheerr ttoo aaccccoouunnttiinngg ppoolliiccyy aanndd ffiinnaanncciiaall ddiisscclloossuurreess Key audit matter PPrroocceessssiinngg eerrrroorrss Maintenance provisions are determined via complex calculations which use budgeted cost rates and an estimated timetable of required checks. There are a number of individually judgements and assumptions to be made when calculating the provision and associated asset balances. The key assumptions used include: expected future utilisation patterns of the aircraft; expected maintenance intervals and costs (future rates) of the maintenance at the time it is estimated to occur and discount rate applied to the future liability. Changes in these assumptions could result in significant adjustments to the level of provision and associated asset balances recognised. The effect of these matters is that, as part of our risk assessment, we determined that aircraft maintenance, restoration and handback provision obligations have a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements, and possibly many times that amount, which is the reason why we have considered it a key matter of our audit. The financial statements disclose the sensitivity estimated by the Group. How the matter was addressed in our audit Our procedures included: AAsssseessssiinngg pprriinncciipplleess: Determining whether the recognition of maintenance provisions and capitalised maintenance assets are in accordance with IAS 37 requirements, lease obligations and industry practice. - RRee--ppeerrffoorrmmaannccee:: Assessing the maintenance model for mathematical accuracy by performing a recalculation of the year end provision held. - TTeessttss ooff ddeettaaiill: Inspecting lease agreements and - maintenance contracts on a sample basis for significant return obligations and checking that those lease obligations were included in the maintenance model. Agreeing budgeted and contracted rates on a sample basis to supporting documentation. - RRee--ppeerrffoorrmmaannccee:: Assessing the maintenance prepayment calculation for each type of engine and performing a recalculation of the year-end balance based on the latest forecast for expected forecast flying hours and contracted rates. AAsssseessssiinngg ccoonnssiisstteennccyy: Critically assessing the forecast future flying hours assumption underpinning provisions calculations, against the Board approved forecasts and changes in the future fleet plans.. - HHiissttoorriiccaall ccoommppaarriissoonnss:: Assessing whether past estimates have been historically accurate by comparing actual cost to previously recognised provisions. - AAssssuummppttiioonnss aasssseessssmmeenntt: Assessing the future utilisation assumptions in light of past experience and considering changes in fleet utilisation, including the grounding of aircraft for extended periods of time. - AAsssseessssiinngg ttrraannssppaarreennccyy:: Assessing the Group’s disclosures in relation to the key judgements around the accounting for aircraft maintenance, restoration and handback costs. - INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 275 INDEPENDENT AUDITORS' REPORT 276 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 6 PPaasssseennggeerr aanndd ccaarrggoo rreevveennuuee rreeccooggnniittiioonn ((€€2211,,007733 mmiilllliioonn;; 22002211:: €€77,,550088 mmiilllliioonn)) SSeeee nnoottee 55 ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, rreeffeerr ffuurrtthheerr ttoo aaccccoouunnttiinngg ppoolliiccyy aanndd ffiinnaanncciiaall ddiisscclloossuurreess.. Key audit matter How the matter was addressed in our audit PPrroocceessssiinngg eerrrroorrss Passenger and cargo revenues are made up of a high volume, low value number of transactions. They are recorded via a highly automated, but complex, transactional process including third party booking management systems as well as operational data such as when a flight has flown thus triggering the revenue recognition point. Passenger revenues include tickets containing multiple flights, booking classes and a variety of surcharges and taxes which vary by route. Revenue accuracy depends on correctly applying the relevant inputs and rules. Due to limited judgement and estimation involved, passenger and cargo revenues are not at a high risk of significant misstatement. However, due to materiality in the context of the Group financial statements, this is considered to be one of the areas where significant audit effort was spent. Our procedures include: - AAsssseessssiinngg pprriinncciipplleess:: Assessing Group’s revenue recognition policy by reference to the accounting standards Passenger revenue (€19,458m (2021: €5,835m)): - CCoonnttrrooll ooppeerraattiioonn:: Testing the design and implementation, and the operating effectiveness of General IT Controls over the key revenue accounting systems considering appropriate configuration and prevention of unauthorised access and changes. Testing design and implementation, and the operating effectiveness of manual and automated controls underpinning the recognition of revenue. - TTeessttiinngg aapppplliiccaattiioonn:: Using our Revenue Data Analytics programme to recreate the revenue flow through the accounting systems for the key revenue accounts and assess whether the entries pass through the expected stages and accounts. - TTeessttss ooff ddeettaaiill:: Testing revenue journals to determine whether they are recorded based on our understanding of the revenue process. Testing revenue transactions on a sample basis by re-calculating the appropriate fare rules and verifying flight flown status. - TTeessttss ooff ddeettaaiill:: Testing revenue by tracing a sample of passenger events, such as bookings, departures, voucher issuances and cancellations, back to the revenue data. - TTeessttss ooff ddeettaaiill:: Testing year end trade receivables to cash received post year end. Testing on a sample basis for flights departing close to the year end whether revenue was recorded in the correct period. - HHiissttoorriiccaall ccoommppaarriissoonnss:: For passenger breakage revenue, we have evaluated the Group’s accounting policy, assessed the methodology applied and challenged key assumptions by comparing against the Group’s airlines’ past experiences. - TTeessttss ooff ddeettaaiillss:: Testing on a sample basis vouchers and refunds issued during the year to assess whether such transactions have been appropriately recognised. - OOuuttssoouurrcciinngg ccoonnttrroollss:: Inspecting the third-party Service Organisation Control reports to determine whether General IT controls over certain passenger revenue systems operated effectively during the year.. Cargo revenue (€1,615m (2021: €1,673m)): - TTeessttss ooff ddeettaaiill:: Testing, on a sample basis, cargo revenue transactions to external support and cash received. Other Information: Consolidated Management Report 7 Other information solely comprises the 2022 consolidated management report, the preparation of which is the responsibility of the Parent's Director s’ and which does not form an integral part of the consolidated financial statements. Our audit opinion on the consolidated financial statements does not encompass the consolidated management report. Our responsibility regarding the information contained in the consolidated management report is defined in the legislation regulating the audit of accounts, as follows: a) Determine, solely, whether the consolidated non-financial information statement and certain information included in the Annual Corporate Governance Report and the Annual Report on Directors’ Remuneration, as specified in the Spanish Audit Law, have been provided in the manner stipulated in the applicable legislation, and if not, to report on this matter. b) Assess and report on the consistency of the rest of the information included in the consolidated management report with the consolidated financial statements, based on knowledge of the Group obtained during the audit of the aforementioned consolidated financial statements. Also, assess and report on whether the content and presentation of this part of the consolidated management report are in accordance with applicable legislation. If, based on the work we have performed, we conclude that there are material misstatements, we are required to report them. Based on the work carried out, as described above, we have observed that the information mentioned in section a) above has been provided in the manner stipulated in the applicable legislation, that the rest of the information contained in the consolidated management report is consistent with that disclosed in the consolidated financial statements for 2022, and that the content and presentation of the report are in accordance with applicable legislation. Directors' and Audit and Compliance Committee's Responsibility for the Consolidated Financial statements The Parent's Directors are responsible for the preparation of the accompanying consolidated financial statements in such a way that they give a true and fair view of the consolidated equity, consolidated financial position and consolidated financial performance of the Group in accordance with IFRS-EU and other provisions of the financial reporting framework applicable to the Group in Spain, and for such internal control as they determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Parent's Directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. The Parent's Audit and Compliance Committee is responsible for overseeing the preparation and presentation of the consolidated financial statements. Auditor's Responsibilities for the Audit of the Consolidated Financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with prevailing legislation regulating the audit of accounts in Spain will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 277 INDEPENDENT AUDITORS' REPORT 278 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 8 As part of an audit in accordance with prevailing legislation regulating the audit of accounts in Spain, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: – Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. – Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. – Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Parent's Directors. – Conclude on the appropriateness of the Parent's Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. – Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves a true and fair view. – Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Audit and Compliance Committee of the Parent regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Parent's Audit and Compliance Committee with a statement that we have complied with the applicable ethical requirements, including those regarding independence, and to communicate with them all matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards. From the matters communicated to the Audit and Compliance Committee of the Parent, we determine those that were of most significance in the audit of the consolidated financial statements of the current period and which are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS European Single Electronic Format We have examined the digital files of International Consolidated Airlines Group S.A. and its subsidiaries for 2022 in European Single Electronic Format (ESEF), which comprise the XHTML file that includes the consolidated financial statements for the aforementioned year and the XBRL files tagged by the Parent, which will form part of the annual financial report. INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 279 8 As part of an audit in accordance with prevailing legislation regulating the audit of accounts in Spain, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: – Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. – Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. – Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Parent's Directors. – Conclude on the appropriateness of the Parent's Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. – Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves a true and fair view. – Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Audit and Compliance Committee of the Parent regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Parent's Audit and Compliance Committee with a statement that we have complied with the applicable ethical requirements, including those regarding independence, and to communicate with them all matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards. From the matters communicated to the Audit and Compliance Committee of the Parent, we determine those that were of most significance in the audit of the consolidated financial statements of the current period and which are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS European Single Electronic Format We have examined the digital files of International Consolidated Airlines Group S.A. and its subsidiaries for 2022 in European Single Electronic Format (ESEF), which comprise the XHTML file that includes the consolidated financial statements for the aforementioned year and the XBRL files tagged by the Parent, which will form part of the annual financial report. GLOSSARY Adjusted earnings per share Airline non-fuel costs Earnings are based on results before exceptional items after tax, adjusted for earnings attributable to equity holders and income statement impact of 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 Total operating expenditure before exceptional items, less fuel, oil costs and emission charges and less non-flight specific costs. Within non-fuel costs are the costs associated with generating Other revenue, which typically do not represent the costs of transporting passengers or cargo and instead represent the costs of handling and maintenance for other airlines, non-flight products in BA Holidays and costs associated with other miscellaneous non-flight revenue streams. Shown on a constant currency basis Airline non-fuel costs per ASK Airline non-fuel costs divided by ASK Available seat kilometres (ASK) The number of seats available for sale multiplied by the distance flown Available tonne kilometres (ATK) Block hours 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 per CTK Cargo revenue divided by CTK Cargo tonne kilometres (CTK) The number of tonnes of cargo carried that generate revenue (freight and mail) multiplied by the distance flown Dividend cover EBITDA Gross capex Interest cover Invested capital Levered free cash flow Liquidity Manpower equivalent Merger effective date Net debt The number of times the result for the year covers the dividends paid and proposed Operating result before exceptional items, interest, taxation, depreciation, amortisation and impairment Gross capital expenditure is the total investment in fleet, customer product, IT, ETS allowances and infrastructure before any proceeds from the sale of property, plant and equipment as shown in the Cash flow statement (‘Acquisition of property, plant and equipment and intangible assets’) The number of times the profit/(loss) before taxation and exceptional items adding back net interest expense and interest income cover the net interest expense and interest income The average of property, plant and equipment and software intangible assets over a 12-month period between the opening and closing net book values. The fleet aspect of property, plant and equipment is inflated over the average age of the fleet to approximate the replacement cost of the associated assets The cash generated in the year, including movements in borrowings and before returns to shareholders. It is calculated as the net increase in cash and cash equivalents taken from the Cash flow statement, adjusting for movements in Current interest-bearing deposits and adding back the cash outflows associated with dividends paid and the acquisition of treasury shares Cash and cash equivalents plus Current interest-bearing deposits, plus committed general undrawn facilities and committed aircraft undrawn facilities 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 cash and cash equivalents and current interest-bearing deposits 280 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Additional information Net Promoter Score (NPS) Operating margin Overall load factor 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 result before exceptional items as a percentage of total revenue RTK expressed as a percentage of ATK Passenger load factor RPK expressed as a percentage of ASK Passenger unit revenue per ASK (PRASK) Passenger revenue before exceptional items divided by ASK Passenger revenue per RPK (yield) Passenger revenue before exceptional items divided by RPK Productivity Punctuality Regularity ASK divided by average manpower equivalent 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 Return on Invested Capital (RoIC) EBITDA, less fleet depreciation adjusted for inflation, depreciation of other property, plant and Revenue passenger kilometres (RPK) equipment, and amortisation of software intangibles, divided by average invested capital and is expressed as a percentage The number of passengers that generate revenue carried multiplied by the distance flown Revenue tonne kilometres (RTK) The revenue load in tonnes multiplied by the distance flown Sector Sold cargo tonnes Total capital A one-way revenue flight The number of cargo tonnes sold, including freight, courier, mail and interline Total equity plus net debt Total revenue per ASK (RASK) Total revenue before exceptional items divided by ASK Total operating expenditure excluding fuel per ASK Total operating expenditure per ASK (CASK) Total operating expenditure before exceptional items excluding fuel divided by ASK Total operating expenditure before exceptional items divided by ASK Total traffic revenue per ATK Revenue from total traffic before exceptional items (passenger and cargo) divided by ATK INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 281 AIRCRAFT FLEET Number in service with Group companies1 Owned Finance lease Operating lease Total December 31, 2022 Total December 31, 2021 Changes since December 31, 2021 Future deliveries Options2 Airbus A319ceo Airbus A320ceo Airbus A320neo Airbus A321ceo Airbus A321neo Airbus A321 LR Airbus A321 XLR Airbus A330-200 Airbus A330-300 Airbus A350-900 Airbus A350-1000 Airbus A380 Boeing 737-8200 Boeing 737-10 Boeing 777-200 Boeing 777-300 Boeing 777-9 Boeing 787-8 Boeing 787-9 Boeing 787-10 Embraer E190 Group total 8 42 2 11 – - - - 4 - 3 2 - - 38 5 - - 1 - 9 – 21 35 3 2 - - 1 4 6 10 10 - - 2 4 - 10 8 4 - 125 120 33 136 23 30 14 8 - 15 12 9 - - - - 3 7 - 2 9 - 12 313 41 199 60 44 16 8 - 16 20 15 13 12 - - 43 16 - 12 18 4 21 558 39 190 50 51 14 8 - 18 18 9 8 12 - - 43 16 - 12 18 2 23 531 2 9 10 (7) 2 - - (2) 2 6 5 - - - - - - - - 2 (2) 27 - - 45 - 46 - 14 - - 7 5 - 25 25 - - 18 - - 7 - - - 50 - - - 14 - - 16 36 - 100 - - - 24 - - 6 - 192 246 1 During the year to December 31, 2022, the Group has changed the basis in which it presents the aircraft fleet table. Aircraft are reported based on their contractual definitions as opposed to their accounting determination. For accounting purposes, while all operating leases are presented as lease liabilities, finance leases are presented as either lease liabilities or asset financed liabilities, depending on the nature of the individual arrangement. Refer to note 2 for further information. 2 The options to purchase 100 Boeing 737 aircraft allow for flexibility in the choice of variant. As well as those aircraft in service the Group also holds 18 aircraft (December 31, 2021: 29) not in service. 282 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Additional information 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)1 Passenger revenue per RPK1 Cargo revenue per CTK1 Total revenue per ASK (RASK)1 Average fuel price Fuel cost per ASK1 Operating profit/(loss) before depreciation and amortisation (EBITDA)1 Total operating expenditure excluding fuel per ASK (CASK ex. fuel)1 Operating margin1 Lease adjusted operating margin1 Total operating expenditure per ASK (CASK)1 Dividend cover Interest cover Net debt Equity Adjusted net debt to EBITDA Net debt to EBITDA Exchange rates Translation – weighted average Transaction Transaction Transaction 2022 2021 20202 20192 20183 million million million ‘000 ‘000 263,592 215,749 3,980 94,726 561 121,965 78,689 3,970 38,864 539 113,195 72,262 3,399 31,275 444 337,754 324,808 285,745 270,657 5,580 118,253 682 5,713 112,920 702 619,122 307,519 267,748 775,486 754,700 hours 1,781,829 892,455 820,983 2,272,904 2,207,374 59,505 50,222 60,612 66,034 64,734 558 12.8 7.7 61.7 98.7 7.38 9.02 40.58 8.75 1,074 2.32 531 8.1 4.5 86.4 96.7 4.78 7.41 42.14 6.93 587 1.59 533 6.4 2.7 88.8 91.8 4.92 7.71 38.42 6.95 376 1.80 598 13.5 8.6 77.8 98.7 6.65 7.86 20.02 7.55 628 1.78 573 13.5 9.0 75.5 98.7 6.59 7.91 20.53 7.47 687 1.63 hours hours % % €cents €cents €cents €cents $/metric tonne €cents €million 3,303 (1,017) (2,291) 5,361 5,481 €cents % % €cents times times €million €million times times £:€ £:€ €:$ £:$ 5.96 5.3 n/a 8.29 n/a 1.4 10,385 2,022 n/a 3.1 1.17 1.17 1.05 1.23 7.78 (35.1) n/a 9.36 n/a (4.0) 11,667 846 n/a (11.5) 1.15 1.15 1.20 1.38 9.03 (55.8) n/a 10.83 n/a (6.6) 9,762 1,610 n/a (4.3) 1.13 1.13 1.13 1.27 4.81 12.7 n/a 6.59 3.8 6.2 7,571 7,120 n/a 1.4 1.13 1.13 1.12 1.27 4.77 14.4 14.4 6.40 3.9 6.7 6,430 6,720 1.6 1.2 1.13 1.13 1.18 1.33 1 Figures on a pre-exceptional items basis 2 The 2019 and 2020 results have been restated for the treatment of administration costs associated with the Group’s defined benefit pension schemes 3 2018 figures restated for accounting standards IFRS 16 'Leases' and to reclassify the costs the Group incurs in relation to compensation for flight delays and cancellations as a deduction from revenue as opposed to an operating expense n/a: not applicable INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 283 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. 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. 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 and Wales: BR014868 UK 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 Institutional investors: investor.relations@iairgroup.com Private shareholders: shareholder.services@iairgroup.com For shareholder enquiries, contact: Deutsche Bank Trust Company Americas c/o American Stock Transfer & Trust Co, 6201 15th Avenue, Brooklyn NY 11219, USA Email: db@astfinancial.com Toll free: 800 301 3517 (within the US) International: +1 718 921 8137 Online: www.adr.db.com Financial calendar Financial year end: December 31, 2022 Q1 results: May 5, 2023 Half-year results: July 28, 2023 Q3 results: October 27, 2023 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. These statements can be identified by the fact that they do not relate only to historical or current facts. By their nature, they involve risk and uncertainties because they relate to events and depend on circumstances that will occur in the future. Actual results could differ materially from those expressed or implied by such forward- looking statements. Forward-looking statements often use words such as “expects”, “may”, “will”, “could”, “should”, “intends”, “plans”, “predicts”, “envisages” or “anticipates” or other words of similar meaning. They include, without limitation, any and all projections relating to the 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 expenditure, acquisitions and divestments relating to the Group, discussions of the Group’s business plan, and our assumptions, expectations, objectives and resilience with respect to climate scenarios. All forward-looking statements in this report are based upon information known to the Group on the date of this report and speak as of the date of this report. Other than in accordance with its legal or regulatory obligations, the Group does not undertake to update or revise any forward-looking statement to reflect any changes in events, conditions or circumstances on which any such statement is based. Actual results may differ from those expressed or implied in the forward-looking statements in this report as a result of any number of known and unknown risks, uncertainties and other factors, including, but not limited to, the current economic and geopolitical environment and ongoing recovery from the COVID-19 pandemic and uncertainties about its future impact and duration, many of which are difficult to predict and are generally beyond the control of the Group, and it is not reasonably possible to itemise each item. Accordingly, readers of this report are cautioned against relying on forward-looking statements. Further information on the primary risks of the business and the Group’s risk management process is set out in the Risk management and principal risk factors section in this report. All forward-looking statements made on or after the date of this report and attributable to IAG are expressly qualified in their entirety by the primary risks set out in that section. Many of these risks are, and will be, exacerbated by the ongoing recovery from the COVID-19 pandemic and uncertainties abouts its future impact and any further disruption to the global airline industry as well as the current economic and geopolitical environment. 284 INTERNATIONAL AIRLINES GROUP | Annual Report and Accounts 2022 Additional information INTERNATIONAL AIRLINES GROUP This report is printed on paper certified in accordance with the FSC® (Forest Stewardship Council®) and is recyclable and acid-free. Pureprint Ltd is FSC certified and ISO 14001 certified showing that it is committed to all round excellence and improving environmental performance is an important part of this strategy. Pureprint Ltd aims to reduce at source the effect its operations have on the environment and is committed to continual improvement, prevention of pollution and compliance with any legislation or industry standards. Pureprint Ltd is a Carbon / Neutral® Printing Company. 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