Annual Report • Dec 31, 2015
Annual Report
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ANNUAL REPORT & ACCOUNTS 2015
IAG is required to prepare a Management Report in accordance with Article 262 of the Spanish Companies Act and Article 49 of the Spanish Commercial Code. Pursuant to this legislation, this management report must contain a fair review of the progress of the business and the performance of the company, together with a description of the principal risks and uncertainties that it faces. In the preparation of this report, IAG has taken into consideration the guide published in 2013 by the Spanish National Securities Market Commission (CNMV) which establishes a number of recommendations for the preparation of management reports of listed companies. The Management Report is contained in the following sections:
35 Financial overview
36 Economic landscape
GOVERNANCE FINANCIAL STATEMENTS
CORPORATE
ADDITIONAL INFORMATION
STRATEGIC REPORT
IN FACT, WE HAVE EXCEEDED THEM.
WHETHER IT'S IN OUR FIRST FIVE YEARS, OR IN THE FUTURE, OUR SUCCESS COMES DOWN TO THIS:
WORKING TOGETHER, WE ACHIEVE.
Our ambition is to try to be not just a major player but the world's leading airline group and in our first five years we've established strong foundations for the future.
We've exceeded our initial targets and are absolutely convinced that this is only the start. The best is yet to come and new stretching targets have been set for 2016 – 2020.
Diluted earnings per share before exceptional items
Vueling acquisition completed
IAG Cargo created
Iberia's new brand launched
Synergies target raised from €560 million to €650 million
EPS / €0.21
Iberia Plan de Futuro launched
Global Business Services (GBS) established a centre in Krakow, Poland
IAG 2016-2020 targets presented
Aer Lingus acquisition completed
0.1
3.5
€0.20
Definition We measure Equity Free Cash flow as EBITDA less cash tax, cash interest and capital expenditure.
2011 2012 2013 2014 2015
5.3
12.7
0 3
Return on invested capital is defined as operating profit before exceptional items adjusted for lease and inflation divided by invested capital. See Glossary.
1 Includes recommended final dividend of 10 € cents per share
The strategic report that follows contains a fair and balanced analysis, consistent with the size and complexity of the business in accordance with the expectations of the regulations of the Companies Act of 2006.
20 Key performance indicators
22 Aer Lingus
Antonio Vázquez Chairman
Airline Group's fifth Annual Report which covers a period of huge achievement for the Company and looks confidently ahead to further significant success in the future."
2015 was a year of really significant achievement for IAG and I'm delighted to have this chance to reflect on all the progress we've made since the Company was established five years ago.
Our achievements in that time have been significant. As you recall, we set a target to achieve an operating profit of €1.5 billion in 2015 when we laid out our initial plans for the Company. Thus to report operating profits, excluding Aer Lingus, of €2.3 billion on Group revenues of €22.9 billion for the year is a stunning result. All the more so when you think of the significant progress since the €485 million combined profit that British Airways and Iberia recorded when we first formed IAG. pleased with that situation. "It is a great pleasure to welcome you to International
And that achievement is mirrored across a whole range of other measures. We realised some €856 million of annual synergies from across the business, more than double our 2011 target of €400 million. This year we carried almost 95 million passengers on our four airlines, twice the number we were carrying five years ago, and our total fleet has grown from 348 to 529 aircraft.
This is a formidable growth record, and, on the strength of it, we were able to upgrade our targets for the five years to 2020 very considerably at our Capital Markets day in November. The ambitious new goals for earnings growth, operating profit margin, equity free-cash flow and return on invested capital underline our confidence that we can continue growing strongly and profitably in the years ahead.
But commercial aviation is a complicated business and the history of our industry has been a bumpy one. So perhaps one of the most pleasing aspects of our performance to date is that we now have the sort of financial ratios that would apply to a "normal" company, operating in a far less complex sector. This has never been the case for an airline company before and we are very
Our performance is even more striking when you remember where we started. In 2011, British Airways was just emerging from major financial surgery to mend the injuries inflicted by the global financial crisis. Iberia was in intensive care and in a fight for its very survival.
So it was vital that the Management Team laid out a very clear vision of what we needed to do to build the IAG of today. It's a plan we've followed with real determination, with the Board, the Management Team, and everyone throughout the business working cohesively to bring that vision to life.
In the process, we have completed a depth of transformation at both British Airways and Iberia that is without precedent, certainly in Europe. Indeed, you have to look at some of the Chapter 11 restructurings of US airlines to find anything comparable. That is something we can be truly proud of.
As we execute our future growth strategy the outlook for the industry remains positive. Despite some obvious global economic challenges, not least in the short term, the International Air Transport Association (IATA) is, nevertheless, forecasting that global passenger numbers will double to around 7 billion by 2034, with an average annual growth rate of 3.8 per cent.
In addition, the industry is in much better shape and taking a much more rational approach to managing investment, remunerating investors and controlling capacity, as we've seen in the recent period of sharply falling oil prices. That mirrors our own very disciplined approach. It is, and will remain, the right way forward.
It was always IAG's stated ambition to lead the process of consolidation in our industry and our unique business model has allowed us to acquire and integrate bmi, Vueling and Aer Lingus with relative ease. Progress on consolidation is slower than we would like, due to foreign investment controls and regulation, making it all the more important to pursue other forms of co-operation for the benefit of our customers. That's why we are so pleased to have signed a far-reaching joint business agreement between Iberia, British Airways, and LATAM.
Under this revenue sharing agreement, which is awaiting regulatory approval from the appropriate competition authorities in South America, the airlines will be able to offer customers greater choice, a range of frequent flyer benefits and much better links, including serving 100 destinations in South America and 87 in Europe.
Governance structures at IAG were inevitably complex at the outset. But progressively we have sought to simplify our structures so we have the flexibility to manage this fast-moving business on a day-to-day basis, while still remaining compliant with the more exigent governance and transparency requirements. I'm satisfied that we've handled the process very well.
We continue to adapt our processes. In 2015 we made changes to meet new governance codes in both Spain and the UK. We now comply with most of the recommendations in these codes and explain our position carefully where we take a slightly different approach.
Over the years we've refreshed the board regularly to strengthen our capabilities. We have a superb Board at IAG, with a diverse group of talented people who have a wealth of international business and public policy experience. The Board and particularly the Nominations Committee continue focusing in succession planning of the Board so as to ensure we have the right balance of skills, experience and capabilities that IAG could require at every given moment.
Significant changes are underway in the leadership of our airlines. Careful succession planning remains a constant focus for the IAG Board and Management Committee and it's a significant milestone to see Alex Cruz move from Vueling to lead British Airways following Keith Williams' retirement. Javier Sánchez-Prieto, previously CFO of Iberia, will become CEO of Vueling. We're also delighted to see Steve Gunning become the British Airways CFO and be replaced by Andrew Crawley from British Airways as the CEO of IAG Cargo. These moves are evidence of the fantastic inventory of talent we have within the business.
We continue to look constantly for ways to improve our environmental performance. In 2015 we consolidated our sustainability activities at a Group level and also set challenging new 2020 targets for noise and CO2 reduction. We will use all the tools at our disposal – modern aircraft, efficient technology and sustainable fuels – to improve our footprint.
We also work collaboratively with other airlines and governments to ensure our industry makes a meaningful contribution to tackling climate change. We've taken a lead role here, for instance pushing for the industry to adopt a target to halve CO2 emissions by 2050.
2016 is a critical year in achieving those goals. October's International Civil Aviation Organisation assembly could see the adoption of a new global agreement on emissions trading for our industry, something we strongly support. We need a truly global deal and I believe we are closer to that today than ever before.
All of our airlines continue to operate successful corporate responsibility programmes in their home markets and in locations they fly to, another important part of our sustainability agenda.
I'm glad to end this letter by focusing on another crucial ambition we have always had as a company and were able to meet in 2015 – our desire to reward shareholders for their tremendous support of IAG over the years.
We were really delighted to confirm our dividend payments during the year and we've made it absolutely clear that we intend to pursue a sustainable dividend policy for the long term.
I think the investor community understands very well where we are as a company, where we are going and are increasingly confident that we will deliver on our targets and our promises. It's very good to have that level of transparency in our relationship with them.
I want to thank all our other stakeholders for their support as well. In particular I pay tribute to people right across the business who have worked so hard to get IAG to where it is today. They, above all, give me huge confidence that we can achieve even greater things in the years ahead.
Antonio Vázquez Chairman
As IAG completes its fifth year in business and sets out ambitious new targets for 2020, Chief Executive Officer Willie Walsh tackles some of the main questions on the minds of IAG stakeholders.
We've had five very successful years and, when I look back, I'm really pleased with the tremendous progress we've made. We set ourselves very ambitious targets back in 2011 and people questioned if we'd be able to achieve them. But not only have we met those targets, we've exceeded them comfortably. I think that shows that, with a clear vision, determination, strong leadership and strong management, you can achieve very good results in this industry and I'm really pleased IAG has led the field in proving that.
See page 35 for more on our financial performance
Without question IAG can sustain and improve this financial performance – the best is yet to come! That's the clear message we gave to investors during our Capital Markets Day in November, 2015. We are confident we can do better because we have created a business that is structurally more efficient founded on a sustainably lower cost base. We'll build on that efficiency to grow our business in a profitable way, taking advantage of all the opportunities in front of us. But we'll also make sure we protect ourselves from any external challenges we come across. So, yes, we will definitely do better in future – even though we've done exceptionally well so far.
See page 20 for more on our future growth targets
Every industry faces risks from external suppliers and the airline sector is no exception. I've highlighted unjustifiable increases in airport charges as the main issue we need to focus on and the industry is actually coming together on this. We've created a new association, Airlines for Europe, to defend ourselves against what we see as quasi-monopoly practices by the airports. And I'll just give you one example – proposals to build a third runway at Heathrow.
There's an £18 billion price tag on the expansion plans. But when you consider that building the third runway itself would only cost £180 million – just 1 per cent of that £18 billion bill – you've got to ask yourself why is so much money being spent? It's prohibitive. And if it translates into a huge increase in charges at Heathrow, we will object to it. We will not pay a bill that will inevitably translate into huge increases in charges – charges that our customers and shareholders will ultimately incur.
We saw a significant fall in the oil price in 2015 but some of that benefit has been offset by the strengthening of the US dollar. As we pay for our fuel in dollars, we've not seen the full advantage of the fall in prices.
But I'm pleased to see that the industry is responding in a rational manner to this volatile situation. And I think that suggests, in the first place, that airlines do not expect the oil price to remain as low as it is now for long. More importantly, I think it reflects an industry that has learned from its past mistakes. Capacity discipline is broadly the same today as it was when the oil price was at \$100 a barrel, as opposed to \$34 or \$35 today and I would expect that to continue. So, in the short term, lower prices should provide some cost benefits. But, longer term, we'd expect the oil price to increase again.
www.iairgroup.com
Aer Lingus is a fantastic addition to IAG. It's a very efficient, well-run airline and it's operating in an environment where it has very strong growth opportunities. It's got an excellent network on transatlantic routes, which is one of the key areas we've always said IAG would focus on. And people often forget that it's not just the Irish market itself that is exciting for Aer Lingus. When you consider that there are 40 to 50 million Americans with Irish roots or connections, you're selling a very strong brand into a US market that's much bigger than people imagine. And that's why we're focusing so hard on the transatlantic business and so pleased to welcome Aer Lingus into the group.
See pages 22 – 27 for more information on our operating companies
Our environmental performance continued to improve in 2015 and we've set ourselves challenging new targets for the future. On CO2 emissions, for instance, we are achieving 95.4 grammes of CO2 per passenger km in 2015, down from 101.2 in 2012. Now we've committed to reducing this to 87.3 grammes by 2020 – a tough but important challenge.
We've also made some important changes in how we manage performance, consolidating all our activities on the environmental front within IAG to create greater focus and to learn from each other on areas such as noise reduction. But we also did some very smart things in 2015. We're retrofitting our Airbus A320 aircraft with "sharklets" that will improve performance. We continue to invest in new, lighter equipment on board the aircraft – new seating and new carts, for example. These small changes make a big difference because anything we can do to reduce the weight of the aircraft significantly improves fuel efficiency and environmental performance.
But there's a bigger picture here. We're committed to taking a lead role in improving the environmental performance of the industry as a whole, not just the performance of our individual airlines.
See pages 28 – 34 for more information on our environmental performance and goals
IAG combines the leading airlines in the UK, Spain and Ireland. The airlines' customers benefit from a larger combined network for both passenger and cargo.
1 Includes Aer Lingus passengers from January 1, 2015.
Leadership in IAG's main cities 1 3
Leadership across the Atlantic 2 4
Stronger Europe-to-Asia position in critical markets
Stronger intra-Europe profitability
Competitive cost positions across our business
5
6
In 2015 the Group completed the merger synergy programme, its actual benefits considerably exceeding the original merger targets. The Group has positioned itself to embed these savings and further revenue generation into its day-to-day activities. The IAG platform will continue to deliver transformational benefits.
The synergy programme has leveraged internal capabilities, best practices and economies of scale across the operating companies, achieving significant savings for the Group. In 2015 net benefits were more than double the initial target set in 2011, reaching €802 million for the year.
Many of the initial savings came from predictable economies of scale but as we progressed into the programme we found additional ways to extract value from the business.
The revenue work stream has been a real success, offering a wider choice of trip combinations and code-shares to customers while benefiting from an increase in revenue generation and from an integrated sales team.
Other areas of success include:
In 2011 IAG's objective was to establish a scalable platform to deliver IT, procurement and back office support functions in such a way that new and existing airlines would be able to quickly and seamlessly plug into these services.
The concept has evolved into the creation of the IAG platform. Teams across the group have worked to centralise and harmonise services, exploiting strengths and transforming the way the Group operates. IAG is expanding into new Group initiatives that will strengthen and maximise value across the Group portfolio.
The chart below shows the components of the IAG platform and how these services are established to deliver benefits for the airlines. This global integrated platform is about leveraging economies of scale, driving better service, cost effectiveness and higher returns on investment, but also allowing the operating companies to focus on their brands, customers and operations.
The GBS model aims to deliver backoffice services at lower costs, embedding modern working practices in the Group and delivering a higher quality of service. GBS Group Finance Services, Group Procurement and Group IT are working together to unleash incremental value that could not be done with individual functions in the operating companies. Significant progress has been made in the implementation of the Global Business Services that will eventually progress beyond shared service models.
Key achievements in 2015:
implementation of a single consolidated treasury management system;
launch of IT transformation programme; and
Post transformation, GBS aims to deliver around 30 per cent saving in people costs across the global finance community.
The procurement and finance transformation is underway and will expand to all operating companies. GBS Group IT will continue to deliver an IT platform scalable for future growth.
Fleet: The teams have continued to work on the fleet harmonisation in three areas: cabin configuration, avionics and emergency equipment. The model has been extended to all new fleet. The goals of the programme remain to lower operation costs through lean and flexible capital expenditure. The teams have also developed a group connectivity strategy and are evaluating options for the shorthaul fleet.
The IAG Digital Transformation team was set up in January 2015 to drive business model transformation across IAG and embrace its digital potential. The team is designed to think big, act small and scale quickly. IAG is developing a connectivity strategy by exploring learnings from trials that have been in progress since 2010. IAG is setting aggressive targets: 90 per cent of the longhaul fleet will be fitted by early 2019 and the first in service "air to ground" shorthaul aircraft is planned for 2017. The team is in its initial stages and collaborating with digital experts in Israel and on the West coast to identify potential opportunities for the Group.
A small team led by Luis Gallego has been created in 2015 to undertake a strategic assessment of maintenance activities across the Group.
one of the world's leading global premium carriers.
low-cost and premium service
leading airline between Europe and Latin America
the best product in the Irish airline market to customers at a competitive price
one of the world's leading international air freight carriers
loyalty solutions
"Last year IAG comfortably exceeded its original 2015 targets and committed to new goals that will stretch our performance further in the next five years. I'm very confident we have the right structure and the determination to sustain our record of profitable growth."
Chief Executive Officer
Since the creation of IAG, 2015 was always an important milestone for the business and, five years on, I'm very pleased with the progress we've made.
To be able to achieve a record financial performance, secure continued growth in our existing airlines, complete the acquisition of Aer Lingus, and introduce dividend payments to shareholders is a great achievement. But we're clear we can do a great deal more.
That's always been our position. When we unveiled ambitious five-year targets for IAG in 2011, many investors were sceptical that we could achieve them. So it was particularly pleasing that we not only met, but comfortably exceeded those targets in 2015.
Above all it's been really satisfying to prove a basic conviction that, with clear vision, strong leadership and a constant determination to beat our targets, we can achieve sustainable profitable growth in the long term.
We had many successes last year, not least achieving a record operating profit of €2.335 billion, far outstripping our initial €1.5 billion target for 2015.
We've done a great job securing synergies confirming our original belief that together we would be a stronger business, capable of building a formidable growth platform. Net annual savings after our first five years amounted to €856 million, more than double our initial €400 million target.
We also continued to demonstrate the strength of our unique business model, a structure that is now the envy of many of our competitors. To be able to operate four independent airline brands – British Airways, Iberia, Vueling, and now Aer Lingus – and see them all improve their performance despite confronting different markets, opportunities and challenges, is a fantastic achievement.
Our Cargo operation has been successfully re-organised and continues to perform well despite structural changes in the sector and a growing imbalance between capacity and demand. Our Avios loyalty business goes from strength to strength and is now set for new growth in the year ahead as it expands its customer and supplier base.
We're also making good progress in centralising parts of the business where we can achieve real efficiencies. Our Global Business Services (GBS) is
handling routine transactional activities in Krakow, Poland, as a case in point. But we're looking for other areas where we can combine resources for the benefit of our airlines, such as IT, digital solutions and maintenance, all of which look promising.
Last year was not without its challenges. 2015 was a year of extreme and unprecedented volatility in both the oil and currency markets.
The oil price declined from a peak of around \$100 a barrel in 2014 to recent lows of around \$30. However, sharp rises in the value of the US dollar – the currency we use to buy our fuel – meant that we realised less benefit than many expected and with volatility likely to remain, we continue to hedge our fuel purchases to manage that uncertainty.
The aviation industry has responded well to this situation. Traditionally it would have reacted to falling prices by flooding the market with new capacity. This time airlines have maintained their discipline and stuck to their fleet replacement plans, as we have. That indicates a general belief that oil prices will rise again and reflects an industry that has learned from past mistakes.
We saw both threats and opportunities during the year. Some markets suffered and in response, we temporarily reduced capacity, demonstrating our ability to quickly mitigate unexpected risks. Similarly, where opportunities emerged, we used our increased flexibility to boost capacity.
To retain the confidence of IAG shareholders and investors we need to demonstrate we can continue to grow while still covering our cost of capital, year in and year out.
We believe we can and at our Capital Markets Day in November 2015, we unveiled even more ambitious targets covering the five years to 2020.
We're now working to a new 15 per cent target for return on invested capital. Meeting that will be testing, but we are not afraid of the challenge. We are targeting an operating profit margin of between 12 and 15 per cent and average growth in earnings per share of more than 12 per cent per annum.
Capital spending will continue as we improve our business, expand our network, replace aircraft and provide better services for customers. But the same unwavering discipline will apply. We will only spend money where it's clear we can make a return.
I'm convinced 2016 will be a better year for IAG than 2015. I'm equally sure we can sustain that performance.
2016 will see some significant changes in the leadership of IAG and it's great to have succession plans in place which reward talented people within the business. Keith Williams retires as Executive Chairman of British Airways after a fantastic career at the airline. It's been a huge pleasure to work with Keith and I can't over-emphasise the contribution he has made, not least to the creation of IAG.
He will be replaced by Alex Cruz, who moves from the role of Vueling Chairman and Chief Executive Officer. Alex has spearheaded Vueling's phenomenal success in recent years and as part of the IAG management committee he knows the strengths of British Airways and the challenges that lie ahead. He will be a different leader to Keith, but equally successful, I am sure. I am pleased to announce Javier Sánchez-Prieto as CEO of Vueling, previously CFO of Iberia.
Steve Gunning becomes Chief Financial Officer at British Airways, having successfully led the IAG Cargo business, while Andrew Crawley will move from his commercial role in British Airways to take over running the Cargo operation.
While it's been a successful year for all of the IAG airlines, all four remain firmly focused on future profitable growth driven by the stretching targets we've set for them.
An undoubted highlight of the year was the acquisition of Aer Lingus. We've been impressed with what it has achieved under the leadership of Chief Executive Officer Stephen Kavanagh, and the development of its transatlantic network, from its Dublin hub.
Leadership in the transatlantic market has always been a key goal, and Aer Lingus will bolster that ambition and
offer a strong dollar revenue base. People look at Ireland as a relatively small market, but Aer Lingus is a great brand with a very strong point of sale in North America. Also Ireland is increasingly attracting investment from US multinationals, particularly in the pharmaceuticals, IT and digital sectors. Dublin is fed by a very good shorthaul network and enjoys pre-flight US customs and border clearance benefits that play really well with customers. The airline is a natural fit with IAG and a very welcome addition to the Group.
With a more efficient cost base, British Airways continues to make good financial progress, but cost efficiency will remain a priority. It is investing wisely in new products, winning rising customer satisfaction scores and has been voted the number one UK Superbrand for the last two years.
Capacity constraints at Heathrow obviously put some limits on network growth, but we continue to launch new routes including San Jose, California, and Tehran.
Not pictured Executive Directors: Willie Walsh Chief Executive Officer; Enrique Dupuy de Lôme, Chief Financial Officer. See page 58 for our Board of Directors.
IAG Management Committee led by Willie Walsh is responsible for the overall direction and strategy of the Group, the delivery of synergies and co-ordination of central functions.
Stephen Kavanagh Chief Executive Officer of Aer Lingus
Alex Cruz Chairman and Chief Executive Officer of Vueling
Ignacio de Torres Zabala Director of Global Services
Keith Williams Executive Chairman of British Airways
Steve Gunning Chief Executive Officer of IAG Cargo
Julia Simpson Chief of Staff
For a full biography of each member please visit iairgroup.com/govmanage
Luis Gallego Martin Chairman and Chief Executive Officer of Iberia
Robert Boyle Director of Strategy
Chris Haynes General Counsel
I can't praise the people at Iberia enough for the fantastic turnaround they have achieved under the airline's Plan de Futuro – a true example of real transformation. Under Luis Gallego's leadership, every aspect of the airline has been changed – from operational standards, to brand strength, customer satisfaction, culture and, of course, the financial performance and cost base of its network.
This has given us the confidence to accelerate investment. Having scaled back the network to mend Iberia's finances, we are now reclaiming territory that was ours, particularly in South America. We're growing into new markets too with the launch in 2016 of non-stop services to Tokyo and – subject to the granting of slots and permissions – to Shanghai, a fantastic first for Iberia.
Vueling is now established as a significant premium brand in Europe's low-cost sector and performed strongly despite some tough operational issues in 2015. It continues to focus hard on what it does best – controlling costs and growing profitably. It is not afraid to test new markets – capitalising on its successes, but prepared to move on if it is the right call. It's this approach that has seen it build on its strong presence in Barcelona and expand its network, notably in Italy and France.
One of the key strengths of our business model is that we can add new airlines to the Group relatively easily as we can dedicate resources from IAG on acquisitions, without distracting any of our existing airlines. That's a unique strength, certainly in Europe.
We continue to review further potential acquisitions, but will only make acquisitions that are right for the business. While regulation and foreign ownership controls mean opportunities remain relatively scarce, joint ventures are an important subset of the consolidation process. We were delighted to reach a joint business agreement between British Airways, Iberia and LATAM. Although subject to final regulatory approval, it will allow us to offer customers much greater connectivity between South America and Europe and many other important benefits.
Like any industry, airlines constantly face risks, but I think we've proved that we are good at anticipating threats and responding quickly.
Airport charges are one particular risk where we face quasi-monopoly activity by airport operators. We've come together as an industry on this, and other, issues forming a new association called Airlines for Europe.
The proposed development of a third runway at Heathrow illustrates the issue well. The Davies Commission has estimated the cost of the project would be a prohibitive £18 billion, an extraordinary sum, when you consider the cost of building the actual runway would be just £180 million – or 1 per cent of the total bill.
We continue to take a lead role in improving the environmental performance of our industry. 2015 saw us centralise our global environmental activities within IAG to create more focus and to make it easier to share ideas. We also set tough new targets for CO2 emissions. Introducing new, more efficient aircraft to our fleet makes a big difference but we're also increasing the efficiency of our existing fleet in smart ways, for instance retrofitting our Airbus A320s with "sharklets" and using lighter equipment inside aircraft.
We've been critical of the UK government's short-sighted failure to support the development of aviation bio-fuels, one of the reasons our waste-to-liquid joint venture with Solena ended during the year. Biofuels are critical to unlocking the long-term sustainability of our industry and we continue to talk to alternative suppliers.
More immediately, 2016 is a critical year for the industry with governments coming together at the International Civil Aviation Organisation's assembly in Montreal in October to agree a new global emissions trading scheme for the industry. We have long advocated such a system. We now need to make real progress.
It's been a momentous five years for IAG and I look back on our achievements with great pride. But I hope it's clear that we are in no way resting on our laurels. We are firmly focused on the future.
As our new targets for profitable growth indicate, we're determined to build on the strong foundations we have created – a determination I know is shared across the entire Group.
Thanks to our achievements to date and the tremendous hard work, skill and dedication of people throughout the business, I'm very confident we can do just that.
Willie Walsh Chief Executive Officer
IAG's performance is driven by its unique structure which supports each operating company in delivering returns, while leading strategy and driving Group synergies. This approach enables the Group to be responsive to the needs of individual markets and customers while capturing the value of group scale.
IAG is able to anticipate and respond rapidly to changing dynamics by giving the individual airlines the independence to manage their different challenges. While IAG oversees and sets individual airlines financial targets, local management retains profit accountability and is responsible for the delivery of the plan. Individual airlines are also responsible for adapting its customer proposition to the local markets they operate in. Retaining individual airlines' brands has proven to be a very effective model to maintain customer loyalty in each of the markets IAG operates in.
Although IAG's operating companies have the autonomy to adapt to the needs of individual markets, IAG continues to develop an integrated
platform where individual airlines can benefit from Group efficiencies and share in best practices. The "plug & play" platform provides scalable systems to drive more ambitious cost savings programmes, further revenue improvement opportunities and improved service delivery. Cost synergies have transitioned to a higher level of ambition through the creation of IAG's back office platform, Global Business Services (GBS). The centrally managed platform is embedding modern working practices to deliver higher quality and more efficient service to IAG airlines in IT, Procurement and Finance functions.
The integrated platform also provides new revenue opportunities by driving customer loyalty across a portfolio of brands through IAG's shared global
reward currency, Avios. Similarly, IAG Cargo is creating new cargo revenue opportunities by offering an integrated product portfolio to key cargo forwarders.
IAG continues to play a key role in the consolidation of the airline industry and continuously evaluates possible acquisitions and strategic partnership to further enhance the Group's portfolio. The parent company's structure has been designed to assess and facilitate new acquisitions without distracting the individual airlines' management that will remain focused on delivering the financial plan.
See page 20 for how we are achieving our goals
Providing the broadest choice of destinations to our customers in our five main cities: London, Barcelona, Madrid, Dublin and Rome.
The acquisition of Aer Lingus in 2015 has resulted in Dublin becoming IAG's fifth main city with continued expansion of the network footprint and improved routing options. Aer Lingus, together with its regional franchise added seven new destinations throughout 2015 and now operates to a total of 77 destinations from Dublin. IAG has continued to invest in Rome by increasing based aircraft from four to nine and adding 20 new routes reaching a total of 58 destinations served from Rome in 2015. IAG has also strengthened its leadership position in Barcelona, London and Madrid through continued capacity growth and network expansion adding 21, 17 and 10 destinations respectively.
IAG has also continued to improve its customer proposition in main cities, delivering improved operational performance, increasing personalisation capabilities and upgrading service recovery programmes.
Providing the most comprehensive frequency and network proposition in collaboration with our oneworld partners American Airlines and LATAM Airlines Group.
Demand in 2015 was significantly impacted by currency volatility and economic uncertainty in Latin America mainly driven by the disappointing economic performance of Brazil. The US Dollar appreciated 8.8 percent against the euro while the Brazilian real plunged to historic lows against the US dollar.
The addition of Aer Lingus to the group has further strengthened IAG's leadership across the Atlantic providing opportunities to leverage Dublin's advantageous geographical position for serving connecting flows between Europe and North America. Aer Lingus increased transatlantic capacity by 15 percent in 2015 and added Washington as the seventh North American destination served by the airline. British Airways continued to strengthen key markets by deploying the Airbus A380 in Miami, San Francisco and Washington. Iberia also strengthened its position across the Atlantic leveraging new aircraft and continued cost reductions to launch three new routes to Cali, Medellin and Havana, providing an overall increase of eight percent in total capacity.
Increasing our direct network footprint, improving our product offering and leveraging our partners' network reach.
IAG has continued to strengthen its presence in Asia. Group capacity to the region increased by 3 per cent in 2015 and Kuala Lumpur was reintroduced as a destination directly serviced by British Airways. IAG enhanced the customer proposition through further leveraging our partnerships in the region that ultimately provide customers with a greater network footprint and service options throughout Asia. British Airways continued to invest through deployment of new aircraft as well as developing a more tailored service offering to Asian customers. Airbus A380 and Boeing 787 deployment in the region almost doubled from one in eight departures in 2014 to a quarter of IAG's operations in 2015. British Airways also announced that it will open two new cabin crew bases in Shanghai and Beijing to offer Chinese customers the language skills and cultural experience they are accustomed to. Finally, China Southern joined IAG's cargo Partner Plus Programme, enabling IAG Cargo customers to book confirmed space on China Southern's Asian network.
See pages 20 – 21 for more about our key performance indicators
Leveraging shorthaul growth opportunities and strengthening our presence in core established markets.
2015 has been another year of high volatility in the region. Geopolitical issues coupled with a decline in commodity prices have negatively impacted the Europe-to-Africa market. IAG has been proactive in managing its regional exposure and has adapted capacity to address market volatility in order to manage our RoIC performance. British Airways adjusted its network, ceasing operations to Entebbe while at the same time increasing capacity to South Africa. Vueling continued to benefit from Barcelona's geographical position, launching new narrow body services to Sub-Saharan Africa (Ghana and Cape Verde) while also reducing capacity in Senegal and Gambia. Looking ahead, Iberia will be returning to South Africa after a three year absence through the relaunch of Johannesburg services.
Optimising our legacy shorthaul networks, maximising commercial collaboration between our business units and expanding our low cost carrier footprint.
IAG's growth in Europe has primarily been driven by the strongest RoIC performing shorthaul entities within the Group, Vueling and Iberia Express. The Barcelona based carrier reached the significant milestone of operating 100 shorthaul aircraft in 2015, a landmark that has been achieved by only two other European low cost carriers. Iberia continued to execute its Transformation Plan, driving improved European performance, while British Airways strengthened its position by increasing the seat density of its shorthaul fleet. Commercial collaboration across the group saw improved utilisation of key assets including Avios, BA Holidays, intra-group codeshares and combined marketing efforts which have enabled IAG to grow both capacity and profitability in key markets.
Leveraging our scale, integrating best practices and driving simplification and harmonisation across the Group.
2015 saw the completion of the Iberia-British Airways merger synergy programme, delivering cost improvements of €290 million through a combination of common fleet specification and outsourcing of transactional activities, as well as IT standardisation and joint procurement. Beyond our synergy programme, IAG will continue to enhance its integrated platforms of GBS and maintenance, providing IAG airlines with a greater ability to deliver cost reductions while at the same time improving overall system quality. Achieving our cost savings programmes is key in order to achieve our shareholder return targets. IAG has also extended its fleet harmonisation programme to include the Airbus A330 and Airbus A350 aircraft families with Airbus A330 specific savings estimated at €3 million per aircraft. The harmonisation programme will not only increase our capital efficiency but also provide the flexibility to shift capital between operating companies.
KEY PERFORMANCE INDICATORS
We have defined the Group's key performance indicators in terms of long-term goals to reach our strategic objectives.
See page 18 – 19 for more about strategy
See page 76 – 97 for more about remuneration. KPIs linked to remuneration of executive directors are marked with the symbol R 3
The KPI "Total shareholder return" is described in the remuneration report on pages 76 – 97 together with its performance. The performance of the other KPIs is discussed in the financial overview on pages 35 – 46
IAG established long-term planning objectives for the Group with the aim to deliver sustainable cash returns to its shareholders. These objectives are summarised in four categories that are interrelated.
IAG reviewed its long-term planning objectives as part of the Group's Business Plan1 process and defined goals for the next five years1 for each of the objectives. Through this year's business planning cycle we have identified further benefits from internal initiatives together with tailwinds from the fuel price. As a result, we have announced an upgrade to our long-term goals for the period 2016-2020.
Each objective is measured by a set of financial key performance indicators and metrics. Following the completion of the business plan review process, IAG sets stretching financial targets annually for each operating company to support the delivery of the Group's long-term goals.
The Group's performance against the KPIs is measured on a regular basis by IAG's Management Committee and their remuneration reward is linked to the achievement of the targets and longterm planning goals.
Operating companies also use specific metrics to measure their operating performance.
Although not key performance indicators, the Group measures nonfinancial metrics, such as the diversity of our people and the impact that our airlines have on the environment. Read more about our non-financial performance in our Sustainability Report on pages 28 – 34.
In addition, the operating companies review non-financial measures, such as airline punctuality and customer satisfaction, which are linked to variable remuneration and used to incentivise their employees. These measures are reviewed regularly by the management teams of each of the airlines, and by exception, by the IAG Management Committee.
IAG OBJECTIVES AND LONG-TERM GOALS
STRATEGIC REPORT
RoIC (%)
2011 2012 2013 2014 2015
We use 12-months rolling RoIC1 as a profitability KPI to assess efficient return on the Group's asset base. It quantifies how well the airlines generate cash flow in relation to the capital invested1 in their business together with their ability to fund growth and to pay dividends.
Return on invested capital is defined as operating profit before exceptional items adjusted for lease and inflation divided by invested capital2. See Glossary.
OPERATING PROFIT (€m)
We measure improvement in the financial performance of each operating company through the operating profit. It is also a key component of the Group's remuneration policy.
We use the operating margin ratio to measure the efficiency of our business which links with our strategic objective to reach a competitive cost position and to optimise revenues through market leadership.
Operating profit is the Group operating result before exceptional items.
Adjusted operating margin is defined as operating profit/(loss) adjusted for lease before exceptional items as a percentage of total revenue. See glossary.
Earnings per share reflects the profitability of our business and the core elements of value creation for our shareholders. Growing earnings indicates that the Group is on the right path to create value for its shareholders.
Adjusted earnings per share is defined as profit before exceptional items, after tax adjusted for earnings attributable to equity holders and interest on convertible bonds, divided by the number of outstanding shares adjusted for dilutive impact.
2011 2012 2013 2014 2015
We use this KPI to monitor our capital and to assess financial headroom through the same lens as financial institutions.
Adjusted Net Debt to EBITDAR is calculated as long-term borrowings, less cash and cash equivalents and other current interest-bearing deposits plus capitalised operating aircraft lease costs divided by EBITDAR. In 2013 and in 2015 the full year EBITDAR of Vueling and Aer Lingus, respectively, were included in the metric.
2011 2012 2013 2014 2015
EBITDAR is an indicator of the profitability of the business and of the core cash flows generated by our business model. The measure is not impacted by the financing structure of our aircraft.
EBITDAR is calculated as operating profit before exceptional items, depreciation, amortisation and rental charges.
EQUITY FREE CASH FLOW (€m)
Equity free cash flow is a key indicator of the financial management of the business. It reflects the cash generated by the business that is available to fund dividends to our shareholders, to improve leverage and to undertake inorganic growth opportunities.
We measure Equity Free Cash flow as EBITDA before exceptional items less cash tax, cash interest and capital expenditure.
1 In the calculation, the asset inflation is estimated at 1.5 per cent to allow for inflation and efficiencies of new fleet. Pre-delivery payments and intangible assets are excluded from the RoIC calculation. We use value of the assets at period end. Through this year's business plan process, we have refined the definition of the RoIC. It had a 0.5 points impact on the 2014 reported result. Prior year information has not been restated.
2 In 2015, the full year results of Aer Lingus were included in the calculation.
"Aer Lingus joins IAG as a strong, profitable airline with a resilient business model and a competitive cost base."
Chief Executive Officer of Aer Lingus
2015 saw us post a strong operating profit result, while keeping the discipline on the operating expenditure excluding fuel per available seat kilometre on a constant currency basis (-1 per cent yoy). We believe the business is now well positioned to combine efficient growth with appropriate investment to deliver on our RoIC targets;
We remain committed to delivering choice and quality service to our customers at a competitive price. In 2015 we initiated our "Good to Great" programme, which incorporates consistent service standards across the customer journey, training 1,600 frontline staff. This was supported by significant
investment in hard product enhancements. We introduced a new lie-flat business class seat on our expanded Airbus A330 fleet and upgraded our lounges in Dublin and North America. We modernised the Aer Lingus brand to support our positioning as the smart choice for consumers in our markets. Our new website went live in the fourth quarter and we released our new mobile application in early 2016 with improved functionality and experiential content. The results so far have been very encouraging – we carried more passengers in 2015 than ever before.
Our transatlantic network sustained the momentum of recent years throughout 2015. We successfully filled our additional seat capacity growth of 14 per cent without compromising yield growth while maintaining the ratio of point to point and network traffic flows. In 2016 we will add Los Angeles, Newark and Hartford to the network and bring to ten the number of North American gateways that we serve directly. This growth will further strengthen IAG's leadership in the North Atlantic market.
As demand conditions in Ireland began to improve towards the end of 2014 we set ambitious targets for seat factor growth across our shorthaul network. In 2015 we added 2.6 points to seat factor. Our offering is synonymous with central airports, schedule quality and hospitable service. We are intensifying our efforts to preserve our differentiation while closing the cost gap with our main competition. We will continue to improve shorthaul performance through targeted load factor growth, retail success and aggressive cost management.
Already we have commenced a number of exciting initiatives as we look to harness the potential benefit to Aer Lingus and IAG presented by Group platforms. They will continue to develop throughout 2016 and be complemented by further initiatives as integration deepens. Our newly launched frequent flyer programme, Aer Club, will plug into the global Avios network and transform the way we manage loyalty.
We will bring a whole new set of customers to Aer Lingus with expanded market reach; whether through codeshare partnerships or broader alliances. Group Global Business Services will provide us with economies of scale across a range of key support areas that until now we could only aspire to. Joint procurement is already delivering value. Two Airbus A330s resourcing our 2016 expansion have been procured at a rate Aer Lingus could not have achieved on a standalone basis.
In 2016 Aer Lingus will celebrate its 80th anniversary. It will be a year of opportunity for Aer Lingus: the opportunity to extract the benefits delivered by IAG ownership, the opportunity to deliver and contribute to Group RoIC targets; and the opportunity to compete for the resources necessary to continue to successfully grow Aer Lingus.
| € million | 20151 | Higher/lower2 |
|---|---|---|
| Revenue | 1,718 | +10.4% |
| EBITDAR | 284 | +29.7% |
| Operating profit | 124 | +72.2% |
| Adjusted operating profit margin | 8.9% | +2.9pts |
| RoIC | 12.0% | +4.4pts |
1 Relates to full year to December 31, 2015 under aligned Group accounting policies.
2 Variance against full year to December 31, 2014 under aligned Group accounting policies, excluding certain non-recurring items.
"2015 was marked by further progress in financial and operational performance towards our targets and putting in place the framework for increased targets to 2020."
Executive Chairman of British Airways
The new 2020 plan will build on the positive sentiment already achieved by continuing to invest in the areas we know our customers value the most whilst continuing financial and operational discipline and improvement. There is no better person than Alex Cruz as incoming Chairman and Chief Executive to implement the new plan.
We saw an increase in the number of customers willing to recommend British Airways (as measured by NPS), reflecting the positive impact of shorthaul cabin refurbishments and new aircraft on longhaul routes, and saw improvements in punctuality despite this being a difficult year for airlines as a result of air traffic control strikes across Europe. The airline's customer service scores held steady, despite a significant increase in the number of customers.
British Airways' business plan targets an operating margin of between 12 and 15 per cent. Key to achieving this are:
building sustainable, profitable shorthaul model and hold London market share;
raising customer satisfaction with £6.7 billion investment in new product;
The North Atlantic is a fairly mature air travel market for British Airways, but it continues to be a significant one, and, British Airways forecasts continued growth over the business plan period. The key change in the market place in recent years has been Delta taking effective ownership of Virgin Atlantic. The two airlines have coordinated schedule, upgraded product and are actively seeking to take corporate market share from British Airways and our partner American Airlines.
The Atlantic Joint Business (AJB) is responding robustly to the challenge with a commitment to strengthening key markets supplemented by the launch of new destinations.
British Airways believes it is important to keep market share in its key market to maintain relevance with consumers. Gatwick returned to profitability and is now growing. The focus of improvement is now Heathrow. Commercial developments including growing leisure routes in the peak summer and improvements to ba.com and mobile to increase sales conversion of flight and non-flight products.
A competitive cost base is essential to a sustainable shorthaul model. British Airways will reduce unit costs by further densifying the cabins and up-gauging aircraft. There will be renewed focus on airport and engineering costs.
British Airways is investing significantly in the customer over the next five years with a target of improving the Customer NPS. In 2015 the refurbishment of the shorthaul cabins was completed and, between 2016 and 2020, 41 brand new longhaul and 31 shorthaul aircraft will be taken on which will be quieter, more comfortable and with the latest In Flight Entertainment (IFE) systems. In addition, 18 Boeing 747s and 46 Boeing 777s will be refurbished with new IFE. By 2020, 99 per cent of the longhaul fleet will be new or refurbished.
Through the growth outlined above the company will seek more favourable unit costs with key suppliers including hub airports, European handling agreements, parts pool agreements, maintenance providers, and catering. In addition, the company will review opportunities for further synergies within IAG on core functions and use of technology to reduce overheads.
The British Airways and American Airlines on-board product will be upgraded in 2016 and investment on the ground will continue.
A number of sales and marketing initiatives have been launched to further enhance the offering to customers including the launch of a new joint business loyalty programme for small and medium enterprises customers.
Safety and security performance will focus on the two key drivers of engineering our safety risks and developing a proactive safety culture. British Airways was again more reliable than key competitors in 2015 with more on-time departures from London than EasyJet or Ryanair according to Civil Aviation Authority (CAA) data.
| £ million | 20151 | Higher/lower |
|---|---|---|
| Revenue | 11,598 | -1.0% |
| EBITDAR | 2,252 | +19.4% |
| Operating profit | 1,375 | +41.0% |
| Adjusted operating profit margin | 12.2% | +3.7pts |
| RoIC | 13.2% | +4.1pts |
1 Includes allocation of Avios results.
"At Iberia, we are halfway through our Plan de Futuro and confident we will achieve our targets."
Chairman and Chief Executive Officer of Iberia
In 2014 Iberia put into action Plan de Futuro. The plan is allowing Iberia to radically transform the company towards a profitable and sustainable future.
In 2015 we can proudly announce we have successfully flown half of our journey, improving results significantly, through a more competitive cost base and our continuous commercial improvement.
In terms of labour, we continue with the optimisation plan of our workforce, while in parallel simplifying processes and structure. We have already reduced our employee cost over total ASK (CASK) by almost 25 per cent since 2012 and expect this reduction to reach 35 per cent by 2018.
In 2015 we also had a strong focus on supplier cost optimisation, through the steady implementation of Plan de Futuro measures on operating costs and overheads. In addition; the initial benefits of the implementation of IAG projects led by IAG's Global Business Services further contributed to our finance and IT cost saving objectives.
The commercial plan that we launched
1 According to Flightstats Global Airlines ranking. 2 Includes allocation of Avios results.
two years ago allowed us to continue closing the unit revenue gap with our competitors, placing the airline in a strong position to minimise the potential impact of a slowdown in Latin America.
Also we continued investing strongly to improve our new longhaul product, with a new in-flight experience in our business and economy classes. By the end of 2016, we will have 100 per cent of new product in longhaul, as we complete retrofitting of Airbus A340-600 and substitute the Airbus A340-300 with the Airbus A330-200.
Client satisfaction was further enhanced by our operational excellence, which allowed Iberia to be the second most punctual airline in the world, up from third last year1 . Iberia Express was ranked the most punctual low cost airline across the globe for the record second year in a row1 .
The new cost base of the Plan de Futuro allowed us to recover the majority of the longhaul routes withdrawn during the restructuring. In 2015, Iberia returned to Havana and announced the re-opening of Johannesburg and San Juan de Puerto Rico. Furthermore, we strengthened our network with new destinations such as Cali and Medellin, additional frequencies to Panama, Chile and Mexico, and further European routes such as Budapest, Manchester and Florence.
This growth meant that, after 11 years without hiring pilots, Iberia announced the entry of up to 200 new pilots, joining under the new productivity and compensation conditions set out in the 2014 labour agreements.
In 2015, Iberia marked a new step in the renewal and optimisation of its fleet. At the end of the year Iberia took delivery
of the first of 13 Airbus A330-200s, phasing out the Airbus A340-300 fleet and reducing fuel burn by 15 per cent with 40 per cent lower maintenance costs. The airline confirmed eight options for Airbus A350-900 to join its fleet from 2018 onwards.
Iberia also placed its first order for the new Airbus A320-NEOs joining its portfolio with a harmonised layout, common to all IAG airlines that will bring significant savings on purchase price and maintenance costs.
The improvements derived from the Plan de Futuro allowed Iberia airport services to compete in the auction process for Spanish airports handling licences, winning 17 out of the 20 licences, including the recovery of Barcelona airport. This success will allow Iberia to maintain its position as market leader for the next seven years.
The implementation of Plan de Futuro productivity and cost optimisation measures have allowed to increase the competitiveness of our MRO unit.
2015 results show a strong financial improvement, with an operating profit of €247 million (2014: €50 million), confirming that we are on the right path towards a future of flexible growth and sustainable profitability
Iberia remains confident in our Plan de Futuro and of achieving the Group's financial targets:
| € million | 20152 | Higher/lower |
|---|---|---|
| Revenue | 4,764 | +13.5% |
| EBITDAR | 720 | +43.4% |
| Operating profit | 247 | +394.0% |
| Adjusted operating profit margin | 7.0% | +3.5pts |
| RoIC | 10.0% | +5.8pts |
"Vueling has increased capacity by 14 per cent in 2015 with more than 350 routes, 23 bases, 155 destinations and 25 million passengers and continues to see profitable opportunities for growth in 2016."
Chairman and Chief Executive Officer of Vueling
In 2015 the flexibility and harmonisation of the Vueling fleet, ensured profitable growth and saw a strengthening of Vueling's culture of innovation.
Vueling has tripled its fleet since 2009, with 104 aircraft in 2015. Flexibility, gauge and harmonisation are the three main axes for the Vueling fleet to achieve cost savings and improve customer perception:
• Harmonisation: Vueling is part of the IAG fleet harmonisation project, adopting the same features such us the introduction of light seats. Moreover, the airline continues working on the premium services with more legroom, cabin dividers, power outlets and mood lighting.
Vueling's profitable growth is based mainly on three factors:
well as, joint tender processes with IAG, are contributing to improve efficiency.
Despite the weaker euro, the favourable fuel price scenario has benefited Vueling's costs with a fuel unit cost decrease of around 4 per cent.
Vueling is characterised by its track record of continuous innovation. In the last few years, the airline has developed mobile services making the mobile app the first tool for the customer full flight self-management. Other innovation concepts related with airports services include auto check-in, on-board services such as Wi-Fi and power outlets are currently being developed. In 2015 there were 15 aircraft with power outlets on-board.
| PERFORMANCE | ||
|---|---|---|
| € million | 2015 | Higher/lower |
| Revenue | 1,962 | +13.7% |
| EBITDAR | 386 | +18.4% |
| Operating profit | 160 | +13.5% |
| Adjusted operating profit margin | 11.7% | +0.2pts |
| RoIC | 13.7% | -1.2pts |
"With multiple ways to earn rewards through a growing alliance of leading brands Avios offers unmatchable travel rewards and benefits leading to extraordinary experiences for our customers."
Chief Executive Officer of Avios
Avios represents a profitable, dynamic and scalable tool for IAG. Avios has increased its active customer base by 18 per cent in 2015 and continues to see growth opportunities in 2016 and beyond. Avios is favourably positioned to perform well based upon its core loyalty capabilities, cost model and portfolio of current and potential partners.
In January 2015 the Avios loyalty reward business was carved out to create an independent operating unit of IAG. Through greater independence, IAG's wholly owned customer loyalty currency provider is on a trajectory to deliver even better results, with a new commercial model and legal structure whereby Avios has formalised relationships with British Airways and Iberia and partnerships outside IAG, including Flybe and Meridiana.
During the year, Avios offered customers access to greater redemption flight availability by successfully managing the realignment of collection and redemption propositions across the IAG frequent flyer programmes, whilst minimising and managing risks with currency partners and ensuring no degradation in revenue.
Avios continued to expand its reach into new markets and geographies by concluding partnership agreements with Kulula and Aer Lingus that will see those airlines adopt the Avios currency. These agreements complement the strong foundation within IAG airlines, increasing Avios future growth and evidencing its scalability and partner interest in the Avios currency model. Additionally, Avios also successfully renegotiated multi-year contracts with key financial partners, establishing a solid platform for future growth.
Throughout 2015, additional and enhanced redemption products were deployed, including the broadening of the hotel content, inventory and price options, expansion of the international ferry and car hire portfolio and the introduction of new online shopping platforms. Improved upgrade products and Pay with Avios (offering discounts on commercial published tickets) on a wider range of flights were also instated. The implementation of peak and off peak reward flight prices, lowering off peak longhaul flights by 35 per cent, was a further step towards enhancing the customer proposition.
Avios launched the 'Do More' with Avios campaign, focussing on driving satisfaction and currency utility with existing collectors. 'Do More', based on the Avios brand essence of 'Time Well Spent', was another step towards aligning Avios to the emotional, rather than functional, benefits of travel.
Avios has successfully brought together 'Do More' across all customer channels including social media, specifically Twitter feeds to connect 'real time' with customers to demonstrate the value of the Avios currency. It was through this and other initiatives in 2015 that Avios was able to increase its active customer numbers so markedly.
In November 2015, Avios formally took responsibility for the servicing of English speaking British Airways Executive Club applicant tier card holders, establishing its contact centre capabilities as a Group centre of excellence, driving synergies and expertise by increased focus on selling and servicing redemption products.
Avios pursued an ambitious innovation agenda in 2015, creating a dedicated digital innovation directorate. The establishment of an innovation lab has created an environment to deliver new currency applications and prototypes. Avios has delivered Europe's first loyalty app for the Apple watch and rebuilt and relaunched both its mobile apps, going through an accelerated process from first designs to launch inside three months. These continue to have functionality added.
The Avios culture embraces engagement and promotes the potential of the virtual currency to stimulate innovation. Avios ran its first hackathons which generated over 200 ideas from employees about how to develop improved customer experiences. Avios built a stand-alone payment portal prototype to allow partners to integrate Avios payments more easily, and also piloted a social media sales widget. Collectively, these tools increase the utility of the Avios digital platform in order to make reward and redemption of the currency easier and quicker for customers and partners.
"Our strategy has undoubtedly been put to the test this year and, most importantly, it has proven its worth."
Chief Executive Officer of IAG Cargo
The airfreight industry experienced a challenging year, with excess capacity and reduced demand leading to significant price and yield pressures. The year began with an unexpected boost from the US West Coast port strike, which in turn led to a sharp rise in demand that forced traditionally sea going freight onto aircraft. However, while this provided air freight with a welcome boost through to spring 2015, the increase in demand was temporary. In the second quarter, challenging market conditions returned, again putting air carriers under pressure.
In 2014, IAG Cargo designed and launched a strategy specifically built for unpredictable trading conditions often caused by uncontrollable external factors. IAG Cargo has termed this a 'new normal', whereby overcapacity and aggressive competition have become expected day-to-day challenges. In light of this, 2015 has seen IAG Cargo continue to deliver its strategy of differentiation via premium products, cost efficiency and volume variability, and flexible regional strategies and partnerships, all of which tackle the regionally unique trading conditions that exist across 350 destinations served.
IAG Cargo has continued to set its own path in an industry subject to excess capacity and market fluctuations, initiating several industry defining firsts. Underpinning IAG Cargo's initiatives in 2015 has been our relentless focus on the growth of premium products. A strong network, customer proposition and product portfolio have enabled growth in our premium product mix to 20 per cent this year. A primary driver of this is our pharmaceutical product, Constant Climate. This grew by 44 per cent, in volume terms and, following a Good Distribution Practice (GDP) certification award, is now regarded as an industry leading product. IAG Cargo now serves 110 pharma approved destinations. Prioritise, our express product, also grew by 32 per cent in 2015. This was driven by several company-wide initiatives, such as an increase in premium warehouse capacity and substantial growth from express intact and small business. IAG Cargo also optimised its schedule to open up 2,000 new same-day connections through its London and Madrid hubs. This shortening of transit times further strengthened the express proposition offered.
We continue to focus on unit cost control through suppliers' renegotiations and productivity improvements.
Through focusing on strategic partnerships and the utilisation of the carrier's substantial belly hold network, IAG Cargo has continued to commit to sensible capacity management throughout 2015. Extending and expanding its capacity sharing agreement with Qatar Airways, as well as introducing new freighter capacity arrangements with Finnair cargo, has meant that IAG Cargo is able to expand its network and provide additional freighter services to its customers in a cost effective way. This stems from establishing sensible partnership deals. The Partner Plus programme grew to seven members this year, with the addition of Finnair, China Southern and Aer Lingus. Partner Plus allows IAG cargo to expand its network, without having to invest in new infrastructure
which in turn enables us to fill spare capacity on the aircraft. Utilisation of capacity across the network was also supported by the recently launched revenue management system, Optima. This has been a critical tool in setting price more effectively, enabling the delivery of optimal returns.
IAG Cargo expanded its global network in 2015. By launching several important destinations: Kuala Lumpur, Cali, Medellin and Havana. The company has provided its customers with new options for shipping goods into key markets. In addition, new aircraft joined the fleet this year. The Boeing 787 fleet provides customers with larger, temperature controlled holds that are well suited to the increasing volumes of sensitive cargo being sent by air.
Despite what has been a difficult 2015 for the industry, we have delivered a stable and resilient performance, while growing our bottom line contribution. IAG Cargo's model is now firmly established and, with the integration of Aer Lingus Cargo well underway, the unified sales team, revenue management system and network will bring further benefits to customers.. Therefore we remain confident that the right strategy is in place for 2016.
"In 2015, we established a new Group sustainability function in IAG, set ambitious goals on noise and carbon efficiency and developed a programme to deliver these targets by 2020."
At IAG we have a focus on sustainability as we recognise its importance in enabling the growth of our business but we also firmly believe that as a responsible company this is the right way to do business. Demonstrating this ethos, this year we set ourselves the ambition of becoming the world's leading airline group on sustainability.
The Group will continue to focus on efficiency through investing in modern aircraft and technology, and supporting delivery of new sustainable fuels and operational procedures to reduce aircraft emissions and noise. We will also continue to work collaboratively with the rest of the industry and with governments to ensure our sector has a sustainable future.
2016 will be a significant year for the aviation industry as we prepare to agree a global-market based measure for carbon dioxide emissions at the International Civil Aviation Organisation (ICAO) General Assembly in September 2016. This agreement is pivotal in enabling the industry to meet its target of carbon neutral growth from 2020 and setting the course towards the further target of halving industry CO2 emissions by 2050.
IAG has been an important player in the international work to develop a globalmarket based measure and will continue to actively support this activity during 2016 and beyond to ensure aviation plays its full part in addressing global climate change.
Antonio Vázquez Chairman
As one of the largest airline groups in the world, IAG contributes to global economic prosperity by connecting people, places, communities, and cultures. The connectivity that airlines provide, which cannot be met by alternative means of transport, contributes to increased productivity and prosperity by encouraging investment, innovation and efficiency.
In 2015 IAG transported over 95 million customers (including Aer Lingus passengers since January 1, 2015) and delivered 5,293 million tonnes of cargo kilometres. Total revenue was €22,858 million and the Group employed 60,862 people (average manpower equivalent).
In 2015, we established an IAG sustainability function led by the Group Head of Sustainability with the following primary responsibilities:
Progress has already been made in these areas with a new Group Sustainability Policy established and our Pathway 2020 strategy defining the main areas of focus for the Group.
While the individual airlines within the Group will continue to drive their own sustainability programmes, this new function at IAG defines Group ambition and will drive further performance improvement and consistency across the Group, delivering both environmental and financial benefits.
The new Group sustainability governance structure is shown in the chart to the right.
The Group Head of Sustainability reports directly to the Chief of Staff and, twice per year, provides reports to the IAG Management Committee, and also to the IAG Audit and Compliance Committee.
Sustainability programmes within the individual airlines are maintained under the control of each airline and their boards. The Group sustainability team works closely with the relevant leaders in each of the operating companies to ensure delivery of initiatives contributing to the Group sustainability targets.
The IAG risk management process (see page 47 of this report) provides both assessment and action on risks in the area of sustainability, such as climate change regulation, noise and labour relations.
On sustainability, we actively engage with industry partners and associations, policy makers, shareholders, the investment community and governments to influence policy and drive action to support our Group sustainability objectives.
IAG also actively participates in the industry delegation on the ICAO work programme for a global climate deal and will positively engage in the next phase of this process, concluding at the ICAO General Assembly in September 2016.
In the UK we work closely with Sustainable Aviation (SA), an industry coalition working towards cleaner, quieter and smarter aviation. Since 2005 we've worked through SA with other airlines, manufacturers, airports and the air traffic control authority to deliver a common, credible voice for aviation sustainability.
2015 marked the tenth anniversary of SA and the conclusion of our two year tenure as Chair of the SA Council. Showcase outputs from SA include the UK-wide continuous descent campaign which delivered over 45,000 additional continuous descents in the first year to August 2015, saving both noise and emissions, and the industry-leading Carbon, Noise and Alternative Fuels roadmaps which describe how the industry can deliver improved sustainability performance to 2050.
We continue to chair two of SA's working groups on Sustainable Fuels and Operational Improvements and have extended the scope of our membership from British Airways to IAG.
Inspired by the progress of Sustainable Aviation in the UK, we have begun talks with partners in Spain to establish a similar group to improve our sustainability performance there.
IAG is determined that the Group and our industry contribute to global climate change goals, including the United Nations target to avoid more than two degrees rise in global temperatures due to climate change, as agreed at the November 2015 Paris Climate Change Summit. Our contribution to this global goal will be delivered by playing our part in delivering the industry target of carbon neutral growth from 2020 and the further target of halving aviation's net CO2 emissions by 2050.
The Group demonstrates good performance on fuel efficiency with 95.4 grammes of carbon dioxide per passenger kilometre in 2015.
We have set a group target to further improve our carbon efficiency to 87.3 grammes of CO2 per passenger kilometre by 2020, representing a 9 per cent improvement on performance. During 2016, we will be looking to improve this target through identifying additional fuel operating efficiencies.
In addition, significant progress has been made towards the development of sustainable low carbon fuels and a global economic measure to enable further cost-effective emissions reductions. The Group is at the forefront of efforts to ensure the success of these key elements of our sustainability strategy.
The Group advocates carbon pricing through global carbon markets as the most cost effective mechanism to tackle aviation's emissions. In collaboration with industry partners, IAG is contributing to development of an intergovernmental global market-based measure to cap net CO2 emissions from 2020. ICAO members are working towards agreement of a simple and equitable design of the mechanism, as previously mentioned, at the autumn 2016 ICAO General Assembly.
IAG airlines comply with the EU Emissions Trading System (ETS) that currently applies to intra-European flights. The EU ETS will be reviewed at the end of 2016 following the outcome of the ICAO General Assembly.
Our customers have a strong interest in the climate change activities at our airlines and we actively engage them by taking steps to mitigate our emissions.
For example, British Airways' Carbon Fund channels customer donations from flight bookings at ba.com to projects that invest in renewable energy and energy efficiency. It is one way the airline is working with customers to tackle climate change and have positive social impacts in the UK. So far the Carbon Fund has supported 14 renewable energy projects, exceeding €1.3 million in community benefits through projects such as solar panels, efficient lighting and installation of biomass boilers for schools, communities and leisure centres.
In 2015 Vueling launched the Green Book to be distributed to all Vueling pilots, which highlights practical steps to improve fuel management and efficiency.
The Green Book is just part of a wider training programme to promote fuel efficiency among Vueling pilots. Over half of Vueling pilots have now attended face-to-face fuel efficiency training which provides an opportunity to ask questions and share ideas for further improvements. Just a year after first adopting the Green Book and the new training programme, results are already manifesting in the improvement of operating efficiency and reduced carbon emissions.
In 2015, Vueling added 19 aircraft to its fleet, reducing average fleet age by 3.3 per cent. In addition average weight per aircraft was reduced by over 100 kilograms, contributing to further fuel savings. 35 per cent of Vueling's fleet is fitted with sharklets, which improve fuel efficiency by up to 4 per cent during the cruise phase of flight.
Aer Lingus have developed a new fuel management system designed to improve data collection, analysis, validation and management of one of the airlines biggest costs: fuel. In 2015, this system has already delivered further significant benefits for Aer Lingus and has helped the Fuel Management Committee track the success of their initiatives. For example:
The Fuel Efficiency Network shares with the other airlines the success of the Aer Lingus Fuel Management System.
Carbon efficiency and other environmental performance attributes were important factors in selecting the 23 new aircraft that entered the IAG fleet during 2015, including 5 Boeing 787-900s, 2 Airbus A380s, 5 Airbus A321s and 11 Airbus A320s. These aircraft are significantly cleaner and quieter than the aircraft they replace.
In 2015 IAG's combined carbon efficiency, expressed in grams of carbon dioxide per passenger kilometre (gCO2/pkm), was 95.4 gCO2/pkm. This represents a 2.2 per cent improvement over 2014, and was largely driven by fleet renewal.
IAG continues to improve coordination across the Group on operational fuel saving initiatives through a dedicated team of pilots and experts. In November 2015 we formed the IAG Fuel Efficiency Network bringing together the experts in each airline to share best practice in fuel efficiency with a target in 2016 to save an additional 200,000 tonnes of CO2.
IAG's fuel efficiency, carbon and noise performance is largely driven by new, more efficient aircraft replacing older aircraft in the fleet. The table below shows the significant acquisition of new aircraft by IAG over the next five years.
IAG remains committed to the development of sustainable fuels that provide measurable greenhouse gas emission reductions.
The Group supports a range of projects with the IAG Fuel Procurement team working collaboratively with the Group's airlines. During 2015, there has been progress on a number of projects and on our work with governments to introduce more supportive policies for sustainable aviation fuels.
In 2014 we reported on British Airways' GreenSky project to construct an advanced fuels facility converting waste to sustainable jet fuel. During 2015, the project was delayed following the withdrawal of a key partner but British Airways is actively working to establish a partnership with a new technology supplier and we remain optimistic that this pathway offers a viable future for sustainable aviation fuels in the UK.
British Airways also continued to work with the UK Government and took part in the Transport Energy Taskforce on future biofuel policy resulting in a recommendation for aviation fuels to be included in the Government's Renewable Transport Fuels Obligation.
Iberia has continued to participate in the Spanish Government's collaborative programme Bioqueroseno to support the development of a sustainable fuels industry for aviation. During 2015 the
Bioqueroseno programme, along with the EU Initiative Towards Sustainable Kerosene for Aviation (ITAKA), made further progress in developing sustainable camelina plantations, taking Spain a step closer to production of biojet fuel.
Iberia continues to support the international atmospheric research project IAGOS (In-service Aircraft for a Global Observing System), by carrying atmospheric monitoring instruments on board one of its Airbus A340 aircraft. In 2015 the aircraft collected data during 334 flights, helping scientists achieve better weather prediction and informing future climate prediction models.
IAG is actively pursuing a range of ways to reduce the noise impact of our operations on communities around airports.
In 2015 the noise performance of IAG fleet continued to improve as we invested in new, quieter aircraft. 99 per cent of IAG aircraft fleet now meet the ICAO Chapter 4 technology standard for noise, an increase of 0.3 per cent from 2014. Investment in over 168 new aircraft over the next five years will continue to improve our noise performance, which will deliver a 10 per cent reduction in our noise per flight by 2020. During 2016, we will be looking to improve this target through developing additional noise efficient flying procedures.
| Future | |||||
|---|---|---|---|---|---|
| 2015 | 2014 | deliveries | Options | ||
| Airbus A320 family | 335 | 271 | 121 | 128 | |
| Airbus A330 | 16 | 8 | 14 | 7 | |
| Airbus A340 | 24 | 24 | - | - | |
| Airbus A350 | – | – | 43 | 57 | |
| Airbus A380 | 10 | 8 | 2 | 7 | |
| Boeing 747 | 40 | 43 | - | - | |
| Boeing 767 | 12 | 14 | - | - | |
| Boeing 777 | 58 | 58 | - | - | |
| Boeing 787 | 13 | 8 | 29 | 18 | |
| Other | 21 | 25 | 2 | 15 | |
| Total fleet | 529 | 459 | 211 | 232 |
These procedures will include continuous descent approaches, delayed landing gear extension, optimised approach, flap settings slightly steeper and two segment approaches British Airways also led a series of flight trials during 2015 to test quieter operational techniques.
The air quality performance of IAG fleet has continued to improve as part of our fleet renewal. In 2015, Group compliance with the ICAO Committee on Aviation Environmental Protection (CAEP4) standard for oxides of nitrogen (NOx) was 93 per cent, up 1.3 per cent from 2014, and 65 per cent of our fleet meet the more stringent CAEP6 NOx standard, up 3.3 per cent from 2014.
Operational practices such as reduced auxiliary power unit (APU) run times while aircraft are on stand, and reduced engine taxiing, are also helping reduce the impact of our aircraft on local air quality.
IAG airlines are continuing to pursue a range of initiatives to reduce waste and increase recycling. Examples of British Airways initiatives including on-board segregation of plastic bottles and aluminium cans for recycling and working with a service partner and the airport to segregate EU, origin aircraft waste on arrival to London Heathrow. This has allowed significantly more material to be recycled whilst meeting strict regulations for the control of international catering waste.
Vueling is continuing to work with the non-profit organisation Nutrition without Borders, to reduce food waste by retrieving some products from crew meals for redistribution in community kitchens.
IAG remains committed to procuring goods and services from suppliers who can demonstrate ethical principles in the way they conduct their business in relation to quality, safety, environmental responsibility and human rights.
In 2015, British Airways collaborated with industry partners Airbus, Heathrow Airport and NATS, the UK air traffic control agency, on a 'Fly Quiet Programme' to explore opportunities for quieter flight operations.
In 2015 IAG completed health, safety and environment supplier audits and worked with suppliers on mitigating actions with a focus on safety leadership, training and local programmes. Vueling also launched a new Supplier Portal, a platform enabling closer management and more transparency in supplier relationships.
Safety across the IAG Group is managed independently by each airline through the establishment of a safety board structure with each Accountable Manager ensuring the delivery of a safe and compliant operation.
While each airline is accountable under EASA Operations for their safe operation, an IAG Safety Committee meets regularly and is chaired by the IAG Chief Executive Officer and attended by senior representatives from British Airways, Iberia, Vueling and Aer Lingus.
The purpose of the IAG Safety Committee is to compare safety and compliance performance across the airlines, to learn from safety events and share best practice. The current focus is on the delivery of common standards for ground handling operations.
In 2015 Vueling successfully passed the audit to renew its IOSA certification standard, fulfilling the highest quality and safety standards in the aviation industry.
British Airways is providing guidance to flight crew and cabin crew to support the UK Border Agency initiative to reduce human trafficking. Awareness of this issue is now part of the normal cabin crew training. This is in addition to general cabin observation for unusual behaviour on board which is standard procedure across the Group's airlines.
The IAG Board monitors and reports on diversity at all levels across the Group. In particular, diversity has been a key consideration in planning the long-term composition of the Board itself. The Board diversity policy is described on the Company's website, where the gender diversity figures are also disclosed and are shown in the graphs below:
As well as encouraging diversity in our workforce IAG is also improving our services to make air transport more accessible for everyone. At Vueling, for example, a new booking process allows passengers with reduced mobility to check in on-line, automatically assign a seat and, if needed, request additional assistance during their travel. They have also updated their guide for passengers with special needs and published a guide for families travelling with children to help make the travel experience easier. At Barcelona and Rome airports dedicated check-in counters for passengers with special needs and those travelling with children have also been created. IAG supports equal pay and will capture data to report this in the future.
IAG actively contributes to the development and support of local communities, including flight destinations and areas where the Group works. IAG aims to be a responsible neighbour, and limit the impact of its operations on these communities. The generosity of our employees and passengers continues to make a significant positive contribution to communities around the world. In 2015 for example:
Vueling passengers donated €95,000 to the Sant Joan de Déu children's hospital in Barcelona and €145,000 for Bambino Gesù children's hospital in Rome.
Vueling donated €10,000 to Unicef to assist children affected by Nepal's earthquake, started a fundraising campaign with Save the Children for child refugees in Europe and continued to support the non-profit organisation Make-a-Wish.
| Indicator | Units | 201510 | 2014 | 2013 | 2012 | Year over year (2015-2014) |
|---|---|---|---|---|---|---|
| Total energy consumption from jet fuel, gas and electricity |
Megawatt hours |
101,051,244 | 96,712,371 | 91,062,826 | 89,350,479 | 4.5% |
| Greenhouse gas (GHG) emissions1 2 3 4 | ||||||
| Direct (Scope 1) | Tonnes CO2 e |
26,335,726 | 25,219,827 | 23,664,495 | 23,249,641 | 4.4% |
| Indirect (Scope 2) | Tonnes CO2 e |
115,304 | 113,833 | 118,036 | 132,610 | 1.3% |
| Other indirect (Scope 3) | Tonnes CO2 e |
5,419,599 | 5,179,537 | 4,871,126 | n/a | 4.6% |
| GHG emissions intensity (grammes of carbon dioxide per passenger kilometre)1 2 4 |
gCO2/pkm | 96 | 98.2 | 100.4 | 101.2 | (2.2%) |
| CO2 emissions intensity for flight operations only |
gCO2/pkm | 95.4 | 97.5 | 99.7 | 100.5 | (2.2%) |
| Percentage of aircraft fleet that meet ICAO Chapter 4 technology standard for noise5 6 |
Percentage | 99.0% | 98.7% | 93.1% | 90.9% | 0.3pts |
| Percentage of aircraft fleet that meet ICAO CAEP 4 technology standard for Oxides of Nitrogen (NOx) emissions5 6 |
Percentage | 93.0% | 91.7% | 89.7% | 87.5% | 1.3pts |
| Percentage of aircraft fleet that meet ICAO CAEP 6 technology standard for Oxides of Nitrogen (NOx) emissions5 6 |
Percentage | 65.0% | 61.7% | 56.1% | 48.0% | 3.3pts |
| Water consumption at main sites | Cubic metres | 543,02811 | 501,219 | n/a | n/a | 8.3% |
| Waste produced at main sites excluding suppliers7 |
Tonnes | 10,546 | 9,932 | n/a | n/a | 6.2% |
| Average age of aircraft fleet | Years | 10.8 | 10.5 | 11.1 | 11.8 | 2.9% |
| Average manpower equivalent | Number | 60,892 | 59,484 | 60,089 | 59,574 | 2.4% |
| Number of new permanent hires in calendar year |
Number | 5,216 | 3,670 | 2,647 | 4,389 | 42.1% |
| Average hours of training per year, per employee |
Hours | 36.1 | 37.3 | 35.6 | 35.0 | (3.2%) |
| Monetary value of significant fines for non-compliances with laws and regulations8 |
Euros | 468,576 | 392,359 | n/a | n/a | 19.4% |
| Total customer and colleague direct and in-kind donations to charity9 |
Euros | 11,457,171 | 13,515,678 | 15,058,811 | 20,139,797 | (15.2%) |
Notes
1 GHG indicators represent the most accurate figures available at date of publication. The IAG Investor CDP report available later in the year will contain the finalised data.
2 IAG has reported all GHG emissions sources required under the 2006 Companies Act (Strategic and Directors' Reports) Regulations 2013. IAG uses the Greenhouse Gas
Protocol Corporate Accounting and Reporting Standard (revised edition), applying an operational control boundary.
3 The GHG emissions are split into Scope 1 (direct, burning jet fuel and natural gas), Scope 2 (indirect, electricity), and Scope 3 (indirect, upstream fossil fuel production). 4 The emissions data was calculated by applying the UK Government's GHG conversion factors for Company Reporting (2012 to 2015).
5 The International Civil Aviation Organization's Committee on Aviation Environmental Protection (CAEP) establishes international standards for aircraft noise and engine emissions. Oxides of Nitrogen (NOx) emissions are relevant to local air quality around airports. The ICAO CAEP 4 and 6 NOx standards were applicable for engines first manufactured after December 31, 2003 and December 31, 2007 respectively. The ICAO CAEP Chapter 4 technology standard for aircraft noise is applicable for new aircraft certified on or after January 1, 2006.
6 Noise and NOx indicators include the combined performance of all airlines in the Group. Historic values have been revised in line with this and therefore are different to those shown in previous reports.
7 Waste figures cover all airlines in the Group but for Vueling include paper waste only. British Airways data is for British Airways only Grundon contract at Heathrow and Gatwick and includes dry and liquid waste but does not include contractor waste such as catering.
8 Figures referring to monetary fines relate to British Airways, Iberia, Vueling and Aer Lingus. The fines incurred by British Airways in 2015 were; (1) a fine for failing to have 24/7 Brazilian Portuguese language speaking call centre (from 2012) resulting in fine c. USD 30,000. The fines incurred by Iberia were: (1) USA treasury settlement for FAA (Fine 2014EA700185 FAA), USD30,000. (2) Tax charge €59,797, (3) Tax charge €46,327, (4) Tax charge €21,384, (5) Adjustments for fuel €111,547, (6) Tax charge €20,905, (7) Tax charge €30,001 for Iberia.com sales, (8) Adjustments €32,600 for deposit return to Spanish tour operator, (9) Tax charge €22,788 for deposit return to Spanish tour operator, (10) Treasury fine €22,788 for deposit return to Spanish tour operator, (11) Local payment €47,200 with settlement 201502040033 Colombia (National Treasure Aerocivil), punishment UEAC. Vueling and Aer Lingus incurred no fines over value USD 20,000.
9 Figures referring to charity donations for 2013 and 2012 relate to British Airways and Iberia only. 2014 includes Vueling and 2015 also includes Aer Lingus from acquisition date. Figures converted into euros based on 2015 conversion rate pounds to euros of 1.3711.
10 All figures for IAG 2015 include Aer Lingus from acquisition date.
11 Water data includes Vueling, Iberia and Aer Lingus for 2015, with British Airways 2014 water data as placeholder until 2015 data is available later in the year as part of CDP report.
STRATEGIC REPORT
"We are pleased with the success of our synergies programme exceeding €800 million in 2015. The Group has begun to benefit from the new IAG platform including Avios reorganisation, through IAG GBS savings, and new developments in digital and MRO."
2015 has been a positive year for IAG and we have been able to improve our targets significantly in the context of the industry and general economic environment.
Our operating result for the Group was €2,300 million (excluding Aer Lingus) reaching the high end of our expected range, with all three airlines beating their performance from last year. Behind this strong performance we have to mention efficient management of our passenger unit revenues on a significant capacity growth, and accelerating unit cost reductions, both in non-fuel and in fuel cost lines. These achievements have generated margin and RoIC increases in British Airways, Iberia and Vueling. The successful completion and integration of Aer Lingus has also exceeded our expectations.
Our capacity growth has been allocated mostly to Iberia and Vueling on their strategic market opportunities and cost advantages, while British Airways focus has been kept on product and market leadership together with cost savings.
The key to our success has been from our continuous efforts in cost control, with significant progress in productivity and supplier cost reductions across the Group.
This has driven the significant improvement in equity free cash flow versus last year, getting us closer to the expected average for the next five year period of an EBITDAR increase of circa €1.2 billion, lower capital expenditure from a slower pace of new fleet deliveries, a strong focus on investment rationalisation and cash preservation.
The Group cash position has improved, even after completion of the Aer Lingus acquisition and an initial dividend payment. Our gearing ratio, expressed in adjusted net debt divided by EBITDAR remained at 1.9 times, reflecting our strong cash generation, financial strength and our ability to consider new business opportunities in the future.
Finally, 2015 has also been a success in terms of our earnings per share. Our fully diluted earnings per share before exceptional items increased by 77.6 per cent and we paid our maiden dividend this year.
Enrique Dupuy de Lôme Chávarri Chief Financial Officer
Fuel unit costs for the year before exceptional items down 6.3 per cent, down 17.2 per cent at constant currency
Non-fuel unit costs for the year before exceptional items up 4.3 per cent, down 3.9 per cent at constant currency
See pages 36 – 37 for more about our economic landscape
See pages 38 – 46 for the financial review
See pages 47 – 54 for risk management and principal risk factors
Global GDP growth came in below expectations in 2015 at 3.1 per cent, 0.3 percentage points lower than in 2014, and 0.4 percentage points below International Monetary Fund (IMF) forecasts issued in January 2015. The IMF expects the rate of GDP growth to increase in 2016, forecasting GDP growth of 3.4 per cent, representing a slight pick-up from advanced economies, but a decline in emerging and developing economies.
Whilst the UK economy continued to recover at a strong pace relative to other G7 economies in 2015, it lost momentum through the year. The economy grew 2.5 in the first quarter down to 1.9 per cent growth in the last quarter. Unemployment continued to fall in 2015 ending at 5.2 per cent compared to 5.7 per cent in 2014, representing the lowest level for eight years. UK consumer confidence also continued to improve in 2015. The GfK UK Consumer Confidence Index remained positive in every month of 2015, with the index at +2 in December 2015, compared to -4 in December 2014 and -13 in December 2013. Inflation fell short of the Bank of England's 2 per cent target, with CPI expanding only 0.2 per cent in 2015. There continued to be much debate around the timing of interest rate increases by the Bank of England during the year, but the official bank rate remained unchanged in 2015. The Organisation of Economic Co-operation and Development (OECD) and the IMF currently forecast UK Real GDP growth of around 2.3 per cent in 2016 compared to 2.2 per cent in 2015.
Economic growth in the Eurozone picked up in 2015, with the economy growing 1.3 per cent in the first quarter, 1.6 per cent in the second quarter and third quarter and 1.5 per cent in the last quarter. However, as in 2014 and 2013, there continued to be a divergence in performance between different member states. Spain was one of the fastest growing countries in the Eurozone in 2015, with the economy strengthening through the year and reporting a +3.5 per cent rise in real GDP in the fourth
quarter of 2015. In contrast, real GDP in France rose only +1.3 per cent in the fourth quarter. As had been widely expected, the European Central Bank (ECB) expanded its Quantitative Easing programme at the beginning of 2015, with the programme continuing into 2016. The inflation rate for the Eurozone turned positive in the second quarter, but the level of inflation growth remained low, increasing +0.2 per cent in December 2015, with ECB President Mario Draghi reiterating the ECB's commitment to raising inflation as quickly as possible. The unemployment rate continued to fall, reaching a four year low by the end of 2015 of 10.4 per cent.
The solid economic recovery in the US continued in 2015, although there was a reduction in momentum as the year progressed. The US economy grew 2.9 in the first quarter, 2.7 per cent in the second quarter, 2.1 per cent in the third quarter and 1.8 per cent in the last quarter. Although consumer confidence fell slightly in 2015, based on the University of Michigan Consumer Sentiment Index, this decline happened in the second half of 2015. The labour market continued to strengthen with the unemployment rate dropping to 5.0 per cent at the end of 2015, from 5.6 per cent last year. Whilst the rate of inflation growth remained muted throughout 2015, the US Federal Reserve increased interest rates 0.25 percentage points in December 2015, the first rise since 2006.
Latin America experienced another difficult year in 2015 , with real GDP contracting 0.3 per cent compared to growth of 1.3 per cent in 2014. Growth was once again weakest in South America with a reduction in real GDP of 1.5 per cent compared to growth of 0.7 per cent in 2014. Venezuela remained in recession, with real GDP reducing 10.0 per cent in 2015 compared to a reduction of 4.0 per cent in 2014. Brazil, Latin America's largest economy, and Ecuador also slipped into recession this year, with real GDP reducing 3.8 per cent in Brazil and 0.6 per cent in Ecuador. In addition, the rate of growth, compared with 2014, declined in every country in South America with the exception of Chile and Peru. Uncertainty continues to undermine economic recovery, with falling commodity prices, emerging market slowdown, currency depreciation and political turbulence. Economies in Central America, such as Mexico, remained more robust, with real GDP increasing 3.9 per cent, compared to growth of 4.1 per cent in 2014.
IATA is forecasting industry operating margins of 8.2 per cent in 2016, building on operating margins of 7.7 per cent in 2015. IATA forecast industry seat capacity to increase 4.0 per cent compared to 3.7 per cent in 2015, with ASKs increasing ahead of this by 7.1 per cent compared to 5.5 per cent in 2015. Passenger load factor is expected to slip slightly to 80.4 per cent from 80.6 per cent in 2015, with return fares per passenger to decline 7.9 per cent in 2016, lower than the 13.8 per cent decline in 2015.
As was the case in 2015 and 2014, IATA forecast North America to generate the highest net post-tax profit margin in 2016, of 9.5 per cent, the same as 2015.
As in the past three years, IATA forecast Africa to generate the lowest net post-tax margin in 2016 at -0.5 per cent although an improvement from 2015. Africa is the only region IATA forecast to be loss making in 2016, with losses due to regional conflict and competitive challenges.
| Eurozone | US | Latin America | ||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| OECD | 1.8% | 1.5% | 2.5% | 2.4% | n/a | n/a |
| IMF | 1.6% | 1.5% | 2.8% | 2.6% | 0.8% | (0.8%) |
In contrast to Africa, IATA expects airlines in Latin America to generate a profit in 2016, recovering from the losses in 2015. For Europe, IATA forecast net post-tax margins of 4.3 per cent in 2016, better than the 3.5 per cent in 2015. While IATA expects, Asia Pacific net tax margins of 3.2 per cent, up 0.3 points from last year.
Positive changes to the industry continue, with many companies, including IAG, undertaking multi-year programmes aimed at reducing their operating costs to sustainable levels for the medium and long-term.
IAG paid its maiden dividend and updated its long-term planning goals for 2016-2020. These included a Return on Invested Capital (real terms) targeting sustainable 15 per cent compared to +12 per cent previously; an operating profit margin range of 12 to 15 per cent compared to 10 to 14 per cent; and average earnings per share growth of +12 per cent per annum compared to +10 per cent.
IAG completed the acquisition of Irish airline Aer Lingus, which joined the Group in August 2015. Iberia made significant progress towards the goals set as part of their Plan de Futuro restructuring programme launched in 2014. British Airways made further progress towards its goals, and Vueling continued to expand across Europe, announcing the launch of a new base at Paris Charles de Gaulle airport opening in 2016.
The airline industry remains among the most heavily regulated in the world. In 2015 there have been significant developments impacting the industry.
The UK government continues to impose APD on airlines, the heaviest tax of its kind in the world, which cost the industry as a whole some £3.2 billion in the financial year to March 2015. Previously announced changes to APD were implemented during the year for passengers on longhaul services to destinations in the Far East, South
America, Caribbean and Southern Africa. APD was also removed for children under 12 years old from May 2015 and this will be extended to children under 16 years old from May 2016.
Following last year's recommendation by the Smith Commission to devolve APD at Scottish airports, the Scottish Government is currently consulting on the structure and level of the tax with a view to possibly reducing tax. IAG considers that piecemeal reductions could simply serve to distort competition between UK airports and will therefore continue to argue for the complete abolition of APD across the UK.
During the year, the UK Government responded to the arguments put by IAG and many airlines to improve the visa regime for visitors to the UK. Specifically, improvements were announced for Chinese visitors that will be implemented in early 2016, including the introduction of a two year visit visa at the same cost as the existing six month visa and trials of a ten year visa similar to that offered by the US to visitors from China. This could improve the UK's competitive position in terms of attracting high spending visitors from China. IAG will press for similar improvements for visitors from other key markets.
In 2012, the European Union (EU) launched an emissions trading scheme. Following international opposition, the EU reduced the coverage of the scheme to flights within the EU to allow time for the development of a global marketbased approach by the International Civil Aviation Organisation (ICAO).
The ICAO General Assembly in October 2013 agreed to develop a global marketbased measure by 2016. As a result of this progress at ICAO, the EU introduced a regulation to continue with intra-EU scope of the ETS until 2016. This reduced scope will be reviewed after the ICAO General Assembly in October 2016 when a decision will be made about its future scope.
The Airports Commission set up by the previous coalition Government delivered its report on UK airport capacity during the year, recommending a new 3,500 metre runway to the north west of Heathrow. The Government was expected to announce its decision on this recommendation in December 2015, but has delayed doing so until summer 2016 at the earliest. Given the uncertainty we remain sceptical about the Government's commitment to make a final decision in favour of a new airport capacity.
IAG believes that Heathrow is the correct location for new runway capacity but has challenged the excessive costs of the proposals put forward by Heathrow's operator (HAL), arguing that any new capacity must be delivered cost effectively. We will continue to pursue this objective vigorously over the coming year.
The European Commission launched its "Aviation Strategy" on December 7, 2015, its objective is to ensure that the European aviation sector remains competitive and takes full advantage of the benefits of the fast-changing and developing global economy. Legislative initiatives in the strategy include a request to negotiate comprehensive EU-level air transport ("Open Skies") agreements with a number of countries, the completion of the Single European Sky project and an update of the EU's aviation safety rules. In the coming year IAG will continue its engagement with the EU Institutions to ensure its interests are taken into account as the various initiatives are developed.
The air traffic industry performed well benefiting from lower fuel unit costs and reasonable demand growth, despite some softening in the global economic environment. Overall, North America and Europe were the strongest markets, while Africa was impacted by lower fuel prices and Latin America was impacted by weaker currencies in areas such as Brazil and Argentina.
The market growth trend for the industry in 2015 was strong, with a passenger load factor improvement of 0.5 points on a capacity increase of 5.9 per cent. Volumes increased on additional capacity in all regions with passenger load factor improvements except the Middle East which saw a significant increase in market capacity.
| Year to December 31, 2015 | Capacity ASKs |
Passenger load factor |
Higher/ (lower) |
|---|---|---|---|
| Europe | 3.8% | 82.6 | 1.0 pts |
| North America | 3.1% | 81.8 | 0.1 pts |
| Latin America | 9.2% | 80.1 | 0.1 pts |
| Africa | 1.5% | 68.5 | 1.0 pts |
| Middle East | 13.2% | 76.4 | (1.7) pts |
| Asia Pacific | 6.4% | 78.2 | 1.3 pts |
| Total market | 5.9% | 79.7 | 0.5 pts |
Source: IATA Air Passenger Market analysis
In 2015, IAG increased capacity, measured in available seat kilometres (ASKs) by 8.2 per cent or 5.0 per cent excluding Aer Lingus. With the exception of Africa, Middle East and South Asia, IAG capacity was increased
• New destinations, shorthaul seat densification and larger aircraft at British Airways.
IAG Passenger load factor was 81.4 per cent which was higher than the IATA average of 79.7 per cent and one point higher than last year.
| Year to December 31, 2015 |
ASKs higher/ (lower) |
Passenger load factor |
Higher/ (lower) |
|---|---|---|---|
| Domestic | 7.7% | 78.2 | 0.9 pts |
| Europe | 20.5% | 79.1 | 1.0 pts |
| North America | 5.3% | 84.0 | 0.9 pts |
| Latin America and Caribbean |
7.6% | 83.1 | 1.7 pts |
| Africa, Middle East and South Asia |
(3.0%) | 78.6 | 0.7 pts |
| Asia Pacific | 9.0% | 83.2 | 1.1 pts |
| Total network | 8.2% | 81.4 | 1.0 pts |
While the Domestic and European markets were very competitive our passenger load factors improved in both regions, but remain still lower than the European average reported by IATA, influenced by the higher dependency of our shorthaul fleet on connectivity and stronger seasonality of our networks.
North America continues to represent the largest part of the IAG network and with the highest passenger load factor. Excluding Aer Lingus, capacity was flat year over year, with a slight decrease at British Airways impacted by the introduction of new fleet such as the Boeing 787 and Airbus A380, offsetting an increase at Iberia from additional capacity to Miami, New York and Los Angeles. IAG passenger load factor for North America improved 0.9 points, ahead of the year over year increase reported by IATA.
Latin America and Caribbean capacity increase reflects additional frequencies to Mexico by both British Airways and Iberia. Iberia has three additional destinations: Cali, Medellin and Havana. Passenger load factor in this region increased and was three points ahead of the industry average.
Africa, Middle East and South Asia decrease is driven by reductions in North and West Africa due to weaker demand resulting from falling fuel prices, political unrest and Ebola. Flying was ceased to Entebbe by British Airways, and reduced in Senegal and Gambia by Vueling. Additional capacity was deployed to South Africa and new services launched to Ghana and Cape Verde. Passenger load factor improved 0.7 points.
In Asia Pacific, the capacity increase is driven by the full year impact of up gauging last year to Hong Kong with the Airbus A380, Hyderabad and Chennai. In 2015, a direct flight to Kuala Lumpur was added and the Singapore and Haneda routes were expanded. Passenger load factors increased to 83.2, the second highest region on the IAG network.
The 2015 performance includes Aer Lingus from August 18, 2015. Since the acquisition date, Aer Lingus contributed 3.2 points of the Group's 8.2 point capacity increase, €622 million (3 per cent) in revenues and €35 million (1.5 per cent) before exceptional items in operating profit. The following review includes these results, the comparative period excludes Aer Lingus.
Passenger revenue for the Group rose 14.2 per cent for the year on a capacity increase of 8.2 per cent, benefiting from the stronger pound sterling and US dollar.
At constant currency ('ccy') and excluding Aer Lingus, passenger unit revenue decreased 3.7 per cent. This decrease in passenger unit revenues was from lower yields (passenger revenue/revenue passenger kilometre) partially offset by a 1.0 point improvement in load factors.
The passenger unit revenue reduction follows a pattern of industry growth in a falling fuel cost environment, allowing the airlines to increase margins despite lowering fares.
At ccy, passenger yields were down at British Airways and Iberia with pressure on fares from lower fuel prices particularly on oil related routes. Lower yields were also noted from economic uncertainty and weakening of currencies throughout Latin America, Africa and the Middle East. At the same time revenue performance still remained strongest in our main key market, North Atlantic. At Vueling yield pressure was less prominent, down 1.5 per cent, reflecting its relative strength in its domestic market. Aer Lingus yield improved since acquisition with a strong performance across the North Atlantic. Together, the Group carried 88 million passengers, an increase of 11 million from 2014, with passenger load factor improvement across all four carriers.
PASK at ccy (%)
The airfreight industry experienced another challenging year with capacity exceeding demand. IAG Cargo continued its focus on strategic partnerships, with an increase in its capacity share agreement with Qatar Airways and a new agreement with Finnair cargo. Cargo volume measured in tonne kilometres (CTK) decreased 2.9 per cent with a reduction in yield of 3.9 per cent at ccy. Despite a decrease in CTKs, IAG Cargo grew its volumes in Constant Climate and Prioritise premium products improving its net contribution to the Group.
Other revenue includes the BA Holidays programme, third party maintenance and third party handling. Excluding currency, other revenue improved 2.5 per cent, primarily from an increase in activity at BA Holidays partially offset by a decrease in third party activity.
| Revenue | Higher/(lower) | ||
|---|---|---|---|
| € million | 2015 | Year over year |
Per ASK at ccy |
| Passenger revenue | 20,350 | 14.2% | (3.5%) |
| Cargo revenue | 1,024 | 3.2% | |
| Other revenue | 1,484 | 9.7% | |
| Total revenue | 22,858 | 13.3% | (4.1%) |
Following sterling and dollar strength, employee costs rose 13.4 per cent. At ccy, and on a unit basis employee costs are down 3.5 per cent. The Group employed an average of 60,862 people (measured in average manpower equivalent 'MPE'), an increase of 2.3 per cent versus last year. Excluding Aer Lingus, average MPEs are down 0.6 per cent on 5 per cent ASK growth. Increases were primarily from Vueling growth offset by headcount reductions flowing through from Iberia's Mediation Agreement. Employee unit costs improved at Iberia from the reduction in employees in addition to growth. British Airways employee unit costs increase slightly from salary awards and pension costs. Vueling also sees higher unit costs with the crew collective agreement and the impacts associated with opening international bases, increasing allowances and overnight costs. Productivity increased 5.8 per cent for the Group, with improvements at each airline.
| Employee costs | Higher/(lower) | |||
|---|---|---|---|---|
| € million | 2015 | Year over year |
Per ASK at ccy |
|
| Employee costs | 4,905 | 13.4% | 3.5% |
| Productivity | Higher/ (lower) |
|
|---|---|---|
| 2015 | Year over year |
|
| Productivity | 4,481 | 5.8% |
| Average manpower equivalent | 60,862 | 2.3% |
Total fuel costs for the year increased by 1.6 per cent. At ccy, and on a unit basis fuel costs are down 17.2 per cent from lower fuel prices net of hedging, and from improved unit consumption. The foreign exchange impact on fuel costs, net of hedging was adverse c. 12 percentage points for the Group, against the pound sterling and the euro. Fuel unit costs were reduced 6.3 per cent in euro terms. Consumption improved c. 2 percentage points with new generation aircraft and improved operational procedures.
| Fuel costs | Higher/(lower) | ||
|---|---|---|---|
| € million | 2015 | Year over year |
Per ASK at ccy |
| Fuel, oil costs and emissions charges |
6,082 | 1.6% | 17.2% |
Total supplier costs for the year rose by 12.6 per cent. At ccy and on a unit basis, supplier costs were reduced by 4.5 per cent. The supplier unit cost improvement reflects the strong airline cost performance and continued benefits from the Group initiatives, including GBS procurement, synergies and maintenance.
| Supplier costs | Higher/(lower) | ||
|---|---|---|---|
| € million | 2015 | Year over year |
Per ASK at ccy |
| Supplier costs: | 4.5% | ||
| Handling, catering and other operating costs |
2,371 | 14.9% | |
| Landing fees and en-route charges |
1,882 | 21.0% | |
| Engineering and other aircraft costs |
1,395 | 9.3% | |
| Property, IT and other costs |
965 | 4.1% | |
| Selling costs | 912 | 6.2% | |
| Currency differences | 45 |
Handling, catering and other operating costs rose 5.6 per cent at ccy reflecting additional BA Holiday activity (c. 3 points), higher number of passengers carried and inflationary price increases. These factors were partially offset by an improvement in operations year over year, which reduced costs related to disruption.
Landing fees and en-route charges were higher by 15.2 per cent at ccy. Excluding Aer Lingus1 , the increase was 7.3 per cent, due to additional flying hours, with sectors flown up and a marginal average inflationary price rise.
Engineering and other aircraft costs were down 3.7 per cent excluding currency impacts. During the year a €35 million credit was recognised with the renegotiation of engine manufacturer contracts; by contrast, in the prior year, a €28 million provision for the obsolescence of spare parts was recorded (c. 5 point year over year improvement). The underlying movement reflects more aircraft and higher flying hours, partially offset by less third party maintenance.
Property, IT and other costs are down 4.4 per cent excluding currency due to cost improvements including IT initiatives and one-time benefits.
Selling costs decreased 2.3 per cent excluding currency. Additional costs were incurred related to higher passenger numbers and from initiatives in new markets, offset by lower commissions paid and improvements in supplier contract terms.
The Group's ownership costs were up 12.5 per cent, with 9 points of adverse currency. During the year the Group reviewed the useful lives and residual values of its fleet, realigning by aircraft type and to each airline's retirement plan. The principal impact was accelerated depreciation of Iberia's owned Airbus A340-300 fleet, extending the useful lives of British Airways Boeing 777 fleet and adjustments to the Airbus A320 fleet, with a total net credit of €36 million. The underlying rise in ownership costs reflects new replacement aircraft and an increase in total fleet.
| Ownership costs | Higher/(lower) | ||
|---|---|---|---|
| € million | 2015 | Year over year |
Per ASK at ccy |
| Ownership costs | 1,966 | 12.5% | 4.3% |
| Number of fleet | Higher/(lower) | |
|---|---|---|
| 2015 | Year over year |
|
| Shorthaul | 351 | 20.6% |
| Longhaul | 178 | 6.0% |
| 529 | 15.3% |
The Group's operating profit, before exceptional items, for the year was €2,335 million, a €945 million improvement from last year. This increase reflects the Group's drive towards achieving a competitive cost base with improved productivity and non-fuel cost savings. The macro economic environment was challenging, impacting passenger unit revenues but improving total unit costs and generating a net currency benefit. Our adjusted operating margin improved by 3.4 points to 11.2 per cent.
1 The impact of Aer Lingus was significant on Landing fees and en-route charges from its shorter stage length, with proportionally higher block hours and sectors than the Group's.
| British Airways £ million |
Aer Lingus € million |
|||
|---|---|---|---|---|
| 2015 | Higher/ (lower) |
2015 | Higher/ (lower) |
|
| ASKs | 174,274 | 2.0% | 21,476 | 5.4% |
| Seat factor (per cent) | 81.5 | 0.5pts | 81.6 | 2.6pts |
| Passenger revenue | 10,279 | (1.7%) | 1,628 | 11.3% |
| Cargo revenue | 547 | (8.5%) | 53 | 12.8% |
| Other revenue | 772 | 15.4% | 37 | (19.6%) |
| Total revenue | 11,598 | (1.0%) | 1,718 | 10.4% |
| Fuel, oil costs and emissions charges |
3,030 | (13.8%) | 388 | 4.0% |
| Employee costs | 2,516 | 2.2% | 331 | 2.8% |
| Supplier costs | 3,800 | (1.5%) | 715 | 11.4% |
| EBITDAR | 2,252 | 19.4% | 284 | 29.7% |
| Ownership costs | 877 | (3.7%) | 160 | 8.8% |
| Operating profit before | ||||
| exceptional items | 1,375 | 41.0% | 124 | 72.2% |
| Adjusted operating margin | 12.2% | 3.7pts | 8.9% | 2.9pts |
| Passenger yield | ||||
| (£ pence or € cents/RPK) | 7.24 | (4.1%) | 9.29 | 2.2% |
| Unit passenger revenue (£ pence or € cents/ASK) |
5.90 | (3.6%) | 7.58 | 5.6% |
| Total unit revenue | ||||
| (£ pence or € cents/ASK) | 6.66 | (2.9%) | 8.00 | 4.8% |
| Fuel unit cost | ||||
| (£ pence or € cents/ASK) | 1.74 | (15.5%) | 1.81 | (1.1%) |
| Non-fuel unit costs (£ pence or € cents/ASK) |
4.13 | (2.4%) | 5.62 | 3.1% |
| Total unit cost | ||||
| (£ pence or € cents/ASK) | 5.87 | (6.7%) | 7.42 | 1.9% |
British Airways operating profit was £1,375 million, a £400 million improvement over prior year on capacity increase of 2.0 per cent. Progress in the year was based on non-fuel unit cost improvements and from fuel benefits partially offset by weaker yields including on oil related routes.
In pound sterling terms, approximately half of the passenger revenue weakness was offset through non-fuel unit cost savings. Non-fuel unit cost savings were achieved in supplier contract terms, including maintenance and through IT initiatives. British Airways' adjusted operating margin improved 3.7 points to 12.2 per cent.
For the full year, Aer Lingus operating profit was €124 million. Excluding exceptional items*, an improvement of €72 million over last year. Capacity was increased 5.4 per cent, primarily in the longhaul.
In euro terms and influenced by a strong US dollar, Aer Lingus increased its unit revenues by 4.8 per cent with both yield and seat factor improvements. The strong dollar was also partially responsible for a lower fuel unit cost saving and for the 3.1 per cent increase in non-fuel unit costs. Efficiencies were achieved, particularly in employee unit costs.
Overall Aer Lingus improved its adjusted operating margin by 2.9 points to
8.9 per cent. * Aer Lingus 2014 comparative results exclude the cost of pension settlement which is considered exceptional in nature.
| Iberia € million |
Vueling € million |
|||
|---|---|---|---|---|
| 2015 | Higher/ (lower) |
2015 | Higher/ (lower) |
|
| ASKs | 59,872 | 10.2% | 30,476 | 14.2% |
| Seat factor (per cent) | 81.1 | 2.5pts | 81.3 | 0.9pts |
| Passenger revenue | 3,561 | 12.1% | 1,962 | 13.7% |
| Cargo revenue | 253 | 0.0% | – | – |
| Other revenue | 950 | 13.5% | – | – |
| Total revenue | 4,764 | 11.6% | 1,962 | 13.7% |
| Fuel, oil costs and emissions charges | 1,249 | 8.0% | 533 | 9.2% |
| Employee costs | 1,021 | (1.4%) | 189 | 21.2% |
| Supplier costs | 1,774 | 12.6% | 854 | 13.1% |
| EBITDAR | 720 | 43.4% | 386 | 18.4% |
| Ownership costs | 473 | 4.6% | 226 | 22.2% |
| Operating profit before exceptional items |
247 | 394.0% | 160 | 13.5% |
| Adjusted operating margin | 7.0% | 3.5pts | 11.7% | 0.2pts |
| Passenger yield | ||||
| (€ cents/RPK) | 7.33 | (1.6%) | 7.92 | (1.5%) |
| Unit passenger revenue (€ cents/ASK) |
5.95 | 1.7% | 6.44 | (0.3%) |
| Total unit revenue | ||||
| (€ cents/ASK) | 7.96 | 1.3% | 6.44 | (0.3%) |
| Fuel unit cost | ||||
| (€ cents/ASK) | 2.09 | (1.9%) | 1.75 | (4.4%) |
| Non-fuel unit costs | ||||
| (€ cents/ASK) | 5.46 | (3.2%) | 4.16 | 1.2% |
| Total unit cost (€ cents/ASK) |
7.55 | (2.7%) | 5.91 | (0.5%) |
Iberia's operating profit was €247 million, up €197 million versus last year, achieving an adjusted operating margin of 7.0 per cent. Iberia made significant progress on its Plan de Futuro, improving its cost base and recovering routes previously withdrawn. Capacity for the year was up 10.2 per cent, with a flat unit revenue performance in euro terms, driven by currency benefits from a weak euro and improvements in seat factor. On the cost side, non-fuel unit costs improve with substantial employee cost savings from lower MPEs and through supplier initiatives, including finance and IT.
The turnaround of Iberia is leading to a profitable and efficient new airline capable of growing in its strategic markets and starting to achieve positive returns for the Group with a positive profit after tax of €155 million* .
Vueling's operating profit was €160 million with an adjusted operating margin of 11.7 per cent, up 0.2 points versus last year. Vueling continued to expand its network increasing capacity by 14.2 per cent while maintaining unit revenues broadly flat, a strong revenue performance. Non-fuel unit costs were adverse, impacted by the crew collective agreement signed in 2014, allowances attributed to the opening of new bases and additional aircraft. Supplier unit costs improved and 2015 also saw further progress on fleet flexibility and harmonisation.
Vueling continues to be the low cost carrier growth tool for the Group, expanding its network at a higher rate and increasing its presence in the intra-European point to point traffic in areas such as Rome and Paris. Even with this ambitious growth Vueling achieved one of the highest RoICs of the Group.
* Excludes intragroup dividends received and profit on the sale of the Iberia plus (to Avios).
Exchange rate movements are calculated by retranslating current year results as though they had been generated at prior year exchange rates. The reported results are impacted by translation currency from converting results from currencies other than euro to the Group's reporting currency of euro. From a transaction perspective, the Group performance is impacted by the fluctuation of exchange rates, primarily pound sterling, euro and US dollar. The Group exchange rates used and the estimated impact of translation and transaction exchange rates on operating profit before exceptional items are set out as follows. At constant currency, the Group's operating profit before exceptional items would have been €2,246 million, €89 million lower than the reported result.
The Group hedges its transaction exposures but not any potential impact from translation.
| € million | Higher/ (lower) |
|---|---|
| Reported revenue | |
| Translation impact | 1,652 |
| Transaction impact | 265 |
| Total exchange impact on revenue | 1,917 |
| Reported operating expenditure | |
| Translation impact | (1,441) |
| Transaction impact | (387) |
| Total exchange impact on operating expenditures |
(1,828) |
| Reported operating profit | |
| Translation impact | 211 |
| Transaction impact | (122) |
| Total exchange impact on operating profit |
89 |
| 2015 | Higher/ (lower) |
|
|---|---|---|
| Translation | ||
| £ to € | 1.37 | 7.9% |
| Transaction | ||
| £ to € | 1.37 | 10.5% |
| € to \$ | 1.12 | (16.4%) |
| £ to \$ | 1.54 | (6.7%) |
For a full list of exceptional items, refer to note 5 of the Financial statements. Below is a summary of the significant exceptional items recorded.
In 2015, net exceptional charges at the operating profit level were €17 million (2014: €361 million). The exceptional charges included in Property, IT and other relate to the Aer Lingus acquisition costs of €33 million and a legal settlement at British Airways from the 2006 cargo cartel claim. The exceptional credit in Fuel, oil and emissions reflects the impact of recording Aer Lingus fuel cost at the hedged price in the pre-exceptional column, rather than at spot price as in the reported column.
In 2014, exceptional charges were recognised relating to the restructuring provision of €260 million, a currency charge of €180 million, impairment reversal of €79 million, gain on sale of €83 million and deferred tax credit of €413 million.
Net non-operating costs after exceptional items were €517 million, up from €201 million last year. The increase is due to:
The great majority of the Group's activities are taxed in the countries of effective management of the main airline operations (UK, Spain or Ireland, with corporation tax rates during 2015 of 20.25 per cent, 28 per cent and 12.5 per cent respectively). The Group's effective tax rate for the year is 20 per cent (2014: 22 per cent).
Although the Group continues to offset prior year tax losses and other tax assets against its current year taxable profit, in 2015 the Group paid corporation taxes of €245 million (2014: €118 million). This represents 13.6 per cent (2014: 14.3 per cent) of the Group's accounting profit before tax.
Profit after tax before exceptional items was €1,539 million, up 77.3 per cent. The increase reflects a strong operating profit performance. Diluted earnings per share before exceptional items is one of our key performance indicators and increased by 77.6 per cent.
The Board is proposing a final dividend to shareholders of 10 euro cents per share, which brings the full year dividend to 20 euro cents per share. The final dividend will be paid, subject to shareholder approval, on July 4, 2016 to shareholders on the register on July 1, 2016.
The Group's equity free cash flow improvement in 2015 was in part due to the increase in EBITDA from stronger operating results and secondly from lower capital expenditure ('CAPEX') spend.
In 2014, the Group's CAPEX reflected a significant level of investment, in excess of a typical year and the Group's target of less than €2.5 billion. This was due primarily to the timing of aircraft delivery payments. In 2015, the Group took delivery of nine new aircraft, two Airbus A380s, five Boeing 787-900s, one Airbus A320 and one Embraer E-190.
The use of cash in working capital reflects higher prepayments including fuel, a reduction in payables primarily from lower fuel prices, and a seasonality impact from the timing of the addition of Aer Lingus.
Pension and restructuring payments increased from the Iberia restructuring plan and from foreign exchange.
The acquisition of Aer Lingus net of its cash and deposits was a cash outflow of €438 million. In contrast, in 2014 funds were received from the sale of Amadeus.
Financing and refinancing are discussed in the following section.
Adequate cash levels are maintained by each operating company. The cash balance increased by €912 million versus last year.
| € million | 2015 | 2014 |
|---|---|---|
| EBITDAR before exceptional | 4,301 | 3,137 |
| Aircraft lease costs ('rentals') | (659) | (551) |
| EBITDA | 3,642 | 2,586 |
| Interest | (197) | (159) |
| Tax | (245) | (118) |
| Capex | (2,040) | (2,622) |
| Equity free cash flow | 1,160 | (313) |
| Movement in working | ||
| capital and other non-cash | (658) | (150) |
| Pension and restructuring | (588) | (457) |
| Acquisition of subsidiary (net of cash and deposits) / |
||
| divestment of investment | (438) | 589 |
| Dividend paid | (163) | – |
| Net financing and refinancing | 1,067 | 1,000 |
| Other investing movements | 366 | 455 |
| Other financing movements | (184) | (43) |
| Cash in flow | 562 | 1,081 |
| Opening cash, cash equivalents | ||
| and interest bearing deposits | 4,944 | 3,633 |
| Net foreign exchange differences | 350 | 230 |
| Cash and cash equivalents and other interest-bearing deposits |
5,856 | 4,944 |
| € million | 2015 | 2014 |
|---|---|---|
| British Airways | 2,806 | 3,206 |
| Iberia | 832 | 870 |
| Aer Lingus | 772 | – |
| Vueling | 633 | 651 |
| IAG and other Group companies | 813 | 217 |
| Cash and cash equivalents and interest-bearing deposits |
5,856 | 4,944 |
| € million | 2015 | 2014 | Higher/ (lower) |
|---|---|---|---|
| Debt | (6,617) | (5,122) | (1,495) |
| Cash and cash | |||
| equivalents and interest | |||
| bearing deposits | 4,944 | 3,633 | 1,311 |
| Net debt at January 1 | (1,673) | (1,489) | (184) |
| Increase in cash net of exchange |
– | 1,311 | (1,311) |
| Net cash outflow from | |||
| repayments of debt and lease financing |
1,026 | 1,009 | 17 |
| New borrowings and finance leases |
(905) | (2,009) | 1,104 |
| Increase in net debt | |||
| from regular financing | 121 | (1,000) | 1,121 |
| Debt acquired | (406) | – | (406) |
| Cash and cash | |||
| equivalents and | |||
| interest bearing deposits acquired |
913 | – | 913 |
| Net debt through | |||
| Business combination | 507 | – | 507 |
| Financing raised | |||
| for acquisition | (1,087) | – | (1,087) |
| Exchange and other | |||
| non-cash movements | (642) | (495) | (147) |
| Net debt at December 31 |
(2,774) | (1,673) | (1,101) |
| Capitalised aircraft | |||
| lease costs | (5,736) | (4,408) | (1,328) |
| Adjusted net debt | |||
| at December 31 | (8,510) | (6,081) | (2,429) |
IAG's objectives when managing capital are to safeguard the Group's ability to continue as a going concern, to maintain an optimal capital structure in order to optimise the cost of capital and to provide future returns to shareholders. The Group monitors capital using adjusted gearing and adjusted net debt to EBITDAR.
Cash net of exchange was flat versus last year including the payment of an interim dividend and partial financing of the Group's acquisition of Aer Lingus. Regular net refinancing was broadly balanced with a slight decrease in debt of €121 million.
The Group's regular net debt reduced by €507 million from the addition of Aer Lingus, reflecting its strong cash position and its mix of operating versus financing leases.
IAG launched two tranches of convertible bonds totalling €1 billion to finance the Aer Lingus acquisition, of which €118 million is recognised as equity.
Capitalised aircraft lease costs rose from the addition of Aer Lingus and from an increase in leased aircraft at British Airways.
Adjusted net debt rose to €8,510 million, however financial headroom improved as adjusted net debt to EBITDAR remained flat at 1.9 times.
The Group generated sufficient equity free cash flow in 2015 to support the recommendation of an interim and final cash dividend of €407 million for its shareholders with equity free cash coverage of 2.8 times.
Adjusted net debt
Net debt Adjusted net debt to EBITDAR
Capital expenditure authorised and contracted for amounted to €16,091 million (2014: €11,604 million) for the Group. The majority of this is in US dollars and includes commitments until 2022 for 118 aircraft from the Airbus A320 family, 29 Boeing 787s, 43 Airbus A350s, 14 Airbus A330s and 2 Airbus A380s.
IAG does not have any other off-balance sheet financing arrangements.
The Board has overall responsibility for ensuring that IAG has appropriate risk management and internal controls in place and that they continue to work effectively.
There is a comprehensive risk management process and methodology ensuring a robust assessment of the principal risks facing the Group. This process is led by the Management Committee and supported by Head of Group Audit and Risk Management. Best practices are shared across the Group.
Throughout the Group, risk owners are responsible for identifying risks within their area of responsibility, quantifying the risk and managing the risk including putting in place appropriate response plans. They are supported by risk management professionals who maintain risk maps for each airline. The risk maps plot each critical risk on an impact and probability scale. For each critical risk, mitigating actions are documented and are actively managed. Risk maps are reviewed by each airlines' management committee who consider the accuracy and completeness of the map, significant movements in risk and any changes required to the response plans addressing those risks Aer Lingus' existing risk management process is being integrated into the Group framework and Aer Lingus risks were considered in the Management Committee's December 2015 risk update.
At the Group level, material risks from the airlines, together with Group wide risks, are maintained in a Group risk map. The IAG Management Committee reviewed the Group risk map twice during the year in advance of reviews by the Audit and Compliance Committee of the Board in accordance with the September 2014 UK Corporate Governance Code and the 2015 Spanish Unified Good Governance Code of Listed Companies recommendations. The IAG Board discussed risk at a number of meetings including a review of the Group's risk appetite; Chief Executive Officer updates; regular discussions around strategy and the Business Plan.
During 2015 the Board adopted 19 risk appetite statements following the 2014 UK Corporate Governance Code's guidance on risk management. These statements inform the business, either qualitatively or quantitatively, on the Board's appetite for certain risks. Each risk appetite statement formalised how performance is monitored either on a Group wide basis or within major projects.
The highly regulated and commercially competitive environment, together with the businesses' operational complexity, exposes the Group to a number of significant risks. We remain focused on mitigating these risks at all levels in the business although many remain outside our control; for example, changes in government regulation, adverse weather, pandemics, fuel prices and foreign exchange.
Risks are grouped into four categories: strategic; business and operational; financial; and compliance and regulatory risks. Guidance is provided below on the principal risks that may threaten the Group's business model, future performance, solvency and liquidity. Where there are particular circumstances that mean that the risk is more likely to materialise, those circumstances are described below. The list is not intended to be exhaustive.
Open competition and markets are in the long-term best interests of the airline industry and we have a high appetite for continued deregulation and consolidation. We seek to minimise the risk that government intervention or the regulation of monopoly suppliers disadvantages us. In general the Group's strategic risk was stable during the year, as the economy in Spain recovered and competitor capacity growth was broadly rational. The table on page 49 includes digital disruption as a new strategic risk, the Group will continue to invest in exploiting digital technology and monitor competitor activity closely.
The safety and security of our customers is a fundamental value to us. The Group balances the resources we devote to building resilience into operations and the impact of disruption on customers. In 2015 British Airways commenced the
implementation of its new customer management systems that provide airport check in and aircraft boarding functionality. The plan has been designed to build up operational experience of the new system before it is implemented in high volume stations. It was implemented in 33 stations in 2015 and 2016 will see a gradual roll out to all international stations followed by Gatwick and Heathrow.
Cyber risk has been separately identified as a principal risk this year, the Management Committee has led the response to cyber risk through monthly reviews and initiatives to ensure that there are consistently robust defences and incident response plans throughout the Group.
IAG balances the relatively high business and operational risks inherent in our business through adopting a low appetite for financial risk. This
conservative approach involves maintaining high cash balances and substantial committed financing facilities. Policies around fuel price and currency risk explicitly consider our appetite for fluctuations in cash and profitability resulting from market movements. However, we are also careful to understand our hedging positions compared to our competitors to ensure that we are not commercially disadvantaged by being over-hedged in a favourable market.
In 2015 financial risks generally decreased as falling fuel prices reduced our short US dollar exposure and the financing market for both aircraft and corporate transactions continued to be favourable.
The Group has no tolerance for breaches of legal and regulatory requirements in the markets in which IAG operates.
| Risk | Potential impact | Management and mitigation |
|---|---|---|
| Strategic | ||
| Competition | The markets in which we operate are highly competitive. The Group faces direct competition on our routes, as well as from indirect flights, charter services and other modes of transport. Competitor capacity growth in excess of demand growth could materially impact our margins. Some competitors have cost structures that are lower than ours or have other competitive advantages such as government support or benefitting from insolvency protection. In |
The IAG Management Committee devotes one weekly meeting per month to strategic issues. The Board dedicates two days per year to Group strategy. The Group strategy team supports the Management Committee by identifying where resources can be devoted to exploit profitable opportunities. Airline revenue management departments and systems optimise market share and yield through pricing and inventory management activity. |
| addition the low cost model continues to be extended into longhaul by our competitors. |
The Group's strong global market positioning, leadership in strategic markets, alliances, joint businesses, cost competitiveness and diverse customer base continue to address this risk. The Group is continually reviewing its product offerings and responds through initiatives, such as investing in Wi-Fi across 90 per cent of the longhaul fleet by early 2019. |
|
| Digital disruption | Competitors, or new entrants to the travel market, may use digital technology to disrupt the business. |
The Group's unrelenting focus on the customer, together with our own exploitation of digital technology, reduces the impact digital disruptors can have. In 2015 the Group established a digital team focusing on innovation. |
| Consolidation and deregulation |
Although the airline industry is competitive, we believe that the customer would benefit from further consolidation. Failing airlines can be rescued by government support delaying the opportunity for more efficient airlines to capture market share and expand. Mergers and acquisitions amongst competitors have the potential to adversely affect our market position and revenue. |
The Group maintains rigorous cost control and targeted product investment to remain competitive. |
| The Group has the flexibility to react to market opportunities arising from weakened competitors. Vueling and Iberia Express give us additional flexibility in this regard as it can deploy capacity at short notice across Europe. |
||
| Joint business arrangements such as the agreements with American Airlines and JAL include delivery risks such as realising planned synergies and agreeing the deployment of additional capacity within the joint business. Any failure of a joint business or a joint business partner could adversely impact our business. |
The Management Committee regularly reviews the commercial performance of joint business agreements and the status of negotiations between the parties. |
|
| Failure of a franchise partner will reduce traffic feed into our hubs or major outstations. |
The Management Committee regularly reviews our franchisee performance and risks. |
|
| The airline industry is dependent on alliances and IAG is no exception to this. |
Maintaining a leading presence in oneworld and ensuring the alliance attracts and retains the right members are key to safeguarding the network. |
| Risk | Potential impact | Management and mitigation |
|---|---|---|
| Strategic continued | ||
| Government intervention |
Some of the markets in which the Group operates remain regulated by governments, in some instances controlling capacity and/or restricting market entry. Relaxation of such restrictions, whilst creating growth opportunities for the Group, may have a negative short-term impact on our margins. |
The Group's government affairs department monitors government initiatives, represents our point of view and forecasts likely changes to laws and regulations. |
| Regulation of the airline industry covers many of our activities including route flying rights, airport landing rights, departure taxes, security and environmental controls. Excessive taxes or increases in regulation may impact on our operational and financial performance. |
The Group's ability to comply with and influence changes to regulations is key to maintaining operational and financial performance. We continue to discuss the negative effect the imposition of APD has on the UK economy with the UK Government. |
|
| Airports | IAG is dependent on and may be affected by infrastructure decisions or changes in policy by governments, regulators or other entities outside the Group's control. London Heathrow has no spare runway capacity and has operated on the same two main runways since it opened over 60 years ago. As a result, British Airways is vulnerable to short-term operational disruption. |
The Group continues to promote the timely conclusion of the UK Government's deliberations on additional runway capacity at London Gatwick and London Heathrow airports. We advocate development at a reasonable cost which should be borne by the users of the new capacity. |
| IAG's airlines participate in the slot trading market at Heathrow airport; acquiring slots at reasonable prices when available. |
||
| IAG is also dependent on the oil industry making sufficient investment in fuel supply infrastructure. Peak consumption at London Heathrow and |
British Airways enters into long-term contracts with fuel suppliers to secure fuel supply at a reasonable cost. |
|
| London Gatwick airports is nearing the capacity of the pipe and rail infrastructure serving these airports. In addition, storage capacity at London Heathrow is lower than at other international airports, increasing the risk of any disruption to supply impacting our operations. |
Short-term fuel shortages are addressed by contingency plans. |
|
| IAG is also dependent on the performance of suppliers of airport services such as airport operators, border control and caterers. |
These risks are mitigated by active supplier management and contingency plans. |
| Risk | Potential impact | Management and mitigation |
|---|---|---|
| Business and operational | ||
| Brand reputation | The Group's brands have significant commercial value. Erosion of the brands, through either a single event or a series of events, may adversely impact our leadership position with customers and ultimately affect our future revenue and profitability. |
The Group allocates substantial resources to safety, operational integrity and new aircraft to maintain its market position. Our 2016 – 2020 Business Plan sees an annual Capital Expenditure of less than €2.5 billion of which around 80 per cent is directed towards improving, growing and replacing the aircraft fleet. |
| Economic conditions |
IAG's revenue is highly sensitive to economic conditions in the markets in which we operate. Deterioration in either a domestic or the global economy may have a material impact on our financial position. |
The Board and the Management Committee review the financial outlook and business performance of the Group through the financial planning process and regular |
| Economic conditions in the Group's main markets were good in 2015 as their economies have adjusted to an extended period of low inflation. The UK (36 per cent of Group revenue) and the USA (15 per cent of Group Revenue) have remained stable. Economic conditions in Spain (15 per cent of Group Revenue); have continued to improve with growth of around 3.5 per cent in 2015. |
reforecasts. These reviews are used to drive the Group's financial performance through the management of capacity and the deployment of that capacity in geographic markets, together with cost control, including management of capital expenditure and the reduction of operational and financial leverage. |
|
| There is more uncertainty as we move into 2016 with the combination of low commodity prices and reduced China growth impacting African and South American economies. |
External economic outlook, fuel prices, and exchange rates are carefully considered when developing strategy and plans and are regularly reviewed by the Management Committee and Board |
|
| The UK Brexit vote is likely to be accompanied by the risk of some short term economic uncertainty within the UK; that risk may extend into the longer term should there be a vote to exit. We have undertaken a risk assessment to ensure that we can operate effectively should this scenario occur. At this stage, we don't believe it will have a significant impact on our business. |
as part of the monitoring of financial and business performance. |
|
| Employee relations |
The Group has a large unionised workforce represented by a number of different trade unions. Collective bargaining takes place on a regular basis and breakdowns in the bargaining process disrupt operations and adversely affect business performance. |
Human resource departments within the airlines engage in collective bargaining with the many trade unions representing our staff. |
| Failure of a critical IT system |
IAG is dependent on IT systems for most of our principal business processes. The failure of a key system may cause significant disruption to our operation and/or lost revenue. |
System controls, disaster recovery and business continuity arrangements exist to mitigate the risk of a critical system failure. |
| In 2015 the British Airways Travel Programme commenced implementation of its new customer management system that provides passenger check in and aircraft boarding functionality. As such it is a critical operational system. In 2016, the system will be implemented in complex and high volume stations, including Gatwick and Heathrow. |
The programme has a strong risk management work stream designed to minimise, but not eliminate, the risk of disruption during implementation. The roll out plan is designed to build up operational experience of the system before it is implemented in higher volume stations. |
|
| The programme is subject to regular internal audits. The Audit and Compliance Committee's review of the programme is set out in their report on page 69. |
| Risk | Potential impact | Management and mitigation |
|---|---|---|
| Business and operational continued | ||
| Cyber attack | Financial loss, disruption or damage to brand reputation arising from an attack on our systems by criminals, terrorists or foreign governments. |
A Group Cyber Security Governance Board reviews the Group IT security strategy, cyber risk initiatives and considers advice from industry experts. The IAG Management Committee reviews cyber risk on a monthly basis and supports Group wide initiatives to enhance defences and response plans. |
| Whilst ensuring that we are up to date with industry standards and address identified weaknesses, the fast moving nature of this risk means that we will always retain some vulnerability. |
||
| Pandemic | If there is a significant outbreak of infectious disease such as swine flu, staff absence will increase which may seriously impact the operation. Leisure customers may cancel trips and key corporate clients may discourage travel, significantly impacting sales. |
Management has business continuity plans to mitigate this risk to the extent feasible. |
| Landing fees and security charges |
Airport, transit and landing fees and security charges represent a significant operating cost to the airlines and have an impact on operations. Whilst certain airport and security charges are passed on to passengers by way of surcharges, others are not. |
The Group engages in regulatory reviews of supplier pricing, such as the UK Civil Aviation Authority's quinquennial review of charges at Heathrow and Gatwick airports. |
| There can be no assurance that such costs will not increase or that the Group will not incur new costs in the UK, Spain or elsewhere. |
||
| Safety/security incident |
The safety and security of our customers and employees are fundamental values for the Group. Failure to prevent or respond effectively to a major safety or security incident may adversely impact our brand, operations and financial performance. |
The corresponding safety committees of each of the airlines of the Group, satisfy themselves that they have appropriate resources and procedures which include compliance with Air Operator Certificate requirements. Their incident centres respond in a structured way in the event of a safety or security incident. |
| Event causing significant network disruption |
Several possible events may cause a significant network disruption. Example scenarios include a major failure of the public transport system; the complete or partial loss of the use of terminals; adverse weather conditions such as snow, fog or volcanic ash; widespread or coordinated air traffic control industrial action; war; civil unrest or terrorism. Such a disruption may result in lost revenue and additional cost. |
Management has robust business continuity plans to mitigate these risks to the extent feasible. |
| Risk | Potential impact | Management and mitigation |
|---|---|---|
| Financial | ||
| Debt funding | The Group has substantial debt that will need to be repaid or refinanced. The Group's ability to finance ongoing operations, committed aircraft |
The IAG Management Committee regularly reviews the Group's financial position and financing strategy. |
| orders and future fleet growth plans is vulnerable to various factors including financial market conditions and financial institutions' appetite for secured aircraft financing. |
The Group has multiple sources of debt financing and has continued to diversify the debt financing within each operating company. In 2015 Iberia raised unsecured debt from the capital markets through the commencement of a Medium Term Note programme and Vueling raised debt through the export credit agency markets. IAG itself confirmed its access to the debt capital markets by launching its second convertible bond issue. |
|
| The Group's high cash balances and committed financing facilities mitigate the risk of short-term interruptions to the aircraft financing market. |
||
| Financial risk | We used approximately 8.3 million tonnes of jet fuel in 2015. Volatility in the price of oil and petroleum products can have a material impact on our operating results. |
This price risk is partially hedged through the purchase of oil derivatives in forward markets which can generate a profit or a loss. The objective of the hedging programme is to increase the predictability of cash flows and profitability whilst maintaining alignment with our competitors. The Group regularly reviews its fuel and currency positions. The results of these reviews are discussed with management and the appropriate action taken. |
| The Group is exposed to currency risk on revenue, purchases and borrowings in foreign currencies. |
The Group seeks to reduce foreign exchange exposures arising from transactions in various currencies through a policy of matching, as far as possible, receipts and payments in each individual currency and actively managing the surplus or shortfall through treasury hedging operations. The approach to financial risk management is set out in note 26 to the financial statements. |
|
| The Group is exposed to currency devaluation of cash held in currencies other than the airlines' local currencies of euro and sterling. This risk is minimised by holding cash in euro and sterling wherever possible but exchange controls in some markets will from time to time delay conversion and repatriation of funds. British Airways experienced delays in the repatriation of funds from Nigeria during the second half of 2015 and at the year end held balances of €72 million equivalent in Nigerian Naira. |
When there are delays in the repatriation of cash coupled with the risk of devaluation, risk is mitigated by the review of commercial policy for the route. This may involve capacity reductions and rebalancing the point of sale away from the local market towards the airline's home market and renegotiating supplier contracts to allow payment in local currencies. |
| Risk | Potential impact | Management and mitigation |
|---|---|---|
| Financial continued | ||
| Financial risk continued |
Interest rate risk arises on floating rate debt and floating rate leases which are typically linked to London Interbank Offered Rates (LIBOR). This exposure is partially offset by the reinvestment of cash deposits which are all of less than one year in tenor. |
The impact of rising interest rates is mitigated through structuring selected new debt and lease deals at fixed rate throughout their term. The approach to interest rate risk management and proportions of fixed and floating debt is set out in note 26 to the Financial statements. |
| The Group is exposed to non-performance of financial contracts by counterparties, for activities such as money market deposits, fuel and currency hedging. Failure of financial counterparties may result in financial losses. |
The approach to financial counterparty credit risk management and the Group's exposure by geography is set out in note 26 to the Financial statements. |
|
| Tax | The Group is exposed to systemic tax risks arising from either changes to tax legislation or a challenge by tax authorities on interpretation of tax legislation. There is a reputational risk that the Group's tax affairs are questioned by the media. |
The Group seeks to comply with the law, act with integrity in all tax matters and maintain an open relationship with regulators. The Group complies with the tax policy approved by the IAG Board during the year. Tax risk is managed by the IAG tax department and reviewed by Management Committee. |
| Compliance and regulatory | ||
| Governance | The governance structure the Group put in place at the time of the merger had a number of complex features, including nationality structures to protect British Airways' and Iberia's routes and operating licences and merger assurances to preserve the specific interests of those companies. |
The governance structure continued to work well in 2015. From January 21, 2016, the merger assurances expired. |
| Non-compliance with competition, bribery and corruption law |
The Group is exposed to the risk of individual employees' or groups of employees' unethical behaviour resulting in reputational damage, fines or losses to the Group. |
The Group has comprehensive policies designed to ensure compliance, together with mandatory training programmes in place to educate employees in these matters. |
The directors have assessed the viability of the Group over a five year period to December 2020. The assessment takes account of the Group's current position and the potential impact of the Group's principal risks. Based on this assessment, the directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2020.
In making this statement the directors have considered severe but plausible scenarios in which combinations of principal risks materialise together. The effectiveness of mitigating management actions has also been considered. Each scenario considered the impact on liquidity, solvency and the ability of to raise financing over the period to December 2020.
The directors have determined that the five year period to December 2020 is an appropriate period over which to provide its viability statement. In making this assessment, the directors have taken account of the planning horizon of the five year Group business plan and the Group's financial targets. In selecting the five year horizon for the viability statement, it is recognised that such future assessments are subject to a level of uncertainty that increases with time and, as a result, future outcomes cannot be guaranteed or predicted with certainty.
CORPORATE GOVERNANCE
In compliance with the Financial Reporting Council's UK Corporate Governance Code, the company has prepared the Corporate Governance Report that follows.
"As this report testifies, the last five years have been a momentous time for International Airlines Group and all its operating companies and, as you'd expect, that has meant significant changes in our corporate governance structure and the profile of the Board."
Antonio Vázquez
Chairman
Throughout this period our approach to governance and the composition and function of the Board have evolved considerably. Above all we have tried to create the right internal governance structure to support our dynamic and highly successful business model, led by a holding company and formed of independent airlines with their own brands and operations.
The Group was born as the product of a merger of two companies, with structures inevitably complex due to airlinespecific regulations and the particular circumstances of both companies. Since then, the Group has grown to include two new airlines and has evolved as a distinct entity to those originally merged companies. Our job as a Board has been to look progressively at ways to adapt to this new born entity and to its strategy and culture, simplifying the initial structures so that we have the flexibility that this dynamic business needs. I'm pleased to report that this work has been largely very successful.
Proof of that fact came during the year with the successful acquisition and integration of Aer Lingus, our fourth operating airline alongside British Airways, Iberia and Vueling.
The relative ease with which this transaction was handled, not only underlined the power of our business model, but showed that our governance structures have matured considerably and that we really have achieved that desired level of management flexibility, balanced by effective Board oversight, within the Group.
There is always room for improvement, of course, and we continue to look for ways to refine and improve our structures. But I'm delighted that our latest internal review of performance – in which I spoke, at length, to each member of the Board – produced the most positive feedback we have had since IAG's incorporation. This exercise is a very useful way to assess our achievements and a great tool for planning necessary future developments.
A major highlight of the year was the first dividend payment to our shareholders, a very satisfying achievement for the Group. The fact that we have been able to deliver on this promise on schedule again illustrates well how our governance structures are supporting the strategy and performance of the Group.
As we indicated last year, the Board's Nominations Committee is continuing to work on succession planning – a task which is obviously of huge importance to the Group as it develops and grows.
This work is happening at two levels. From a Board perspective, our task is to ensure that we have the right balance of directors, with a blend of appropriate experience, skills and profile. We must also ensure that timely plans are in place to recruit new members to the Board, either in the normal process of refreshment or in emergency situations.
Management Committee in its plans for succession within its own ranks and within our operating companies. A key objective is to put schemes in place that will reward talented people within the business, giving them opportunities to progress and build on their skills. This work is led by our Group Chief Executive, fully supported by the Board.
In 2015, this was a particular priority as we contemplated significant changes in the leadership of our operating companies and we are particularly pleased with how this process went. The changes will see Vueling's Chairman and CEO, Alex Cruz, take over the leadership of British Airways on the retirement of Keith Williams. Steve Gunning moves into the CFO role at British Airways, while Drew Crawley moves the other way to succeed Steve as CEO of our Cargo business.
Although we are always willing to recruit people with the right skills from outside the business, these moves clearly illustrate the wealth of talent we have within the Group and that our structures offer us the chance to create continuity even at times of great change.
The Board has, as I've said, been gradually refreshed in recent years and I am indeed fortunate to have the support of such a superb group of colleagues. There were no new additions to the Board in 2015. However, Jose Pedro Pérez-Llorca did not stand for re-election at our shareholder's meeting in June, meaning that the number of directors on the Board has gone down from 13 to 12. We feel this is an appropriate number for our Board given the current circumstances and the characteristics of the Group.
There were, however, several changes in the make-up of our committees. In June, Sir Martin Broughton took over the Chairmanship of the Nominations Committee from me in accordance with changes in Spanish governance requirements. In September, the Board approved the appointment of Dame Marjorie Scardino as Chairwoman of the Remunerations Committee, where she succeeds Baroness Kingsmill in that role.
Although we have tried to streamline our governance structures in recent years, it remains vital that we comply with changing governance requirements, and set out our reasons carefully if we ever choose to take a slightly different approach. We continued to do this in 2015.
www.iairgroup.com 57But the Board also plays a key role in supporting the As a company listed on both the Spanish and the London stock exchanges, IAG must meet Spanish and UK listing requirements and take into consideration governance standards in both countries. Two new sets of governance requirements have come into force in the last 18 months - the new Spanish Good Governance Code for Listed Companies, which was published in February 2015, and a new UK Corporate Governance Code unveiled in October 2014. We have amended the Board regulations during 2015 to adapt to these new standards and approved several Group policies as recommended by the Spanish Code in January 2016.
We're pleased our remuneration policy was approved on a binding vote for the first time in 2015. We continue to ensure that we meet both the Spanish and UK requirements in this area and do all we can to adequately address any concerns our shareholders may have. Similarly the Audit and Compliance Committee has put a special focus on the Group's enterprise risk management system during 2015 to make sure we comply with governance standards in both Spain and the UK.
One other significant change during the year was the adoption of a new Group policy on sustainability, which will now be supervised by the Audit and Compliance Committee. The IAG Management Team is committed to developing common Group practices and standards so that we can more effectively share best practice, on such issues as noise and CO2 reduction, between our operating airlines. We already take a lead role in improving the environmental performance of our industry. But these changes will, I am convinced, make our approach, internally and externally, all the more coherent.
My fellow Board directors and I regularly meet with shareholders and investors, not only at formal events like our AGM and Capital Markets Day, but also through regular road shows and more informal meetings.
Since the early days of IAG I have seen our relationship with the investment community grow stronger and stronger. Back in 2011, some investors doubted we could fulfil our ambitious plans for the business, but their perception of the business has now become very positive.
They understand the unique strength of our business model – they've watched it in action. They've seen us not just meet our targets for the business, but exceed them. And they've seen us deliver on our promises, not least our determination to introduce dividend payments and our firm commitments to create a sustainable dividend policy for the long term. I think we have won the confidence of investors and we will fight very hard to keep it in the years ahead.
I am extremely proud of what we've achieved in our first five years as a combined group. But I share with all my colleagues within IAG a confidence that greater success lies ahead.
Chairman
First appointed: May 2010. Re-elected June 2015
Key areas of prior experience: consumer, sales/marketing, finance, governance
Member, Advisory Board of Telefónica América Latina. Member, Advisory Board of the Franklin Institute. Member, Advisory Board of Loyola University.
Chairman, Iberia 2009-2013. Chairman and CEO, Altadis Group 2005-2008. Chairman, Logista 2005-2008. Non-Executive Director, Iberia 2005-2007. Chief Operating Officer and other various positions, Cigar Division of Altadis Group 1993-2005. Various positions at Osborne 1978-1983 and Domecq 1983-1993.
May 2010. Re-elected June 2015
Key areas of prior experience: consumer, finance, governance
Chairman, Sports Investment Partners.
Chairman, British Airways 2004-2013 and Director since 2000. President, Confederation of British Industry 2007-2009. Chairman, Liverpool FC 2010. Chairman, British Horseracing Board 2004-2007. Chairman, British American Tobacco 1997-2004 following its demerger from BAT Industries, previously Chief Executive Officer, BAT Industries 1993-1997 and member of the Board since 1988. Other executive positions at British American Tobacco 1971-1993.
First appointed: May 2010. Re-elected June 2015
Key areas of prior experience: airline industry
Current external appointments: Chairman of the Ireland State Debt Agency.
Chief Executive Officer, British Airways 2005-2011. Chief Executive Officer, Aer Lingus 2001-2005. Chief Operating Officer, Aer Lingus 2000-2001. Chief Executive Officer, Futura (Aer Lingus' Spanish Charter airline) 1998-2000. Joined Aer Lingus as cadet pilot in 1979.
Non-Executive Director
N S
September 2010. Re-elected June 2015
Key areas of prior experience: finance, telecommunications, consumer
Chairman and Chief Executive Officer, Telefónica Group. Non-Executive Director, China Unicom. Member, Columbia Business School Board of Overseers.
Member of the Board, Telecom Italia 2007- 2013. Non-Executive Director, Telefónica 1997-2000. Executive Chairman, Altadis Group 1996-2000. Member of the Board, Madrid Stock Exchange 1991-1996. Chairman, Spanish Financial Analysts' Association 1991-1996. Chairman and founder, Beta Capital 1985-1996.
Non-Executive Director
September 2010. Re-elected June 2015
Key areas of prior experience: consumer, finance, sales/marketing, governance
Non-Executive Chairman, InterContinental Hotel Group. Trustee, Leverhulme Trust. Temasek European Advisory Panel. Patron, St Jude India Children's Charity.
Senior Independent and Non-Executive Director, Tesco 2009-2015. Director, INSEAD 2009-2013. Senior Independent and Non-Executive Director, Pearson PLC 2002-2012. Group Chief Executive, Unilever 2005-2008. Chairman, Unilever PLC. Deputy Chairman, Unilever NV. Finance Director and other executive positions (including a number of Unilever major operating companies and divisions in the USA, Indonesia and Portugal), having joined the Unilever Group in 1973.
First appointed:
N
A
September 2013. Re-elected June 2015
Key areas of prior experience: finance, airline industry
Current external appointments: Chairman, Iberia Cards.
Chief Financial Officer, Iberia 1990-2011. Head of finance and deputy director of financial resources, Instituto Nacional de Industria (INI) and Teneo financial group, 1985-1989. Head of subsidiaries at Enadimsa (INI Group), 1982-1985, Chairman IATA finance committee.
First appointed:
September 2010. Re-elected June 2015
Key areas of prior experience:
government, legal and regulatory affairs
Non-Executive Director, EON Supervisory Board. Non-Executive Director, Telecom Italia. Member of the International Advisory Board, IESE Business School. Member of the House of Lords since 2006.
Vice Chair and Senior Independent Director, APR Energy 2010-2015. Non-Executive Director, British Airways 2004-2011. Deputy Chairman, Competition Commission 1997- 2003. Chairman, Department of Trade and Industry's Accounting for People task force 2003.
A Audit and Compliance Committee S Safety Committee
N Nominations Committee R Remuneration Committee
Non-Executive Director
First appointed: September 2010. Re-elected June 2015
finance, consumer, corporate governance
Current external appointments: Chairman, Great North Star LLC. Non-Executive Director, Smurfit Kappa Group. Non-Executive Director and Chairman of the Audit Committee, Avnet Inc.
Chairman, Rothschild North America 2012- 2015. CEO, Rothschild North America and Co-Head of Global Investment Banking 2010-2012. Non-Executive Director, British Airways 2006-2011. Executive Director and Chief Financial Officer, Unilever 2007-2010. Vice Chairman, Chief Financial Officer and Head of International, General Mills 1998-2007. Executive Vice President and Chief Financial Officer, Northwest Airlines 1996-1998. Executive Vice President and other executive positions, Pepsi-Cola 1992-1996. Chairman and Co-Founder, LEK Consulting 1983-1992. Partner, Bain & Company 1977-1983.
Non-Executive Director
February 2014. Re-elected June 2015
consumer, customer development, strategic planning, supply chain, innovation and marketing communications
Senior Vice President and President of Kellogg Latin America, Corporate Officer and member of Kellogg's Global Leadership Team. Board Member of the Council of the Americas.
Vice-President and General Manager Global Personal Care and Corporate Fragrance Development Colgate-Palmolive Co. 2010-2011, Vice-President Marketing and Innovation Europe/South Pacific Division Colgate-Palmolive Co. 2005-2010, President and CEO Spain and Spain Holding Company 2003-2005, General Manager Hong Kong and Director, Greater China Management team 2002-2003, Marketing Director Venezuela 2000-2002, Marketing Director Ecuador 1998-2000.
First appointed: September 2010. Re-elected June 2015
Key areas of prior experience: professional services, finance services
Chairman, F&C Asset Management PLC. Non-Executive Director and Chairman of the Remuneration Committee, British American Tobacco PLC.
Chairman, Nomura International plc 2009- 2015. Member, Advisory Committee for the Chancellor of the Exchequer on the competitiveness of the UK financial services sector 2009-2010. Member, President's committee of the Confederation of British Industry 2000-2008. Chairman and Senior Partner, PricewaterhouseCoopers 2000- 2008. Managing Partner, PricewaterhouseCoopers 1998-2000 and
other executive positions at PricewaterhouseCoopers 1982-1998.
Non-Executive Director
R
December 2013. Re-elected June 2015
commercial management, government affairs, communications, digital and media, legal services
Non-Executive Director, Twitter, Inc. Member, Board of Pure Tech Health Inc. Member, charitable boards including The MacArthur Foundation (Chairman), London School of Hygiene and Tropical Medicine (Chairman), and The Carter Center. Member, Board of the Royal College of Art. Member of the Visiting Committee for the MIT Media Lab. Member, Board of Bridge International Academies (HQ - Kenya).
Chief Executive Officer, Pearson plc 1997-2012. Chief Executive Officer, The Economist Group from 1993-1996. President, The Economist Group US 1985-1993. Lawyer practising in the US 1975-1985.
A R
First appointed:
June 2013. Re-elected June 2015
Key areas of prior experience: finance, professional services, information technology, hospitality industry
Non-Executive Director, Indra. Non-Executive Director, OHL. Non-Executive Director and Chairman of the Audit Committee, Aktua. Non-Executive Director, Broseta. International Senior Advisor Centerbridge. Executive Chairman of various family owned companies.
Non-Executive Director, N+1 2014-2015. International Senior Advisor BNP Paribas 2011-2014. Member, Global Executive Committee Deloitte 2007-2009. Managing Partner, EMEA Deloitte 2007-2009. Managing Partner, Global Tax & Legal Deloitte 2007- 2009. Member, Global Management Committee Deloitte 2003-2007. Managing Partner, Latin America Deloitte 2003-2007. Managing Partner, Integration Andersen Deloitte 2002–2003, Managing Partner, Europe Arthur Andersen 2001-2002. Managing Partner, Global Tax & Legal Arthur Andersen 1997 2001. Managing Partner, Garrigues 1997-2000.
IAG is the parent of different operating companies who have their own brands and operations. The Board of IAG sets the Group's strategic aims, ensures that the necessary financial and other resources are in place for the Group to meet its objectives and reviews management performance. The Board sets the Group's values and standards and ensures that its obligations to its shareholders and others are understood and met.
The IAG Management Committee is responsible for the day-today management of the Group, including capturing cost and revenue synergies, and the development of Group long-term strategy. Headed by IAG's Chief Executive, it includes the Company's leadership team and the top executives of the four Group airlines and cargo business. This structure facilitates the planning and execution of the Group's strategy and the extraction of synergies, and allows the coordination as well as the exchange of experience and knowledge within the Group.
• Ensures dialogue with shareholders
From a business perspective, IAG centralises the Group corporate functions and management, being responsible for the joint business plan and synergies delivery. IAG is integrated by several operating companies, each of them responsible for the management of their respective businesses and accountable for the implementation of the joint business and synergy plan. Each of these companies has its own board of directors and its own executive committee, led by the top executive of each company.
The IAG Board currently comprises ten non-executive directors and two executive directors, IAG's Chief Executive and Chief Financial Officer. The Board has four advisory committees to assist it with certain of its functions: Audit and Compliance, Nominations, Remuneration and Safety. The role and responsibilities of each of these committees are set out in the Board Regulations, available on IAG's website.
The Board Regulations (article 3.4) contain a schedule of matters exclusively reserved for Board decision. In particular the Board has retained for itself:
The Board is led by the Chairman. The Chairman sets the agenda for Board discussions to promote an effective and constructive debate and to support a sound decision-making process. He ensures that directors receive accurate, timely and clear information, in particular about the Company's performance, its strategy, challenges and opportunities.
The Chairman is responsible for ensuring that there is an effective communication with shareholders and that the directors and the executives of the Company understand and address the concerns of investors. The Chairman provides support and advice to the Chief Executive, recognising his executive responsibility for managing the Group.
The Chief Executive is responsible and accountable to the Board for the management and profitable operation of the Company. The division of responsibilities between the Chairman and the Chief Executive is set out in the Board Regulations.
The role of the Senior Independent Director is to provide a sounding board for the Chairman, to serve as intermediary for the other directors when necessary and to be available to shareholders, should they have any concerns they cannot resolve through the normal channels. His responsibilities also include leading the evaluation of the Chairman's performance annually.
The non-executive directors provide a strong, independent element on the Board. They are well placed to constructively challenge and support management, contributing a broad range of experience and expertise. All non-executive directors have access to the Board Secretary and the Group General Counsel for any further information they require. If any of the non–executive directors has any concerns about the running of the Group, they discuss these concerns with one of the executive directors, the Group General Counsel or the Chairman. If their concerns cannot be resolved in this way, then they are recorded in the Board minutes. No such concerns arose during the reporting period.
Directors are offered the possibility to update and refresh their knowledge of the business and any technical related matter on an ongoing basis to enable them to continue fulfilling their responsibilities effectively. Directors are consulted about their training and development needs, and given the opportunity to discuss training and development matters as part of their annual individual performance evaluation.
In 2015 the Board received specific briefings on key business developments, such as digital and Wi-Fi connectivity, competition law, airline ownership and control regulations and changes to the UK and the Spanish corporate governance codes. In addition to this, the July Board meeting was held at Waterside, British Airways' head office, and the occasion was used to have a special session for non-executive directors to give them the opportunity to spend time with employees from the British Airways operation, as well as to meet and discuss business issues with the British Airways leadership team.
New directors receive a tailored induction programme, including one-to-one meetings with management both at IAG level and throughout the Group offering them a complete overview of the Group businesses, and also the opportunity to visit the Group's key sites. The induction also covers governance and directors' duties according to both the Spanish and the UK frameworks.
During the reporting period, the Chairman and the non–executive directors met twice without the executives present. The Chairman met each non-executive director individually to discuss their contribution to the Board and the Senior Independent Director met with the other non-executive directors to discuss the performance of the Chairman.
As a company incorporated and listed in Spain, IAG is subject to applicable Spanish legislation and to the Spanish corporate governance framework. At the same time, as it has a listing on the London Stock Exchange, IAG 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 as amended from time to time (a copy of which is available from www.frc.org.uk).
This Corporate Governance section (the UK Corporate Governance Report) includes an explanation regarding the Company's application of the main principles of the UK Corporate Governance Code. In addition, the Company prepares an Annual Corporate Governance Report according to Spanish
legal requirements which includes information regarding compliance with the Spanish Good Governance Code of Listed Companies. This report is included on pages 163 to 222.
The Company considers that during the year it has complied with all the provisions of the UK 2014 Corporate Governance Code but for the following matter: The service contract for Antonio Vázquez does not comply with the recommendation that notice periods should be set at one year or less so as to limit any payment on exit. The terms of Antonio Vázquez's service contract as Executive Chairman of Iberia were considered at the time of the merger between British Airways and Iberia, and it was determined that an entitlement to lump-sum retirement benefits in excess of one year's salary should be carried over into his IAG service contract. It was thought necessary to continue the Iberia benefits in order to retain this key director and, as such, complying with the UK Corporate Governance Code's principle of only offering a remuneration package sufficient to retain this director. Details can be found in the Directors' Remuneration Report.
The Company complies with the provisions of the Spanish Good Governance Code of Listed Companies, with the exceptions described in the Spanish Annual Corporate Governance Report.
The Company believes that, notwithstanding the above exception, it has a robust governance structure. The Company's UK Corporate Governance Report is available on the Company's website.
The Board physically met nine times during the reporting period. The Board also held its annual two-day strategy meeting in September 2015.
Meetings attended by each director of the Board and the different committees during the reporting period are shown in the table below:
| Director | Board meetings |
Audit and Compliance Committee meetings |
Nominations Committee meetings |
Remuneration Committee meetings |
Safety Committee meetings |
|---|---|---|---|---|---|
| Total in the period | 9 | 7 | 5 | 4 | 2 |
| Antonio Vázquez | 9 | – | 5 | – | 2 |
| Sir Martin Broughton | 9 | – | 5 | – | 2 |
| Willie Walsh | 9 | – | – | – | 2 |
| César Alierta | 4 | – | 4 | – | – |
| Patrick Cescau | 9 | 7 | – | – | – |
| Enrique Dupuy de Lôme Chávarri |
9 | – | – | – | – |
| Baroness Kingsmill | 8 | – | 4 | 3 | – |
| James Lawrence | 9 | 7 | – | – | – |
| María Fernanda Mejía | 9 | – | – | 4 | – |
| José Pedro Pérez–Llorca1 | 3 | – | – | – | – |
| Kieran Poynter | 8 | 7 | – | – | 2 |
| Dame Marjorie Scardino | 8 | – | – | 4 | – |
| Alberto Terol | 9 | 7 | – | 4 | – |
1 José Pedro Pérez-Llorca left the Board on June 18, 2015.
The Board and committees' performance evaluation was conducted internally in 2015. The last external evaluation was completed in 2013. The review took the format of a selfassessment survey designed to test directors' opinions and views on a number of matters including: the role and organisation of the Board, Board composition, organisation of meetings, quality of Board debate, knowledge and experience, relationship with management, and progress made against the 2015 action plan.
The Board Secretary prepared a report on the performance evaluation of the Board and each of the committees. The Board report was considered by the Nominations Committee; with each of the committees' reports and the results of the questionnaires being considered by the different committees and discussed at the Board meeting held in January 2016. The review concluded that the Board had effectively fulfilled its responsibilities during 2015, and the general progress made was unanimously recognised by the Board.
The Chairman also met with each director individually to provide feedback on their performance. He also discussed the functioning of the Board as a whole and the contribution expected of each director. The Board evaluation also included an assessment of performance against the objectives agreed for 2015. Progress made on Board and executive succession planning and talent development was recognised, as well as the actions agreed to improve Board effectiveness.
The Board action plan for 2016 includes:
IAG adopted a Board Diversity Policy in September 2012, which was updated in June 2014. IAG's Diversity Policy aimed to promote diversity in the Board composition and established the Board's aspirational goal of achieving 25 per cent female representation on the Board by 2015. This target was met by the Company ahead of this time frame.
Following the new Spanish corporate governance code recommendation, the Board has recently approved a Directors Selection and Diversity Policy which supersedes the former Board Diversity Policy. The objective of this new policy is to ensure that the appointments of directors are based on a prior analysis of the Board's needs and favours a diversity of knowledge, experience and gender. This policy incorporates the former diversity principles while regulating the process for appointing directors. Under this policy, director appointments are evaluated against the existing balance of skills, knowledge and experience on the Board, and directors are asked to be mindful of diversity, inclusiveness and meritocracy considerations when examining nominations to the Board.
The Directors Selection and Diversity Policy establishes a new female representation objective of 33 per cent for 2020 following the recommendation included in the final Davies Report published in the UK. IAG's Directors Selection and Diversity policy is published on IAG's website.
The Board continues to recognise the value of diversity as a tool to enrich its discussions and decision-making process. The Nominations Committee supports the Board in the consideration of diversity in relation to Board composition and succession planning taking into consideration the conclusions drawn from the annual review of the Board's performance. The Board, through its Nominations Committee, regularly reviews the percentage of women that sit on the Board and on the IAG Management Committee, as well as the number of women in the Group's workforce worldwide. This information is included on page 33 of this report. The Board and IAG Management Committee continue to focus on this important area.
Directors must disclose to the Board any situation of direct or indirect conflict that they may have with the interests of the Company. In the event of conflict, the affected directors must abstain from participating in the transaction referred to by the conflict. The definition of conflict of interests is set out in the Board Regulations on the Company's website.
The Company has purchased insurance against Directors' and Officers' liability for the benefit of the directors and officers of the Company and its subsidiaries.
The Annual General Meeting held on June 18, 2015 authorised the Board, with the express power of substitution, for a term ending at the 2016 Annual General Meeting (or, if earlier, 15 months from June 18, 2015), to:
(b) up to a further one-sixth of the aggregate nominal amount of the Company's issued share capital as at the date of passing such resolution in connection with an offer by way of rights issue (such amount to be reduced by the amount that the share capital has been increased by and the maximum amount that the share capital may need to be increased by on the conversion or exchange of any securities issued by the Board under the relevant authorisation).
(ii) issue securities (including warrants) convertible into and/or exchangeable for shares of the Company, up to a maximum limit of one billion 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:
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.
Under the above-mentioned authority, the Company, up to December 31, 2015, purchased 18,692,036 shares with a nominal value of 0.50 euros each. All the shares purchased will be used to satisfy awards under the IAG Share Plans. For further details see note 29 to the financial statements. The Securities Code of Conduct of the Company contains the treasury stock transactions code of the Company. This can be accessed on the Company's website.
As of December 31, 2015, the share capital of the Company amounted to 1,020,039,261.50 euros (2014: 1,020,039,261.50 euros), divided into 2,040,078,523 shares (2014: 2,040,078,523 shares) of the same class and series and with a nominal value of 0.50 euros each, fully subscribed and paid.
As of December 31, 2015 the Company owned 14,684,018 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.
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 five 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, 2015 the equivalent of 18.4 million shares was held in ADR form (2014: 23.3 million IAG shares).
The significant shareholders of the Company at December 31, 2015 were:
| Name of shareholder |
Number of direct shares |
Number of Name of indirect shares direct holder |
Total shares | Percentage of capital |
|---|---|---|---|---|
| Qatar Airways (Q.C.S.C) | – | 203,863,316 Qatar Airways Luxembourg. S.à.r.l. | 203,863,316 | 9.993% |
| Standard Life Investment (Holdings) Ltd |
60,639,188 | 61,942,109 Standard Life Investments Limited and Ignis Investment Services Limited |
122,581,297 | 6.008% |
| Europacific Growth Fund | 107,329,400 | – – | 107,329,400 | 5.261% |
| Capital Research and Management Company |
– | 102,997,951 Collective investment institutions managed by Capital Research and Management Company |
102,997,951 | 5.049% |
| Legal & General Investment Management Limited |
54,407,837 | 11,611,554 Legal & General (Unit Trust Managers) Limited | 66,019,391 | 3.236% |
| BlackRock Inc | – | 61,696,340 Funds and accounts managed by investors controlled by BlackRock Inc. |
61,696,340 | 3.024% |
| Lansdowne Partners International Limited |
– | 36,869,133 Funds and accounts managed by Lansdowne Partners (UK) LLP |
36,869,133 | 1.807% |
| Invesco Limited | – | 22,064,264 Mutual benefit societies and pension funds managed by Invesco Limited and its subsidiaries |
22,064,264 | 1.082% |
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.
In the event that the Board deems it necessary or appropriate to adopt measures to protect an operating right of the Company or of its subsidiaries, in light of the nationality of its shareholders or any persons with an interest in the Company's shares, it may adopt any of the measures provided for such purpose in article 11 of the Bylaws, including the determination of a maximum number of shares that may be held by non-EU shareholders provided that such maximum may not be lower than 40 per cent of the Company's share capital.
The Board may also (i) agree on the suspension of voting and other political rights of the holder of the relevant shares, and (ii) request that the holders dispose of the corresponding shares so that no non-EU person may directly or indirectly own such shares or have an interest in the same. If such transfer is not performed on the terms provided for in the Bylaws, the Company may acquire the corresponding shares (for their subsequent redemption) pursuant to applicable legislation. This acquisition must be performed at the lower of the following prices: (a) the book value of the corresponding shares according to the latest published audited balance sheet of the Company; and (b) the middle market quotation for an ordinary share of the Company as derived from the London Stock Exchange's Daily Official List for the business day on which they were acquired by the relevant non-EU person.
The Board is committed to maintaining an open dialogue with shareholders and recognises the importance of that relationship in the governance process. The Chairman is responsible for ensuring that an effective communication with shareholders takes place and that directors and executives understand and address investors' concerns.
In this respect, the Board approved in January 2016 a policy regarding communication and contacts with shareholders, institutional investors and proxy advisors, following the 2015 Spanish Good Governance Code recommendation. This policy is available on the Company's website.
IAG has a comprehensive investor relations programme which aims to help existing and potential investors understand the Group and its business. Regular shareholder meetings were held with executive directors, the Chairman of the Board and the investor relations team during 2015. During March 2015, IAG's Chairman consulted with major institutional shareholders on a range of topics. In addition to this, the former Chair of the Remuneration Committee, Baroness Kingsmill, along with IAG's Group Head of Investor Relations met with many of our largest shareholders to discuss remuneration matters.
Shareholder feedback is provided to the Board to ensure that directors understand the objectives and views of major investors. During 2015, the Group Head of Investor Relations reported to the Board on three different occasions, providing the Board with a regular update on shareholders views.
The Group's medium to long term plans and targets were discussed in detail in a full day of presentations by the senior management team at the annual Capital Markets day that took place on November 6, 2015. Seven of the 10 non-executive directors of the Company attended this meeting, giving major shareholders and investors the opportunity to discuss corporate governance matters with members of the Board. The event was broadcast live via webcast. The presentations are available in full on the Company's website, along with the accompanying transcript.
Both institutional and private shareholders may contact the Company through a dedicated website, via email and directly by telephone.
The following significant agreements contain provisions entitling the counterparties to exercise termination in the event of 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.
As part of the merger entered into by the Company, British Airways and Iberia in 2011, certain assurances were given to protect the specific interests of British Airways and Iberia and their respective stakeholders (Assurances) (page 127 of the Registration Document available on the IAG website). The observance and enforcement of those Assurances was carried out via the mechanisms that were put in place for this purpose and that are described on pages 129 and 130 of the Registration Document. Any disputes relating to the Assurances are determined by an Assurance Committee. No matters were referred to the Assurance Committee during 2015. The Assurances automatically terminated on the fifth anniversary of the merger effective date (January 21, 2016).
No material adjusting post balance sheet events occurred after December 31, 2015.
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, 2015 the Board composition was:
| Name of Board Member | Position | Category1 |
|---|---|---|
| Antonio Vázquez | Chairman | Other external2 |
| Sir Martin Broughton | Deputy Chairman | Independent non-executive |
| Willie Walsh | Chief Executive Officer | Executive |
| César Alierta | Director | Independent non-executive |
| Patrick Cescau | Director | Independent non-executive |
| Enrique Dupuy de Lôme | Chief Financial Officer | Executive |
| Baroness Kingsmill | Director | Independent non-executive |
| James Lawrence | Director | Independent non-executive |
| María Fernanda Mejía | Director | Independent non-executive |
| Kieran Poynter | Director | Independent non-executive |
| Dame Marjorie Scardino | Director | Independent non-executive |
| Alberto Terol | Director | Independent non-executive |
1 In accordance with the definitions set forth in the Spanish Companies Act.
2 Antonio Vázquez was, until the execution of the merger between British Airways and Iberia, the Executive Chairman of Iberia. Pursuant to the Spanish Companies Act, Antonio Vázquez will be considered, as from January 21, 2016, as an independent non-executive director given that five years have elapsed since he stepped down from such executive position.
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 directors are responsible for maintaining, and for reviewing the effectiveness of the Company's system of internal control including internal financial control. This is designed to provide reasonable, but not absolute, assurance regarding the safeguarding of assets against unauthorised use or disposition and the maintenance of proper accounting records and the reliability of financial information used within the business or for publication. This process is in accordance with the Financial Reporting Council's Guidance to Directors and the CNMV's Internal Control over Financial Reporting (ICFR). These controls are designed to manage rather than eliminate the risk of failure to achieve business objectives due to circumstances which may reasonably be foreseen and can only provide reasonable but not absolute assurance against material misstatement or loss.
The Company has in place internal control and risk management systems in relation to the Company's financial reporting process and the Group's process for the preparation of consolidated financial statements.
A risk-based audit plan for the Group was approved by the Audit and Compliance Committee. The Audit and Compliance Committee considered control matters raised by management and both the internal and external auditors and reported its findings to the Board. The CNMV standard requires the disclosure of material weaknesses in ICFR: no such weaknesses were identified during the year under review or up until the date of approval of this report.
CORPORATE GOVERNANCE
27 September 2010
The Audit and Compliance Committee is responding to the increasingly challenging corporate governance environment. We recognise our role is more important than ever in reviewing the effectiveness of internal controls and providing assurance on risk management.
Both the Spanish and the UK regulators introduced new Corporate Governance guidance in 2015. The Audit and Compliance Committee has overseen the successful implementation of this guidance, ensuring that recommendations are adopted in a way that makes a positive contribution to the business. In response to the new Spanish code the Committee has expanded its remit to include Sustainability. We are already working closely with the IAG Head of Sustainability to ensure that the new Group policy and pathway develop the good practices already existing within the airlines.
Each year we assess the performance of the Committee through a questionnaire and careful consideration of the results. The Committee is working well and I am happy with the way we are constructively challenging the Management Team across a broad and relevant agenda.
Audit and Compliance Committee Chairman All the Committee members have recent and relevant financial experience for
the purposes of the UK Corporate Governance Code.
The composition, competencies and operating rules of the Audit and Compliance Committee are regulated by article 29 of the Board Regulations. A copy of these Regulations can be found on IAG's website.
The Committee met seven times during 2015. Each year the Committee also holds closed meetings and meets privately with both the external and internal auditors as appropriate.
In addition to the Secretary and Deputy Secretary, regular attendees at Committee meetings included the Chairman, the Chief Executive Officer, the Chief Financial Officer, the Head of Group Audit and Risk Management and the Head of Group Reporting together with representatives from the external auditors.
The Committee's principal responsibilities and activities during the year were:
review of the effectiveness of the internal control system, provide assurance on the risk management process and review the principal risks facing the Group;
review and agreement of the internal audit programme, resourcing, effectiveness and resolution of issues raised; and
During the year, the Committee performed an evaluation of its performance and concluded it is operating effectively. The Committee updated its terms of reference to reflect the new requirements of the 2015 Spanish Corporate Governance Code including the Committee's responsibility for the selection process for the external auditor, the internal auditor reporting functionally to the Chair of the Audit Committee and a new oversight role with respect to Sustainability.
In its July 2015 meeting, the Committee reviewed management's proposed approach to the viability statement required for the year ended 2015 under the 2014 UK Corporate Governance code. The Committee focused on the risks that should be combined to generate severe but plausible downturn scenarios, how those risks might interact, how solvency is assessed and the period over which viability is considered. The February 2016 Committee reviewed the detailed analysis which adopted a five year time horizon, reflecting the Group's Business plan period.
The Committee reviewed developments in the anti-bribery compliance programme including the establishment of a Group wide Know Your Counterparty due diligence programme which has initially focused on general sales agents employed by the airlines in foreign jurisdictions. A sanctions compliance risk map was reviewed together with the results of targeted sanctions compliance initiatives. The Committee endorsed the Head of Compliance's plans to develop a Group-wide sanctions policy and training in higher risk areas. The Head of Competition Law reported to the Committee on compliance initiatives during the year, training attendance and priorities for 2016.
The Committee received regular litigation status reports from the General Counsel including the status of the remaining civil claims against British Airways following the 2010 European Commission decision on alleged cartel activity with respect to air cargo prices. The decision was partially annulled as against British Airways following an appeal to the general court of the European Union and British Airways was advised that the fine would be refunded in full. It is not yet clear what the European Commission's next steps will be.
With respect to the civil claims the Committee agreed with management's view that, given the status of proceedings and the recent General Court decision, it is not possible at this stage to predict the outcome of the proceedings and no financial provision should be made for the civil claims.
The Committee reviewed the new Group-wide Sustainability policy that replaced existing policies in the individual airlines. We also reviewed the sustainability strategy and targets in key areas such as carbon footprint and noise performance.
Delays were experienced in the conversion and repatriation of British Airways' cash from Nigeria in the second half of 2015. This resulted in a balance of €72 million equivalent at year end. The Committee reviewed British Airways' commercial responses which balanced limiting the growth in cash balances against maintaining a presence in the market.
Throughout the year, the Committee considers the implications of new accounting standards, reviews complex accounting transactions, and considers the key estimates and judgements used in the preparation of the Group financial statements. In 2015, these included the life and residual value of the fleet, the provisional Aer Lingus purchase price allocation, the revenue deferral relating to unredeemed Avios and employee benefit obligations.
The life and residual value of fleets are determined on an airlineby-airline basis as the fleet plan will see different retirement ages in each airline. Residual values are driven by the age of the aircraft on retirement from the fleet and the expected demand for the aircraft or its component parts. British Airways revised its
estimates for its Boeing 777-200 fleet and its Airbus A320 family fleet. Iberia accelerated depreciation on its Airbus A340-300 fleet and also amended its Airbus A320 fleet family. The Committee reviewed the economic rationale and customer proposition impact of the changes and satisfied itself that the new expected lives and accompanying reduced residual values were appropriate management estimates. The 2015 impact of life extensions, together with changes to the residual values of specific aircraft nearing retirement, was a net credit of €36 million.
The Committee reviewed the valuation methodologies employed in the provisional Aer Lingus purchase price allocation together with EY's interim report on their audit. The Committee is satisfied that good progress has been made and the provisional purchase price allocation fairly reflects the work carried out to date. The purchase price allocation will be completed by August 2016.
In 2015 management finalised its implementation of a new data analytics tool that provides insight into customers' acquisition and use of Avios. The data analytics tool is also used to validate the accounting estimate of "breakage", the proportion of Avios issued that will never be redeemed. The new results obtained supported management's existing accounting estimates.
The December 2015 Committee reviewed the accounting for British Airways and Aer Lingus pension schemes together with Iberia collective redundancy schemes. This review included consideration of Aer Lingus' participation in the Irish Airlines Superannuation schemes and treatment as defined contribution under IAS 19. Treatment as defined contribution is considered to be appropriate as there is no obligation, legal or constructive, for Aer Lingus to change its contributions to the scheme.
The Committee also reviewed and agreed with management's decision to include maintenance contracts as a key accounting estimate and judgement. Contract terms are becoming more complex, covering multiple elements and can span several years.
The Travel Programme incorporates a new customer check-in and aircraft boarding system together with new IT integration technology. As such it is a critical programme presenting risks to customer service as the systems are rolled out through 2015 and 2016. The Committee requested two updates from the accountable IT and operations directors together with the lead of the programme's risk management work stream. The reviews focused on the governance structure of the programme; key risks around implementation; and how Internal Audit recommendations relating to programme resourcing, contingency planning, testing and go / no go criteria were being addressed.
The Group Head of IT and the Group IT Security Manager attended the Committee to discuss the fast developing cyber risk landscape. The Committee reviewed IAG's response which included developing and implementing a Cyber Security Strategy. The Committee also focused on actions arising from an Internal Audit review and a Management Committee led tactical initiative to ensure consistent cyber security responses across the Group.
The Committee continued to review the Group's fuel and foreign exchange hedging positions on a quarterly basis, ensuring that the approved hedging profile was being adhered to and continued to be appropriate.
Following the establishment of a new Group tax policy in 2014, the Committee carried out a review of tax risks and governance. Looking forward, tax risk has been incorporated into the new Enterprise Risk Management Policy and will be reported to the Committee on a six monthly basis.
2015 saw Internal Control over Financial Reporting (ICFR) moving into a maintenance phase having been implemented in 2013 and 2014. ICFR, which is a Spanish Corporate Governance requirement, is a thorough analysis of risks in financial reporting, the documentation of accounting processes, and testing of internal controls. In 2015 no material weaknesses were identified. A full description of ICFR is set out in Section F of the Spanish Corporate Governance Report on page 200.
The Committee considers whether the Annual Report and Accounts are fair, balanced and understandable. This review is supported by a process whereby all sections of the Annual Report and Accounts are allocated to senior managers and members of the Management Committee who attest that the sections are fair, balanced and understandable. The Committee also reviews disclosure throughout the year through receiving a quarterly report from the IAG Disclosure Committee outlining all the matters they discuss.
The Committee reviewed the effectiveness of the Group's Enterprise Risk Management systems, ensuring that they met the new recommendations of the 2015 Spanish Good Governance Code and the UK Financial Reporting Council's new guidance on risk management. Whilst concluding positively, the Committee endorsed management's plan to centralise Enterprise Risk Management resources at the Group level and implement a Group-wide system whereby risk owners attested to the proper management of principal risks.
The Group's external auditors, EY, will be appointed as auditors of Aer Lingus for 2016 in line with the Committee's policy of having one auditor for the Group. The Committee works closely with EY, with their partners attending all seven meetings during the year. The Committee reviewed the engagement letter, fees and the audit plan which included EY's assessment of risk areas within the financial statements. This risk assessment highlighted revenue recognition, the Aer Lingus Business combination and employee benefit schemes, as such the EY analysis was consistent with the areas reviewed by the Committee under Accounting issues. Audit results were reviewed during three meetings; for the half year, for the findings from interim audits, and for the year-end matters.
In assessing the effectiveness and independence of the external auditors, the Committee considered relevant professional and regulatory requirements and the relationship with the auditors as a whole. The Committee monitored the auditors' compliance with relevant regulatory, ethical and professional guidance on the rotation of partners, and assessed their qualifications, expertise, resources and the effectiveness of the audit process, including a report from the external auditor on its own internal quality procedures. The assessment included a detailed questionnaire completed by key directors, managers and a sample of accounting staff throughout the Group. The questionnaire results demonstrated that EY's overall performance was good and that they are providing an effective external audit across the Group. Having reviewed EY's performance during 2015, the Committee concluded that EY were independent and that it was in the Group's and shareholders' interests not to tender the audit in 2016 and recommends their re-appointment.
The Group audit was last tendered on the incorporation of the IAG in 2010. The Company intends to comply with the UK Corporate Governance Code requirement to tender the external audit at least every ten years and the transition arrangements that would require the audit to be tendered for the year 2021 at the latest. Subject to its implementation in the UK, the new EU Regulation regarding the statutory audit of public interest entities will require us to change auditors in 2021. EY rotate the Partners on the engagement in line with their own independence standards, 2015 will be the last year that Rafael Paez Martinez opines on the IAG financial statements and we look forward to working with Hildur Eir Jonsdottir in 2016.
www.iairgroup.com 51Treasury risk management Non-audit services provided by the external auditors are subject to a Board approved policy that prohibits certain categories of work and controls the overall level of expenditure. The Committee reviews the nature and volume of projects undertaken by the external auditors on a quarterly basis and the Committee Chairman pre-approves projects over €100,000 or of an unusual nature. The overall volume of work is addressed by a target maximum of €1.3 million with an additional allowance of up to €1 million for large projects where EY are uniquely placed to carry out the work. Spend in 2015 was below the target maximum at €872,000 with an additional €557,000 relating to the acquisition of Aer Lingus and the completion of EY projects in place at Aer Lingus at the time of acquisition. 45 per cent of the €872,000 spend related to recurring work on the audit of accounts required by our Joint Business arrangements. Details of the fees paid to the external auditors during the year can be found in note 7 to the financial statements.
The Committee reviewed procedures whereby staff across the Group can raise confidential concerns regarding accounting, internal control, auditing and other matters. Third-party providers are used to provide whistleblowing channels so that all staff across the Group can report concerns to senior management in their company. The Committee also reviewed the volume and nature of cases reported and noted that there were no significant financial or compliance issues raised.
I am delighted to present the Nominations Committee's Report for 2015.
Succession planning and the succession pipeline remained a key agenda item for the Committee this year. Building on the comprehensive exercise carried out last year, the Committee continued working on succession planning for the Board; ensuring that the Board has the right balance of diverse skills and experience; and that refreshment and emergency plans are also in place. As far as executive succession is concerned, we have closely monitored the initiatives designed to develop internal talent and also ensured that emergency succession proposals are in place. We were pleased to see a greater focus on values and culture in recruitment, talent assessments and the succession planning work.
The Committee reviewed this year the change in the chair of the Remuneration Committee, with Dame Marjorie Scardino succeeding Baroness Kingsmill in this role. I have to say that Marjorie and Denise managed an exemplary handover. Mentioning this Committee, which has a 75 per cent female representation, it gives me the opportunity to comment on the new Directors Selection and Diversity Policy, approved by the Committee in January 2016, which establishes a new 33 per cent commitment for our Board in line with Lord Davies' recommendations.
Ahead of our AGM, the independence, effectiveness and commitment of each of the non-executive directors were reviewed and discussed with them privately by the Chairman of our Board, and former Chairman of this Committee. The results were shared with the Nominations Committee and formed the basis of our proposals for the re-election of directors.
And finally, the Committee has considered the important changes made to key positions in our operating companies' leadership teams. I cannot finish my report without mentioning the retirement of Keith Williams from the Group, for whom we have a profound professional and personal respect. As announced at our Capital Markets Day, he is being replaced by Alex Cruz, currently Chairman and Chief Executive of Vueling, evidencing the value of our succession planning exercise and the quality of our internal talent.
Nominations Committee Chairman
The composition, competencies and operating rules of the Nominations Committee are regulated by article 30 of the Board Regulations. A copy of these Regulations can be found on the Company's website. These Regulations state that the Nominations Committee shall be made up of no less than three and no more than five non-executive directors appointed by the Board, with the dedication, capacity and experience necessary to carry out its function. A majority of the members of the Nominations Committee must be independent directors. Currently, all members are non-executive directors and three of them are considered independent.
The Nominations Committee's responsibilities are contained in the Board Regulations. These can be summarised as:
During 2015 the Nominations Committee met five times. Directors' attendance at these meetings is shown on page 62.
The Committee dealt with the following significant issues during 2015:
Building on the exercise accomplished in 2014, the Nominations Committee continues to review and refresh non-executive director succession planning. During 2015, the Committee considered the adequacy of succession arrangements at Board level. The Committee reviewed the skills matrix, the likely pattern of Board retirements over the coming years, as well as the chairmanship and membership of each committee, considering possible successor candidates for the different positions within the Board and its committees.
www.iairgroup.com 73The Nominations Committee The Committee also considered the adequacy of succession arrangements for executive directors, and for key executive positions at IAG and at the operating companies. The Group Chief Executive led the necessary arrangements for succession planning of the top 50 leadership positions across the Group, including the IAG Management Committee, the operating companies' leadership teams and other key executive positions at IAG. For each position, 'ready now successors' and 'other potential successors' have been identified from within the business, ensuring that the majority of positions have at least two possible internal successors. For certain positions it is recognised that the most suitable successors will be external appointments. During the year, a number of internal candidates were successfully promoted into top 50 leadership positions in addition to some external appointments.
In developing the management succession plan, work has been undertaken to identify the critical leadership capabilities that are required amongst the top leaders of the Group and these are being used to help assess potential successors. Other vital considerations throughout the succession planning process include the diversity mix across the leadership group and the length of time spent in each role. The Committee recognises the importance of developing internal talent at IAG, particularly with regard to succession planning for certain key senior positions.
During the year the Committee reviewed the composition and balance of the Board's committees and recommended changes to the Board for approval. As a result, on June 18, the Committee endorsed the appointment of Sir Martin Broughton to replace Antonio Vázquez as Chairman of the Nominations Committee. In addition, on the Committee's recommendation, the Board approved the appointment of Dame Marjorie Scardino as Chair of the Remuneration Committee, succeeding Baroness Kingsmill who remained a committee member.
In addition to this, José Pedro Pérez-Llorca did not stand for re-election at the Shareholders' Meeting in June 2015. The Board expressed its gratitude for his service during more than 14 years to IAG and Iberia. No new directors were appointed to the Board during the year.
The Committee reviews Directors' performance and independence as part of the Committee's assessment of their eligibility for re-election. The performance, commitment, ability and availability of each of the non-executive directors have been reviewed and discussed with them privately by the Chairman. The results were shared with the Nominations Committee and the Committee recommended each director standing for reelection at the 2015 Shareholders' Meeting be re-elected.
The Committee's performance was evaluated internally for the second year following the external evaluation process carried out in 2013. This year, in accordance with the new Spanish Good Governance Code for Listed Companies, the Nominations Committee also led the Board evaluation process as detailed on page 63 of this Corporate Governance Report.
The Committee was found to be operating effectively. Committee members are satisfied with the progress made in the work of this Committee in its five years of existence, particularly in relation to succession planning. As objectives for 2016, the Committee considers strengthening succession planning for the top leadership positions in IAG and its operating companies, as well as the improvement in the induction programme for new directors and Committee members.
IAG approved a Diversity Policy in September 2012, which was reviewed and updated in June 2014. All appointments to the Board are based upon merit and suitability of the candidate to the particular role being filled, having regard to the benefits of diversity on the Board, including gender.
As set out in the Board's Diversity Policy, IAG achieved the 2015 target of 25 per cent female representation on the Board. It is the Committee's intention to continue to focus on this important area during 2016 taking into consideration the recommendations of the final report of the Women on Boards Davies review published in October 2015 in the United Kingdom.
As mentioned before, the Nominations Committee reviewed a new Directors Selection and Diversity Policy which was submitted for Board approval on January 28, 2016. This policy is available on the Company's website.
This new policy sets a different target for female representation on IAG's Board of 33 per cent by 2020 in line with Lord Davies' recommendation. It is the Nominations Committee's intention to reconcile the achievement of this objective while preserving the general diversity and merit based appointment principles established in IAG's policy.
Further details on diversity, can be found on page 63 of this corporate governance section and page 33 in the sustainability section of the annual report.
CORPORATE GOVERNANCE
19 October 2010 19 October 2010 19 October 2010 19 October 2010
The Safety Committee has continued with its regular activities during 2015.
As a tool of support and coordination within the Group, the Safety Committee has continued monitoring all matters relating to the operational safety of IAG's airline companies, as well as to the systems and resources dedicated to safety activities across the Group.
Taking into consideration that IAG is the parent company of a group of airlines, the work of this Committee, beyond the oversight of safety matters, is focused on standards within the Group. In this sense, I am very satisfied with the progress made to date. We are already seeing the benefits of the comparison, the cooperation and the exchange of experience and good practices between our airline companies.
We have welcomed this year the addition of Aer Lingus to our Group. Its Corporate Safety & Risk Manager attended our December Safety Committee meeting and will start reporting to the Safety Committee as all other Group airlines do, benefiting and contributing to this common undertaking.
Safety Committee Chairman
Composition, competencies and operating rules of the Committee are regulated by article 32 of the Board Regulations. The Committee shall be made up of no fewer than three and no more than five Directors appointed by the IAG Board, with the dedication, capacity and experience necessary to carry out their function.
In addition to Committee members, senior managers with responsibility for safety matters are invited to attend and to report at the Committee meetings as and when necessary. During 2015, the British Airways Director of Safety and Security, representatives of the Iberia and Vueling safety teams and the Aer Lingus Corporate Safety & Risk Manager attended Safety Committee meetings.
Responsibility for safety matters belongs to the Group's airlines. IAG, through its Safety Committee, will have an overall view of each airline's safety performance and of any important issues that may affect the industry. The Safety Committee also has visibility on the Group's airlines resources and procedures. Responsibility for performing detailed and technical assessments remains with each Group airline, overseen by their respective safety committees.
The Committee's duties include:
The Safety Committee reports any relevant information and a summary of its activity to the IAG Board, and follows up on any safety-related measures as determined by the IAG Board.
During 2015, the Committee held two meetings, attended by all four Committee members. The key topics discussed included the relevant safety events which occurred during the relevant period, regulatory developments and initiatives from industry associations, along with the regular safety review reports of British Airways, Iberia and Vueling.
30 October 2014 19 December 2013
27 September 2010
As Chairman of the Remuneration Committee from September 2015, and on behalf of the Board, I am pleased to present the Remuneration Report for 2015.
IAG's strategy is to become the leading international airline group in an increasingly consolidated industry, creating value and delivering higher returns for our shareholders through leadership in core markets and the realisation of cost and revenue synergy opportunities across the group of airlines and aviation related businesses.
The strategy is executed and sustained by consistent improvement in financial performance and in return on investment, in each part of the Group. This requires overseeing transformation programmes through use of the IAG "platform" at each of our airlines, while leveraging cost and revenue opportunities across the Group.
IAG's executive remuneration framework aims to underpin those business objectives and the financial targets attached to them:
The remuneration policy is designed to deliver total remuneration that is competitive and with increased emphasis on "pay for performance". The Committee will continue to ensure that executive remuneration is aligned with the business strategy and is confident that the overall reward framework for 2015, 2016 and beyond is in the best interests of shareholders.
The performance share plan which vests during 2016 had a three-year performance period (2013 to 2015). Performance targets for the two measures (adjusted EPS and TSR) were set at the beginning of 2013.
At that time, the Company reported an adjusted EPS of negative 23.4 euro cents for 2012, and the share price during 2012 had varied between 136p and 190p. Very ambitious goals were set, with stretch targets for 2015 adjusted EPS of 52 euro cents, and TSR of 8 per cent per annum outperformance of an industry index.
Over the last three years, the Company has produced an extraordinary performance. All our airlines transformed their profitability (led by the Iberia turnaround programme), leading to 2015 adjusted EPS reaching 71.4 euro cents, an increase in the share price by the end of 2015 to 611p (more than trebling in three years, and creating an extra value to shareholders of over £9 billion), and TSR outperforming the index by 35 per cent per annum. This is a great success story. As a result, the performance share plan awarded to executives in 2013 will pay out in 2015 at its maximum level, with both adjusted EPS and TSR having significantly exceeded the stretch target.
The financial targets for the 2015 annual incentive plan set at the beginning of the year were very demanding (the on-target level was increased by 68 per cent), but continued improvement of our performance, with profitability €200 million above the incentive plan on-target level, means that the two-thirds portion of the scheme linked to financial performance will pay out 70 per cent of the maximum opportunity (the final third portion being focused on individual objectives).
Last year's report showed that the Committee had approved several actions to strengthen the alignment between executives and shareholders (which included adding a return metric and an additional holding period to the performance share plan, expanding the shareholding guidelines, and strengthening the malus and clawback provisions). In the last 12 months, the Committee has overseen the implementation of these major decisions.
Major decisions that the Committee has taken during 2015 include:
including the arrangements for the CEO of Aer Lingus, and the review of the Company's incentive target ranges to take into account Aer Lingus' contribution to the Group.
www.iairgroup.com 57 remuneration arrangements for the Aer Lingus acquisition, Our former Chair of this Committee, Baroness Kingsmill, along with Group Head of Investor Relations, Andrew Barker, has met many of our largest shareholders over the last year. They have very much valued your comments and support, as well as your suggestions, for our remuneration policy. We noted your support for the 2014 Remuneration Report and the Remuneration Policy submitted for shareholders' consideration at our annual Shareholders' Meeting. We did note, however, the abstentions registered on the policy vote, which seem to be based on certain concerns raised by investors, mainly around how much flexibility the Company had allowed itself in some areas of the remuneration package. Particular areas of concern were the potential maximum package that could be offered to new executive directors, and the potential maximum face value award that could be offered in the PSP. We believe that we have now addressed these issues. You will note that at the beginning of the Policy Section, we state that in terms of application of the policy, we will not deviate at all from our standard practice.
As a Spanish incorporated company, IAG is subject to Spanish corporate law. The Spanish legal regime regarding directors' remuneration was modified in late 2014 by Law 31/2014, amending the Companies Act to improve corporate governance, and establishing a legal framework substantially parallel to that of the UK as far as directors´ remuneration disclosure and approval requirements are concerned.
It is the Company's intention once again to comply voluntarily with all reporting aspects of the UK legislation of 2013 and to follow best practice UK standards, for the benefit of our UK shareholder base. Therefore, the Company has prepared a Directors' Remuneration Report in accordance with UK legislation (the UK DRR). Additionally, the Company has prepared a Spanish Directors' Remuneration Report (the Spanish DRR) bearing in mind that our annual Shareholders' Meeting is subject to Spanish corporate law. We have ensured that the Spanish DRR and the UK DRR are totally consistent. The Spanish DRR, prepared in accordance with Spanish legislation, is available on the Company's website.
At last year's annual Shareholders' Meeting, the remuneration policy was submitted for a binding vote, and passed. As the policy is intended to be long term (three years), it will not be submitted for a vote at the Company's next annual Shareholders' Meeting. There have been a few minor adjustments to how the policy will be applied in practice (listed below at the beginning of the policy section), all of which are to the advantage of shareholders, but no changes to the policy will be proposed this year. There will be, as usual, a vote on the remuneration implementation report at the Company's next annual Shareholders' Meeting, and this will be advisory.
The Remuneration Committee has balanced carefully how the Company pays its people and how the Company is building up value for its shareholders. We welcome any suggestions or questions about our conclusions.
Share Price
Chairman of the Remuneration Committee
Implementation of remuneration policy in 2015 Implementation of remuneration policy in 2015
In addition to the Remuneration Committee Chair's statement, this Directors' Remuneration Report contains two different sections:
The Remuneration Committee takes responsibility for the preparation of the report, which is approved by the Board.
This Report has been prepared in accordance with the UK Listing Rules, and, although there is no requirement for a Spanish company to do so, the requirements of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) (amendment) Regulations 2013.
The Company's policy on directors' remuneration was approved by shareholders at the annual Shareholders' Meeting on June 18, 2015. No changes to the policy will be proposed this year. However, mindful of shareholders' views, certain aspects of how the policy operates in practice have been discussed by the Remuneration Committee and subsequently approved by the Board with effect from January 1, 2016. These adjustments to the application of policy are listed below at the beginning of the Remuneration Policy section.
The Company's remuneration policy is to provide total remuneration packages which are linked to the business strategy, competitive, and take into account each individual's performance of their role in the Company's work.
The Company's primary comparator group is the FTSE 26 to 100 (excluding financial services), with a secondary reference to Ibex-35 and global airline companies where appropriate. The Committee is updated on pay and conditions of the employees within the Group, and takes this into account when considering executive directors' remuneration.
The policy as shown on the following pages is unchanged from last year, as approved by shareholders at the 2015 annual Shareholders' Meeting. However, listed below is how the policy will be applied in practice in respect of certain remuneration elements. Also, notes to clarify adjustments to the practical application of the policy have been added to the Policy section, in italics.
Face value awards for performance share plan awards will not exceed 200 per cent of salary for the CEO of IAG, and not exceed 150 per cent of salary for other executive directors.
Executive directors below the CEO of IAG (currently, this is just the CFO of IAG) had their shareholding requirement increased to 200 per cent of basic salary, with effect from January 1, 2016.
The maximum value of variable remuneration offered at recruitment will be no more than that awarded to current directors. Therefore, for a new CEO of IAG there will be a 200 per cent maximum opportunity in the annual incentive plan and a 200 per cent maximum face value award for the performance share plan. For any new executive director other than a new CEO of IAG, the figures will be maxima of 150 per cent and 150 per cent respectively. These figures exclude any buy-out amounts.
| Purpose and link to strategy |
Operation of element of policy | Maximum opportunity | Performance metrics |
|---|---|---|---|
| Base salary To attract and retain talent to help achieve our strategic objectives |
Takes account of role, skills and contribution. The positioning of base salaries is set with reference to market positioning (primarily the FTSE 26 to 100 excluding financial services), as well as the individual's skills and contribution. Basic salaries are reviewed annually, to take effect on January 1 each year. |
Although there is no formal maximum, basic salaries are reviewed annually by the Remuneration Committee by taking into account the following factors: company affordability, the value and worth of the executive, retention risks, and the size of pay increases generally across the whole group of companies. |
Individual and business performance are considered in reviewing and setting base salary. |
| Annual incentive award Incentivises annual corporate financial performance and the delivery of role specific objectives |
The Board, on a recommendation from the Committee, sets the financial targets that apply to the annual incentive award (two thirds of the annual incentive) at the beginning of each year. These are set by reference to a number of factors including the Business Plan (as approved by the Board). For the one-third portion based on personal objectives, the Remuneration Committee, on the proposal of the Chairman, will consider the Chief Executive Officer performance against his role-specific objectives; and the Remuneration Committee, on the proposal of the Chief Executive Officer, will consider the Chief Financial Officer performance against his role-specific objectives. Both performance evaluations will be submitted to the Board for final approval. The Board, on a recommendation from the Committee, retains the discretion to prevent any |
The maximum opportunity in the incentive plan is 200 per cent of salary. 50 per cent of this will be awarded for on-target performance, and there will be no payment at all until financial and personal performance have reached the threshold level of the target range. |
Two-thirds of the annual incentive is subject to a financial measure (e.g. IAG operating profit), and one-third is based on role specific objectives. |
| incentive award payments if, in its opinion, the underlying financial performance of the Company had not been satisfactory in the circumstances. Malus and clawback provisions apply – see below. |
|||
| Incentive Award Deferral Plan (IADP) Aligns the |
The IADP operates over 50 per cent of the annual incentive award. It is designed to align the interests of executives with shareholders by providing a proportion of the annual incentive in deferred shares. |
Half of any annual incentive plan pay-out is deferred into shares. |
No other performance conditions apply because it is based on performance already delivered. |
| interest of executives and shareholders and provides a retention |
The shares will be subject to forfeiture if the executive leaves during the three year deferral period, except if the executive is granted Good Leaver status. This is covered in the section below on exit payment policy. |
||
| tool | On vesting, executives will receive the benefit of any dividends paid over the deferred period. In line with the rules of the IADP and IAG's philosophy to encourage and facilitate employee shareholding, participants may elect to self-fund any tax due rather than sell a portion of their share award to meet tax liabilities. Malus provision applies – see below. |
| Purpose and link to strategy |
Operation of element of policy | Maximum opportunity | Performance metrics |
|---|---|---|---|
| Performance Share Plan (PSP) Incentivises long-term shareholder value creation. Drives and rewards delivery of sustained TSR and financial performance |
The PSP is a discretionary plan targeted at key senior executives and managers of the Group who directly influence shareholder value. The PSP consists of an award of the Company's shares which vests subject to the achievement of pre-defined performance conditions which are designed to reflect the creation of long term value within the business. These performance conditions are measured over a performance period of at least three financial years. No payment is required from individuals when the shares are awarded or when they vest. The Board, after considering the recommendation of the Remuneration Committee, retains the discretion to prevent any PSP award payments if, in its opinion, the underlying financial performance of the Company had not been satisfactory in the circumstances. On vesting, in line with the rules of the PSP and IAG's philosophy to encourage and facilitate employee shareholding, participants may elect to self-fund any tax due rather than sell a portion of their share award to meet tax liabilities. Following the performance period, there is an additional holding period of two years. Malus and clawback provisions apply – see below. |
The face value of awards will not normally exceed 200 per cent of salary in respect of any financial year of the Company (with the Board having the discretion to award up to 300 per cent of salary in exceptional circumstances). Note: this discretion will not be used. At the threshold level of the performance target range, either 10 per cent or 25 per cent will vest depending on which performance measure is being tested. |
Any PSP award made will be measured over at least three years. Each year, the Board, following the advice of the Committee, will determine appropriate performance conditions, with appropriate and stretching target ranges. These will take into account market conditions and also ensure alignment with shareholder interests. At least one condition is likely to be a measure of Group share performance compared with an index of other companies who are subject to external influences impacting share price similar to those of the Group. One or more measures will provide a strong measure of the underlying financial performance of the business. |
| Taxable Benefits Ensures total package is competitive |
Life insurance, personal travel and where applicable, a company car, fuel, occasional chauffeur services, and private health insurance. Where appropriate, benefits may include relocation and international assignment costs. |
Although there is no formal maximum, the Company determines benefits policy by taking into account company affordability, and with reference to the external market. |
|
| Pension Provides post-retirement remuneration and ensures total package is competitive |
The Company operates a defined contribution scheme as a percentage of salary. Executives can opt instead to receive a salary supplement in lieu of a pension. The Chief Executive Officer of IAG and the Chief Financial Officer of IAG are eligible for membership of the pension scheme. |
The level of employer contribution is 25 per cent of basic salary. |
In order to increase alignment with shareholders, executives are required to build up a minimum personal shareholding equal to a set percentage of base salary. The CEO of IAG is required to build up and maintain a shareholding of 250 per cent of basic salary, and other executive directors are required to build up and maintain a shareholding of 150 per cent of basic salary (note: with effect from January 1, 2016, executive directors other than the CEO of IAG are required to build up and maintain a shareholding of 200 per cent of basic salary).
Executives will be required to retain the entire 100 per cent of shares (net of tax) which vest from share plans until their respective shareholding requirement is attained.
| The Board, following the advice of the Committee, has authority under the malus provisions of the Performance Share Plan and the Incentive Award Deferral Plan to reduce or cancel awards before they vest, and authority under the clawback provisions of the Performance Share Plan to recover payments during the additional holding period, if special circumstances exist. These special circumstances include fraud; material breach of any law, regulation or code of practice; misstatement of results; misconduct; failure of risk management; or any other circumstances in which the Board considers it to be in the interests of shareholders for the award to lapse or be adjusted. For the PSP, clawback provisions apply during the two years' additional holding period. For the IADP, there will be three years from the date of award in which shares can be withheld, i.e. the entire period from the date of the award until vesting. For the cash element of the annual incentive plan, clawback provisions apply for three years from the date of payment. The proportion of an award to be withheld or recovered will be at the discretion of the Board, upon consideration of the Committee, taking into account all relevant matters. Non-Executive Directors The table below summarises the main elements of remuneration for non-executive directors: Purpose and link to strategy Operation of element of policy Maximum opportunity Fees are set with reference to market positioning (primarily the The maximum annual aggregate gross Basic Fees IBEX 35 and the FTSE 26 to 100, excluding financial services). remuneration (including annual basic fees Fees are set and benefits, including travel benefits) to take into To acknowledge certain key roles at Board level, fees are set payable to directors shall not exceed account separately for the Non-Executive Chairman, and the Non-Executive €3,500,000 as approved by the the level of Deputy Chairman. There is also an additional fee paid to any Shareholders' Meeting on October 19, responsibility, non-executive director for holding a Committee Chairmanship. 2010, in accordance with article 37.3 experience, of the Company's Bylaws. There is no additional fee for Committee membership. abilities and dedication Non-executive director fees will take into account external market required. conditions to ensure it is possible to attract and retain the necessary talent. There is no specific review date set, but it is the Company's intention to review fees from time to time. There has been no change to fee levels since IAG came into existence in 2011. Non-executive directors (including the Chairman and Deputy Chairman) The maximum total annual gross amount Taxable are entitled to use air tickets of the airlines of the Company or related to of the personal travel benefit is €500,000 Benefits the Company in accordance with the applicable travel scheme. for all non-executive directors taken together (including any former non As foreseen under article 37.8 of the Company's Bylaws this benefit executive director who may enjoy this may also be provided to non-executive directors after they have benefit at any given time). vacated office in accordance with the applicable travel scheme. Remuneration Policy below Director Level IAG employees at all levels participate in the discretionary Annual Incentive Plan. Both the size of award and weighting of performance conditions vary by level, with some business unit specific measures incorporated where relevant. The financial targets are the aggregate of the financial targets of the Group's companies, ensuring alignment between the Group's head office and the Group's companies. All senior managers across the Group participate in the IADP (currently 50 per cent of any annual incentive payment deferred in IAG shares for three years) and certain selected senior managers in the PSP in line with the executive directors. Employees below senior manager level do not participate in either. The same performance conditions and weightings apply to all participants of the PSP. The size of award varies by performance and level in the business. Managers at the airlines in the Group participate in their own airline short-term incentive plans. These all have performance measures specific to their airline, and are typically financial, operational, and customer service measures. Most companies within the Group have profit share schemes, designed to give employees below manager level an opportunity to share in the success of their company within the Group. |
Malus and Clawback Provisions | |
|---|---|---|
| 61 81 www.iairgroup.com www.iairgroup.com |
Notwithstanding the forward-looking policy detailed herein, and always in compliance with applicable law, the Company will make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) where the terms of the payment were agreed (i) before the policy came into effect or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Board, the payment was not in consideration for the individual becoming a director of the Company. For these purposes "payments" includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are "agreed" at the time the award is granted which may include different performance measures to those outlined in the forward-looking policy table above.
A significant portion of the Company's total remuneration package is variable, with emphasis placed on longer-term reward to align closely executive directors' and senior managers' interests with shareholder interests. The charts below show, for 2016 and for each executive director, the minimum remuneration receivable, the remuneration receivable if the director performs in line with the Company's expectations, and the maximum remuneration receivable. Share price variation during the performance period is not taken into consideration in these scenarios.
Fixed remuneration is basic salary (2016 level of €1,168,000), plus taxable benefits (2015 actual of €37,000) plus pension related benefits (2015 actual of €293,000).
The annual incentive amount is zero at the minimum remuneration level, €1,168,000 at the on-target level (50 per cent of the maximum opportunity of 200 per cent of salary), and €2,336,000 at maximum (200 per cent of salary).
The long-term incentive amount is zero at the minimum remuneration level, €1,168,000 at the on-target level (50 per cent of the face value award of 200 per cent of salary) and €2,336,000 at maximum (200 per cent of salary).
All amounts are actually paid in sterling, and are shown here in euro at the €:£ exchange rate of 1.3742
Fixed remuneration is basic salary (2016 level of €736,000), plus taxable benefits (2015 actual of €26,000) plus pension related benefits (2015 actual of €180,000).
The annual incentive amount is zero at the minimum remuneration level, €552,000 at the on-target level (50 per cent of the maximum opportunity of 150 per cent of salary), and €1,104,000 at maximum (150 per cent of salary).
The long-term incentive amount is zero at the minimum remuneration level, €552,000 at the on-target level (50 per cent of the face value award of 150 per cent of salary) and €1,104,000 at maximum (150 per cent of salary).
All amounts are actually paid in sterling, and are shown here in euro at the €:£ exchange rate of 1.3742
Annual Incentive
Long Term Incentive
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 | Date of contract | Notice period |
|---|---|---|
| Willie Walsh | January 21, 2011 | 12 months |
| Enrique Dupuy de Lôme |
January 21, 2011 | 12 months |
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 lump sum in lieu of the first six months base salary is payable within 28 days of the date of termination of employment. A payment in respect of base salary for the second six month period only becomes payable if, in the Company's opinion, the executive has taken reasonable steps to find alternative paid work and then only in six monthly instalments. 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.
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 duties to a reasonable standard, acts dishonestly, is guilty of misconduct or persistent breach of his 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 service contract where there is a transfer of the business in which he is working or ceases to be eligible to work in Spain or the UK (as applicable).
Under the PSP and IADP, if a director leaves, the Board, after considering the recommendation of the Remuneration Committee, may exercise their discretion (within the rules of the two 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, redundancy, retirement, or death. Executive directors leaving with Good Leaver status will receive shares awarded to them under the IADP scheme, and a pro-rata amount of their PSP shares subject to the company performance conditions being met. The pro-ration is calculated according to what proportion of the performance period the executive director spent in company service. If Good Leaver status is not granted to an executive director, all outstanding awards made to them under the PSP and IADP will lapse.
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 six months.
Non-executive directors (including the Chairman and Deputy 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 (1) year. The dates of the Chairman's and current non-executive directors' appointments are as follows:
| Non-Executive Director | Date of the first appointment | Date of last re-election |
|---|---|---|
| Antonio Vázquez | May 25, 2010 | June 18, 2015 |
| Sir Martin Broughton | May 25, 2010 | June 18, 2015 |
| César Alierta | September 27, 2010 | June 18, 2015 |
| Patrick Cescau | September 27, 2010 | June 18, 2015 |
| Baroness Kingsmill | September 27, 2010 | June 18, 2015 |
| James Lawrence | September 27, 2010 | June 18, 2015 |
| Kieran Poynter | September 27, 2010 | June 18, 2015 |
| Alberto Terol | June 20, 2013 | June 18, 2015 |
| Dame Marjorie Scardino | December 19, 2013 | June 18, 2015 |
| María Fernanda Mejía | February 27, 2014 | June 18, 2015 |
The Company's consent is required before an executive can accept an external non-executive appointment and permission is only given in appropriate circumstances.
The remuneration for new executive directors will be in line with the policy for current executive directors as far as possible, as expressed in the policy table earlier in this report.
On appointment, new executive directors will have their basic salary set by taking into account the external market, their peers, and their level of experience. New executive directors will participate in the annual and long-term incentives on the same basis as existing directors.
The Board, after considering the recommendation of the Remuneration Committee, retains the discretion to deviate from the stated remuneration policy as necessary to ensure the hiring of candidates of the appropriate calibre with due regard to the best interests of shareholders. For example, to facilitate recruitment, the Board, after considering the recommendation of the Committee, may make one-off awards to "buy out" variable pay or contractual rights forfeited on leaving a previous employer. Generally, such buy-out awards will be made on a comparable basis to those forfeited giving due regard to all relevant factors (including value, performance targets, the likelihood of those targets being met and vesting periods). In such circumstances, shareholders will be provided with full details and rationale in the next published remuneration report.
Excluding the value of any potential buy-out, the maximum value of variable remuneration offered at recruitment to any new executive director will be 500 per cent of base salary, in line with the stated policy. Note: the maximum value of variable remuneration will be no more than that awarded to current directors.
In the case of an internal promotion to executive director, the Company will continue to honour any commitments made before promotion. Other than that, the remuneration arrangements on recruitment will be as above.
Non-executive directors will be recruited in line with the Company's remuneration policy principles outlined before.
The pay of employees across all companies in IAG is taken into account when determining the level of any increase in the annual salary review of directors. This takes place each year at the January Committee meeting.
When determining the PSP awards for executive directors, the Committee takes note of the eligibility criteria and the potential size of awards for executives below director level in all companies within IAG.
At the operating company level, the company consults with employee representative bodies, including trade unions and works councils. This will include consultation on company strategy, the competitive environment, and employee terms and conditions. In addition, some of the operating companies run employee opinion surveys in order to take into consideration employee views on a variety of subjects, including leadership, management, and pay and benefits.
The Committee discusses at its October meeting each year the issues and outcomes from the annual Shareholders' Meeting held in June, and determines any appropriate action required as a result.
The Company consults regularly with its major investors on all matters relating to executive remuneration. The Company will engage in an extensive investor consultation exercise whenever there are any significant changes to remuneration policy.
CORPORATE GOVERNANCE
The Committee's composition, competencies and operating rules are regulated by article 31 of the IAG Board Regulations. A copy of these Regulations is available on the Company's website.
Beyond executive directors, the Committee oversees the general application of the remuneration policy to the IAG Management Committee (and also remuneration matters of senior managers generally across the Group).
According to article 31 of the Board Regulations the Remuneration Committee shall be made up of no less than three and no more than five non-executive directors appointed by the Board, with the dedication, capacity and experience necessary to carry out their function. A majority of the members of the Remuneration Committee shall be Independent directors. Baroness Kingsmill was Chair of the Committee until September 24, 2015. Dame Marjorie Scardino was appointed as Chair of the Committee from that date by the Board upon a recommendation of the Nominations Committee. For the reporting period all members were considered Independent non-executive directors of the Company and none of the members has any personal financial interest, other than as a shareholder, in the matters to be decided.
In 2015, the Committee met four times and discussed, amongst others, the following matters:
| Meeting | Agenda items discussed |
|---|---|
| January | Review of IAG Executive Committee members' basic salaries |
| Implementation arrangements for the strengthened malus and clawback provisions | |
| February | 2014 annual incentive plan payments to IAG Executive Committee members |
| Vesting outcome of the Performance Share Plan 2012 award | |
| Final review of 2014 Directors' Remuneration Report | |
| April | Preparation for the 2015 annual Shareholders' Meeting |
| October | Spain and UK executive remuneration market update, including new Spanish corporate governance code recommendations |
| Remuneration strategy for 2016 First update on the 2015 Directors' Remuneration Report |
|
| Remuneration arrangements arising as a result of the Aer Lingus acquisition |
The Committee appointed Towers Watson as its external advisers in 2014, following a tender process. Towers Watson report directly to the Committee. The fees paid to Towers Watson for advice provided to the Remuneration Committee were €57,716 for 2015. Towers Watson is a signatory to the voluntary UK Code of Conduct for executive remuneration consultants. Towers Watson also provide other services to the Company in terms of the valuation of awards under the PSP for accounting purposes.
The Company obtained high level headline remuneration survey data from a variety of sources. During the year, the CEO of IAG provided regular briefings to the Committee apart from when his own remuneration was being discussed.
Subject to full audit
| Director | Taxable | Total for year to | Taxable | Total for year to | ||
|---|---|---|---|---|---|---|
| (€'000) | Fees | benefits | December 31, 2015 | Fees | benefits | December 31, 2014 |
| Antonio Vázquez1 | 484 | 19 | 503 | 484 | 19 | 503 |
| Sir Martin Broughton | 350 | 56 | 406 | 350 | 44 | 394 |
| César Alierta | 120 | - | 120 | 120 | – | 120 |
| Patrick Cescau | 120 | 34 | 154 | 120 | 20 | 140 |
| Baroness Kingsmill | 135 | 25 | 160 | 140 | 22 | 162 |
| James Lawrence | 140 | 37 | 177 | 123 | 23 | 146 |
| María Fernanda Mejía | 120 | 8 | 128 | 100 | 4 | 104 |
| José Pedro Pérez-Llorca2 | 60 | 6 | 66 | 120 | 3 | 123 |
| Kieran Poynter | 120 | 29 | 149 | 137 | 14 | 151 |
| Dame Marjorie Scardino | 125 | 72 | 197 | 120 | 38 | 158 |
| Alberto Terol | 120 | 26 | 146 | 120 | 29 | 149 |
| Total (€'000) | 1,894 | 312 | 2,206 | 1,934 | 216 | 2,150 |
1 Antonio Vázquez took a voluntary 25 per cent reduction in his fee, effective December 1, 2012.
2 José Pedro Pérez-Llorca was no longer a director from June 18, 2015.
Each director has confirmed in writing that they have not received any other items in the nature of remuneration other than those already disclosed in the table above.
Fees paid in the year for non-executive directors.
Taxable benefits
Taxable benefits including personal travel.
For the year to December 31, 2015, €:£ exchange rate applied is 1.3742
For the year to December 31, 2014, €:£ exchange rate applied is 1.2356
The table below sets out the single total figure and breakdown for each executive director. An explanation of how the figures are calculated follows the table. The remuneration for each executive director reflects the performance of the Company and the contribution each individual has made to the ongoing success of the Company.
| Director ('000) | Base salary | Taxable benefits |
Pension related benefits |
Annual incentive award |
Long-term incentive vesting |
Total for year to December 31 2015 |
|---|---|---|---|---|---|---|
| Executive Directors | ||||||
| Willie Walsh (GBP) 1 | 850 | 27 | 213 | 1,360 | 4,005 | 6,455 |
| Willie Walsh (euro) | 1,168 | 37 | 293 | 1,869 | 5,504 | 8,871 |
| Enrique Dupuy de Lôme (GBP) 1 | 525 | 19 | 131 | 483 | 1,456 | 2,614 |
| Enrique Dupuy de Lôme (euro) | 721 | 26 | 180 | 664 | 2,001 | 3,592 |
| Total (€'000) | 1,889 | 63 | 473 | 2,533 | 7,505 | 12,463 |
| 2014 | ||||||
|---|---|---|---|---|---|---|
| Director | Taxable | Pension related |
Annual incentive |
Long-term incentive |
Total for year to | |
| ('000) | Base salary | benefits | benefits | award | vesting | December 31, 2014 |
| Executive Directors | ||||||
| Willie Walsh (GBP)1 | 850 | 26 | 212 | 1,662 | 3,640 | 6,390 |
| Willie Walsh (euro) | 1,050 | 32 | 262 | 2,054 | 4,498 | 7,896 |
| Enrique Dupuy de Lôme (GBP)1 | 515 | 22 | 129 | 553 | 1,324 | 2,543 |
| Enrique Dupuy de Lôme (euro) | 636 | 27 | 159 | 683 | 1,636 | 3,141 |
| Total (€'000) | 1,686 | 59 | 421 | 2,737 | 6,134 | 11,037 |
| 1 Willie Walsh and Enrique Dupuy de Lôme remuneration is paid in sterling and expressed in euro for information purposes only. Additional explanations in respect of the single total figure table for 2015 Each director has confirmed in writing that they have not received any other items in the nature of remuneration other than those already disclosed in the table above. Base salary Salary paid in year for executive directors. Taxable benefits Taxable benefits including personal travel and, where applicable, a company car, fuel, occasional chauffeur services and private health insurance. Pension related benefits Employer contribution to pension scheme, and/or cash in lieu of pension contribution. Annual incentive plan Annual incentive award for the period ended December 31, 2015 (accrued at December 31, 2015, but cash payments (50 per cent of the award) not paid until March 2016). The outcomes of the performance conditions which determined the award are described in the next section. Half of the annual incentive award is deferred into shares for three years (Incentive Award Deferral Plan (IADP)). For the 2015 annual incentive plan, these will vest in March 2019. Long-term incentive vesting This relates to the IAG PSP 2013 award based on performance measured to December 31, 2015, although the shares vested will not be delivered until March 2016. For the purposes of this table, the award has been valued using the average share price in the three months to December 31, 2015 of 585.0 pence. 59 per cent of the value of awards vesting under the 2013 PSP cycle was the result of share price appreciation, reflecting the significant increase in shareholder value created over the period. The outcomes of the performance conditions which determined vesting are described below. For the year to December 31, 2015, €:£ exchange rate applied is 1.3742 For the year to December 31, 2014, €:£ exchange rate applied is 1.2356 Life Insurance The Company provides life insurance for all executive directors. For the year to December 31, 2015 the Company paid contributions of €28,230 (2014: €15,648). Variable pay outcomes Subject to audit 2015 Annual Incentive Plan At the beginning of 2015, the Board, upon a recommendation by the Committee, set IAG operating profit as the financial target to be applied to the two-thirds of the Annual Incentive Plan for that year. Operating profit was considered to be the most appropriate financial measure in aligning shareholder interests with the Company and individual performance. For the one-third portion based on role-specific objectives, the Remuneration Committee, on the proposal of the Chairman, considered the Chief Executive Officer's performance against his objectives; and the Remuneration Committee, on the proposal of the Chief Executive Officer, considered the Chief Financial Officer's performance against his objectives. Both performance evaluations were submitted to the Board for final approval on February 25, 2016. The maximum award for the Chief Executive Officer of IAG was 200 per cent of salary (100 per cent of salary for on-target performance), and for the Chief Financial Officer of IAG 120 per cent of salary (60 per cent of salary for on-target performance). |
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| www.iairgroup.com | 67 87 www.iairgroup.com |
| Measure | Chief Executive Officer of IAG | Chief Financial Officer of IAG | |
|---|---|---|---|
| IAG Operating Profit (before exceptional items) |
Payout | €1,090,199 £793,333 |
€404,246 £294,168 |
| (67 per cent) | per cent of maximum awarded |
70 per cent Please see below for details of the performance target ranges |
70 per cent Please see below for details of the performance target ranges |
| Role-specific objectives (33 per cent) |
Outcomes versus targets |
€778,713 £566,667 Please see below for details of the extent of the achievement of objectives. |
€259,872 £189,108 Please see below for details of the extent of the achievement of objectives. |
| per cent of maximum awarded |
100 per cent | 90 per cent | |
| Details of any discretion exercised |
|||
| Overall outcome | €1,868,912 £1,360,000 |
€664,118 £483,276 |
Half of the overall outcome of the annual incentive detailed above is payable in deferred shares in the Company vesting after three years (under the Incentive Award Deferral Plan). IAG operating profit (before exceptional items) for 2015 (two-thirds of the annual incentive) has resulted in 70 per cent of the maximum paying out for this element of the incentive (2014: 97 per cent). This is between the on-target level and the stretch target level of the target range. The target range for 2015 was as follows: the threshold level at which payments would begin was €1,800 million, the on-target level at which 50 per cent of the maximum would pay out was €2,100 million, and the stretch target level at which the maximum would pay out was €2,600 million. There was a straight line sliding scale between the threshold level and the on-target level, and between the on-target level and the stretch target level. The figure used for IAG operating profit for 2015 excludes Aer Lingus' contribution to the Company.
The Chief Executive Officer of IAG's main objective is to manage the successful implementation of the Group's strategy. His specific achievements in 2015 against his objectives were:
The Chief Executive Officer of IAG has continued to supervise the synergy programme, and synergy outperformance has continued the 2015 delivery plan has been exceeded by €120 million. The merger synergy programme, initiated in 2011 at the outset of the Group, is now complete, with the target exceeded. He has overseen the creation of the 'IAG Platform', which will produce the "next generation synergies", and significant progress has been made on these. As a result of all these achievements, the Company was able to announce to its investors in November 2015 a considerable upgrade to our long-term return and equity cash flow objectives. At the same time, the Company announced its first dividend, with an aim of generating much more cash for shareholders.
The Chief Financial Officer of IAG's role-specific objectives for 2015 were:
| Measure | Threshold | Maximum | Outcome | Vesting (as per cent award granted in 2013) |
|---|---|---|---|---|
| TSR performance compared to the TSR performance of the MSCI European Transportation (large and mid-cap) index (50 per cent) |
IAG's TSR performance equal to the index (25 per cent of award vests) |
IAG's TSR performance exceeds index by 8 per cent p.a. (100 per cent of award vests) |
Performance exceeded index by 35 per cent p.a. |
100 per cent |
| Adjusted Earnings per Share (EPS) (50 per cent) |
2015 EPS of 30 €cents (10 per cent of award vests) |
2015 EPS of 52 €cents (100 per cent of award vests) |
71.4 €cents | 100 per cent |
| Details of any discretion exercised | ||||
| Overall outcome | 100 per cent |
| During 2015, he has ensured a rigorous cost focus in all operating company activity, and ensured that growth has been disciplined and on improved margins. The improvement in return on invested capital has exceeded the business plan. Continued progress in efficiency programmes at all operating companies have beaten synergy targets. The Enterprise Risk Management system has allowed |
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|---|---|---|---|---|
| timely and effective Management Committee interventions on principal risks. Aer Lingus acquisition bridge financing and the November 2015 convertible bond issue were both executed at efficient rates. |
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| IAG PSP Award 2013 | ||||
| The IAG PSP award granted on March 6, 2013 was tested at the end of the performance period which began on January 1, 2013 and ended on December 31, 2015. The awards were equivalent to 200 per cent of salary for the Chief Executive Officer of IAG and 120 per cent of salary for the Chief Financial Officer of IAG. |
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| 50 per cent of the award was subject to achievement of the Company's adjusted EPS targets and 50 per cent subject to a TSR performance condition measured against an index. The vesting of any award was subject to the Board being satisfied that the Group's underlying financial performance was satisfactory in the circumstances prevailing over the three year period. |
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| The outcome of the performance condition was as follows: | ||||
| Measure | Threshold | Maximum | Outcome | Vesting (as per cent award granted in 2013) |
| TSR performance compared to the TSR performance of the MSCI European Transportation (large and mid-cap) index (50 per cent) |
IAG's TSR performance equal to the index (25 per cent of award vests) |
IAG's TSR performance exceeds index by 8 per cent p.a. (100 per cent of award vests) |
Performance exceeded index by 35 per cent p.a. |
100 per cent |
| Adjusted Earnings per Share (EPS) (50 per cent) |
2015 EPS of 30 €cents (10 per cent of award vests) |
2015 EPS of 52 €cents (100 per cent of award vests) |
71.4 €cents | 100 per cent |
| Details of any discretion exercised | ||||
| Overall outcome | 100 per cent | |||
| ended on December 31, 2014. The awards were equivalent to 200 per cent of salary for the Chief Executive Officer of IAG and 120 per cent of salary for the Chief Financial Officer of IAG. 50 per cent of the award was subject to achievement of the Company's adjusted EPS targets and 50 per cent subject to a TSR performance condition measured against an index. The vesting of any award was subject to the Board being satisfied that the Group's underlying financial performance was satisfactory in the circumstances prevailing over the three year period. The outcome of the performance condition was as follows: |
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| Measure | Threshold | Maximum | Outcome | Vesting (as per cent award granted in 2012) |
| TSR performance compared to the TSR performance of the MSCI European Transportation (large and mid-cap) index (50 per cent) |
IAG's TSR performance equal to the index (25 per cent of award vests) |
IAG's TSR performance exceeds index by 8 per cent p.a. (100 per cent of award vests) |
Performance exceeded index by 20 per cent p.a. |
100 per cent |
| Adjusted Earnings per Share (EPS) (50 per cent) |
2014 EPS of 20 €cents (10 per cent of award vests) |
2014 EPS of 50 €cents (100 per cent of award vests) |
2014 EPS 40.2 €cents |
70.6 per cent |
| Details of any discretion exercised | ||||
| Overall outcome | 85.3 per cent | |||
| Scheme interests awarded during the financial year Subject to Audit The IAG Performance Share Plan (PSP) is a discretionary plan targeted at key senior Group executives and managers who directly influence shareholder value. The Company granted an award under the PSP on May 28, 2015. The table in this section sets out the key details of the award. The Committee believes that comparing the Company's TSR to that of European transportation companies, including airlines, is appropriate, given that these companies are subject to external influences impacting share price performance similar to those of |
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| the Group. This comparison therefore provides a good reference point for management outperformance and value creation. | www.iairgroup.com | 69 89 www.iairgroup.com |
The Committee believes that EPS performance provides a strong measure of the underlying financial performance of the business.
Return on Invested Capital (RoIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. The Committee believes that it also provides a strong measure of the underlying financial performance of the business. It is one of the main areas that the Company wishes to focus on improving for the long-term.
| Target | 2017 EPS between 70 €cents and 100 €cents (straight line vesting between threshold and maximum) |
2017 RoIC between 12 per cent and 15 per cent (straight line vesting between threshold and maximum) |
IAG's TSR performance between index return and 8 per cent p.a. outperformance (straight line vesting between threshold and maximum) |
|---|---|---|---|
| Maximum | 2017 EPS of 100 €cents 100 per cent vests |
2017 RoIC of 15 per cent 100 per cent vests |
IAG's TSR performance exceeds index by 8 per cent p.a. 100 per cent vests |
| Holding period | Additional period of two years after the performance period |
EPS measure is adjusted for exceptional items. The Board, after considering the recommendation of the Remuneration Committee, retains the discretion to review and, if appropriate, revise the EPS targets and/or definition in the context of any corporate transactions, provided that, in its view, any revised targets are no more or less challenging than the original targets. To the extent that any such adjustments are made, the Committee will disclose the basis for any adjustments and the rationale in subsequent reports.
PSP 2015 – eligibility, metrics, and targets
The Company operates a defined contribution scheme in which the executive directors are entitled to receive a contribution of 25 per cent of base salary. Executives may opt to receive a salary supplement in lieu of such contributions.
Willie Walsh is a member of the Company's pension scheme and the Company paid contributions during the reporting period of £39,950 (2014: £42,460), plus cash in lieu of contributions of £172,550 (2014: £170,037).
Enrique Dupuy de Lôme is no longer a member of the Company's pension scheme, and the Company therefore did not pay any contributions during the reporting period (2014: £12,359, when he was a member of the Company's pension scheme for part of the year). He received cash in lieu of contributions of £131,325 (2014: £116,392).
No executive directors have left office during 2015. There were no payments made to non-executive directors after they left office during 2015.
Rafael Sánchez-Lozano stood down from the Board of Directors on March 27, 2013. During the reporting period he received 20,616 deferred shares in August 2015 from the 2012 IADP award (relating to performance in the 2011 Annual Incentive Plan).
José Pedro Pérez-Llorca received travel benefits worth €404 during 2015 after he had left the Company.
| Number of votes cast | For | Against | Abstentions | |
|---|---|---|---|---|
| 2014 Annual Directors' | 1,313,200,803 | 1,242,765,311 | 14,857,525 | 54,710,853 |
| Remuneration Report | (94.637 per cent) | (1.131 per cent) | (4.166 per cent) | |
| Directors' Remuneration | 1,313,200,803 | 973,503,807 | 49,560,764 | 289,280,495 |
| Policy | (74.132 per cent) | (3.774 per cent) | (22.029 per cent) |
| Statement of Voting | ||||||
|---|---|---|---|---|---|---|
| The table below shows the consultative vote on the 2014 annual Directors' Remuneration Report and the binding vote on the directors' remuneration policy at the 2015 annual Shareholders' Meeting: |
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| Number of votes cast | For | Against | Abstentions | |||
| 2014 Annual Directors' Remuneration Report |
1,313,200,803 | 1,242,765,311 (94.637 per cent) |
14,857,525 (1.131 per cent) |
54,710,853 (4.166 per cent) |
||
| Directors' Remuneration Policy |
1,313,200,803 | 973,503,807 (74.132 per cent) |
49,560,764 (3.774 per cent) |
289,280,495 (22.029 per cent) |
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| Statement of Directors' Shareholding and Share Interests | ||||||
| Subject to Audit | ||||||
| In order that their interests are aligned with those of shareholders, each executive director is required to build up and maintain a minimum personal shareholding in the Company. |
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| Under the Group's shareholding guidelines, the CEO of IAG is required to build up and maintain a shareholding of 250 per cent of salary. Other executive directors are required to build up and maintain shareholdings of 200 per cent of salary. In addition, they are required to retain the entire 100 per cent of shares (net of tax) which vest from share plans until their respective shareholding requirement is attained. The Committee has reviewed executive directors' progress against the requirements and notes that both executive directors are well above the shareholding requirement. There has been a significant improvement in shareholding for the executive directors over the past two years, as a result of PSP awards vesting, and deferred shares awards from annual incentive plans. |
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| Shares which count towards the guideline include shares already held by the executive, vested and exercised shares, vested and unexercised shares, and unvested deferred annual incentive shares. The table below summarises current executive directors' interests as of December 31, 2015: |
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| Executive Director | Shareholding requirement |
Shares owned |
Shares already vested from performance share plans |
Shares already vested from deferred annual incentive plans |
Unvested shares from deferred annual incentive plans |
Total qualifying shareholding |
| Willie Walsh | 250 per cent of salary |
22,000 | 1,094,465 | 126,754 | 159,246 | 1,402,465 (712 per cent of salary) |
| Enrique Dupuy de Lôme | 200 per cent of salary |
100 | 282,017 | 19,752 | 79,697 | 381,566 (332 per cent of salary) |
| 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. During the reporting period in question no executive director held a directorship from which they retained a fee. Willie Walsh is a non-executive director of the Irish National Treasury Management Agency, for which he has declined a fee. |
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| www.iairgroup.com | 71 91 www.iairgroup.com |
Non-executive directors are paid a flat fee each year. The Non-Executive Chairman's fee is €645,000, voluntarily reduced by 25 per cent to €483,750 with effect from December 1, 2012 until further notice. The Non-Executive Deputy Chairman has a fee of €350,000. Other non-executive directors have a fee of €120,000. The additional fee for holding a Committee Chairmanship is €20,000.
In relation to the Chairman, as set out in the British Airways/Iberia merger documentation, the conditions of the service contract with Iberia were taken into account at the time of the merger. This means that he will therefore continue to be entitled to a lump-sum retirement benefit in an amount of €2,800,000. The fund balance under the policy (including accrued interest) will be paid upon exit from the Company for any reason.
| Total shares and voting rights |
Percentage of capital |
|---|---|
| Antonio Vázquez 512,291 |
0.025 |
| Sir Martin Broughton 174,910 |
0.009 |
| Willie Walsh 1,243,219 |
0.061 |
| César Alierta 1,000,000 |
0.049 |
| Patrick Cescau 0 |
0.000 |
| Enrique Dupuy de Lôme 301,869 |
0.015 |
| Baroness Kingsmill 2,000 |
0.000 |
| James Lawrence1 326,500 |
0.016 |
| María Fernanda Mejía 100 |
0.000 |
| Kieran Poynter 0 |
0.000 |
| Dame Marjorie Scardino 100 |
0.000 |
| Alberto Terol 9,200 |
0.000 |
| Total 3,570,189 |
0.175 |
1 Held as IAG ADRs (one IAG ADR equals five IAG shares).
There have been no changes to the shareholdings set out above between December 31, 2015 and the date of this report.
The Investment Association sets guidelines that restrict the issue of new shares under all the Company's share schemes in any ten year period to 10 per cent of the issued ordinary share capital and restrict the issues under the Company's discretionary schemes to 5 per cent in any ten year period. At the annual Shareholders' Meeting on June 18, 2015 the Company was given authority to allocate up to 67,500,000 shares (3.31 per cent of the share capital) in 2015, 2016, 2017 and 2018. Of this a maximum of 7,650,000 shares could be allocated to executive directors under all IAG share plans for awards made during 2015, 2016, 2017 and 2018. At December 31, 2015, 2.40 per cent of the share capital had been allocated under the IAG share plans.
The highest and lowest closing prices of the Company's shares during the period and the share price at December 31, 2015 were:
| At December 31 2015 | 611p |
|---|---|
| Highest in the period | 617p |
| Lowest in the period | 465p |
| Company performance graph and Chief Executive Officer of IAG 'single figure' table |
IAG's total shareholder return (TSR) performance compared to the FTSE 100 |
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|---|---|---|---|---|---|---|---|
| The chart shows the value by December 31 2015 of a | hypothetical £100 invested on listing compared with the value | 250 | |||||
| of £100 invested in the FTSE 100 index over the same period. A spot share price has been taken on the date of listing, and a |
200 | ||||||
| three month average has been taken prior to the year ends. The FTSE 100 was selected because it is a broad equity index |
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| of which the Company is a constituent, and the index is | 150 | ||||||
| widely recognised. | 100 | ||||||
| 50 Jan 11 Dec 11 |
Dec 12 Dec 13 |
Dec 14 Dec 15 |
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| IAG | FTSE 100 | ||||||
| The table below shows the CEO 'single total figure' of remuneration for each year since the creation of IAG in January 2011: | |||||||
| CEO of IAG – | 2011 £1,550,000 |
2012 £1,083,000 |
2013 £4,971,000 |
2014 £6,390,000 |
2015 £6,455,000 |
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| 'total single figure' of remuneration |
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| Annual incentive |
The above 'total single figure' includes £302,000 annual incentive (18 per cent of maximum). |
No annual incentive payment. |
Includes annual incentive payment of £1,299,375 (78.75 per cent of maximum). |
Includes annual incentive payment of £1,662,222 (97.78 per cent of maximum). |
Includes annual incentive payment of £1,360,000 (80.00 per cent of maximum). |
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| Long-term incentive |
The above 'total single figure' includes £251,594 value of long-term incentives vesting (35 per cent of maximum). |
Zero vesting of long term incentives. |
The above 'total single figure' includes £2,593,569 value of long-term incentives vesting (100 per cent of maximum). |
The above 'total single figure' includes £3,640,135 value of long-term incentives vesting (85 per cent of maximum). |
The above 'total single figure' includes £4,005,185 value of long-term incentives vesting (100 per cent of maximum). |
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| Notes | The above 'total single figure' includes 20 days of remuneration (in January 2011) paid by British Airways. |
Whilst the performance of the CEO of IAG would in the opinion of the Board have justified the payment of the annual incentive, after considering the financial performance of the Group, the Board decided to exercise its discretion to withhold the payment of the annual incentive. |
70 per cent of the value of awards vesting under the 2011 PSP was the result of share price appreciation, reflecting the significant increase in shareholder value created over the period. |
61 per cent of the value of awards vesting under the 2012 PSP was the result of share price appreciation, reflecting the significant increase in shareholder value created over the period. |
59 per cent of the value of awards vesting under the 2013 PSP was the result of share price appreciation, reflecting the significant increase in shareholder value created over the period. |
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| term incentive vesting. | Single total figure of remuneration includes basic salary, taxable benefits, pension related benefits, annual incentive award, and long | www.iairgroup.com | 73 93 |
The table below shows how the remuneration of the Chief Executive Officer of IAG has changed for 2015 compared to 2014. This is then compared to a group of appropriate employees. It has been determined that the most appropriate group of employees are all UK employees in the Group, comprising around 40,000 employees in total. To make the comparison between the CEO of IAG and employees as meaningful as possible, it was determined that as large a group as possible of employees should be chosen. The selection of all UK employees in the Group (roughly two-thirds of the entire Group's employees) meets these criteria. The majority of the 40,000 UK employees in the Group are employed by BA, but there are also a number of employees from all other companies in the Group based in the UK. It was determined that employees outside the UK would not be considered for the comparison, as very different employment market conditions exist in other countries.
| Chief Executive Officer of IAG | UK employees | |||
|---|---|---|---|---|
| Basic salary | No basic salary increase for 2015. | Basic salary awards in 2015 at UK companies in the Group averaged around 2 per cent. |
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| Annual incentive | Decrease from £1,662,222 in March 2015 (covering the 2014 performance period) to £1,360,000 in March 2016 (covering the 2015 performance period). This represents a 18 per cent decrease. |
Changes in overall annual incentive payments for 2015 vs. 2014 varied considerably around the Group, depending on the incentive design, financial performance, and non-financial performance at each individual company. |
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| Taxable benefits | No change in benefits policy. Actual payments increased to £27,000 in 2015 from £26,000 in 2014. |
No change in benefits policy. Overall costs 2015 vs. 2014 increased very slightly in line with inflation. |
The table below shows, for 2015 and 2014, total remuneration costs, operating profit, and dividends for the Company.
| 2015 | 2014 | |
|---|---|---|
| Total employee costs, IAG | €4,905,000,000 | €4,325,000,000 |
| Total remuneration, directors (including non-executive directors) | €14,669,000 | €13,187,000 |
| IAG Operating Profit (before exceptional items) | €2,300,000,000 | €1,390,000,000 |
| Dividend declared | €203,000,000 | – |
| Dividend proposed | €204,000,000 | – |
The figure used for IAG operating profit for 2015 excludes Aer Lingus' contribution to the Company.
Basic salaries for executive directors are reviewed from January 1 each year. After careful consideration of Company affordability, the worth of each executive, retention risks, and the size of pay increases generally across the Group for 2016 (which varied across the Group from 2 per cent to 3 per cent), the Board, following the recommendation of the Remuneration Committee, approved the following:
| Executive Director | Basic salary review |
|---|---|
| Chief Executive Officer of IAG | £850,000 (€1,168,000) (no increase from 2015). |
| Chief Financial Officer of IAG | £535,800 (€736,000) (in UK sterling terms, an increase of 2.0% from 2015). |
The Remuneration Committee agreed to offer the Chief Executive Officer a salary increase in line with that applied to other executives, however it was respectfully declined by him.
The Board, after considering the recommendation of the Committee, has approved a stretching target range for IAG operating profit for 2016 at the threshold, on-target and maximum levels. At threshold, there will be a zero pay-out, 50 per cent of the maximum will pay out at the on-target level, and 100 per cent of the maximum will only pay out once the stretch target has been achieved. There will be a straight line sliding scale between threshold and on-target, and on-target and the stretch target. For commercial reasons, the target range will not be disclosed until after the end of the performance year. It will be disclosed in next year's Remuneration Report.
For 2016, the maximum award for the Chief Executive Officer of IAG will be 200 per cent of salary and for the Chief Financial Officer of IAG 150 per cent of salary.
The Board, on the Committee's recommendation, has approved a PSP award for 2016, with a performance period of January 1, 2016 to December 31, 2018.
For 2016, the face value of awards for the Chief Executive Officer will be 200 per cent of salary and for the Chief Financial Officer 150 per cent of salary.
The Board has approved the use of three performance conditions, each with a one-third weighting. These are the same three performance conditions that were used in 2015 (each had a one-third weighting in 2015).
The first is based on IAG TSR performance relative to the MSCI European Transportation Index. This condition is considered appropriate because the companies in the index are subject to external influences impacting share price similar to those of the Group. The target range is identical to 2015, and is outlined earlier in this report.
The second performance condition is based on adjusted EPS. This condition is considered appropriate because it provides a strong measure of the underlying financial performance of the business. The Board and the Committee have agreed that the earnings per share (EPS) target range for the 2016 PSP award should be increased. This reflects the continued improvement in the financial performance of the Group, and ensures that the target remains appropriately stretching. The adjusted EPS measure will be as follows:
| Weighting | One-third |
|---|---|
| Threshold | 2018 adjusted EPS of 105 €cents |
| 10 per cent vests | |
| Target (straight line vesting between threshold and maximum) | 2018 adjusted EPS between 105 €cents and 145 €cents |
| Maximum | 2018 adjusted EPS of 145 €cents |
| 100 per cent vests |
The third performance condition is Return on Invested Capital (RoIC). This is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business, and is considered an appropriate measure because it also provides a strong measure of the underlying financial performance of the business. The RoIC measure will be as follows:
| Weighting | One-third |
|---|---|
| Threshold | 2018 RoIC of 12 per cent |
| 10 per cent vests | |
| Target (straight line vesting between threshold and maximum) | 2018 RoIC between 12 per cent and 15 per cent |
| Maximum | 2018 RoIC of 15 per cent |
| 100 per cent vests |
There will be an additional holding period of two years. This means that executives will be required to retain the shares for a minimum of two years following the end of the performance period. This is to strengthen the alignment between executives and shareholders.
Taxable benefits and pension related benefits (as a percentage of basic salary) remain unchanged for 2016.
Non-executive director fees remain unchanged for 2016. The fees have remained unchanged since 2011.
The following directors held conditional awards over ordinary shares of the Company granted under the IAG PSP.
| Number | Awards | Awards | Awards | Number of | |||
|---|---|---|---|---|---|---|---|
| Director | Plan | Date of award |
of awards at January 1, 2015 |
vested during the year |
lapsed during the year |
made during the year |
awards at December 31, 2015 |
| Executive Directors | |||||||
| Willie Walsh | IAG PSP August 3, 2012 | 1,024,844 | 874,191 | 150,653 | – | – | |
| IAG PSP | March 6, 2013 | 684,647 | – | – | – | 684,647 | |
| IAG PSP | March 6, 2014 | 379,310 | – | – | – | 379,310 | |
| Total | 2,088,801 | 874,191 | 150,653 | – | 1,063,957 | ||
| – | |||||||
| Enrique Dupuy de Lôme | IAG PSP August 3, 2012 | 372,670 | 317,887 | 54,783 | – | – | |
| IAG PSP | March 6, 2013 | 248,963 | – | – | – | 248,963 | |
| IAG PSP | March 6, 2014 | 137,931 | – | – | – | 137,931 | |
| Total | 759,564 | 317,887 | 54,783 | – | 386,894 |
The performance conditions for the 2013 PSP award above were tested by the Remuneration Committee, and reported to the Board, in their meetings held in February 2016. The performance conditions for the 2014 PSP award above will be tested to determine the level of vesting. For this award, 50 per cent of the award is subject to TSR performance measured against an index, and 50 per cent is subject to adjusted EPS performance. The performance conditions will be measured over a single three year performance period.
The award granted on August 3, 2012 was tested at the end of the performance period, and as a result 85.3 per cent of the award vested, as detailed earlier in this report in the section on Variable Pay Outcomes.
The values attributed to the Company's ordinary shares in accordance with the plan rules on the dates of the PSP awards were as follows: 2014: 435 pence; 2013: 241 pence; and 2012: 161 pence.
The following directors held nil-cost options over ordinary shares of the Company granted under the IAG PSP.
| Director | Date of grant | Number of options at January 1, 2015 |
Exercise price |
Options exercised during the year |
Options lapsed during the year |
Options granted during the year |
Exercisable from |
Expiry date | Number of options at December 31, 2015 |
|---|---|---|---|---|---|---|---|---|---|
| Executive Directors | |||||||||
| Willie Walsh | May 28, 2015 |
– | – | – | – | 309,091 | January 1, 2020 |
December 31, 2024 |
309,091 |
| Total | - | - | - | - | 309,091 | 309,091 | |||
| Enrique Dupuy de Lôme | May 28, 2015 |
– | – | – | – | 112,364 | January 1, 2020 |
December 31, 2024 |
112,364 |
| Total | – | – | – | – | 112,364 | 112,364 |
The performance conditions for the 2015 PSP award above will be tested to determine the level of vesting. For this award, one-third of the award is subject to TSR performance measured against an index, one-third is subject to adjusted Earnings per Share (EPS) performance, and one-third is subject to Return on Invested Capital (RoIC) performance. The performance conditions will be measured over a single three year performance period. For the 2015 PSP award, following the performance period there is an additional holding period of two years.
The value attributed to the Company's ordinary shares in accordance with the plan rules on the date of the 2015 PSP award was 550 pence.
| The following directors held conditional awards over ordinary shares of the Company granted under the IAG IADP (awarded as a result of IAG performance for the periods that ended December 31, 2012; December 31, 2013 and December 31, 2014). Relates to Number of Awards Awards incentive award awards at released lapsing Awards made Number of awards earned in respect Date of January 1, during the Date of during the during the Director of performance award 2015 year vesting year year Executive Directors Willie Walsh 2011 August 3, 2012 93,773 93,773 August 3, 2015 – – 2013 March 6, 2014 149,353 – March 6, 2017 – – 2014 May 28, 2015 – – March 8, 2018 – 151,111 Total 243,126 93,773 – 151,111 Enrique Dupuy de Lôme 2011 August 3, 2012 37,267 37,267 August 3, 2015 – – 2012 March 6, 2013 62,241 – March 6, 2016 – – 2013 March 6, 2014 50,862 – March 6, 2017 – – 2014 May 28, 2015 – – March 8, 2018 – 50,252 Total 150,370 37,267 – 50,252 There are no performance conditions to be tested before vesting for the IADP, except that the director must still be employed by the Company at the time of vesting. The value attributed to the Company's ordinary shares in accordance with the plan rules on the date of the 2015 IADP award was 550 pence (2014: 435 pence; 2013: 241 pence; 2012: 161 pence). The value attributed to the Company's ordinary shares in accordance with the plan rules on the date of the 2012 IADP award was 161 pence. The share price on the date of the vesting of this award (August 3, 2015) was 551 pence. The money value of the shares received was the share price on the date of the vesting multiplied by the number of shares in respect of the award vested, as shown in the table above. |
Incentive Award Deferral Plan | ||||
|---|---|---|---|---|---|
| at December 31, | |||||
| 2015 | |||||
| - | |||||
| 149,353 | |||||
| 151,111 | |||||
| 300,464 | |||||
| – | |||||
| 62,241 | |||||
| 50,862 | |||||
| 50,252 | |||||
| 163,355 | |||||
| 77 |
The Group's consolidated statements which follow have been prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union. This section also includes the Report of Spanish Corporate Governance filed with the Comisión Nacional del Mercado de Valores to comply with the statutory requirements for companies listed on the Spanish market.
Independent Auditors' Report
FINANCIAL STATEMENTS
| Year to December 31 | |||||||
|---|---|---|---|---|---|---|---|
| Before exceptional items |
Exceptional | Total | Before exceptional items |
Exceptional | Total | ||
| € million | Note | 2015 | items | 2015 | 2014 | items | 2014 |
| Passenger revenue | 20,350 | 20,350 | 17,825 | 17,825 | |||
| Cargo revenue | 1,024 | 1,024 | 992 | 992 | |||
| Other revenue | 1,484 | 1,484 | 1,353 | 1,353 | |||
| Total revenue | 4 | 22,858 | 22,858 | 20,170 | 20,170 | ||
| Employee costs | 8 | 4,905 | 4,905 | 4,325 | 260 | 4,585 | |
| Fuel, oil costs and emissions charges | 6,082 | (51) | 6,031 | 5,987 | 5,987 | ||
| Handling, catering and other operating costs | 2,371 | 2,371 | 2,063 | 2,063 | |||
| Landing fees and en-route charges | 1,882 | 1,882 | 1,555 | 1,555 | |||
| Engineering and other aircraft costs | 1,395 | 1,395 | 1,276 | 1,276 | |||
| Property, IT and other costs | 965 | 68 | 1,033 | 927 | 927 | ||
| Selling costs | 912 | 912 | 859 | 859 | |||
| Depreciation, amortisation and impairment | 6 | 1,307 | 1,307 | 1,196 | (79) | 1,117 | |
| Aircraft operating lease costs | 6 | 659 | 659 | 551 | 551 | ||
| Currency differences | 45 | 45 | 41 | 180 | 221 | ||
| Total expenditure on operations | 20,523 | 17 | 20,540 | 18,780 | 361 | 19,141 | |
| Operating profit | 4 | 2,335 | (17) | 2,318 | 1,390 | (361) | 1,029 |
| Finance costs | 9 | (294) | (294) | (237) | (237) | ||
| Finance income | 9 | 42 | 42 | 32 | 32 | ||
| Net currency retranslation charges | (56) | (56) | (27) | (27) | |||
| Losses on derivatives not qualifying for hedge accounting |
(170) | (170) | (49) | (49) | |||
| Net gain related to available-for-sale | |||||||
| financial assets Share of profits in investments accounted |
18 | 5 | 5 | 10 | 83 | 93 | |
| for using the equity method | 17 | 6 | 6 | 2 | 2 | ||
| Loss on sale of property, plant and equipment and investments |
(38) | (38) | (11) | (11) | |||
| Net financing charge relating to pensions | 9 | (12) | (12) | (4) | (4) | ||
| Profit before tax | 1,818 | (17) | 1,801 | 1,106 | (278) | 828 | |
| Tax | 10 | (279) | (6) | (285) | (238) | 413 | 175 |
| Profit after tax for the year | 1,539 | (23) | 1,516 | 868 | 135 | 1,003 | |
| Attributable to: | |||||||
| Equity holders of the parent | 1,518 | 1,495 | 847 | 982 | |||
| Non-controlling interest | 21 | 21 | 21 | 21 | |||
| 1,539 | 1,516 | 868 | 1,003 | ||||
| Basic earnings per share (€ cents) | 11 | 74.6 | 73.5 | 41.6 | 48.2 | ||
| Diluted earnings per share (€ cents) | 11 | 71.4 | 70.4 | 40.2 | 46.4 |
| Year to December 31 | |||
|---|---|---|---|
| € million | Note | 2015 | 2014 |
| Items that may be reclassified subsequently to net profit | |||
| Cash flow hedges: | |||
| Fair value movements in equity | 31 | (1,104) | (1,235) |
| Reclassified and reported in net profit | 31 | 1,290 | 357 |
| Available-for-sale financial assets: | |||
| Fair value movements in equity | 31 | (9) | 29 |
| Reclassified and reported in net profit | 31 | (5) | (359) |
| Currency translation differences | 31 | 181 | 168 |
| Items that will not be reclassified to net profit | |||
| Remeasurements of post-employment benefit obligations | 31 | 156 | (394) |
| Total other comprehensive income for the year, net of tax | 509 | (1,434) | |
| Profit after tax for the year | 1,516 | 1,003 | |
| Total comprehensive income for the year | 2,025 | (431) | |
| Total comprehensive income is attributable to: | |||
| Equity holders of the parent | 2,004 | (452) | |
| Non-controlling interest | 31 | 21 | 21 |
| 2,025 | (431) |
Items in the consolidated Statement of comprehensive income above are disclosed net of tax.
FINANCIAL STATEMENTS
| December 31 | December 31 | ||
|---|---|---|---|
| € million | Note | 2015 | 2014 |
| Non-current assets | |||
| Property, plant and equipment | 13 | 13,672 | 11,784 |
| Intangible assets | 16 | 3,246 | 2,438 |
| Investments accounted for using the equity method | 17 | 41 | 27 |
| Available-for-sale financial assets | 18 | 74 | 84 |
| Employee benefit assets | 32 | 957 | 855 |
| Derivative financial instruments | 27 | 62 | 80 |
| Deferred tax assets | 10 | 723 | 769 |
| Other non-current assets | 19 | 365 | 188 |
| 19,140 | 16,225 | ||
| Current assets | |||
| Non-current assets held for sale | 15 | 5 | 18 |
| Inventories | 520 | 424 | |
| Trade receivables | 19 | 1,196 | 1,252 |
| Other current assets | 19 | 1,235 | 602 |
| Current tax receivable | 79 | 9 | |
| Derivative financial instruments | 27 | 198 | 178 |
| Other current interest-bearing deposits | 20 | 2,947 | 3,416 |
| Cash and cash equivalents | 20 | 2,909 | 1,528 |
| 9,089 | 7,427 | ||
| Total assets | 28,229 | 23,652 | |
| Shareholders' equity | |||
| Issued share capital | 28 | 1,020 | 1,020 |
| Share premium | 28 | 5,867 | 5,867 |
| Treasury shares | 29 | (113) | (6) |
| Other reserves | 31 | (1,548) | (3,396) |
| Total shareholders' equity | 5,226 | 3,485 | |
| Non-controlling interest | 31 | 308 | 308 |
| Total equity | 5,534 | 3,793 | |
| Non-current liabilities | |||
| Interest-bearing long-term borrowings | 23 | 7,498 | 5,904 |
| Employee benefit obligations | 32 | 858 | 1,324 |
| Deferred tax liability | 10 | 419 | 278 |
| Provisions for liabilities and charges | 25 | 2,049 | 1,967 |
| Derivative financial instruments | 27 | 282 | 359 |
| Other long-term liabilities | 22 | 223 | 226 |
| 11,329 | 10,058 | ||
| Current liabilities | |||
| Current portion of long-term borrowings | 23 | 1,132 | 713 |
| Trade and other payables | 21 | 3,803 | 3,281 |
| Deferred revenue on ticket sales | 4,374 | 3,933 | |
| Derivative financial instruments | 27 | 1,328 | 1,313 |
| Current tax payable | 124 | 57 | |
| Provisions for liabilities and charges | 25 | 605 | 504 |
| 11,366 | 9,801 | ||
| Total liabilities | 22,695 | 19,859 | |
| Total equity and liabilities | 28,229 | 23,652 | |
| Year to December 31 | |||
|---|---|---|---|
| € million | Note | 2015 | 2014 |
| Cash flows from operating activities | |||
| Operating profit | 2,318 | 1,029 | |
| Depreciation, amortisation and impairment | 1,307 | 1,117 | |
| Movement in working capital and other non-cash movements | (627) | 205 | |
| Payments related to restructuring (net of provision) | (154) | 212 | |
| Employer contributions to pension schemes | 32 | (699) | (612) |
| Pension scheme service costs | 32 | 265 | 203 |
| Interest paid | (197) | (159) | |
| Taxation | (245) | (118) | |
| Net cash flows from operating activities from continuing operations | 1,968 | 1,877 | |
| Net cash flows used in operating activities from discontinued operations | – | (15) | |
| Net cash flows from operating activities | 1,968 | 1,862 | |
| Cash flows from investing activities | |||
| Acquisition of property, plant and equipment and intangible assets | (2,040) | (2,622) | |
| Sale of property, plant and equipment and intangible assets | 273 | 404 | |
| Net proceeds from sale of investments | 6 | 589 | |
| Acquisition of subsidiary (net of cash acquired) | (1,146) | – | |
| Interest received | 48 | 37 | |
| Decrease/(increase) in other current interest-bearing deposits | 1,436 | (1,352) | |
| Dividends received | 9 | 2 | |
| Other investing movements | 30 | 12 | |
| Net cash flows from investing activities | (1,384) | (2,930) | |
| Cash flows from financing activities | |||
| Net proceeds from long-term borrowings | 2,757 | 2,009 | |
| Net proceeds from equity portion of convertible bond issued | 101 | – | |
| Repayment of borrowings | (954) | (223) | |
| Repayment of finance leases | (837) | (786) | |
| Acquisition of treasury shares | (163) | (23) | |
| Distributions made to holders of perpetual securities and other | (21) | (20) | |
| Dividend paid | (163) | – | |
| Net cash flows from financing activities | 720 | 957 | |
| Net increase/(decrease) in cash and cash equivalents | 1,304 | (111) | |
| Net foreign exchange differences | 77 | 98 | |
| Cash and cash equivalents at 1 January | 1,528 | 1,541 | |
| Cash and cash equivalents at year end | 20 | 2,909 | 1,528 |
| Interest-bearing deposits maturing after more than three months | 20 | 2,947 | 3,416 |
| Cash, cash equivalents and other interest-bearing deposits | 20 | 5,856 | 4,944 |
At December 31, 2015 Aer Lingus held €49 million of restricted cash within interest-bearing deposits maturing after more than three months relating to the pension escrow.
At December 31, 2015 British Airways held €72 million equivalent of restricted cash in Nigeria.
FINANCIAL STATEMENTS
For the year to December 31, 2015
| € million | Issued share capital |
Share premium |
Treasury shares (note 29) |
Other reserves |
Retained earnings |
Total shareholders' equity |
Non controlling interest (note 31) |
Total equity |
|---|---|---|---|---|---|---|---|---|
| January 1, 2015 | 1,020 | 5,867 | (6) | (3,162) | (234) | 3,485 | 308 | 3,793 |
| Profit for the year | – | – | – | – | 1,495 | 1,495 | 21 | 1,516 |
| Other comprehensive income for the year: |
||||||||
| Cash flow hedges reclassified and reported in net profit: |
||||||||
| Passenger revenue | – | – | – | 14 | – | 14 | – | 14 |
| Fuel and oil costs | – | – | – | 1,474 | – | 1,474 | – | 1,474 |
| Currency differences | – | – | – | (202) | – | (202) | – | (202) |
| Investments | – | – | – | 4 | – | 4 | – | 4 |
| Net change in fair value of cash flow hedges |
– | – | – | (1,104) | – | (1,104) | – | (1,104) |
| Available-for-sale assets reclassified and reported in net profit |
– | – | – | (5) | – | (5) | – | (5) |
| Net change in fair value of | ||||||||
| available-for-sale financial assets | – | – | – | (9) | – | (9) | – | (9) |
| Currency translation differences | – | – | – | 181 | – | 181 | – | 181 |
| Remeasurements of post employment benefit obligations |
– | – | – | – | 156 | 156 | – | 156 |
| Cost of share-based payments | – | – | – | – | 45 | 45 | – | 45 |
| Vesting of share-based payment schemes |
– | – | 56 | – | (99) | (43) | – | (43) |
| Equity portion of convertible bond issued |
– | – | – | 101 | – | 101 | – | 101 |
| Acquisition of treasury shares | – | – | (163) | – | – | (163) | – | (163) |
| Dividend | – | – | – | – | (203) | (203) | – | (203) |
| Dividend of a subsidiary | – | – | – | – | – | – | (1) | (1) |
| Distributions made to holders of perpetual securities |
– | – | – | – | – | – | (20) | (20) |
| December 31, 2015 | 1,020 | 5,867 | (113) | (2,708) | 1,160 | 5,226 | 308 | 5,534 |
| € million | Issued share capital |
Share premium |
Treasury shares (note 29) |
Other reserves |
Retained earnings |
Total shareholders' equity |
Non controlling interest (note 31) |
Total equity |
|---|---|---|---|---|---|---|---|---|
| January 1, 2014 | 1,020 | 5,867 | (42) | (2,122) | (814) | 3,909 | 307 | 4,216 |
| Profit for the year | – | – | – | – | 982 | 982 | 21 | 1,003 |
| Other comprehensive income for the year: |
||||||||
| Cash flow hedges reclassified and reported in net profit: |
||||||||
| Passenger revenue | – | – | – | 5 | – | 5 | – | 5 |
| Fuel and oil costs | – | – | – | 47 | – | 47 | – | 47 |
| Currency differences | – | – | – | 34 | – | 34 | – | 34 |
| Investments | – | – | – | 271 | – | 271 | – | 271 |
| Net change in fair value of cash flow hedges |
– | – | – | (1,235) | – | (1,235) | – | (1,235) |
| Available-for-sale assets reclassified and reported in net profit |
– | – | – | (359) | – | (359) | – | (359) |
| Net change in fair value of available-for-sale financial assets |
– | – | – | 29 | – | 29 | – | 29 |
| Currency translation differences | – | – | – | 168 | – | 168 | – | 168 |
| Remeasurements of post employment benefit obligations |
– | – | – | – | (394) | (394) | – | (394) |
| Cost of share-based payments | – | – | – | – | 38 | 38 | – | 38 |
| Vesting of share-based payment schemes |
– | – | 59 | – | (46) | 13 | – | 13 |
| Acquisition of treasury shares | – | – | (23) | – | – | (23) | – | (23) |
| Distributions made to holders of perpetual securities |
– | – | – | – | – | – | (20) | (20) |
| December 31, 2014 | 1,020 | 5,867 | (6) | (3,162) | (234) | 3,485 | 308 | 3,793 |
FINANCIAL STATEMENTS
International Consolidated Airlines Group S.A. (hereinafter 'International Airlines Group', 'IAG' or the 'Group') is a leading European airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora (hereinafter 'British Airways' and 'Iberia' respectively) completed a merger transaction becoming the first two airlines of the Group. Vueling Airlines S.A. ('Vueling') was acquired on April 26, 2013, and Aer Lingus Group Plc ('Aer Lingus') on August 18, 2015.
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).
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 presented in euros, rounded to the nearest million unless otherwise stated. These financial statements have been prepared on a historical cost convention except for certain financial assets and liabilities, including derivative financial instruments and available-for-sale financial assets that are measured at fair value. The carrying value of recognised assets and liabilities that are subject to fair value hedges are adjusted to record changes in the fair values attributable to the risks that are being hedged. The financial statements for the prior year include reclassifications that were made to conform to the current year presentation. The amendments have no material impact on the financial statements.
The Group's financial statements for the year to December 31, 2015 were authorised for issue, and approved by the Board of Directors on February 25, 2016.
The Directors have considered the business activities as set out on pages 10 to 19, the Group's principal risks and uncertainties as set out on pages 47 to 54, and the Group's financial position, including cash flows, liquidity position and available committed facilities. The Directors consider that the Group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial statements.
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, adjusted where appropriate to conform to the Group's accounting policies.
Subsidiaries are consolidated from the date of their acquisition, which is the date on which the Group obtains control and continue to be consolidated until the date that such control ceases. Control exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
The Group applies the acquisition method to account for business combinations. The consideration paid is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries that are not held by the Group and are presented separately within equity in the consolidated Balance sheet. Acquisition-related costs are expensed as incurred.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the Income statement.
Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and liabilities assumed.
All intra-group account balances, including intra-group profits, are eliminated in preparing the consolidated financial statements.
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.
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. The Group's consolidated financial statements are presented in euros, which is the Group's presentation currency.
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.
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 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 is held at cost. The Group has a policy of not revaluing property, plant and equipment. Depreciation is calculated to write off the cost less the estimated residual value on a straight-line basis, over the economic life of the asset. Residual values, where applicable, are reviewed annually against prevailing market values for equivalently aged assets and depreciation rates adjusted accordingly on a prospective basis.
Interest attributed to progress payments, and related exchange movements on foreign currency amounts, 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.
All aircraft are stated at the fair value of the consideration given after taking account of manufacturers' credits. Fleet assets owned or held on finance leases are depreciated at rates calculated to write down the cost to the estimated residual value at the end of their planned operational lives on a straight-line basis.
Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of five years and the remaining life of the aircraft.
Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as property, plant and equipment and generally depreciate in line with the fleet to which they relate.
Major overhaul expenditure, including replacement spares and labour costs, is capitalised and amortised over the average expected life between major overhauls. All other replacement spares and other costs relating to maintenance of fleet assets (including maintenance provided under 'pay-as-you-go' contracts) are charged to the Income statement on consumption or as incurred respectively.
Provision is made for the depreciation of all property, plant and equipment. Property, with the exception of freehold land, is depreciated over its expected useful life over periods not exceeding 50 years, or in the case of leasehold properties, over the duration of the lease if shorter, on a straight-line basis. Equipment is depreciated over periods ranging from 4 to 20 years.
Where assets are financed through finance leases, under which substantially all the risks and rewards of ownership are transferred to the Group, the assets are treated as if they had been purchased outright. The amount included in the cost of property, plant and equipment represents the aggregate of the capital elements payable during the lease term. The corresponding obligation, reduced by the appropriate proportion of lease payments made, is included in borrowings.
The amount included in the cost of property, plant and equipment is depreciated on the basis described in the preceding paragraphs on fleet and the interest element of lease payments made is included as an interest expense in the Income statement.
Total minimum payments, measured at inception, under all other lease arrangements, known as operating leases, are charged to the Income statement in equal annual amounts over the period of the lease. In respect of aircraft, certain operating lease arrangements allow the Group to terminate the leases after a limited initial period, without further material financial obligations. In certain cases the Group is entitled to extend the initial lease period on predetermined terms; such leases are described as extendable operating leases.
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 purposes 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.
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.
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. Customer loyalty programmes with an indefinite life 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 airlines are capitalised at cost.
Capitalised landing rights based outside the EU are amortised on a straight-line basis over a period not exceeding 20 years. Capitalised landing rights based within the EU are not amortised, as regulations provide that these landing rights are perpetual.
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.
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 over a period not exceeding five years.
Purchased emissions allowances are recognised at cost. Emissions allowances are not revalued or amortised but are tested for impairment whenever indicators exist that the carrying value may not be recoverable.
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.
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.
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. The Group has assessed the nature of its joint arrangement and determined it to be a joint venture.
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.
Available-for-sale financial assets are non-derivative financial assets not classified as loans and receivables and include listed and unlisted investments, excluding interests in associates. After initial recognition, available-for-sale financial assets are measured at fair value, with changes in fair value recognised in Other comprehensive income until the investment is sold or becomes impaired, at which time the cumulative gain or loss previously reported in equity is 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. Where fair value cannot be reliably estimated, assets are carried at cost.
Trade and other receivables are stated at cost less allowances made for doubtful receivables, which approximates fair value given the short dated nature of these assets. A provision for impairment of trade receivables (allowance for doubtful receivables) is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. Loans to third parties are initially measured at the fair value of the consideration given plus any directly attributable transaction costs, and measured thereafter at amortised cost.
Other current interest-bearing deposits, principally comprising funds held with banks and other financial institutions, are carried at amortised cost using the effective interest method.
Derivative financial instruments, comprising interest rate swap agreements, foreign exchange derivatives and fuel hedging derivatives (including options, swaps and futures) are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss arising from revaluation 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 gains or losses related to derivatives not used as effective hedging instruments are recognised in the Income statement.
Exchange gains and losses on monetary investments are taken to the Income statement unless the item has been designated and is assessed as an effective hedging instrument. Exchange gains and losses on non-monetary investments are reflected in equity until the investment is sold when the cumulative amount recognised in equity is recognised in the Income statement.
Long-term borrowings are recorded at amortised cost, including leases which contain interest rate swaps that are closely related to the underlying financing and as such are not accounted for as an embedded derivative.
Changes in the fair value of derivative financial instruments are reported through operating income or financing according to the nature of the instrument, unless the derivative financial instrument has been designated as a hedge of a highly probable expected future cash flow. Gains and losses on derivative financial instruments designated as cash flow hedges and assessed as effective for the year, are recorded in equity. Gains and losses recorded in equity are reflected in the Income statement when either the hedged cash flow impacts income or the hedged item is no longer expected to occur.
Certain loan repayment instalments denominated in US dollars, euro and Japanese yen are designated as cash flow hedges of highly probable future foreign currency revenues. Exchange differences arising from the translation of these loan repayment instalments are recorded in equity and subsequently reflected in the Income statement when either the future revenue impacts income or its occurrence is no longer expected to occur.
Convertible bonds are classified as compound instruments, consisting of a liability and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt, and is subsequently recorded at an amortised cost basis using the effective interest method until extinguished on conversion or maturity of the bonds, and is recognised within Interest-bearing borrowings. The difference between the proceeds of issue of the convertible bond and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in Equity portion of convertible bond in Other reserves and is not subsequently remeasured.
Issue costs are apportioned between the liability and equity components of the convertible bonds where appropriate based on their relative carrying values at the date of issue. The portion relating to the equity component is charged directly against equity.
The interest expense on the liability component is calculated by applying the effective interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this value and the interest paid is added to the carrying amount of the liability.
The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. A financial asset is considered impaired if objective evidence indicates that one or more events that have occurred since the initial recognition of the asset have had a negative impact on the estimated future cash flows of that asset. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative gain or loss previously reported in Other comprehensive income is included in the Income statement.
An impairment loss in respect of a financial asset carried at amortised cost is calculated as the difference between its carrying value and the present value of the estimated future cash flows discounted at the asset's original effective interest rate.
A financial asset or liability is generally derecognised when the contract that gives rise to it has been settled, sold, cancelled or has expired.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts are recognised in the Income statement.
The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior years.
Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
The Group's net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years. The benefit is discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate is the yield at the balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations approximating those of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the net obligation calculation results in an asset for the Group, the recognition of an asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan ('the asset ceiling'). The fair value of the plan assets is based on market price information and, in the case of quoted securities, is the published bid price.
Current service costs are recognised within operating expenses in the year in which they arise. Past service costs are recognised at the earlier of the plan amendment or curtailment occurring, and when the Group recognises the related restructuring costs or termination benefits. The net interest is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the period to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest and other expenses related to the defined benefit plans are recognised in the Income statement. Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling (excluding interest) and the return on plan assets (excluding interest), are recognised immediately in Other comprehensive income. Remeasurements are not reclassified to the Income statement in subsequent periods.
Termination benefits are payable 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 termination benefits 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 termination benefits 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.
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions:
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.
Non-current assets are classified as held for sale when their carrying value is to be recovered principally through sale as opposed to continuing use. The sale must be considered to be highly probable and to be achieved within 12 months. Held for sale assets are carried at the lower of carrying value and fair value less costs to sell. Property, plant and equipment and intangible assets once classified as held for sale are not depreciated or amortised.
Inventories, including aircraft expendables, are valued at the lower of cost and net realisable value. Such cost is determined by the weighted average cost method. Inventories include mainly aircraft spare parts, repairable aircraft engine parts and fuel.
Cash and cash equivalents includes cash in hand and deposits with any qualifying financial institution repayable on demand or maturing within three months of the date of acquisition and which are subject to an insignificant risk of change in value.
Shares in the Company purchased and held directly by the Company are classified as Treasury shares, and shown as deductions from Shareholders' equity at cost. Shares in the Company held by the British Airways Plc Employee Share Ownership Trust are classified as Investments in own shares, and shown as deductions from Shareholders' equity at cost.
Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from the sale and the original cost being taken to reserves. No gain or loss is recognised in the Income statement on the purchase, sale, issue or cancellation of equity shares.
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 an appropriate valuation model. 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, of 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.
Dividend distributions are recognised as a liability in the year in which the dividends are approved by the company's shareholders. Interim dividends are recognised when they are paid; final dividends when authorised in general meetings by shareholders.
Provisions are made when a future obligation exists for a present liability in respect of a past event and where the amount of the obligation can be reliably estimated.
Employee leaving indemnities and other employee provisions are recorded for flight crew who, meeting certain conditions, have the option of being placed on reserve or of taking early retirement. The Group is obligated to remunerate these employees until they reach the statutory retirement age. The calculation is performed by independent actuaries using the projected unit credit method.
Other employee related provisions are recognised for direct expenditures of business reorganisation (restructuring provisions) where plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken at the balance sheet date.
If the effect is material, expected future cash flows are discounted using a rate that reflects, where appropriate, the risks specific to the provision. Where discounting is used, the increase in the provision due to unwinding the discount is recognised as a finance cost.
Passenger and cargo revenue is recognised when the transportation service has been provided. Passenger tickets net of discounts are recorded as current liabilities as deferred revenue on ticket sales until the customer has flown. Unused tickets are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and statistical analysis of historical trends.
Other revenue including maintenance, handling, hotel and holiday and commissions is recognised at the time the service is provided in accordance with the invoice or contract.
The Group operates five loyalty programmes: Executive Club, Iberia Plus, Avios, Punto and Gold Circle Club. The principal customer loyalty programmes award travellers Avios points to redeem for various rewards primarily redemption travel, including flights, hotels and car hire. In accordance with IFRIC 13 'Customer loyalty programmes', the fair value attributed to the awarded Avios points is deferred as a liability and recognised as revenue on redemption of the points and provision of service to the participants to whom the Avios points are issued.
In addition, Avios points are sold to commercial partners to use in loyalty activity. The fair value of the Avios points sold is deferred and recognised as revenue on redemption of the Avios points by the participants to whom the Avios points are issued. The cost of the redemption of the Avios points is recognised when the Avios points are redeemed.
The Group estimates the fair value of Avios points by reference to the fair value of the awards for which they could be redeemed and is reduced to take into account the proportion of award credits that are not expected to be redeemed based on the results of statistical modelling. The fair value of the Avios point reflects the fair value of the range of available awards.
Exceptional items are those that in management's view need to be separately disclosed by virtue of their size or incidence. The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of business combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale, disposal or impairment of an investment in a business.
Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash items such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step acquisition losses.
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results in the future may differ from estimates upon which financial information has been prepared. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if these are also affected. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed as follows.
The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined using actuarial valuations. Actuarial valuations involve making assumptions about discount rates, expected rates of return on assets, future inflation rates, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these schemes, such estimates are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in notes 32 and 25. The Group exercises its judgement in determining the assumptions to be adopted, in discussion with its independent external actuaries.
Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected direct expenditures of reorganisation based on plans which are sufficiently detailed and advanced.
Passenger revenue is recognised when the transportation is provided. Ticket sales that are not expected to be used for transportation ('unused tickets') are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and historical trends.
In respect of customer loyalty programmes the fair value attributed to awarded points is deferred as a liability and is recognised as revenue on redemption of the points and provision of service to the participants to whom the points are issued. The fair value of the award credits is estimated by reference to the fair value of the awards for which the points could be redeemed and is reduced to take into account the proportion of award credits that are not expected to be redeemed by customers. The Group exercises its judgement in determining the assumptions to be adopted in respect of the number of points not expected to be redeemed through the use of statistical modelling and historical trends and in determining the mix and fair value of the award credits.
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.
The Group recognises deferred income tax assets only to the extent that it is probable that the taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Management consider the operating performance in the current year and the future projections of performance laid out in the approved business plan in order to assess the probability of recoverability. The Business plan relies on the use of assumptions, estimates and judgements in respect of future performance and economics.
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and intangible assets with indefinite economic lives are tested for impairment annually and at other times when such indicators exist. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates as disclosed in note 16.
Other non-financial assets are tested for impairment annually or when there are indicators that the carrying amounts may not be recoverable.
The Group exercises judgement to determine useful lives and residual values of property and plant and equipment. The assets are depreciated to their residual values over their estimated useful lives. At the beginning of the year, the Group revised its estimates for certain fleet. As a result of this review, changes in estimated useful lives and residual values were applied prospectively from January 1, 2015.
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.
Where more than one exchange rate for a particular currency exists, judgement is required in order to determine which rate should be used based on entity specific facts and circumstances. Consideration is given to the Group's intention and ability to use specific mechanisms and whether that use is probable. Where exchangeability is lacking across mechanisms the published legally available rate that best reflects the economics of the Group's activities is considered.
A lease is classified as a finance lease when substantially all the risks and rewards of ownership are transferred to the Group. In determining the appropriate classification, the substance of the transaction rather than the form is considered. Factors considered include but are not limited to the following: whether the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at the price that is sufficiently lower than the fair value on exercise date; the lease term is for the major part of the economic life of the asset; and the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
The Group has a number of maintenance contracts with service providers to repair or replace engine parts. These agreements are complex and the Group exercises judgement in determining the assumptions used to match the consumption of replacement spares and other costs associated with fleet maintenance with the appropriate income statement charge.
The Group has adopted the following interpretation for the first time in the year to December 31, 2015:
IFRIC 21 'Levies'; effective for periods beginning on or after June 17, 2014. IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. Retrospective application is required for IFRIC 21. The application of this amendment had no impact on the Group's net profit or net assets.
Other amendments resulting from improvements to IFRSs or to standards did not have any impact on the accounting policies, financial position or performance of the Group.
The IASB and IFRIC 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. Unless otherwise stated, the Group plans to adopt the following standards, interpretations and amendments:
IFRS 15 'Revenue from contracts with customers' (not yet endorsed by the EU); effective for periods beginning on or after January 1, 2018. The standard establishes a new five-step model that will apply to revenue arising from contracts with customers. Revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. This is a converged standard on revenue recognition which replaces IAS 18 'Revenue', IAS 11 'Construction contracts' and related interpretations. The Group is currently assessing the impact of the new standard.
IFRS 9 'Financial instruments' (not yet endorsed by the EU); effective for periods beginning on or after January 1, 2018. The standard removes the multiple classification and measurement models for financial assets required by IAS 39 and introduces a model that has only two classification categories: amortised cost and fair value. Classification is driven by the business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The accounting and presentation for financial liabilities and for derecognising financial instruments is relocated from IAS 39 without any significant changes. IFRS 9 (2010) introduces additional changes relating to financial liabilities. IFRS 9 adds new requirements to address the impairment of financial assets and hedge accounting. The Group is currently assessing the impact of the new standard.
IFRS 16 'Leases' (not yet endorsed by the EU); effective for periods beginning on or after January 1 2019. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The new standard eliminates the classification of leases as either operating leases or finance leases and instead introduces a single lessee accounting model. Applying this model, lessees are required to recognise a lease liability reflecting the obligation to make future lease payments and a 'right-of-use' asset for virtually all lease contracts. IFRS 16 includes an optional exemption for certain short-term leases and leases of low-value assets. The Group is currently assessing the impact of the new standard.
IAS 19 (Amendment) 'Employee benefits'; effective for periods beginning on or after February 1, 2015 in the European Union. The amendment applies to contributions from employees or third parties to defined benefit plans and clarifies the treatment of such contributions. The amendment distinguishes between contributions that are linked to service only in the period in which they arise and those linked to service in more than one period. The objective of the amendment is to simplify the accounting for contributions that are independent of the number of years of employee service, for example employee contributions that are calculated according to a fixed percentage of salary. Entities with plans that require contributions that vary with service will be required to recognise the benefit of those contributions over employee's working lives. It is anticipated that the application of this amendment will have no significant impact on the Group's net profit or net assets.
There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will have a material effect on the reported income, net assets or disclosures of the Group.
The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.
On August 18, 2015, the Group acquired 540,310,400 shares, representing 100 per cent of the issued ordinary share capital of Aer Lingus Group for €2.55 per share, comprising a cash payment of €2.50 per share and payment of a cash dividend by Aer Lingus of €0.05 per share (payable on May 29, 2015 to Aer Lingus shareholders on the register of members on May 1, 2015).
The acquisition will provide substantial benefits through an enhanced network, particularly to North America, using Dublin as a natural gateway hub for transatlantic routes.
Transaction costs related to the acquisition of Aer Lingus totalling €33 million were recognised within Property, IT and other costs in the Income statement for the year to December 31, 2015.
From August 18, 2015 Aer Lingus' contribution to the consolidated Group results was revenue of €622 million, and an operating profit of €32 million after exceptional items. Had Aer Lingus been consolidated from January 1, 2015, the Group would have reported total revenue of €23,955 million and an operating profit after exceptional items of €2,410 million for the year to December 31, 2015. At December 31, 2015 the fair value of the assets and liabilities acquired were provisional, pending the finalisation of the property, plant and equipment and landing rights valuation exercise.
The provisional fair values of the assets and liabilities arising from the acquisition are as follows:
| € million | Fair value |
|---|---|
| Property, plant and equipment | 721 |
| Intangible assets | |
| Brand | 110 |
| Landing rights1 | 172 |
| Other | 40 |
| Other non-current assets | 164 |
| Cash and cash equivalents | 205 |
| Other current interest-bearing deposits | 708 |
| Trade receivables2 | 54 |
| Other current assets | 66 |
| Interest-bearing borrowings | (406) |
| Trade and other payables | (604) |
| Provision for liabilities and charges | (158) |
| Employee benefit obligations | (9) |
| Deferred tax liability | (35) |
| Net identifiable assets acquired | 1,028 |
1 For indefinite lived landing rights, see note 16.
2 The gross contractual amount for trade receivables is €55 million, 98 per cent which is expected to be collected.
The goodwill is recognised as follows:
| € million | |
|---|---|
| Cash consideration1 | 1,351 |
| Provisional fair value of identifiable net assets | 1,028 |
| Provisional goodwill | 323 |
1 There is no deferred or contingent consideration.
None of the goodwill recognised is expected to be deductible for tax purposes.
British Airways, Iberia, Vueling and Aer Lingus are managed as individual operating companies. Each airline operates its network operations as a single business unit. 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. The IAG Management Committee makes resource allocation decisions 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. Therefore, based on the way the Group treats its businesses, and the manner in which resource allocation decisions are made, the Group has four (2014: three) reportable operating segments for financial reporting purposes, reported as British Airways, Iberia, Vueling and Aer Lingus. Other Group companies include head office companies.
For the year to December 31, 2015
| 2015 | |||||||
|---|---|---|---|---|---|---|---|
| British | Other Group | ||||||
| € million | Airways | Iberia | Vueling | Aer Lingus | companies | Total | |
| Revenue | |||||||
| External revenue | 15,862 | 4,412 | 1,962 | 622 | – | 22,858 | |
| Inter-segment revenue | 53 | 352 | – | – | 145 | 550 | |
| Segment revenue | 15,915 | 4,764 | 1,962 | 622 | 145 | 23,408 | |
| Depreciation, amortisation and impairment | (1,053) | (206) | (13) | (27) | (8) | (1,307) | |
| Operating profit/(loss) before exceptional items | 1,914 | 247 | 160 | 35 | (21) | 2,335 | |
| Exceptional items (note 5) | (35) | – | – | (3) | 21 | (17) | |
| Operating profit after exceptional items | 1,879 | 247 | 160 | 32 | – | 2,318 | |
| Net non-operating costs | (517) | ||||||
| Profit before tax | 1,801 |
For the year to December 31, 2014
| 2014 | |||||||
|---|---|---|---|---|---|---|---|
| € million | British Airways |
Iberia | Vueling | Other Group companies |
Total | ||
| Revenue | |||||||
| External revenue | 14,456 | 3,989 | 1,725 | – | 20,170 | ||
| Inter-segment revenue | 37 | 279 | – | 107 | 423 | ||
| Segment revenue | 14,493 | 4,268 | 1,725 | 107 | 20,593 | ||
| Depreciation, amortisation and impairment | (1,027) | (76) | (11) | (3) | (1,117) | ||
| Operating profit/(loss) before exceptional items | 1,215 | 50 | 141 | (16) | 1,390 | ||
| Exceptional items (note 5) | – | (361) | – | – | (361) | ||
| Operating profit/(loss) after exceptional items | 1,215 | (311) | 141 | (16) | 1,029 | ||
| Net non-operating costs | (201) | ||||||
| Profit before tax | 828 | ||||||
| b Geographical analysis Revenue by area of original sale € million UK |
2015 8,256 |
2014 6,931 |
|||||
| Spain | 3,462 | 3,203 | |||||
| USA | 3,447 | 2,893 | |||||
| Rest of world | 7,693 | 7,143 | |||||
| 22,858 | 20,170 | ||||||
| Assets by area | |||||||
| December 31, 2015 | |||||||
| € million | Property, plant and equipment |
Intangible assets |
|||||
| UK | 11,112 | 1,346 | |||||
| Spain | 1,798 | 1,852 | |||||
| USA | 26 | 14 | |||||
| Rest of world | 736 | 34 |
| € million | Property, plant and equipment |
Intangible assets |
|---|---|---|
| UK | 10,131 | 1,184 |
| Spain | 1,624 | 1,218 |
| USA | 24 | 12 |
| Rest of world | 5 | 24 |
| 11,784 | 2,438 |
13,672 3,246
| € million | 2015 | 2014 |
|---|---|---|
| Business combination costs1 | 33 | – |
| Pre-acquisition cash flow hedge impact2 | (51) | – |
| Litigation provision3 | 35 | – |
| Foreign currency loss4 | – | 180 |
| Restructuring costs – employee5 | – | 260 |
| Reversal of Iberia brand impairment6 | – | (79) |
| Recognised in expenditure on operations | 17 | 361 |
| Gain on sale of investment7 | – | (83) |
| Total exceptional charge before tax | 17 | 278 |
| Tax on exceptional items | 6 | (144) |
| Net deferred tax credit8 | – | (269) |
| Total exceptional charge/(credit) after tax | 23 | (135) |
Transaction expenses of €33 million were recognised in relation to the Aer Lingus Business combination in the year to December 31, 2015 (note 3).
On August 18, 2015, Aer Lingus had a portfolio of cash flow hedges related to fuel with a net mark-to-market charge of €99 million recorded within Other reserves on the Balance sheet. As these cash flow hedge positions unwind, Aer Lingus will recycle the impact from Other reserves.
The Group does not recognise the pre-acquisition cash flow hedge net position within Other reserves on the Balance sheet, resulting in fuel costs being gross of the pre-acquisition cash flow hedge positions. For the year to December 31, 2015 this has resulted in a decrease in reported fuel expense of €51 million and a related €6 million tax charge.
The litigation provision represents the continuation of the civil claims brought against British Airways in 2006. This provision represents a settled case against British Airways in the cargo claim, for a total of €35 million. The final amount required to pay the remaining claims detailed in note 33 is subject to significant uncertainty.
Since December 2012 repatriation of funds from Venezuela has been limited. Throughout 2013, Iberia recognised net sales at 6.3 bolívares (CADIVI) to the US dollar. The unrepatriated cash at the end of 2013 was €184 million.
From February to October 2014, Iberia recognised net sales at 11 bolívares to the US dollar (SICAD I) since this was the official rate at which Iberia was authorised by the Venezuelan government to repatriate cash. In the third quarter of 2014, Iberia received funds for February to June 2014 at SICAD I and given the ongoing negotiations, the €184 million of unrepatriated funds from 2013 and January 2014 were also revalued to SICAD I. An exceptional charge of €82 million was recognised.
Iberia was unable to repatriate any further funds earned prior to February 2014 or subsequent to June 2014. Given this and combined with the lack of liquidity in Venezuela, the decrease in the Brent barrel price and a government recognised inflation rate of 65 per cent, Iberia determined that SICAD I could no longer be considered available in practice, for the repatriation of the funds. The next alternative rate available at December 31, 2014 was the SICAD II rate of 50 bolívares (Bs.) to the US dollar which Iberia considered to better reflect the economic reality. This rate was applied since November 2014. All remaining funds, which approximately amount to Bs 1.7 billion were revalued to SICAD II resulting in an additional exceptional charge of €98 million. The cash balance at December 31, 2014 was €18 million. A related tax credit of €54 million was recognised.
In the year to December 31, 2014, a restructuring expense of €260 million was recognised in relation to the Iberia Transformation Plan and the agreement on collective redundancies for pilots and ground staff. A related tax credit of €78 million was recognised.
In 2014, the partial impairment made in 2012 of the Iberia Brand of €79 million was reversed. This followed the approval of the five year Business plan including capacity growth and Iberia's return to profitability, which supported the reversal of the Brand impairment (note 16). A related tax charge of €24 million was recognised.
During the third quarter of 2014, Iberia entered into an agreement to settle its hedging transaction over its ownership interest in Amadeus IT Holding S.A. The derivative transaction comprised a collar arrangement on Iberia's Amadeus shareholding of 33,562,331 ordinary shares.
The settlement commenced in August 2014 and occurred in equal instalments over a 100 trading day period. At December 31, 2014 Iberia had settled 99 per cent of the transaction and the resulting €83 million gain was recognised in the Net credit related to available-for-sale financial assets line. A related €36 million tax credit was recognised.
In 2014, the Group recognised a €306 million deferred tax asset relating to losses incurred by Iberia from 2013 and 2012. Recognition is based on Management's expectation of the recoverability of these losses against future profits. Recoverability was based on the improved operating performance in the prior year and from the projections included within the Business plan.
During 2014, the Spanish government enacted a number of changes as part of the Spanish Tax Reform, including the phased reduction of corporation tax rate from 30 per cent to 25 per cent and a change in loss utilisation rules. This was the first tax rate change since 2008. A related tax charge of €37 million was also recognised.
Depreciation, amortisation and impairment of non-current assets:
| € million | 2015 | 2014 |
|---|---|---|
| Owned assets | 834 | 810 |
| Finance leased aircraft | 346 | 277 |
| Other leasehold interests | 47 | 57 |
| Impairment charge on property, plant and equipment | 5 | 8 |
| Amortisation of intangible assets | 75 | 44 |
| Impairment reversal on intangible assets | – | (79) |
| 1,307 | 1,117 |
Operating lease costs:
| € million | 2015 | 2014 | |
|---|---|---|---|
| Minimum lease rentals | –aircraft | 659 | 551 |
| –property and equipment | 195 | 187 | |
| Sub-lease rentals received | (46) | (54) | |
| 808 | 684 |
| € million | 2015 | 2014 |
|---|---|---|
| Cost of inventories recognised as an expense, mainly fuel | 4,899 | 5,377 |
The fees for audit and non-audit services provided by the auditor of the Group's consolidated financial statements and of certain individual financial statements of the consolidated companies, Ernst & Young S.L., and by companies belonging to Ernst & Young's network, as well as fees for services billed to Aer Lingus by PricewaterhouseCoopers LLP ('PwC') and by companies belonging to PwC's network, were as follows:
| 2015 | 2014 | |||
|---|---|---|---|---|
| €'000 | Ernst & Young |
Other auditor |
Ernst & Young |
Other auditor |
| Fees payable for the audit of the Group and individual accounts | 3,552 | 40 | 2,806 | – |
| Fees payable for other services: | – | |||
| Audit of the Group's subsidiaries pursuant to legislation | 571 | 388 | 535 | – |
| Other services pursuant to legislation | 389 | 4 | 349 | – |
| Other services relating to taxation | 57 | – | 269 | – |
| Other assurance services | 552 | – | 359 | – |
| Services relating to information technology | 34 | – | 30 | – |
| Services relating to corporate finance transactions1 | 610 | – | – | – |
| All other services | 85 | – | – | – |
| 5,850 | 432 | 4,348 | – |
1 This mainly included services in relation to the Aer Lingus acquisition.
The audit fees payable are approved by the Audit and Compliance Committee and have been reviewed in the context of other companies for cost effectiveness. A description of the work of the Audit and Compliance Committee is set out in the Report of the Audit and Compliance Committee on page 69 and includes an explanation of how objectivity and independence is safeguarded when non-audit services are provided.
| € million | 2015 | 2014 |
|---|---|---|
| Wages and salaries | 3,277 | 3,194 |
| Social security costs | 485 | 447 |
| Costs related to pension scheme benefits | 372 | 285 |
| Cost of share-based payments | 35 | 29 |
| Other employee costs1 | 736 | 630 |
| 4,905 | 4,585 |
1 Other employee costs include allowances and accommodation for crew.
The average number of employees during the year was as follows:
| 2015 | 2014 | |||
|---|---|---|---|---|
| Average number of employees |
Percentage of women |
Average number of employees |
Percentage of women |
|
| Senior executives | 214 | 24% | 219 | 23% |
| Ground employees: | ||||
| Managerial | 2,385 | 41% | 2,379 | 40% |
| Non-managerial | 32,835 | 36% | 32,527 | 36% |
| Technical crew: | ||||
| Managerial | 5,906 | 10% | 5,694 | 10% |
| Non-managerial | 19,522 | 67% | 18,665 | 67% |
| 60,862 | 59,484 |
| b Directors' remuneration |
||
|---|---|---|
| € million | 2015 | 2014 |
| Board of Directors' remuneration | 15 | 13 |
| Management Committee remuneration | 22 | 18 |
There were three female Directors at December 31, 2015 (2014: three).
The Report of the Remuneration Committee discloses further details of Directors' remuneration.
The Group provides life insurance for the Executive Directors of the Board, and for the year to December 31, 2015 the Group's obligation was €28,000 (2014: €16,000). At December 31, 2015 none of the Executive Directors were members of defined benefit pension schemes.
In relation to Article 229 of the Spanish Companies Act, all IAG Directors have confirmed that they have no conflict with the Company's interests.
| a Finance costs |
||
|---|---|---|
| € million | 2015 | 2014 |
| Interest expense on: | ||
| Bank borrowings | (23) | (26) |
| Finance leases | (138) | (111) |
| Provisions: unwinding of discount | (21) | (39) |
| Other borrowings | (115) | (74) |
| Capitalised interest on progress payments | 2 | 2 |
| Change in fair value of cross currency swaps | 1 | (5) |
| Currency charges on financial fixed assets | – | 16 |
| (294) | (237) | |
| b Finance income |
||
| € million | 2015 | 2014 |
| Interest on other interest-bearing deposits | 42 | 32 |
| c Net financing charge relating to pensions |
||
| € million | 2015 | 2014 |
| Net financing charge relating to pensions | (12) | (4) |
FINANCIAL STATEMENTS
Tax charge/(credit) in the Income statement
| € million | 2015 | 2014 |
|---|---|---|
| Current tax | ||
| Tax on profits | 337 | 228 |
| Adjustments in respect of prior years | 5 | 19 |
| Total current tax charge | 342 | 247 |
| Deferred tax arising on the differences between the accounting and tax treatment of: | ||
| Property, plant and equipment | 10 | (7) |
| Employee leaving indemnities and other employee related provisions | 13 | (14) |
| Tax losses utilised | 42 | 47 |
| Employee benefit plans | (2) | (49) |
| Tax credits | 1 | (27) |
| Foreign exchange | (20) | (2) |
| Fuel derivative losses | (12) | (10) |
| Unremitted earnings of associate companies | 3 | – |
| Deferred revenue in relation to customer loyalty programmes | 16 | (12) |
| Adjustments in respect of prior years | (32) | (36) |
| Effect of tax rate changes | (84) | 41 |
| Other items | 8 | – |
| Advance corporation tax | – | 99 |
| Available-for-sale financial assets | – | (146) |
| Previously unrecognised tax assets | – | (306) |
| Total deferred tax credit | (57) | (422) |
| Total tax charge/(credit) in the Income statement | 285 | (175) |
Tax charged/(credited) directly to Other comprehensive income and Statement of changes in equity
| € million | 2015 | 2014 |
|---|---|---|
| Current tax relating to items charged directly to Other comprehensive income | ||
| Employee benefit plans | (76) | (79) |
| Deferred tax relating to items charged directly to Other comprehensive income | ||
| Cash flow hedges | 53 | (237) |
| Employee benefit plans | 128 | (111) |
| Adjustments in respect of prior years | (1) | – |
| Available-for-sale financial assets | – | (163) |
| Effect of tax rate changes | – | 46 |
| 180 | (465) | |
| Current tax relating to items charged directly to Statement of changes in equity | ||
| Share-based payment schemes | (14) | (8) |
| Deferred tax relating to items charged directly to Statement of changes in equity | ||
| Share-based payments schemes | 4 | (6) |
| Total tax charge/(credit) relating to items included in Other comprehensive income and equity | 94 | (558) |
In 2015 the effect of tax rate changes on items that will not be reclassified to the Income statement was nil (2014: €7 million charge), and the effect on items that may be reclassified to the Income statement was nil (2014: €39 million charge).
The tax charge/(credit) is calculated at the domestic rates applicable to profits or losses in the main countries of operation. The tax charge (2014: credit) on the profit for the year to December 31, 2015 and 2014 is lower than the notional tax charge.
The differences are explained below:
| € million | 2015 | 2014 |
|---|---|---|
| Accounting profit before tax | 1,801 | 828 |
| Tax calculated at 28 per cent in Spain (2014: 30 per cent) and 20.25 per cent in the UK (2014: 21.5 per cent) and 12.5 per cent in Ireland |
381 | 162 |
| Effects of: | ||
| Non-deductible expenses – transaction related | 11 | – |
| Non-deductible expenses – recurring items | 6 | – |
| Employee benefit plan accounting | (8) | (5) |
| Euro preferred securities accounted for as non-controlling interests | (4) | (5) |
| Tax on unremitted earnings | 3 | – |
| Current year tax assets not recognised | 3 | 9 |
| Adjustments in respect of prior years | (27) | (17) |
| Effect of tax rate changes | (84) | 42 |
| Other items | 4 | 8 |
| Disposal and write down of investments | – | (2) |
| Investment credit | – | (61) |
| Previously unrecognised tax assets | – | (306) |
| Tax charge/(credit) in the Income statement | 285 | (175) |
FINANCIAL STATEMENTS
The net deferred tax asset included in the Balance sheet is as follows:
| € million | 2015 | 2014 |
|---|---|---|
| Difference between the accounting and tax treatment of: | ||
| Property, plant and equipment | (1,201) | (1,126) |
| Employee leaving indemnities and other employee related provisions | 472 | 492 |
| Tax losses carried forward | 410 | 396 |
| Fair value losses recognised on cash flow hedges | 298 | 330 |
| Employee benefit plans | 168 | 248 |
| Tax assets in relation to tax credits and deductions | 78 | 89 |
| Share-based payments schemes | 22 | 22 |
| Foreign exchange | 8 | (16) |
| Deferred revenue in relation to customer loyalty programmes | 1 | 17 |
| Other items | 48 | 39 |
| Net deferred tax asset | 304 | 491 |
Movement in provision
| € million | 2015 | 2014 |
|---|---|---|
| Net deferred tax asset/(liability) at the beginning of the year | 491 | (383) |
| Acquired through Business combination | (35) | – |
| Deferred tax (charge)/credit relating to Income statement | (59) | 427 |
| Deferred tax (charge)/credit taken to Statement of other comprehensive income | (180) | 511 |
| Deferred tax (charge)/credit taken to Statement of changes in equity | (4) | 6 |
| Adjustments in respect of prior years | 33 | 36 |
| Effects of tax rate changes | 84 | (87) |
| Exchange movements | (26) | (19) |
| Net deferred tax asset at the end of the year | 304 | 491 |
The Group also contributed tax and related revenues through payment of transaction and payroll related taxes and charges. A breakdown of these other taxes paid during 2015 is as follows:
| € million | 2015 | 2014 |
|---|---|---|
| Payroll related taxes | 455 | 423 |
| UK Air Passenger Duty | 923 | 813 |
| Other ticket taxes and charges | 1,583 | 1,290 |
| 2,961 | 2,526 |
| € million | 2015 | 2014 |
|---|---|---|
| Spanish corporate income tax losses | 35 | 27 |
| UK capital losses arising before the change in ownership of the UK Group in 2011 | 101 | 127 |
| UK capital losses arising after the change in ownership of the Group in 2011 | 10 | 9 |
| UK capital losses arising on properties that were eligible for Industrial Buildings Allowances | 350 | 324 |
| Corporate income tax losses outside of the countries of main operation | 154 | 147 |
No deferred tax liability has been recognised in respect of €795 million (2014: €75 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.
Reductions in the UK corporation tax rate were substantively enacted in the year. The main rate of corporation tax was reduced from 20 per cent to 19 per cent effective from April 1, 2017 and from 19 per cent to 18 per cent effective from April 1, 2020. The deferred tax on temporary differences and tax losses as at December 31, 2015 was calculated at the rate applicable to the year in which the temporary differences and tax losses are expected to reverse.
| € million 2015 |
2014 |
|---|---|
| Earnings attributable to equity holders of the parent for basic earnings 1,495 |
982 |
| Interest expense on convertible bonds 25 |
21 |
| Diluted earnings attributable to equity holders of the parent and diluted earnings per share 1,520 |
1,003 |
| Number '000 |
Number '000 |
| Weighted average number of ordinary shares in issue 2,034,197 |
2,036,121 |
| Assumed conversion on €390 million convertible bond 91,758 |
91,758 |
| Assumed conversion on two tranches of €500 million convertible bonds 9,722 |
– |
| Dilutive employee share schemes outstanding 24,260 |
33,883 |
| Weighted average number of ordinary shares in issue for diluted earnings per share 2,159,937 |
2,161,762 |
| 2015 | 2014 |
| Basic earnings per share (€ cents) 73.5 |
48.2 |
| Diluted earnings per share (€ cents) 70.4 |
46.4 |
| 12 Dividends | |
| € million 2015 |
2014 |
| Cash dividends on ordinary shares declared | |
| Interim dividend of 10 € cents per share (203) |
– |
| Proposed cash dividends | |
| Final dividend of 10 € cents per share (204) |
– |
The proposed dividend would consist of 5 € cents per share from net profit for the year to December 31, 2015 and 5 € cents per share from share premium.
Proposed dividends on ordinary shares are subject to approval at the annual general meeting and are not recognised as a liability at December 31, 2015.
FINANCIAL STATEMENTS
| € million | Fleet | Property | Equipment | Total |
|---|---|---|---|---|
| Cost | ||||
| Balance at January 1, 2014 | 17,673 | 2,085 | 1,344 | 21,102 |
| Additions | 2,316 | 57 | 126 | 2,499 |
| Disposals | (888) | (3) | (22) | (913) |
| Exchange movements | 1,125 | 120 | 67 | 1,312 |
| Balance at December 31, 2014 | 20,226 | 2,259 | 1,515 | 24,000 |
| Additions | 1,774 | 51 | 112 | 1,937 |
| Acquired through Business combination | 693 | 16 | 12 | 721 |
| Disposals | (1,180) | (3) | (56) | (1,239) |
| Reclassifications | (184) | 3 | (22) | (203) |
| Exchange movements | 1,488 | 155 | 90 | 1,733 |
| December 31, 2015 | 22,817 | 2,481 | 1,651 | 26,949 |
| Depreciation and impairment | ||||
| Balance at January 1, 2014 | 9,158 | 867 | 849 | 10,874 |
| Charge for the year | 984 | 77 | 83 | 1,144 |
| Impairment charge recognised during the year1 | 8 | – | – | 8 |
| Disposals | (492) | (2) | (15) | (509) |
| Exchange movements | 594 | 57 | 48 | 699 |
| Balance at December 31, 2014 | 10,252 | 999 | 965 | 12,216 |
| Charge for the year | 1,066 | 70 | 91 | 1,227 |
| Disposals | (954) | (3) | (34) | (991) |
| Reclassifications | (99) | 2 | (10) | (107) |
| Exchange movements | 793 | 75 | 64 | 932 |
| December 31, 2015 | 11,058 | 1,143 | 1,076 | 13,277 |
| Net book values | ||||
| December 31, 2015 | 11,759 | 1,338 | 575 | 13,672 |
| December 31, 2014 | 9,974 | 1,260 | 550 | 11,784 |
| Analysis at December 31, 2015 | ||||
| Owned | 4,726 | 1,289 | 460 | 6,475 |
| Finance leased | 6,364 | 16 | 33 | 6,413 |
| Progress payments | 669 | 33 | 82 | 784 |
| Property, plant and equipment | 11,759 | 1,338 | 575 | 13,672 |
| Analysis at December 31, 2014 | ||||
| Owned | 4,290 | 1,173 | 411 | 5,874 |
| Finance leased | 5,398 | 5 | 32 | 5,435 |
| Progress payments | 286 | 82 | 107 | 475 |
| Property, plant and equipment | 9,974 | 1,260 | 550 | 11,784 |
1 The 2014 impairment charge of €8 million relates to one Airbus A340 aircraft written down to its net realisable value.
The net book value of property comprises:
| € million | 2015 | 2014 |
|---|---|---|
| Freehold | 561 | 542 |
| Long leasehold improvements | 387 | 359 |
| Short leasehold improvements1 | 390 | 359 |
| Property | 1,338 | 1,260 |
1 Short leasehold improvements relate to leasehold interests with duration of less than 50 years.
At December 31, 2015, bank and other loans of the Group are secured on fleet assets with a cost of €1,466 million (2014: €1,169 million) and letters of credit of €278 million in favour of the British Airways Pension Trustees are secured on certain aircraft (2014: €292 million).
Capital expenditure authorised and contracted but not provided for in the accounts amounts to €16,091 million (December 31, 2014: €11,604 million). The majority of capital expenditure commitments are denominated in US dollars, and as such are subject to changes in exchange rates.
The outstanding commitments include €15,971 million for the acquisition of 100 Airbus A320s (from 2016 to 2022), 18 Airbus A321s (from 2016 to 2019), 14 Airbus A330s (from 2016 to 2018), 43 Airbus A350s (from 2018 to 2021), 2 Airbus A380s (in 2016) and 29 Boeing 787s (from 2016 to 2021).
The non-current assets held for sale of €5 million represent three Boeing 737-400 airframes and nine Boeing 737-400 engines that have been stood down from use and are being marketed for sale. These are held at cost less accumulated depreciation and impairment. Total impairment charges recognised in the Income statement relating to these assets during the year was €5 million (2014: nil). These are presented within the British Airways operating segment and will exit the business within 12 months of December 31, 2015.
Assets held for sale with a net book value of €17 million were disposed of during the year to December 31, 2015, of which €11 million related to the sale of the remaining 0.075 per cent investment in Amadeus (which represented one settlement day outstanding) and resulted in a gain of €1 million, and €6 million related to the sale of five Boeing 737 engines, resulting in a loss of €4 million.
At December 31, 2014 the non-current assets held for sale of €18 million represented one settlement day outstanding for the remaining investment of 0.075 per cent in Amadeus (€11 million) and six Boeing 737 engines (€7 million). These were presented within the Iberia and British Airways segments respectively.
combination.
| € million | Goodwill | Brand | Customer loyalty programmes |
Landing rights1 |
Other2 | Total |
|---|---|---|---|---|---|---|
| Cost | ||||||
| Balance at January 1, 2014 | 325 | 341 | 253 | 1,387 | 583 | 2,889 |
| Additions | – | – | – | 1 | 137 | 138 |
| Exchange movements | 3 | – | – | 54 | 29 | 86 |
| Balance at December 31, 2014 | 328 | 341 | 253 | 1,442 | 749 | 3,113 |
| Additions | – | – | – | – | 168 | 168 |
| Additions due to Business combination | 323 | 110 | – | 172 | 40 | 645 |
| Disposals | – | – | – | – | (114) | (114) |
| Reclassifications | – | – | – | – | 20 | 20 |
| Exchange movements | 5 | – | – | 70 | 42 | 117 |
| December 31, 2015 | 656 | 451 | 253 | 1,684 | 905 | 3,949 |
| Amortisation and impairment | ||||||
| Balance at January 1, 2014 | 249 | 79 | – | 72 | 293 | 693 |
| Charge for the year | – | – | – | 1 | 43 | 44 |
| Impairment reversal | – | (79) | – | – | – | (79) |
| Exchange movements | – | – | – | 4 | 13 | 17 |
| Balance at December 31, 2014 | 249 | – | – | 77 | 349 | 675 |
| Charge for the year | – | – | – | 3 | 72 | 75 |
| Disposals | – | – | – | – | (78) | (78) |
| Reclassifications | – | – | – | – | 8 | 8 |
| Exchange movements | – | – | – | 6 | 17 | 23 |
| December 31, 2015 | 249 | – | – | 86 | 368 | 703 |
| Net book values | ||||||
| December 31, 2015 | 407 | 451 | 253 | 1,598 | 537 | 3,246 |
| December 31, 2014 | 79 | 341 | 253 | 1,365 | 400 | 2,438 |
1 The net book value includes non-EU based landing rights of €123 million (2014: €13 million) that have a definite life, of which €110 million were acquired through Business
2 Other intangible assets consist primarily of software with a net book value of €487 million (2014: €353 million), and also include purchased emissions allowances.
The carrying amounts of intangible assets with indefinite life and goodwill allocated to cash generating units (CGUs) of the Group are:
| Landing | Customer loyalty |
||||
|---|---|---|---|---|---|
| € million | Goodwill | rights | Brand | programmes | Total |
| 2015 | |||||
| Iberia | |||||
| January 1, 2015 | – | 423 | 306 | 253 | 982 |
| Transfer to Avios | – | – | – | (253) | (253) |
| December 31, 2015 | – | 423 | 306 | – | 729 |
| British Airways | |||||
| January 1, 2015 | 51 | 840 | – | – | 891 |
| Exchange movements | 5 | 61 | – | – | 66 |
| December 31, 2015 | 56 | 901 | – | – | 957 |
| Vueling | |||||
| January 1 and December 31, 2015 | 28 | 89 | 35 | – | 152 |
| Aer Lingus | |||||
| January 1, 2015 | – | – | – | – | – |
| Additions due to Business combination | 323 | 62 | 110 | – | 495 |
| December 31, 2015 | 323 | 62 | 110 | – | 495 |
| Avios | |||||
| January 1, 2015 | – | – | – | – | – |
| Transfer from Iberia | – | – | – | 253 | 253 |
| December 31, 2015 | – | – | – | 253 | 253 |
| December 31, 2015 | 407 | 1,475 | 451 | 253 | 2,586 |
| Customer | ||||||
|---|---|---|---|---|---|---|
| € million | Goodwill | Landing rights |
Brand | loyalty programmes |
Total | |
| 2014 | ||||||
| Iberia | ||||||
| January 1, 2014 | – | 423 | 227 | 253 | 903 | |
| Impairment losses reversed | – | – | 79 | – | 79 | |
| December 31, 2014 | – | 423 | 306 | 253 | 982 | |
| British Airways | ||||||
| January 1, 2014 | 48 | 789 | – | – | 837 | |
| Additions | – | 1 | – | – | 1 | |
| Exchange movements | 3 | 50 | – | – | 53 | |
| December 31, 2014 | 51 | 840 | – | – | 891 | |
| Vueling | ||||||
| January 1 and December 31, 2014 | 28 | 89 | 35 | – | 152 | |
During the year to December 31, 2015 the Group acquired Aer Lingus, which has been identified as a CGU consistent with the other airlines in the Group. For the year to December 31, 2015 the Group did not conduct an impairment review for the Aer Lingus CGU as the fair value allocations were completed on a provisional basis (note 3). In the absence of any indicators of impairment, it is not considered necessary to carry out an impairment review at December 31, 2015 as goodwill and other intangible assets with indefinite life have been allocated on a provisional basis.
December 31, 2014 79 1,352 341 253 2,025
The recoverable amounts of CGUs have been measured based on their value-in-use.
Value-in-use is calculated using a discounted cash flow model, with the royalty methodology used for brands. Cash flow projections are based on the Business plan approved by the Board covering a five year period. Cash flows extrapolated beyond the five year period are projected to increase based on long-term growth rates. Cash flow projections are discounted using the CGU's pre-tax discount rate.
Annually the Group prepares and approves five year business plans. Business plans were approved in the fourth quarter of the year. The business plan cash flows used in the value-in-use calculations reflect all restructuring of the business that has been approved by the Board and which can be executed by Management under existing agreements.
For each of the airline CGUs the key assumptions used in the value-in-use calculations are as follows:
| 2015 | |||
|---|---|---|---|
| Per cent | British Airways |
Iberia | Vueling |
| Lease adjusted operating margin | 12–15 | 8–14 | 12–15 |
| Average ASK growth per annum | 2–3 | 7 | 10 |
| Long-term growth rate | 2.5 | 2.0 | 2.0 |
| Pre-tax discount rate | 8.6 | 9.7 | 10.3 |
| 2014 | |||
|---|---|---|---|
| Per cent | British Airways |
Iberia | Vueling |
| Long-term growth rate | 2.5 | 2.2 | 2.2 |
| Pre-tax discount rate | 10.0 | 10.2 | 12.5 |
Lease adjusted operating margin is the average annual operating result, adjusted for aircraft operating lease costs, as a percentage of revenue over the five year Business plan to 2020. It is presented as a percentage point range and is based on past performance, Management's expectation of the market development and incorporating risks into the cash flow estimates.
ASK growth is the average annual increase over the Business plan, based on past performance and Management's expectation of the market.
The long-term growth rate is calculated for each CGU based on the forecasted weighted average exposure in each primary market using gross domestic product (GDP) (source: Oxford Economics/Haver Analytics). This is amended from time-to-time to reflect specific market risk.
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 its CGU. It is derived from the weighted average cost of capital (WACC). The WACC takes into consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by airline investors and the cost of debt is broadly based on the Group's interest-bearing borrowings. CGU specific risk is incorporated by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects the timing of future tax flows. The change in discount rate for 2015 reflects a reduction in risk free rates and lower financing costs.
The impairment test of the Avios CGU was based on a value-in-use calculation with a long-term growth rate assumption of 2.4 per cent and a pre-tax discount rate of 9.1 per cent.
In 2015, Management reviewed the recoverable amount of each of its CGUs with the exception of Aer Lingus and concluded the recoverable amounts exceeded the carrying values. As a result, no further tests of brands, customer loyalty programmes or landing rights were performed.
The impairment test of the Iberia brand was reassessed in 2014, given the excess of the Iberia CGU recoverable amount over its carrying value. The reassessment included determining the Iberia brand recoverable amount using the royalty methodology, with a royalty rate of 0.60 per cent. Using this methodology, the recoverable amount of the Iberia CGU was €6,400 million. Individually and in combination, the value-in-use tests of the Iberia CGU and of the Iberia brand supported the reversal of the original €79 million impairment. In 2014, this was recorded as an exceptional credit within Depreciation, amortisation and impairment in the Income Statement.
Additional sensitivities have been considered at the overall CGU level.
No reasonable possible change in the key assumptions for any of the Group's CGUs would cause the carrying amounts to exceed the recoverable amounts.
The Group's principal subsidiaries at December 31, 2015 are listed in the Group investments section.
All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly do not differ from the proportion of ordinary shares held. There have been no significant changes in ownership interests of subsidiaries during the year.
The total non-controlling interest at December 31, 2015 is €308 million which largely comprises €300 million of 6.75 per cent fixed coupon euro perpetual preferred securities issued by British Airways Finance (Jersey) L.P. (note 31).
British Airways Employee Benefit Trustee (Jersey) Limited, a wholly-owned subsidiary of British Airways, governs the British Airways Plc Employee Share Ownership Trust (the Trust). The Trust is not a legal subsidiary of IAG; however, it is consolidated within the Group results.
The share of the assets, liabilities, revenue and profit of the Group's associates, which are included in the Group's financial statements, are as follows:
| € million | 2015 | 2014 |
|---|---|---|
| Total assets | 100 | 79 |
| Total liabilities | (64) | (53) |
| Revenue | 75 | 96 |
| Profit for the year | 6 | 2 |
The detail of the movement in Investment in associates is shown as follows:
| € million | 2015 | 2014 |
|---|---|---|
| At beginning of year | 27 | 25 |
| Share of retained profits | 6 | 2 |
| Acquired through Business combination | 17 | – |
| Disposals | (1) | – |
| Exchange movements | 1 | 2 |
| Dividends received | (9) | (2) |
| 41 | 27 |
During the year the Group acquired a 33.33 per cent equity interest in the share capital of Propius Holdings Limited through the Business combination. At December 31, 2015 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 December 31, 2015 the investment in Handling Guinea Ecuatorial, S.A. exceeded 50 per cent ownership by the Group (51 per cent) and is treated as an associate as the local partner controls its activities. The Group disposed of its investment in Iber-América Aerospace, LLC (65.33 per cent) during the year.
In 2014, Iberia entered into an agreement to settle its hedging transaction over its ownership interest in Amadeus and sell its entire shareholding. The derivative transaction comprised a collar arrangement on Iberia's Amadeus shareholding of 33,562,331 ordinary shares.
The settlement of the derivative contract commenced in August 2014 and the Group's shareholding in Amadeus has been sold in equal instalments over a 100 trading day period. At December 31, 2014 Iberia had settled 99 per cent of the transaction and the resulting €83 million gain was recognised in the Net gain related to available-for-sale financial assets line. The remaining 0.075 per cent investment in Amadeus was settled in January 2015.
Available-for-sale financial assets include the following:
| € million | 2015 | 2014 |
|---|---|---|
| Listed securities | ||
| Comair Limited | 9 | 19 |
| Unlisted securities | 65 | 65 |
| 74 | 84 |
The net gain relating to available-for-sale financial assets was €5 million (2014: net gain of €93 million which related mainly to the Amadeus settlement transaction).
| € million | 2015 | 2014 |
|---|---|---|
| Amounts falling due within one year | ||
| Trade receivables | 1,280 | 1,349 |
| Provision for doubtful receivables | (84) | (97) |
| Net trade receivables | 1,196 | 1,252 |
| Prepayments and accrued income | 925 | 441 |
| Other non-trade debtors | 310 | 161 |
| 2,431 | 1,854 | |
| Amounts falling due after one year | ||
| Prepayments and accrued income | 173 | 119 |
| Other interest-bearing deposits (greater than one year) | 104 | – |
| Other non-trade debtors | 88 | 69 |
| 365 | 188 | |
| Movements in the provision for doubtful trade receivables were as follows: | ||
| € million | 2015 | 2014 |
| At beginning of year | 97 | 89 |
| Provision for doubtful receivables | 8 | 47 |
| Unused amounts reversed | (3) | (21) |
| Receivables written off during the year | (20) | (18) |
| Exchange movements | 2 | – |
| 84 | 97 | |
| The ageing analysis of net trade receivables is as follows: | ||
| € million | 2015 | 2014 |
| Neither past due date nor impaired | 986 | 939 |
| < 30 days | 117 | 205 |
| 30 – 60 days | 77 | 69 |
| > 60 days | 16 | 39 |
| Net trade receivables | 1,196 | 1,252 |
Trade receivables are generally non-interest-bearing and on 30 day terms (2014: 30 day terms).
| € million | 2015 | 2014 |
|---|---|---|
| Cash at bank and in hand | 2,230 | 1,223 |
| Short-term deposits falling due within three months | 679 | 305 |
| Cash and cash equivalents | 2,909 | 1,528 |
| Other current interest-bearing deposits maturing after three months | 2,947 | 3,416 |
| Cash, cash equivalents and other interest bearing deposits | 5,856 | 4,944 |
Cash at bank is primarily held in AAA money market funds and bank deposits. Short-term deposits are made for periods up to three months depending on the cash requirements of the Group and earn interest based on the floating deposit rates.
At December 31, 2015 the Group had no outstanding bank overdrafts (2014: nil).
Other current interest-bearing deposits are made for periods in excess of three months with maturity typically within 12 months and earn interest based on the market rates available at the time the deposit was made.
At December 31, 2015 Aer Lingus held €49 million of restricted cash within interest-bearing deposits maturing after more than three months relating to the pension escrow.
At December 31, 2015 British Airways held €72 million equivalent of restricted cash in Nigeria.
In 2014 the Group had unrepatriated funds recognised by Venezuela's Central Bank which related to sales made in Venezuela from 2013 and 2014. A charge of €180 million against the balance was recorded in 2014 (note 5).
| € million | 2015 | 2014 |
|---|---|---|
| Trade creditors | 2,043 | 1,869 |
| Other creditors | 1,031 | 927 |
| Other taxation and social security | 186 | 129 |
| Accruals and deferred income | 543 | 356 |
| 3,803 | 3,281 |
| Days | 2015 |
|---|---|
| Average days for payment to suppliers | 17 |
| Ratio of transactions paid | 17 |
| Ratio of transactions outstanding for payment | 18 |
| €'000 | 2015 |
|---|---|
| Total payments made | 4,220,000 |
| Total payments outstanding | 81,000 |
| € million | 2015 | 2014 |
|---|---|---|
| Non-current trade creditors | 5 | 2 |
| Accruals and deferred income | 218 | 224 |
| 223 | 226 |
| a Current |
||
|---|---|---|
| € million | 2015 | 2014 |
| Bank and other loans | 576 | 164 |
| Finance leases | 556 | 549 |
| 1,132 | 713 |
| b Non-current |
||
|---|---|---|
| € million | 2015 | 2014 |
| Bank and other loans | 2,176 | 1,069 |
| Finance leases | 5,322 | 4,835 |
| 7,498 | 5,904 |
Bank and other loans are repayable up to the year 2027. Bank and other loans of the Group amounting to €813 million (2014: €541 million) are secured on aircraft. Finance leases are all secured on aircraft or property, plant and equipment.
Bank and other loans comprise the following:
| € million | 2015 | 2014 |
|---|---|---|
| €500 million fixed rate 0.25 per cent convertible bond 20201 | 454 | – |
| €500 million fixed rate 0.625 per cent convertible bond 20222 | 431 | – |
| €390 million fixed rate 1.75 per cent convertible bond 20183 | 350 | 335 |
| £250 million fixed rate 8.75 per cent unsecured Eurobonds 20164 | 343 | 316 |
| Floating rate euro mortgage loans secured on specific aircraft5 | 328 | 60 |
| Floating rate euro syndicate loan secured on investments6 | 192 | – |
| Fixed rate US dollar mortgage loans secured on specific aircraft7 | 174 | 173 |
| Fixed rate pound sterling mortgage loans secured on specific aircraft8 | 102 | 116 |
| Fixed rate Chinese yuan mortgage loans secured on aircraft9 | 102 | – |
| €147 million fixed rate unsecured bond10 | 147 | – |
| Floating rate pound sterling mortgage loans secured on specific aircraft11 | 55 | 125 |
| Floating rate US dollar mortgage loans secured on specific aircraft12 | 52 | 67 |
| Fixed rate unsecured euro loans with the Spanish State (Department of Industry)13 | 15 | 20 |
| European Investment Bank pound sterling loans secured on certain property14 | 7 | 10 |
| Floating rate unsecured euro loan15 | – | 11 |
| 2,752 | 1,233 | |
| Less: current instalments due on bank loans | (576) | (164) |
| 2,176 | 1,069 |
6 Floating rate euro syndicate loan secured on specific investment assets of the Group and bears interest of 1.375 per cent above 6 month EURIBOR. The loan is repayable in 2020.
7 Fixed rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 3.81 per cent and 4.76 per cent. The loans are repayable between 2021 and 2026.
8 Fixed rate pound sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 6.14 per cent and 6.3 per cent. The loans are repayable between 2016 and 2018.
9 Fixed rate Chinese yuan mortgage loans are secured on specific aircraft assets of the Group and bears interest of 5.20 per cent. The loans are repayable in 2022. 10 Total of €147 million fixed rate unsecured bonds between 2.5 to 3.75 per cent coupon repayable between 2018 and 2025.
11 Floating rate pound sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 1.10 per cent and 1.27 per cent. The loans are repayable between 2016 and 2019.
12 Floating rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 1.31 per cent and 2.99 per cent. The loans are repayable between 2016 and 2017.
13 Fixed rate unsecured euro loans with the Spanish State (Department of Industry) bear an interest of between nil and 5.68 per cent and are repayable between 2016 and 2026.
14 European Investment Bank pound sterling loan is secured on certain property assets of the Group and bears interest of 0.71 per cent. The loan is repayable in 2017.
15 Floating rate unsecured euro loan had interest of 0.0225 per cent above EURIBOR; it was repaid in 2015.
FINANCIAL STATEMENTS
| Million | 2015 | 2014 |
|---|---|---|
| Loans | ||
| Bank: | ||
| US dollar | \$246 | \$295 |
| Euro | €536 | €90 |
| Pound sterling | £119 | £198 |
| Chinese yuan | CNY 716 | CNY – |
| €1,027 | €581 | |
| Fixed rate bonds: | ||
| Euro | €1,381 | €335 |
| Pound sterling | £250 | £249 |
| €1,725 | €652 | |
| Finance leases | ||
| US dollar | \$3,464 | \$3,772 |
| Euro | €1,458 | €1,084 |
| Japanese yen | ¥44,599 | ¥37,105 |
| Pound sterling | £656 | £771 |
| €5,878 | €5,384 | |
| €8,630 | €6,617 |
The Group uses finance leases principally to acquire aircraft. These leases have both renewal options and purchase options, at the option of the Group. Future minimum lease payments under finance leases are as follows:
| € million | 2015 | 2014 |
|---|---|---|
| Future minimum payments due: | ||
| Within one year | 692 | 676 |
| After more than one year but within five years | 3,084 | 2,463 |
| In five years or more | 2,769 | 3,100 |
| 6,545 | 6,239 | |
| Less: Finance charges | (667) | (855) |
| Present value of minimum lease payments | 5,878 | 5,384 |
| The present value of minimum lease payments is analysed as follows: | ||
| Within one year | 556 | 549 |
| After more than one year but within five years | 2,723 | 2,079 |
| In five years or more | 2,599 | 2,756 |
| 5,878 | 5,384 |
The Group is no longer subject to financial covenants on the finance lease of one Airbus A340-600.
The Group has entered into commercial leases on certain properties, equipment and aircraft. These leases have durations ranging from less than one year for aircraft to 130 years for ground leases. Certain leases contain options for renewal.
The aggregate payments, for which there are commitments under operating leases, fall due as follows:
| 2015 | 2014 | |||||
|---|---|---|---|---|---|---|
| Property, plant and |
Property, plant and |
|||||
| € million | Fleet | equipment | Total | Fleet | equipment | Total |
| Within one year | 778 | 179 | 957 | 712 | 171 | 883 |
| Between one and five years | 2,184 | 384 | 2,568 | 1,580 | 325 | 1,905 |
| Over five years | 1,206 | 2,456 | 3,662 | 934 | 2,027 | 2,961 |
| 4,168 | 3,019 | 7,187 | 3,226 | 2,523 | 5,749 |
Subleases entered into by the Group relate to surplus rental properties and aircraft assets held under non-cancellable leases to third parties. These leases have remaining terms of one to 22 years and the assets are surplus to the Group's requirements. Future minimum rentals receivable under non-cancellable operating leases are as follows:
| 2015 | 2014 | |||||
|---|---|---|---|---|---|---|
| € million | Fleet | Property, plant and equipment |
Total | Fleet | Property, plant and equipment |
Total |
| Within one year | 1 | 8 | 9 | 2 | 12 | 14 |
| Between one and five years | – | 5 | 5 | – | 6 | 6 |
| Over five years | – | 2 | 2 | – | 2 | 2 |
| 1 | 15 | 16 | 2 | 20 | 22 |
The Group is no longer subject to financial covenants on the operating leases of three Airbus A340-600s.
| 1,013 | 744 | 579 | 235 | 83 | 2,654 | |
|---|---|---|---|---|---|---|
| Non-current | 839 | 546 | 510 | 117 | 37 | 2,049 |
| Current | 174 | 198 | 69 | 118 | 46 | 605 |
| Analysis: | ||||||
| Net book value December 31, 2015 | 1,013 | 744 | 579 | 235 | 83 | 2,654 |
| Exchange differences | 91 | 3 | – | (1) | 5 | 98 |
| Unwinding of discount | 4 | 5 | 10 | 1 | 1 | 21 |
| Release of unused amounts | (30) | (22) | (51) | (19) | (23) | (145) |
| Utilised during the year | (182) | (237) | (24) | (36) | (77) | (556) |
| Acquired through Business combination | 73 | 7 | 67 | 8 | 3 | 158 |
| Provisions recorded during the year | 286 | 93 | 25 | 147 | 56 | 607 |
| Net book value January 1, 2015 | 771 | 895 | 552 | 135 | 118 | 2,471 |
| € million | Restoration and handback provisions |
Restructuring | Employee leaving indemnities and other employee related provisions |
Legal claims provisions |
Other provisions |
Total |
The provision for restoration and handback costs is maintained to meet the contractual return conditions on aircraft held under operating leases. The provision also included an amount relating to leased land and buildings where restoration costs are contractually required at the end of the lease. Where such costs arise as a result of capital expenditure on the leased asset, the restoration costs are capitalised. The provision is a long term provision, typically covering the aircraft lease term.
The Group recognises a provision for targeted voluntary severance schemes previously announced. Part of this provision relates to a collective redundancy programme, which provides for payments to affected employees until they reach the statutory retirement age. The amount provided for has been determined by an actuarial valuation made by independent actuaries, and was based on the same assumptions as those made to determine the provisions for obligations to flight crew below, with the exception of the discount rate, which in this case was 0.47 per cent. The payments related to this provision will continue over ten years.
In 2014 the Group recognised an additional provision in relation to the restructuring plans at Iberia (note 5). The payments related to this provision will continue over nine years.
This provision includes employees leaving indemnities relating to staff under various contractual arrangements.
The Group recognises a provision relating to 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. The Group is required to remunerate these employees until they reach the statutory retirement age, and an initial provision was recognised based on an actuarial valuation. The provision was reviewed at December 31, 2015 with the use of independent actuaries using the projected unit credit method, based on a discount rate of 2.08 per cent and a 2 per cent annual increase in the Consumer Price Index (CPI). This is mainly a long-term provision.
This provision primarily relates to multi-party claims from groups or employees on a number of matters related to its operations, including claims for additional holiday pay and for age discrimination. Also included are provisions related to investigations by a number of competition authorities in connection with alleged anti-competitive concerning the Group's passenger and cargo businesses and provisions related to tax assessment. The final amount required to pay the remaining claims and fines is subject to uncertainty.
Following an appeal to the General Court of the European Union, the 2010 European Commission decision on alleged cartel activity was partially annulled and British Airways was advised that the €104 million fine would be refunded in full. The refund was received in February 2016. It is not yet clear what the European Commission's next steps will be. At December 31, 2015, the Group recognised an asset included in Other current assets and an equal provision, as it is not possible to predict the outcome of the proceedings.
During the year the Group has recognised a litigation provision of €35 million, which was subsequently paid (note 5).
Other provisions includes:
The Group is exposed to a variety of financial risks: market risk (including fuel price risk, foreign currency risk and interest rate risk), counterparty risk, liquidity risk and capital risk. The Group's Financial Risk Management programme focuses on the unpredictability of financial markets and defines the amount of risk that the Group is prepared to retain.
Financial Risk is managed in two tiers under the oversight of the Group treasury department. The first tier comprises fuel price fluctuations, euro-US dollar volatility and sterling-US dollar volatility which represent the largest financial risks facing the Group. The Board approves the level of risk retention. The IAG Management Committee approves the hedging levels and the degree of flexibility in applying the levels that are delegated to the Group Treasury Committee. The Group Treasury Committee meets monthly and includes representatives from Group treasury, British Airways, Iberia, Vueling and Aer Lingus. The Committee approves a mandate for British Airways, Iberia, Vueling and Aer Lingus treasury teams to place hedging cover in the market for their respective companies, the mandate includes the instruments to be used. Second tier risks such as interest rate movements, emissions and minor currency pairs are managed separately by British Airways, Iberia, Vueling and Aer Lingus under authority delegated by their Boards to their treasury departments.
The Group is exposed to fuel price risk. The Group's fuel price risk management strategy aims to provide the Group with protection against sudden and significant increases in oil prices while ensuring that the Group is not competitively disadvantaged in the event of a substantial fall in the price of fuel. The current Group strategy, as approved by the IAG Management Committee, is to hedge:
The Group Treasury Committee provides a quarterly report on the hedging position to the IAG Management Committee and the Audit and Compliance Committee. The Board reviews the strategy, including the risk retained, once a year.
Within the strategy, the Financial Risk Management programme allows for the use of a number of derivatives available on over-the-counter (OTC) markets with approved counterparties.
The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in fuel prices, with all other variables held constant, on the result before tax and equity:
| 2015 | 2014 | ||||
|---|---|---|---|---|---|
| Increase/(decrease) in fuel price per cent |
Effect on result before tax € million |
Effect on equity € million |
Increase/(decrease) in fuel price per cent |
Effect on result before tax € million |
Effect on equity € million |
| 30 | 70 | 656 | 30 | (8) | 972 |
| (30) | (49) | (731) | (30) | 9 | (989) |
The Group presents its consolidated financial statements in euros, has functional entities in euro and sterling, and conducts business in a number of different countries. Consequently the Group is exposed to currency risk on revenue, purchases and borrowings that are denominated in a currency other than the functional currency of the entity. The currencies, in which these transactions are primarily denominated are euro, US dollar, pound sterling and Japanese yen. The Group generates a surplus in most currencies in which it does business. The US dollar is an exception as capital expenditure, debt repayments and fuel purchases denominated in US dollars typically create a deficit.
The Group has a number of strategies to hedge foreign currency risks. The operational US dollar short position is subject to the same governance structure as the fuel hedging strategy set out above. The current Group strategy, as approved by the IAG Management Committee, is to hedge between 60 and 80 per cent of the first year's US dollar short position; between 40 and 60 per cent of the second year's exposure and up to 30 per cent of the third year's exposure. The Group Treasury Committee targets to operate within plus or minus 20 per cent of the policy in years one and two and provides a quarterly report on the hedging position to the IAG Management Committee and Audit and Compliance Committee. The Board reviews the strategy, including the risk retained, once a year. Foreign exchange swaps and options are used to implement the strategy.
Operational cash flows in minor currency pairs are hedged by British Airways, Iberia, Vueling and Aer Lingus under the control of their Boards.
Aircraft operating leases denominated in US dollars are either treated as part of the operational US dollar short position or are subject to separate cross currency swaps, individually approved by the IAG Management Committee, for the life of the lease.
Iberia's balance sheet assets and liabilities in US dollars are hedged through a rolling programme of swaps that eliminate the profit and loss volatility arising from revaluation of these items into euros. British Airways utilises its US dollar, euro and Japanese yen debt repayments as a hedge of future US dollar, euro and yen revenues. Vueling's and Aer Lingus's position in US dollars is managed using derivative financial instruments.
The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in the exchange rates, with all other variables held constant, on result before tax and equity:
| Strengthening/ (weakening) in US dollar rate per cent |
Effect on result before tax € million |
Effect on equity € million |
Strengthening/ (weakening) in pound sterling rate per cent |
Effect on result before tax € million |
Effect on equity € million |
Strengthening/ (weakening) in Japanese yen rate per cent |
Effect on result before tax € million |
Effect on equity € million |
|
|---|---|---|---|---|---|---|---|---|---|
| 2015 | 10 | (2) | (72) | 10 | (43) | 170 | 10 | – | (32) |
| (10) | 2 | 117 | (10) | 43 | (179) | (10) | – | 32 | |
| 2014 | 10 | (1) | (136) | 10 | (1) | 152 | 10 | (2) | (24) |
| (10) | – | 115 | (10) | 1 | (161) | (10) | 2 | 24 |
The Group is exposed to changes in interest rates on floating rate debt and on cash deposits.
Interest rate risk on floating rate debt is managed through interest rate swaps, floating to fixed cross currency swaps and interest rate collars. After taking into account the impact of these derivatives, 79 per cent of the Group's borrowings were at fixed rates and 21 per cent were at floating rates.
All cash deposits are on tenors less than one year. The interest rate is predominantly fixed for the tenor of the deposit.
The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in the interest rates, on result before tax and equity:
| Strengthening/ (weakening) in US interest rate Basis points |
Effect on result before tax € million |
Effect on equity € million |
Strengthening/ (weakening) in euro interest rate Basis points |
Effect on result before tax € million |
Effect on equity € million |
Strengthening/ (weakening) in sterling interest rate Basis points |
Effect on result before tax € million |
Effect on equity € million |
|
|---|---|---|---|---|---|---|---|---|---|
| 2015 | 50 | (3) | 1 | 50 | (6) | – | 50 | 8 | – |
| (50) | 3 | (1) | (50) | 6 | – | (50) | (8) | – | |
| 2014 | 50 | (2) | (1) | 50 | (5) | (5) | 50 | 1 | 1 |
| (50) | 2 | 1 | (50) | 5 | 5 | (50) | (1) | (1) |
The Group is exposed to counterparty risk to the extent of non-performance by its counterparties in respect of financial assets receivable. The Group has policies and procedures in place to minimise the risk by placing credit limits on each counterparty. These policies and procedures are coordinated through the Group Treasury Committee. The Committee also reviews the application of the policies and procedures by British Airways, Iberia, Vueling and Aer Lingus. The Group monitors counterparty credit limits and defaults of counterparties, incorporating this information into credit risk controls. Treasury activities include placing money market deposits, fuel hedging and foreign currency transactions, which could lead to a concentration of different credit risks with the same counterparty. This risk is managed by allocation of exposure limits for the counterparty to British Airways, Iberia, Vueling and Aer Lingus. Exposures at the activity level are monitored on a daily basis and the overall exposure limit for the counterparty is reviewed at least monthly in the light of available market information such as credit ratings. Sovereign risk is also monitored, country concentration and sovereign credit ratings are reviewed at every hedging committee meeting.
Each operating company invests surplus cash in interest-bearing accounts, time deposits, money market deposits, and marketable securities, choosing instruments with appropriate maturities or liquidity to provide sufficient headroom. At the reporting date the operating companies held money market funds and other liquid assets that are expected to readily generate cash inflows for managing liquidity risk.
The financial assets recognised in the financial statements, net of impairment losses, represent the Group's maximum exposure to credit risk, without taking account of any guarantees in place or other credit enhancements. The Group does not hold any collateral to mitigate the exposure, but only transacts with counterparties of sufficient credit rating to reasonably assure the recoverability of financial assets. Counterparty risks arising from acting as guarantor are disclosed in note 33.
At December 31, 2015 the Group's credit risk position, allocated by region, in respect of treasury managed cash and derivatives was as follows:
| Region | Marked-to-market of treasury controlled financial instruments allocated by geography |
|---|---|
| United Kingdom | 20% |
| Spain | 4% |
| Ireland | 7% |
| Rest of Eurozone | 38% |
| Rest of world | 31% |
Liquidity risk management includes maintaining sufficient cash and interest-bearing deposits, the availability of funding from an adequate amount of credit facilities and the ability to close out market positions. Due to the volatile nature of the underlying business, Group treasury maintains flexibility in funding by maintaining availability under committed credit lines.
At December 31, 2015 the Group had undrawn overdraft facilities of €14 million (2014: €13 million). The Group held undrawn uncommitted money market lines of €34 million at December 31, 2015 (2014: €32 million). The Group had the following undrawn general and committed aircraft financing facilities:
| 2015 | ||||
|---|---|---|---|---|
| Million | Currency | € equivalent | ||
| Euro facility expiring between February and November 2016 | €137 | 137 | ||
| US dollar facility expiring between September and December 2016 | \$1,247 | 1,146 | ||
| US dollar facility expiring December 2021 | \$1,164 | 1,069 | ||
| US dollar facility expiring June 2022 | \$1,750 | 1,608 | ||
| 2014 | ||||
| Million | Currency | € equivalent | ||
| Euro facility expiring between January and November 2015 | €335 | 335 | ||
| US dollar facility expiring between January and October 2015 | \$805 | 655 | ||
| Renminbi facility expiring November 2015 | RMB 750 | 99 | ||
| Euro facility expiring January 2016 | €3 | 3 | ||
| US dollar facility expiring between September and October 2016 | \$1,153 | 937 | ||
| US dollar facility expiring December 2021 | \$1,164 | 946 |
The following table analyses the Group's 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 | Within 6 months |
6 – 12 months |
1 – 2 years |
2 – 5 years |
More than 5 years |
Total 2015 |
|---|---|---|---|---|---|---|
| Interest-bearing loans and borrowings: | ||||||
| Finance lease obligations | (315) | (371) | (803) | (2,263) | (2,765) | (6,517) |
| Fixed rate borrowings | (53) | (449) | (89) | (1,109) | (737) | (2,437) |
| Floating rate borrowings | (62) | (73) | (81) | (251) | (207) | (674) |
| Trade and other payables | (3,442) | – | (10) | – | – | (3,452) |
| Derivative financial instruments: | ||||||
| Aircraft lease hedges (asset) | 1 | 1 | 10 | – | – | 12 |
| Forward currency contracts (asset) | 97 | 86 | 38 | 11 | – | 232 |
| Fuel derivatives (asset) | 2 | 1 | – | – | – | 3 |
| Currency options (asset) | 11 | 3 | 4 | 2 | – | 20 |
| Aircraft lease hedges (liability) | (1) | (1) | (3) | – | – | (5) |
| Forward currency contracts (liability) | (6) | – | (2) | (2) | – | (10) |
| Fuel derivatives (liability) | (858) | (465) | (232) | (42) | – | (1,597) |
| Currency options (liability) | (2) | (1) | (1) | (1) | – | (5) |
| Hedge of available-for-sale asset | 1 | – | – | – | – | 1 |
| December 31, 2015 | (4,627) | (1,269) | (1,169) | (3,655) | (3,709) | (14,429) |
| € million | Within 6 months |
6 – 12 months |
1 – 2 years | 2 – 5 years | More than 5 years |
Total 2014 |
| Interest-bearing loans and borrowings: | ||||||
| Finance lease obligations | (320) | (356) | (574) | (1,889) | (3,100) | (6,239) |
| Fixed rate borrowings | (41) | (53) | (441) | (532) | (77) | (1,144) |
| Floating rate borrowings | (48) | (69) | (79) | (43) | (42) | (281) |
| Trade and other payables | (3,017) | – | – | – | – | (3,017) |
| Derivative financial instruments: | ||||||
| Aircraft lease hedges (asset) | 7 | 7 | 11 | 5 | – | 30 |
| Forward currency contracts (asset) | 78 | 61 | 51 | 2 | – | 192 |
| Fuel derivatives (asset) | – | – | – | – | – | – |
| Currency options (asset) | 14 | 10 | 4 | – | – | 28 |
| Aircraft lease hedges (liability) | (1) | (1) | – | – | – | (2) |
| Cross currency swaps (liability) | – | – | (1) | – | – | (1) |
| Forward currency contracts (liability) | (1) | – | – | – | – | (1) |
| Fuel derivatives (liability) | (806) | (518) | (332) | – | – | (1,656) |
| Currency options (liability) | – | – | – | – | – | – |
| Hedge of available-for-sale asset | (5) | – | – | – | – | (5) |
| December 31, 2014 | (4,140) | (919) | (1,361) | (2,457) | (3,219) | (12,096) |
The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements.
The Group enters into derivative transactions under master netting agreements. 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. In certain circumstances, for example, when a credit event such as a default occurs, all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single amount is payable in settlement of all transactions.
December 31, 2015
| € million | Gross value of financial instruments |
Financial instruments that are offset under netting agreements |
Net amounts of financial instruments in the balance sheet |
Related amounts not set off in the balance sheet |
Net amount |
|---|---|---|---|---|---|
| Financial assets | |||||
| Derivative financial assets | 279 | (19) | 260 | (5) | 255 |
| Financial liabilities | |||||
| Derivative financial liabilities | 1,629 | (19) | 1,610 | (5) | 1,605 |
| December 31, 2014 | |||||
| € million | Gross value of financial instruments |
Financial instruments that are offset under netting agreements |
Net amounts of financial instruments in the balance sheet |
Related amounts not set off in the balance sheet |
Net amount |
| Financial assets | |||||
| Derivative financial assets | 263 | (5) | 258 | – | 258 |
| Financial liabilities | |||||
| Derivative financial liabilities | 1,677 | (5) | 1,672 | – | 1,672 |
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, in order to reduce the cost of capital and to provide returns to shareholders.
The Group monitors capital on the basis of the adjusted net debt to EBITDAR. Net debt comprises the current and non-current portions of long-term borrowings, less cash and cash equivalents and other current interest-bearing deposits.
As at December 31, 2015, adjusted net debt increased to €8,510 million from €6,081 million at December 31, 2014.
The detail of the Group's financial instruments at December 31, 2015 and December 31, 2014 by nature and classification for measurement purposes is as follows:
December 31, 2015
| Financial assets | Total carrying | ||||
|---|---|---|---|---|---|
| Derivatives | amount | ||||
| € million | Loans and receivables |
used for hedging |
Available-for-sale | Non-financial assets |
by balance sheet item |
| Non-current assets | |||||
| Available-for-sale financial assets | – | – | 74 | – | 74 |
| Derivative financial instruments | – | 62 | – | – | 62 |
| Other non-current assets | 345 | – | – | 20 | 365 |
| Current assets | |||||
| Trade receivables | 1,196 | – | – | – | 1,196 |
| Other current assets | 545 | – | – | 690 | 1,235 |
| Non-current assets held for sale | – | – | – | 5 | 5 |
| Derivative financial instruments | – | 198 | – | – | 198 |
| Other current interest-bearing deposits | 2,947 | – | – | – | 2,947 |
| Cash and cash equivalents | 2,909 | – | – | – | 2,909 |
| Financial liabilities | Total carrying | ||||
| € million | Loans and payables |
Derivatives used for hedging |
Non-financial liabilities |
amount by balance sheet item |
|
| Non-current liabilities | |||||
| Interest-bearing long-term borrowings | 7,498 | – | – | 7,498 | |
| Derivative financial instruments | – | 282 | – | 282 | |
| Other long-term liabilities | 10 | – | 213 | 223 | |
| Current liabilities | |||||
| Current portion of long-term borrowings | 1,132 | – | – | 1,132 | |
| Trade and other payables | 3,442 | – | 361 | 3,803 | |
| Derivative financial instruments | – | 1,328 | – | 1,328 |
December 31, 2014
| Financial assets | Total carrying | ||||
|---|---|---|---|---|---|
| Derivatives | amount | ||||
| € million | Loans and receivables |
used for hedging |
Available-for-sale | Non-financial assets |
by balance sheet item |
| Non-current assets | |||||
| Available-for-sale financial assets | – | – | 84 | – | 84 |
| Derivative financial instruments | – | 80 | – | – | 80 |
| Other non-current assets | 167 | – | – | 21 | 188 |
| Current assets | |||||
| Trade receivables | 1,252 | – | – | – | 1,252 |
| Other current assets | 244 | – | – | 358 | 602 |
| Non-current assets held for sale | – | – | 11 | 7 | 18 |
| Derivative financial instruments | – | 178 | – | – | 178 |
| Other current interest-bearing deposits | 3,416 | – | – | – | 3,416 |
| Cash and cash equivalents | 1,528 | – | – | – | 1,528 |
| Financial liabilities | Total carrying | ||||
| € million | Loans and payables |
Derivatives used for hedging |
Non-financial liabilities |
amount by balance sheet item |
|
| Non-current liabilities | |||||
| Interest-bearing long-term borrowings | 5,904 | – | – | 5,904 | |
| Derivative financial instruments | – | 359 | – | 359 | |
| Other long-term liabilities | 7 | – | 219 | 226 | |
| Current liabilities | |||||
| Current portion of long-term borrowings | 713 | – | – | 713 | |
| Trade and other payables | 3,017 | – | 264 | 3,281 | |
| Derivative financial instruments | – | 1,313 | – | 1,313 |
The Group's financial instruments are disclosed in hierarchy levels based on the nature of the inputs used in determining the fair values as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis;
Level 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; and
Level 3: Inputs for the asset or liability that are not based on observable market data.
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 those instruments.
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:
Instruments included in Level 1 comprise listed asset investments classified as available-for-sale and interest-bearing borrowings which are stated at market value at the balance sheet date.
Instruments included in Level 2 include derivatives and interest-bearing borrowings.
Forward currency transactions and over-the-counter fuel derivatives are entered into with various counterparties, principally financial institutions with investment grade ratings. These are measured at the market value of instruments with similar terms and conditions at the balance sheet date using forward pricing models. Counterparty and own credit risk is deemed to be not significant.
At December 31, 2014 Level 2 also included a hedge of the available-for-sale asset which took the form of an equity collar. The valuation of this collar was based on a Black Scholes valuation model using share price spot rate, strike price, stock volatility and the euro interest rate curve.
The fair values of the Group's interest-bearing borrowings including leases are determined by discounting the remaining contractual cash flows at the relevant market interest rates at the balance sheet date.
All resulting fair value estimates are included in Level 2 except for certain other investments which are classified as Level 3.
The carrying amounts and fair values of the Group's financial assets and liabilities at December 31, 2015 are set out below:
| Carrying value |
|||||
|---|---|---|---|---|---|
| € million | Level 1 | Level 2 | Level 3 | Total | Total |
| Financial assets | |||||
| Available-for-sale financial assets | 9 | – | 65 | 74 | 74 |
| Aircraft lease hedges1 | – | 12 | – | 12 | 12 |
| Forward currency contracts1 | – | 231 | – | 231 | 231 |
| Fuel derivatives1 | – | 3 | – | 3 | 3 |
| Currency option contracts1 | – | 14 | – | 14 | 14 |
| Financial liabilities | |||||
| Interest-bearing loans and borrowings: | |||||
| Finance lease obligations | – | 6,117 | – | 6,117 | 5,878 |
| Fixed rate borrowings | 2,102 | 496 | – | 2,598 | 2,117 |
| Floating rate borrowings | – | 635 | – | 635 | 635 |
| Aircraft lease hedges2 | – | 5 | – | 5 | 5 |
| Forward currency contracts2 | – | 10 | – | 10 | 10 |
| Fuel derivatives2 | – | 1,595 | – | 1,595 | 1,595 |
1 Current portion of derivative financial assets is €198 million.
2 Current portion of derivative financial liabilities is €1,328 million.
The carrying amounts and fair values of the Group's financial assets and liabilities at December 31, 2014 are set out below:
| Fair value | |||||
|---|---|---|---|---|---|
| € million | Level 1 | Level 2 | Level 3 | Total | value Total |
| Financial assets | |||||
| Available-for-sale financial assets | 19 | – | 65 | 84 | 84 |
| Aircraft lease hedges1 | – | 38 | – | 38 | 38 |
| Forward currency contracts1 | – | 191 | – | 191 | 191 |
| Fuel derivatives1 | – | – | – | – | – |
| Currency option contracts1 | – | 29 | – | 29 | 29 |
| Financial liabilities | |||||
| Interest-bearing loans and borrowings: | |||||
| Finance lease obligations | – | 5,681 | – | 5,681 | 5,384 |
| Fixed rate borrowings | 881 | 313 | – | 1,194 | 960 |
| Floating rate borrowings | 11 | 262 | – | 273 | 273 |
| Aircraft lease hedges2 | – | 10 | – | 10 | 10 |
| Cross currency swaps2 | – | 1 | – | 1 | 1 |
| Forward currency contracts2 | – | 1 | – | 1 | 1 |
| Fuel derivatives2 | – | 1,654 | – | 1,654 | 1,654 |
| Hedge of available-for-sale asset2 | – | 5 | – | 5 | 5 |
| Currency options contracts2 | – | 1 | – | 1 | 1 |
1 Current portion of derivative financial assets is €178 million.
2 Current portion of derivative financial liabilities is €1,313 million.
There have been no transfers between levels of fair value hierarchy during the year.
Out of the financial instruments listed in the previous table, only the interest-bearing borrowings are not measured at fair value on a recurring basis.
The following table summarises key movements in Level 3 financial assets:
| € million | December 31, 2015 |
December 31, 2014 |
|---|---|---|
| Opening balance for the year | 65 | 22 |
| Gains recognised in the Income statement1 | – | 1 |
| Gains recognised in Other comprehensive income2 | – | 48 |
| Settlements | (5) | (7) |
| Exchange movements | 5 | 1 |
| Closing balance for the year | 65 | 65 |
1 Included in Net credit relating to available-for-sale financial assets in the consolidated Income statement.
2 Included in Available-for-sale financial assets – Fair value movements in equity in the consolidated Statement of other comprehensive income.
The fair value of Level 3 financial assets cannot be measured reliably; as such these assets are stated at historic cost less accumulated impairment losses with the exception of the Group's investment in The Airline Group Limited. This unlisted investment had previously been valued at nil, since the fair value could not be reasonably calculated. During the year to December 31, 2014 other shareholders disposed of a combined holding of 49.9 per cent providing a market reference from which to determine a fair value. The revaluation resulted in a gain of €48 million recognised in Other comprehensive income. The investment remains classified as a Level 3 financial asset due to the valuation criteria applied not being observable, with the resultant fair value uplift in the prior year being non-recurring in nature.
FINANCIAL STATEMENTS
Hedge accounting is applied on the following cash flow hedges.
At December 31, 2015 the Group had five principal risk management activities that were designated as hedges of future forecast transactions. These were:
To the extent that the hedges were assessed as highly effective, a summary of the amounts included in equity, the notional principal amounts and the years to which the related cash flows are expected to occur are summarised below:
December 31, 2015
| Cash flows hedged | |||||||
|---|---|---|---|---|---|---|---|
| Financial instruments designated as hedging instruments € million |
Within 6 months |
6 – 12 months |
1 – 2 years | 2 – 5 years | More than 5 years |
Total December 31, 2015 |
|
| Debt repayments to hedge future revenue | 7 | 14 | 33 | 26 | (10) | 70 | |
| Forward contracts to hedge future payments | (92) | (86) | (36) | (9) | (3) | (226) | |
| Hedges of future fuel purchases | 780 | 530 | 206 | 32 | – | 1,548 | |
| Hedges of future aircraft operating leases | 1 | – | (7) | – | – | (6) | |
| Currency options to hedge future payments | (8) | (1) | (2) | (1) | – | (12) | |
| 688 | 457 | 194 | 48 | (13) | 1,374 | ||
| Related deferred tax credit | (298) | ||||||
| Total amount included within equity | 1,076 |
December 31, 2015
| Notional principal amounts | |
|---|---|
| Million | (in local currency) |
| To hedge future currency revenues in euros | €160 |
| To hedge future currency revenues in pound sterling | £76 |
| To hedge future currency revenues in US dollars | \$54 |
| To hedge future operating payments in US dollars | \$3,770 |
| Hedges of future fuel purchases | \$4,710 |
| Cross Currency swaps: | |
| – Floating to fixed (euro) | €260 |
| – Fixed to fixed (euro) | €126 |
| Debt repayments to hedge future revenue: | |
| – US dollars | \$3,061 |
| – Euro | €1,498 |
| – Japanese yen | ¥41,698 |
| – Chinese yuan | CNY 716 |
December 31, 2014 Cash flows hedged Financial instruments designated as hedging instruments € million Within 6 months 6 – 12 months 1 – 2 years 2 – 5 years More than 5 years Total December 31, 2014 Debt repayments to hedge future revenue 15 7 15 49 (45) 41 Forward contracts to hedge future payments (87) (71) (62) (6) – (226) Hedges of future fuel purchases 751 605 369 – – 1,725 Hedges of future aircraft operating leases 1 1 (1) (1) – – Currency options to hedge future payments (12) (6) (4) – – (22) Available-for-sale asset hedge1 5 – – – – 5 673 536 317 42 (45) 1,523 Related deferred tax credit (330) Total amount included within equity 1,193 December 31, 2014 Million Notional principal amounts (in local currency) To hedge future currency revenues against US dollars \$730
| To hedge future operating payments in US dollars | \$2,928 |
|---|---|
| To hedge future operating payments in euros | €325 |
| Hedges of future fuel purchases | \$4,799 |
| Hedges of future share price volatility on available-for-sale assets | €11 |
| Cross currency swaps: | |
| – Floating to fixed (euro) | €360 |
| – Fixed to fixed (euro) | €204 |
| Debt repayments to hedge future revenue: | |
| – US dollars | \$3,307 |
| – Euro | €1,130 |
| – Japanese yen | ¥34,335 |
1 At December 31, 2014 the Group had an investment representing 0.075 per cent of the share capital of Amadeus (note 18). On August 7, 2012 the Group entered into a derivative transaction with Nomura International Plc (Nomura) on its entire ownership interest in Amadeus. The transaction took the form of a 'collar' with two 'European' options. During 2014 Iberia entered into an agreement to settle the hedging transaction in equal instalments over a 100 trading day period. At December 31, 2014 Iberia had settled 99 per cent of the transaction.
At December 31, 2014 the notional principal amount of the cash flow hedge was €11 million. The change in the fair value of the cash flow hedge of €432 million decrease was accounted for as €43 million decrease directly in equity, net of deferred tax; €387 million release from equity, net of deferred tax to the Income statement (as a result of the partial settlement); and the time value credit of €2 million recognised in the Income statement.
The ineffective portion recognised in the Income statement during the year on cash flow hedges was a loss of €70 million (2014: loss of €51 million).
The Group has no significant fair value hedges at December 31, 2015 and 2014.
The Group has no such hedges at December 31, 2015 and 2014.
| December 31, 2015 | 2,040,079 | 1,020 | 5,867 |
|---|---|---|---|
| January 1, 2015: Ordinary shares of €0.50 each | 2,040,079 | 1,020 | 5,867 |
| Allotted, called up and fully paid | of shares 000s |
capital € million |
premium € million |
| Number | Ordinary share | Share |
The treasury shares balance consists of shares held directly by the Group. During the year to December 31, 2015, the Group purchased directly 21.2 million shares at a weighted average share price of €7.70 per share totalling €163 million, which are held as Treasury shares. 7.7 million shares were issued to employees during the year as a result of vesting of employee share schemes. At December 31, 2015 the Group held 14.7 million shares, which represented 0.72 per cent of the Issued share capital of the Company.
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.
The British Airways Share Option Plan 1999 (SOP) granted options to qualifying employees based on performance at an option price which was not less than the market price of the share at the date of the grant (or the nominal value if shares are to be subscribed and this value is greater than the market value). The options are subject to a three year vesting period with the exception of grants made during the year to March 31, 2005, when there was a single re-test after a further year which measured performance of British Airways over the four year period from the date of grant. Upon vesting, options may be exercised at any time until the 10th anniversary of the date of grant. No further grants of options under the SOP have been made since 2005. At December 31, 2015 there are no awards outstanding.
The British Airways Deferred Share Plan 2005 (DSP) was 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 received a percentage of their incentive award in cash and the remaining percentage in shares through the DSP. The maximum deferral is 50 per cent.
In 2011 the Group introduced the IAG Performance Share Plan, 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. For 2011 to 2014, a conditional award of shares is subject to the achievement of a variety of performance conditions, which will vest after three years subject to the employee remaining employed by the Group. From 2015, the award was made as nil-cost options, and also had a two-year additional holding period after the end of the performance period, before vesting takes place. The awards made between 2012 and 2014 will vest based 50 per cent on achievement of IAG's TSR performance targets relative to the MSCI European Transportation Index, and 50 per cent based on achievement of earnings per share targets. The award made in 2015 will vest based one-third on achievement of IAG's TSR performance targets relative to the MSCI European Transportation Index, onethird based on achievement of earnings per share targets, and one-third based on achievement of return on invested capital targets.
In 2011 the Group introduced the IAG Incentive Award Deferral Plan (IADP), 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
| Outstanding at January 1, 2015 '000s |
Granted number '000s |
Lapsed number '000s |
Exercised number '000s |
Outstanding at December 31, 2015 '000s |
Exercisable at December 31, 2015 '000s |
|
|---|---|---|---|---|---|---|
| Share Option Plan | 942 | – | 12 | 930 | – | – |
| Performance Share Plans | 27,960 | 5,051 | 3,539 | 11,620 | 17,852 | 42 |
| Deferred Share Plans and Incentive Award Deferral Plans |
5,649 | 1,918 | 226 | 933 | 6,408 | 17 |
| 34,551 | 6,969 | 3,777 | 13,483 | 24,260 | 59 | |
| Weighted average exercise price of Share Option Plans (£) |
2.76 | – | 2.76 | 2.76 | – | – |
A total of 930,000 (2014: 2,072,000) shares related to the Share Option Plan were exercised at a weighted average market share price of £5.50 (2014: £4.13).
The fair value of equity-settled share-based payment plans determined using the Monte-Carlo model, taking into account the terms and conditions upon which the plans were granted, used the following weighted average assumptions:
| December 31, | December 31, | |
|---|---|---|
| 2015 | 2014 | |
| Weighted average fair value (£) | 3.19 | 2.35 |
| Expected share price volatility (per cent) | 30 | 35 |
| Expected comparator group volatility (per cent) | 20 | 25 |
| Expected comparator correlation (per cent) | 60 | 65 |
| Expected life of options (years) | 2.40 | 3 |
| Weighted average share price at date of grant (£) | 5.50 | 4.33 |
Volatility was calculated with reference to the Group's weekly pound sterling share price volatility. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The fair value of the PSP and the IAG Performance Share Plan also takes into account a market condition of total shareholder returns as compared to strategic competitors. No other features of share-based payment plans granted were incorporated into the measurement of fair value.
The Group recognised a share-based payment charge of €35 million for the year to December 31, 2015 (2014: €29 million).
| Year to December 31, 2015 | Other reserves | ||||||
|---|---|---|---|---|---|---|---|
| € million | Retained earnings |
Unrealised gains and losses1 |
Currency translation2 |
Equity portion of convertible bond3 |
Merger reserve4 |
Total other reserves |
Non controlling interests 5 |
| January 1, 2015 | (234) | (1,086) | 319 | 72 | (2,467) | (3,396) | 308 |
| Profit for the year | 1,495 | – | – | – | – | 1,495 | 21 |
| Other comprehensive income for the year: | |||||||
| Cash flow hedges reclassified and reported in net profit: |
|||||||
| Passenger revenue | – | 14 | – | – | – | 14 | – |
| Fuel and oil costs | – | 1,474 | – | – | – | 1,474 | – |
| Currency differences | – | (202) | – | – | – | (202) | – |
| Investments | – | 4 | – | – | – | 4 | – |
| Net change in fair value of cash flow hedges | – | (1,104) | – | – | – | (1,104) | – |
| Available-for-sale assets reclassified and reported in net profit |
– | (5) | – | – | – | (5) | – |
| Net change in fair value of available-for-sale financial assets |
– | (9) | – | – | – | (9) | – |
| Currency translation differences | – | – | 181 | – | – | 181 | – |
| Remeasurements of post-employment benefit obligations |
156 | – | – | – | – | 156 | – |
| Cost of share-based payments | 45 | – | – | – | – | 45 | – |
| Vesting of share-based payment schemes | (99) | – | – | – | – | (99) | – |
| Equity portion of convertible bond issued | – | – | – | 101 | – | 101 | – |
| Dividend | (203) | – | – | – | – | (203) | – |
| Dividend of a subsidiary | – | – | – | – | – | – | (1) |
| Distributions made to holders of perpetual securities |
– | – | – | – | – | – | (20) |
| December 31, 2015 | 1,160 | (914) | 500 | 173 | (2,467) | (1,548) | 308 |
| Year to December 31, 2014 | Other reserves | ||||||
|---|---|---|---|---|---|---|---|
| € million | Retained earnings |
Unrealised gains and losses1 |
Currency translation2 |
Equity portion of convertible bond3 |
Merger reserve4 |
Total other reserves |
Non controlling interests5 |
| January 1, 2014 | (814) | 122 | 151 | 72 | (2,467) | (2,936) | 307 |
| Profit for the year | 982 | – | – | – | – | 982 | 21 |
| Other comprehensive income for the year: Cash flow hedges reclassified and reported in net profit: |
|||||||
| Passenger revenue | – | 5 | – | – | – | 5 | – |
| Fuel and oil costs | – | 47 | – | – | – | 47 | – |
| Currency differences | – | 34 | – | – | – | 34 | – |
| Investments | – | 271 | – | – | – | 271 | – |
| Net change in fair value of cash flow hedges | – | (1,235) | – | – | – | (1,235) | – |
| Available-for-sale assets reclassified and reported in net profit |
– | (359) | – | – | – | (359) | – |
| Net change in fair value of available-for-sale financial assets |
– | 29 | – | – | – | 29 | – |
| Currency translation differences | – | – | 168 | – | – | 168 | – |
| Remeasurements of post-employment benefit obligations |
(394) | – | – | – | – | (394) | – |
| Cost of share-based payments | 38 | – | – | – | – | 38 | – |
| Vesting of share based payments | (46) | – | – | – | – | (46) | – |
| Distributions made to holders of perpetual securities |
– | – | – | – | – | – | (20) |
| December 31, 2014 | (234) | (1,086) | 319 | 72 | (2,467) | (3,396) | 308 |
1 The unrealised gains and losses reserve records fair value changes on available-for-sale investments and the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge.
2 The currency translation reserve records exchange differences arising from the translation of the financial statements of foreign subsidiaries and associates.
3 The equity portion of convertible bond reserve represents the equity portion of convertible bonds issued. At December 31, 2014, this related to the €390 million fixed rate 1.75 per cent convertible bond, and at December 31, 2015 it also related to the €500 million fixed rate 0.25 per cent convertible bond and the €500 million fixed rate 0.625 per cent convertible bond (note 23).
4 The merger reserve records the difference between the fair value of the shares acquired and the nominal value of the shares issued from the original merger of British Airways and Iberia.
5 Non-controlling interests largely comprise €300 million of 6.75 per cent fixed coupon euro perpetual preferred securities issued by British Airways Finance (Jersey) LP. The holders of these securities have no rights against Group undertakings other than the issuing entity and, to the extent prescribed by the subordinated guarantee, British Airways Plc. In the event of a dividend paid by the Company, the coupon payment is guaranteed. The effect of the securities on the Group as a whole, taking into account the subordinate guarantee and other surrounding arrangements, is that the obligations to transfer economic benefits in connection with the securities do not go beyond those that would normally attach to preference shares issued by a UK company.
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 25).
The principal defined contribution schemes within the Group are in IAG, British Airways, Iberia and Aer Lingus.
Aer Lingus participates in the Irish Airlines Superannuation Schemes. These schemes are treated as defined contribution schemes as there is no obligation, legal or constructive to increase its contributions.
Total employer contributions to defined contribution pension plans in Spain, UK and Ireland for the year to December 31, 2015 were €108 million (2014: €82 million).
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 and NAPS closed to new members in 2003.
Benefits provided under APS are based on final average pensionable pay and, for the majority of members, are subject to inflationary increases in payment in line with the Annual Review Orders (ARO) issued by the British Government, which is based on the Consumer Price Index (CPI). Benefits provided under NAPS are based on final average pensionable pay reduced by an amount (the abatement) not exceeding one and a half times the Government's lower earnings limit. NAPS pension increases are also linked to the ARO and increases are capped at a maximum of five per cent in any one year. In NAPS, annual pensionable pay increases for active members are capped at RPI.
The Trustees of APS have purported to grant an additional discretionary increase above CPI inflation for the 2013/14 pensions in payment. British Airways has challenged the decision as it considers the Trustees have no power to grant such increases and it is concerned about the actuarial funding position of the scheme. British Airways is also concerned about the residual unhedged risk in the scheme, which will be increased by the addition of new unfunded benefits, to which British Airways may ultimately be exposed as the principal employer and sponsor of the scheme. British Airways is committed to an existing recovery plan, which sees deficit payments of €75 million per annum until March 2023. Legal proceedings, initiated by British Airways, are underway to determine the legitimacy of the additional discretionary increase. This discretionary increase has not been reflected in the accounting assumptions used.
APS and NAPS are governed by separate Trustee Boards. Although separate, much of the business of the two schemes is common. Most main Board and committee meetings are held in tandem although each Trustee Board reaches its decisions independently. There are three committees which are separately responsible for the governance, operation and investments of each scheme. British Airways Pension Trustees Limited holds the assets of both schemes on behalf of their respective Trustees.
Deficit payment plans are agreed with the Trustees of each scheme every three years based on the actuarial valuation (triennial valuation) rather than the IAS 19 accounting valuation. The latest deficit recovery plan was agreed on the March 31, 2012 position (note 32i). The actuarial valuations performed at March 31, 2012 are different to the valuation performed under IAS 19 'Employee benefits' at December 31, 2015 mainly due to timing differences of the measurement dates and to the scheme specific assumptions used in the actuarial valuation versus IAS guidance used in the accounting valuation assumptions, notably the discount rate to calculate the present value of the liabilities.
The defined benefit plans expose the Group to risks, such as longevity risk, interest rate risk, market (investment) risk and currency risk.
Most employees of British Airways engaged outside the UK are covered by appropriate local arrangements. British Airways provides certain additional post-retirement healthcare benefits to eligible employees in the US through the US Post-Retirement Medical Benefit plan (US PRMB) which is considered to be a defined benefit scheme.
During the year the Group acquired the Aer Lingus defined benefit pension scheme (net defined benefit liability at the acquisition date of €8 million).
Cash payments to pension schemes comprise normal employer contributions by the Group; deficit contributions based on the agreed deficit payment plan with APS and NAPS; and cash sweep payments relating to additional payments made conditional on the level of cash in British Airways. Total payments for the year to December 31, 2015 net of service costs were €434 million (2014: €409 million) being the employer contributions of €699 million (2014: €612 million) less the current service cost of €265 million (2014: €203 million) (note 32b).
| 2015 | ||||||
|---|---|---|---|---|---|---|
| € million | APS | NAPS | Other1 | Total | ||
| Scheme assets at fair value | 9,916 | 17,997 | 429 | 28,342 | ||
| Present value of scheme liabilities | (8,405) | (18,460) | (805) | (27,670) | ||
| Net pension asset/(liability) | 1,511 | (463) | (376) | 672 | ||
| Effect of the asset ceiling2 | (561) | – | – | (561) | ||
| Other employee benefit obligations | – | – | (12) | (12) | ||
| December 31, 2015 | 950 | (463) | (388) | 99 | ||
| Represented by: | ||||||
| Employee benefit assets | 957 | |||||
| Employee benefit obligations | (858) | |||||
| 99 | ||||||
| 2014 | ||||||
| € million | APS | NAPS | Other1 | Total | ||
| Scheme assets at fair value | 9,542 | 16,201 | 424 | 26,167 | ||
| Present value of scheme liabilities | (8,191) | (17,134) | (795) | (26,120) | ||
| Net pension asset/(liability) | 1,351 | (933) | (371) | 47 | ||
| Effect of the asset ceiling2 | (502) | – | – | (502) | ||
| Other employee benefit obligations | – | – | (14) | (14) | ||
| December 31, 2014 | 849 | (933) | (385) | (469) | ||
| Represented by | ||||||
| Employee benefit assets | 855 | |||||
| Employee benefit obligations | (1,324) | |||||
| (469) |
1 The present value of scheme liabilities for the US PRMB was €62 million at December 31, 2015 (2014: €83 million).
2 APS has 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 trustees.
b Amounts recognised in the Income statement
Pension costs charged to operating result are:
| € million | 2015 | 2014 |
|---|---|---|
| Defined benefit plans: | ||
| Current service cost | 265 | 203 |
| Past service cost | (1) | – |
| 264 | 203 | |
| Defined contribution plans | 108 | 82 |
| Pension costs recorded as employee costs | 372 | 285 |
| Pension costs charged as finance costs are: |
| € million | 2015 | 2014 |
|---|---|---|
| Interest income on scheme assets | (1,031) | (1,058) |
| Interest expense on scheme liabilities | 1,024 | 1,051 |
| Interest expense on asset ceiling | 19 | 11 |
| Net financing expense relating to pensions | 12 | 4 |
| € million | 2015 | 2014 |
|---|---|---|
| Return on plan assets excluding interest income | (462) | 1,338 |
| Remeasurement of plan liabilities from changes in financial assumptions | 498 | (1,837) |
| Remeasurement of experience gains | 183 | 171 |
| Remeasurement of the APS asset ceiling | – | (232) |
| Exchange movements | (12) | (17) |
| Pension remeasurements | 207 | (577) |
A reconciliation of the opening and closing balances of the fair value of scheme assets is set out below:
| € million | 2015 | 2014 |
|---|---|---|
| January 1 | 26,167 | 22,481 |
| Acquired through Business combination | 13 | – |
| Interest income | 1,031 | 1,058 |
| Return on plan assets excluding interest income | (462) | 1,338 |
| Employer contributions1 | 684 | 596 |
| Employee contributions | 114 | 106 |
| Benefits paid | (1,276) | (944) |
| Exchange movements | 2,071 | 1,532 |
| December 31 | 28,342 | 26,167 |
1 Includes employer contributions to APS of €120 million (2014: €83 million) and to NAPS of €535 million (2014: €489 million), of which deficit funding payments represented €110 million for APS (2014: €75 million) and €389 million for NAPS (2014: €229 million).
Scheme assets at December 31 comprise:
| € million | 2015 | 2014 |
|---|---|---|
| Return seeking investments – equities | ||
| UK | 2,724 | 2,499 |
| Overseas | 7,112 | 6,467 |
| 9,836 | 8,966 | |
| Return seeking investments – other | ||
| Private equity | 882 | 769 |
| Property | 2,142 | 1,812 |
| Alternative investments | 1,224 | 928 |
| 4,248 | 3,509 | |
| Liability matching investments | ||
| UK fixed bonds | 3,949 | 3,578 |
| Rest of world fixed bonds | 118 | 205 |
| UK index-linked bonds | 6,650 | 6,212 |
| Rest of world index-linked bonds | 124 | 139 |
| 10,841 | 10,134 | |
| Other | ||
| Cash and cash equivalents | 1,174 | 1,336 |
| Derivatives | (114) | (255) |
| Insurance contract | 1,928 | 1,867 |
| Longevity swap | (40) | (47) |
| Other | 469 | 657 |
| 28,342 | 26,167 |
All equities and bonds have quoted prices in active markets.
For APS and NAPS, the composition of the scheme assets is:
| December 31, 2015 | December 31, 2014 | |||
|---|---|---|---|---|
| € million | APS | NAPS | APS | NAPS |
| Return seeking investments | 1,721 | 12,169 | 1,713 | 10,552 |
| Liability matching investments | 6,103 | 4,616 | 5,661 | 4,367 |
| 7,824 | 16,785 | 7,374 | 14,919 | |
| Insurance contract and related longevity swap | 1,862 | – | 1,798 | – |
| Other | 230 | 1,212 | 370 | 1,282 |
| Fair value of scheme assets | 9,916 | 17,997 | 9,542 | 16,201 |
For both APS and NAPS, the trustees have 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.
The strategic benchmark for asset allocations differentiate between 'return seeking assets' and 'liability matching assets'. Given the respective maturity of each scheme, the proportion for APS and NAPS vary. At December 31, 2015, the benchmark for APS, expressed as a percentage of the assets excluding the insurance contract, was 18.7 per cent (2014: 21.2 per cent) in return seeking assets and 81.3 per cent (2014: 78.8 per cent) in liability matching investments; and for NAPS the benchmark was 68 per cent (2014: 68 per cent) in return seeking assets and 32 per cent (2014: 32 per cent) in liability matching investments. Bandwidths are set around these strategic benchmarks that allow for tactical asset allocation decisions, providing parameters for the investment committee and its investment managers to work within.
In addition to this, APS has an insurance contract with Rothesay Life which covers 24 per cent (2014: 24 per cent) of the pensioner liabilities for an agreed list of members. The insurance contract is based on future increases to pensions in line with RPI inflation and will match future obligations on that basis for that part of the scheme. The insurance contract can only be used to pay or fund employee benefits under the scheme. APS has also secured a longevity swap contract with Rothesay Life, which covers an additional 20 per cent (2014: 20 per cent) of the pensioner liabilities for the same members covered by the insurance contract above. The value of the contract is based on the difference between the value of the payments expected to be received under this contract and the pensions payable by the scheme under the contract.
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.
Both schemes use derivative instruments for investment purposes and to manage exposures to financial risks, such as interest rate, foreign exchange and liquidity risks arising in the normal course of business. Exposure to interest rate risk is managed through the use of Inflation-Linked Swap contracts. Foreign exchange forward contracts are entered into to mitigate the risk of currency fluctuations. For NAPS, a strategy exists to provide protection against the equity market downside risk by reducing some of the upside participation.
The asset-liability matching strategy in respect of the Group's other schemes have been determined in accordance with local practice.
A reconciliation of the opening and closing balances of the present value of the defined benefit obligations is set out below:
| € million | 2015 | 2014 |
|---|---|---|
| January 1 | 26,120 | 22,485 |
| Acquired though Business combination | 21 | – |
| Current service cost | 265 | 203 |
| Past service cost | (1) | – |
| Interest expense | 1,024 | 1,051 |
| Remeasurements – financial assumptions | (498) | 1,837 |
| Remeasurements – demographic assumptions | (183) | (171) |
| Benefits paid | (1,276) | (944) |
| Employee contributions | 114 | 106 |
| Exchange movements | 2,084 | 1,553 |
| December 31 | 27,670 | 26,120 |
The defined benefit obligation comprises €79 million (2014: €95 million) arising from unfunded plans and €27,591 million (2014: €26,025 million) from plans that are wholly or partly funded.
A reconciliation of the effect of the asset ceiling representing the IAS19 irrecoverable surplus in APS is set out below:
| € million | 2015 | 2014 |
|---|---|---|
| January 1 | 502 | 236 |
| Interest expense | 19 | 11 |
| Remeasurements | – | 232 |
| Exchange movements | 40 | 23 |
| December 31 | 561 | 502 |
The principal assumptions used for the purposes of the actuarial valuations were as follows:
| 2015 | 2014 | ||||||
|---|---|---|---|---|---|---|---|
| Per cent per annum | APS | NAPS | Other schemes |
APS | NAPS | Other schemes |
|
| Discount rate | 3.60 | 3.85 | 2.1 – 4.4 | 3.45 | 3.80 | 3.4 – 4.1 | |
| Rate of increase in pensionable pay1 | 2.85 | 3.00 | 3.0 – 4.0 | 2.85 | 2.95 | 3.5 – 4.0 | |
| Rate of increase of pensions in payment | 1.85 | 2.00 | 1.5 – 3.5 | 1.85 | 1.95 | 1.5 – 3.5 | |
| RPI rate of inflation2 | 2.85 | 3.00 | 3.0 – 3.2 | 2.85 | 2.95 | 3.0 – 3.1 | |
| CPI rate of inflation2 | 1.85 | 2.00 | 1.7 – 3.0 | 1.85 | 1.95 | 2.1 – 3.0 |
1 Rate of increase in pensionable pay is assumed to be in line with the RPI rate of inflation.
2 The inflation rate assumptions for NAPS and APS are based on the difference between the yields on index-linked and fixed-interest long-term government bonds. The inflation assumptions are used to determine the rate of increase for pensions in payment and the rate of increase in deferred pensions where there is such an increase.
Rate of increase in healthcare costs is based on medical trend rates of 7.0 per cent grading down to 5.0 per cent over nine years (2014: 7.5 per cent to 5.0 per cent over five years).
In the UK, mortality rates are calculated using the standard SAPS mortality tables produced by the CMI for APS and NAPS. The standard mortality tables were selected based on the actual recent mortality experience of members and were adjusted to allow for future mortality changes. The current longevities underlying the values of the scheme liabilities were as follows:
| Mortality assumptions | 2015 | 2014 |
|---|---|---|
| Life expectancy at age 60 for a: | ||
| –male currently aged 60 | 28.3 | 28.3 |
| –male currently aged 40 | 29.9 | 29.8 |
| –female currently aged 60 | 29.9 | 29.8 |
| –female currently aged 40 | 32.3 | 32.3 |
At December 31, 2015, the weighted-average duration of the defined benefit obligation was 12 years for APS (2014: 12 years) and 19 years for NAPS years (2014: 19 years).
For the US PRMB, mortality rates were based on the RP-14 mortality tables.
Reasonable possible changes at the reporting date to significant actuarial assumptions, holding other assumptions constant, would have affected the present value of scheme liabilities by the amounts shown:
| € million | Increase in net pension liability |
|---|---|
| Discount rate (decrease of 10 basis points) | 448 |
| Future salary growth (increase of 10 basis points) | 84 |
| Future pension growth (increase of 10 basis points) | 330 |
| Future mortality rate – one year increase in life expectancy | 785 |
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.
Pension contributions for APS and NAPS were determined by actuarial valuations made at March 31, 2012 using assumptions and methodologies agreed between the Group and the Trustees of each scheme. At the date of the actuarial valuation, the actuarial deficits of APS and NAPS amounted to €932 million and €3,647 million respectively. In order to address the deficits in the schemes, the Group has also committed to the following undiscounted deficit payments:
| € million | APS | NAPS |
|---|---|---|
| Within 12 months | 75 | 206 |
| 2-5 years | 302 | 1,091 |
| 5-10 years | 170 | 1,935 |
| More than 10 years | – | 107 |
| Total expected deficit payments for APS and NAPS | 547 | 3,339 |
The Group has determined that the minimum funding requirements set out above for APS and NAPS will not be restricted.
The present value of the contributions payable is expected to be available as a refund or a reduction in future contributions after they are paid into the plan. This determination has been made independently for each plan, subject to withholding taxes that would be payable by the Trustees.
Deficit payments in respect of local arrangements outside of the UK have been determined in accordance with local practice.
In total, the Group expects to pay €576 million in employer contributions and deficit payments to its post-retirement benefit plans in 2016. This includes expected employer contributions of €84 million to APS (of which €75 million relates to the funding shortfall) and €466 million to NAPS (of which €206 million relates to the funding shortfall). This excludes any additional deficit contributions which may be required if British Airways declares dividends in future years in excess of payments into the scheme for that year.
There were contingent liabilities at December 31, 2015 in respect of guarantees and indemnities entered into as part of the normal course of the Group's business. No material losses are likely to arise from such contingent liabilities and guarantees. The Group also has the following claims:
The Group is party to a number of legal proceedings in the English courts relating to a decision by the European Commission in 2010 which fined British Airways and ten other airline groups for participating in a cartel in respect of air cargo prices. The decision was partially annulled as against British Airways following an appeal to the general court of the European Union and British Airways was advised that the fine would be refunded in full. It is not yet clear what the European Commission's next steps will be. The original decision has led to a large number of claimants seeking, in proceedings brought in the English courts, to recover damages from British Airways which they claim arise from the alleged cartel activity. It is not possible at this stage to predict the outcome of the proceedings, which British Airways will vigorously defend. British Airways has joined the other airlines alleged to have participated in cartel activity to these proceedings to contribute to such damages, if any are awarded.
The Group is also party to similar litigation in a number of other jurisdictions, including Germany, the Netherlands and Canada, together with a number of other airlines. At present, the outcome of the proceedings is unknown. In each case, the precise effect, if any, of the alleged cartelising activity on the claimants will need to be assessed.
We are currently unable to determine whether the Group has an existing obligation as a result of the past event.
The Group files income tax returns in many jurisdictions throughout the world. Various tax authorities are currently examining the Group's income tax returns. Tax returns contain matters that could be subject to differing interpretations of applicable tax laws and regulations and the resolution of tax positions through negotiations with relevant tax authorities, or through litigation, can take several years to complete. While it is difficult to predict the ultimate outcome in some cases, the Group does not anticipate that there will be any material impact on the Group's financial position or results of operations.
The Group has certain contingent liabilities and guarantees, which at December 31, 2015 amounted to €172 million (December 31, 2014: €138 million).
The Group has contingent liabilities in respect of certain claims and litigation in the normal course of business, which if realised are not expected to have a material adverse effect on the Group's consolidated financial position, results of operations or cash flows. The Group recognises provisions for liabilities when it is more likely than not that a settlement will be required and the value of such a payment can be reliably measured.
The following transactions took place with related parties for the financial years to December 31:
| € million | 2015 | 2014 |
|---|---|---|
| Sales of goods and services | ||
| Sales to associates | 8 | 16 |
| Sales to significant shareholders | 29 | – |
| Purchases of goods and services | ||
| Purchases from associates | 57 | 59 |
| Purchases from significant shareholders | 61 | – |
| € million | 2015 | 2014 |
|---|---|---|
| Receivables from related parties | ||
| Amounts owed by associates | 3 | 6 |
| Amounts owed by significant shareholders | 1 | – |
| Payables to related parties | ||
| Amounts owed to associates | 3 | 6 |
| Amounts owed to significant shareholders | 4 | – |
During the year to December 31, 2015 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 €7 million (2014: €6 million) in relation to the costs of the Pension Protection Fund levy.
In 2012 the Group entered into a hedging transaction at arm's length with Nomura International plc, a related party to IAG as there is a common Non-Executive Board member. The transaction was a risk management exercise to protect the value of the 33,562,331 ordinary shares that the Group holds in Amadeus. During the third quarter of 2014, the Group entered into an agreement to settle the hedging transaction over its ownership interest in Amadeus and sell its entire holding. At December 31, 2014 the Group had settled 99 per cent of the transaction, and the remaining 1 per cent was settled in January 2015.
The Group has transactions with related parties that are conducted in the normal course of the airline business, which include the provision of airline and related services. All such transactions are carried out on an arm's length basis.
For the year to December 31, 2015, the Group has not made any provision for doubtful debts arising relating to amounts owed by related parties (2014: nil).
Further details of the main transactions between the Group, associates and significant shareholders are provided below.
Total sales to associates of €8 million during the year (2014: €16 million) consisted primarily of sales for airline related services to Dunwoody Airline Services (Holding) Limited (Dunwoody) of €8 million (2014: €12 million) and an amount of less than €1 million (2014: €2 million) to Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. (Medios de Pagos).
Purchases from associates totalling €57 million (2014: €59 million) mainly included €29 million of airport auxiliary services purchased from Multiservicios Aeroportuarios, S.A. (2014: €26 million), €10 million of handling services provided by Dunwoody (2014: €11 million), €8 million of services received from International Supply Management, S.L. (2014: €7 million), €7 million of maintenance services received from Serpista, S.L. (2014: €7 million) and €3 million of services received from Iber-America Aerospace, LLC (2014: nil). The comparative year included €5 million of maintenance services received from Madrid Aerospace Services, S.L.
The Group had amounts owed by associates at December 31, 2015 for airline related services rendered, that included balances with Dunwoody of €1 million (2014: €1 million), Madrid Aerospace Services, S.L. of €1 million (2014: €1 million) and Medios de Pagos of €1 million (2014: €1 million).
At December 31, 2015 amounts owed to associates consisted primarily of €1 million due to Dunwoody (2014: €1 million), €1 million to Serpista, S.A. (2014: €1 million) and an amount of less than €1 million to Multiservicios Aeroportuarious, S.A. (2014: €3 million).
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.
On January 30, 2015 Qatar Airways (Q.C.S.C.) announced that it has acquired a 9.99 per cent shareholding in IAG.
Total sales to significant shareholders of €29 million during the year (2014: nil), and total purchases of €61 million (2014: nil) related to interline services with Qatar Airways.
The Group had amounts owed to significant shareholders of €4 million (2014: nil) and owed by significant shareholders of less than €1 million at December 31, 2015 (2014: nil), both related to Qatar Airways.
At December 31, 2015 the Group had cash deposit balances with shareholders holding a participation of between 3 to 5 per cent, of €48 million (2014: €65 million).
Compensation received by the Group's key management personnel, which includes the Board of Directors and Management Committee, in 2015 and 2014 is as follows:
| € million | December 31, 2015 |
December 31, 2014 |
|---|---|---|
| Base salary, fees and benefits | ||
| Board of Directors' remuneration | 15 | 13 |
| Management Committee remuneration | 22 | 18 |
| 37 | 31 |
The Board of Directors includes remuneration for two Executive Directors (2014: two Executive Directors).
The Management Committee includes remuneration for nine members (2014: eight members).
The Company provides life insurance for all Executive Directors and the Management Committee. For the year to December 31, 2015 the Company's obligation was €72,000 (2014: €48,000).
At December 31, 2015 the transfer value of accrued pensions covered under defined benefit obligation schemes, relating to the Management Committee totalled €9 million (2014: €7 million).
No loans or credit transactions were outstanding with Directors or officers of the Group at December 31, 2015 (2014: nil).
According to the provisions of Article 540 of the Spanish Companies Act, the Company presents the Spanish Corporate Governance Report, which provides a detailed explanation of the structure of its governance and its operation. This report has been prepared following the model established by the Comisión Nacional del Mercado de Valores for this purpose.
FINANCIAL STATEMENTS
| Number of | |||
|---|---|---|---|
| Date of last modification | Share capital (€) | Number of shares | voting rights |
| October 7, 2013 | 1,020,039,261.50 | 2,040,078,523 | 2,040,078,523 |
Indicate whether different types of shares exist with different associated rights:
No
| Type Number of shares amount rights Other rights |
Nominal | Nominal amount of voting | ||
|---|---|---|---|---|
| Name or corporate name of Number of direct |
Indirect voting rights | % of total | |||
|---|---|---|---|---|---|
| shareholder | voting rights | Name of direct holder | Number of voting rights | voting rights | |
| Qatar Airways (Q.C.S.C.) | 0 | Qatar Airways Luxembourg S.à.r.l. |
203,863,316 | 9.993% | |
| Standard Life Investments (Holdings) Limited |
60,639,188 | Standard Life Investments Limited and Ignis Investment Services Limited |
61,942,109 | 6.008% | |
| Europacific Growth Fund | 107,329,400 | – | 0 | 5.261% | |
| Capital Research and Management Company |
0 | Collective investment institutions managed by Capital Research and Management Company |
102,997,951 | 5.049% | |
| BlackRock Inc. | 0 | Funds and accounts managed by investors controlled by BlackRock Inc. |
61,696,340 | 3.024% | |
| Legal & General Investment Management Limited |
54,407,837 | Legal & General (Unit Trust Managers) Limited |
11,611,554 | 3.236% | |
| Lansdowne Partners International Limited |
0 | Funds and accounts managed by Lansdowne Partners (UK) LLP. |
36,869,133 | 1.807% | |
| Invesco Limited | 0 | Mutual benefit societies and pension funds managed by Invesco Limited and its subsidiaries |
22,064,264 | 1.082% |
Indicate the most significant movements in the shareholder structure during the year:
| Name or corporate name of shareholder | Date of the transaction | Description of the transaction |
|---|---|---|
| Causeway Capital Management, LLC | January 14, 2015 | Decrease to below 3% of the share capital |
| Templeton Global Advisors Limited | January 19, 2015 | Decrease to below 3% of the share capital |
| BlackRock Inc. | January 23, 2015 | Decrease to below 3% of the share capital |
| Qatar Airways (Q.C.S.C.) | January 23, 2015 | Increase to above 3% of the share capital |
| Qatar Airways (Q.C.S.C.) | January 27, 2015 | Increase to above 5% of the share capital |
| BlackRock Inc. | February 27, 2015 | Increase to above 3% of the share capital |
| BlackRock Inc. | March 20, 2015 | Decrease to below 3% of the share capital |
| BlackRock Inc. | April 29, 2015 | Increase to above 3% of the share capital |
| Lansdowne Developed Markets Master Fund Ltd. | September 21, 2015 | Decrease to below 1% of the share capital |
| BlackRock Inc. | December 3, 2015 | Decrease to below 3% of the share capital |
| BlackRock Inc. | December 4, 2015 | Increase to above 3% of the share capital |
| Name or corporate | Number of direct | Indirect voting rights | % of total | ||
|---|---|---|---|---|---|
| name of director | voting rights Name of direct holder Number of voting rights |
voting rights | |||
| Antonio Vázquez | 512,291 | – | – | 0.025% | |
| Sir Martin | |||||
| Broughton | 155,365 | Jocelyn Broughton | 19,545 | 0.009% | |
| Willie Walsh | 1,243,219 | – | – | 0.061% | |
| César Alierta | 1,000,000 | – | – | 0.049% | |
| Patrick Cescau | 0 | – | – | 0.000% | |
| Enrique Dupuy de Lôme |
301,869 | – | – | 0.015% | |
| Baroness Kingsmill |
2,000 | – | – | 0.000% | |
| James Lawrence | 326,500 | – | – | 0.016% | |
| María Fernanda Mejía |
100 | – | – | 0,000% | |
| Kieran Poynter | 0 | – | – | 0.000% | |
| Dame Marjorie Scardino |
100 | – | – | 0.000% | |
| Alberto Terol | 9,200 | – | – | 0.000% | |
| % of total voting rights held by the Board of Directors: | 0.175% |
Complete the following tables on company's share rights held by the company's directors:
| Name or corporate | Number of | Indirect rights | Number of | ||
|---|---|---|---|---|---|
| name of director | direct rights | Direct holder | Number of voting rights | equivalent shares | % of total voting rights |
| Willie Walsh | 1,673,512 | – | – | 1,673,512 | 0. 082% |
| Enrique Dupuy de | |||||
| Lôme | 662,613 | – | – | 662,613 | 0. 032% |
| Related-party name or corporate name | Type of relationship | Brief description | |
|---|---|---|---|
| – | – | – | |
| A.5 | exchange activities: | Indicate, as applicable, any commercial, contractual or corporate relationships between owners of significant shareholdings, and the company and/or its group, unless they are insignificant or arise from ordinary trading or |
|
| Related-party name or corporate name | Type of relationship | Brief description | |
| BlackRock Investment Management (UK) Ltd. |
Commercial | Cash deposits invested as part of liquidity fund portfolio |
|
| Qatar Airways (Q.C.S.C.) | Commercial | Cargo capacity agreement, passenger codeshares and interline agreement |
|
| A.6 | applicable: | Indicate whether the company has been notified of any shareholders' agreements pursuant to articles 530 and 531 of the Spanish Companies Law. Provide a brief description and list the shareholders bound by the agreement, as |
|
| No | |||
| Parts bound by agreement | % of share capital affected | Brief description of agreement | |
| – | – | – | |
| description as applicable: | Indicate whether the company is aware of the existence of any concerted actions among its shareholders. Give a brief | ||
| No | |||
| Shareholders involved in concerted action | % of share capital affected | Brief description of concerted action | |
| – | – | – | |
| Expressly indicate any amendments to or termination of such agreements or concerted actions during the year: | |||
| Not applicable | |||
| A.7 | company in accordance with article 5 of the Securities Market Law: If so, identify: | Indicate whether any individuals or bodies corporate currently exercise control or could exercise control over the | |
| No | |||
| Name or corporate name | |||
| – | |||
| Remarks | |||
| – |
At year-end:
| Number of shares held directly | Number of shares held indirectly (*) | % of total share capital |
|---|---|---|
| 14,684,018 | 0 | 0.720% |
| (*) Through: | ||
| Name or corporate name of direct stake | Number of shares held directly | |
| – | – | |
| Total | – |
Explain any significant changes during the year, pursuant to Royal Decree 1362/2007:
| % of total share capital |
|
|---|---|
| 0 | 1.056 |
| Total number of direct shares acquired 21,548,242 |
Total number of indirect shares acquired |
The Annual Shareholders' Meeting of International Consolidated Airlines Group, S.A. ("IAG" or the "Company") held on June 18, 2015, granted authorisation to the Board of Directors for the derivative acquisition of shares of the Company in the context of the provisions of article 146 of the Spanish Companies Law, according to the applicable laws and subject to the following conditions:
in each case, exclusive of expenses.
f) The authorisation is granted for a term ending at 2016 annual Shareholders' Meeting (or if earlier, 15 months from June 18, 2015).
The resolution of the Shareholders' Meeting, places expressly on record that for the purposes of provisions of article 146 of the Spanish Companies Law, the shares acquired pursuant to the 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.
| % | |
|---|---|
| Estimated floating capital | 63.64 |
The 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 equal to or of over 0.25 per cent of the Company's capital, or of the voting rights corresponding thereto, 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, in accordance with article 10.1 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 operating affiliates or for any other reason in relation to the potential application of article 11 of the Bylaws (Limitation on share ownership).
In the event of the breach of these obligations by a shareholder or any other person with a confirmed or apparent interest in the Company's shares, the Board of Directors may suspend at any time the voting and other political rights of the relevant person in respect of the shares in relation to which the default has occurred and the relevant shareholder will not be entitled to exercise any voting rights or any political rights at any Shareholders' Meeting. If the shares with respect to which the aforementioned obligations have been breached represent a percentage equal to or greater than 0.25 per cent of the Company's capital, the Board of Directors may also direct that no transfer of any such shares is registered.
In the event that the Board of Directors deems it necessary or appropriate to adopt measures to protect an operating right of the Company or of its operating subsidiaries, in light of the nationality of its shareholders or any persons with an interest in the Company's shares, it may adopt any of the measures provided for such purpose in article 11 of the Bylaws, including the determination of a maximum number of shares that may be held by non-EU shareholders, which may not be less than 40 per cent of the Company's capital stock under any circumstances.
In the event that the Board has specified a maximum number of shares that may be held by non-EU shareholders, and identified those shares the holding of which gave rise or contributed to such a determination, the Board may also (i) agree on the suspension of voting and other political rights of the holder of the relevant shares, and (ii) request that the holders dispose of the corresponding shares so that no non-EU person may directly or indirectly own such shares or have an interest in the same. If such transfer is not performed on the terms provided for in the Bylaws, the Company may acquire the corresponding shares (for their subsequent redemption) pursuant to applicable legislation. This acquisition must be performed at the lower of the following prices: (a) the book value of the corresponding shares according to the latest published audited balance sheet of the Company; and (b) the middle market quotation for an ordinary share of the Company as derived from the London Stock Exchange's Daily Official List for the business day on which they were acquired by the relevant non-EU person.
If applicable, explain the measures adopted and the terms under which these restrictions may be lifted:
If so, identify the various classes of shares and, for each class of shares, the rights and obligations they confer.
B.1 Indicate, and as applicable, describe the difference in relation to the minimum rules established in the Spanish Companies Law (LSC) regarding the quorum required for constitution of the shareholders' meeting.
No
–
| Quorum % other than that established in article 193 of the LSC for general cases |
Quorum % other than that established in article 194 of the LSC for the special cases described in article 194 |
|
|---|---|---|
| Quorum required for first call | – | – |
| Quorum required for second call | – | – |
| Description of differences |
–
Describe how they differ from the rules established in the LSC.
| Qualified majority other than that established in article 201.2 of the LSC for general cases described in 194.1 of the LSC |
Other cases requiring a qualified majority |
|
|---|---|---|
| % set by company for adopting | ||
| corporate resolutions | – | – |
Describe the differences
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.
| Attendance data | |||||
|---|---|---|---|---|---|
| Date of shareholders' | % attending | % remote voting | |||
| meeting | in person | % by proxy | Electronic means | Other | Total |
| June 18, 2015 | 0.124% | 60.677% | 0.003% | 3.566% | 64.370% |
| June 18, 2014 | 0.123% | 52.873% | 0.005% | 2.792% | 55.793% |
No
–
Number of shares required to attend the shareholders' meetings
B.7 Indicate the address and mode of accessing corporate governance content on your company's website as well as other information on shareholders' meetings which must be made available to shareholders on the website.
The Company corporate governance information is available on the Company's website: www.iairgroup.com in the "Corporate Governance" section.
C.1.1 List the maximum and minimum number of directors included in the Bylaws:
| Maximum number of directors | 14 |
|---|---|
| Minimum number of directors | 9 |
| Name or corporate name of director |
Representative | Category of director |
Position on the board |
Date of first appointment |
Date of last appointment |
Election procedure |
|---|---|---|---|---|---|---|
| Antonio Vázquez |
– | Other External | Chairman | May 25, 2010 | June 18, 2015 | Vote at the Shareholders' Meeting |
| Sir Martin Broughton |
– | Independent | Deputy Chairman | May 25, 2010 | June 18, 2015 | Vote at the Shareholders' Meeting |
| Willie Walsh | – | Executive | Chief Executive Officer |
May 25, 2010 | June 18, 2015 | Vote at the Shareholders' Meeting |
| César Alierta | – | Independent | Director | September 27, 2010 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| Patrick Cescau | – | Independent | Director | September 27, 2010 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| Enrique Dupuy de Lôme |
– | Executive | Director | September 26, 2013 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| Baroness Kingsmill |
– | Independent | Director | September 27, 2010 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| James Lawrence |
– | Independent | Director | September 27, 2010 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| María Fernanda Mejía |
– | Independent | Director | February 27, 2014 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| Kieran Poynter | – | Independent | Director | September 27, 2010 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| Dame Marjorie Scardino |
– | Independent | Director | December 19, 2013 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| Alberto Terol | – | Independent | Director | June 20, 2013 |
June 18, 2015 | Vote at the Shareholders' Meeting |
| Total number of directors: | 12 | |||||
| Indicate any board members who left the board during this information period: | ||||||
| Category of the director at the | ||||||
| Name or corporate name of director José Pedro Pérez-Llorca |
time of leaving Independent |
Leaving date 06/18/2015 |
||||
| C.1.3 | Complete the following tables on board members and their respective categories: | |||||
| EXECUTIVE DIRECTORS Name or corporate name of director |
Position held in the company organization chart | |||||
| Willie Walsh | Chief Executive Officer | |||||
| Enrique Dupuy de Lôme | Chief Financial Officer | |||||
| Total number of executive directors | 2 |
% of the total of the board 16.67%
Name or corporate name of director represented or proposing appointment – – Total number of proprietary directors – % of the total of the board –
Name or corporate name of significant shareholder
| Individual or corporate name of director |
Profile |
|---|---|
| Sir Martin Broughton | Key areas of prior experience: consumer, finance, governance. Current external appointments: Chairman, Sports Investment Partners. Previous relevant experience: Chairman, British Airways 2004-2013 and Director since 2000. President, Confederation of British Industry 2007-2009. Chairman, Liverpool FC 2010. Chairman, British Horseracing Board 2004-2007. Chairman, British American Tobacco 1997-2004 following its demerger from BAT Industries, previously Chief Executive Officer, BAT Industries 1993-1997 and member of the Board since 1988. Other executive positions at British American Tobacco 1971-1993. |
| César Alierta | Key areas of prior experience: finance, telecommunications, consumer. Current external appointments: Chairman and Chief Executive Officer, Telefónica Group. Non-Executive Director, China Unicom. Member, Columbia Business School Board of Overseers. Previous relevant experience: Member of the Board, Telecom Italia 2007-2013. Non-Executive Director, Telefónica 1997-2000. Executive Chairman, Altadis Group 1996-2000. Member of the Board, Madrid Stock Exchange 1991-1996. Chairman, Spanish Financial Analysts' Association 1991-1996. Chairman and founder, Beta Capital 1985-1996. |
| Patrick Cescau | Key areas of prior experience: consumer, finance, sales/marketing, governance. Current external appointments: Non-Executive Chairman, InterContinental Hotel Group. Trustee, LeverHulme Trust. Member, Temasek European Advisory Panel. Patron, St Jude India Children's Charity. Previous relevant experience: Senior Independent and Non-Executive Director, Tesco 2009-2015. Director, INSEAD 2009-2013. Senior Independent and Non-Executive Director, Pearson Plc 2002-2012. Group Chief Executive, Unilever 2005-2008. Chairman, Unilever PLC. Deputy Chairman, Unilever NV. Finance Director and other executive positions (including a number of Unilever major operating companies and divisions in the USA, Indonesia and Portugal), having joined the Unilever Group in 1973. |
| Baroness Kingsmill | Key areas of prior experience: government, legal and regulatory affairs. Current external appointments: Non-Executive Director, EON Supervisory Board. Non-Executive Director, Telecom Italia. Member of the International Advisory Board, IESE Business School. Member of the House of Lords since 2006. Previous relevant experience: Vice Chair and Senior Independent Director, APR Energy 2010-2015. Non-Executive Director, British Airways 2004-2010. Deputy Chairman, Competition Commission 1997-2003. Chairman, Department of Trade and Industry's Accounting for People task force 2003. |
| James Lawrence | Key areas of prior experience: finance, consumer, corporate governance. Current external appointments: Chairman, Great North Star LLC. Non-Executive Director, Smurfit Kappa Group. Non-Executive Director and Chairman of the Audit Committee, Avnet Inc. Previous relevant experience: Chairman, Rothschild North America 2012-2015. CEO, Rothschild North America and Co-Head of Global Investment Banking 2010-2012. Executive Director and Chief Financial Officer, Unilever 2007-2010. Non-Executive Director, British Airways 2006-2010. Vice Chairman, Chief Financial Officer and Head of International, General Mills 1998-2007. Executive Vice President and Chief Financial Officer, Northwest Airlines 1996-1998. Executive Vice President and other executive positions, Pepsi-Cola 1992-1996. Chairman and Co-Founder, LEK Consulting 1983-1992. Partner, Bain & Company 1977-1983. |
| Individual or corporate name of director |
Profile |
|---|---|
| María Fernanda Mejía | Key areas of prior experience: consumer, customer development, strategic planning, supply chain, innovation and marketing communications. Current external appointments: Senior Vice President and President of Kellogg Latin America, Corporate Officer and member of Kellogg's Global Leadership Team. Board Member of the Council of the Americas. Previous relevant experience: Colgate-Palmolive Co. – Vice-President and General Manager Global Personal Care and Corporate Fragrance Development 2010-2011, Vice-President Marketing and Innovation Europe/South Pacific Division 2005-2010, President and CEO Spain and Spain Holding Company 2003-2005, General Manager Hong Kong and a Director Greater China Management team 2002-2003, Marketing Director Venezuela 2000-2002, Marketing Director Ecuador 1998-2000. |
| Kieran Poynter | Key areas of prior experience: professional services, finance services. Current external appointments: Chairman, F&C Asset Management plc. Non-Executive Director and Chairman of the Remuneration Committee, British American Tobacco PLC. Previous relevant experience: Chairman, Nomura International plc 2009-2015. Chairman and Senior Partner, PricewaterhouseCoopers 2000-2008. Managing Partner, PricewaterhouseCoopers 1998-2000 and other executive positions at PricewaterhouseCoopers 1982-1998. Member, Advisory Committee for the Chancellor of the Exchequer on the competitiveness of the UK financial services sector 2009-2010. Member, President's Committee of the Confederation of British Industry 2000-2008. |
| Dame Marjorie Scardino | Key areas of prior experience: commercial management and government affairs, communications, digital and media, legal services. Current external appointments: Non-Executive Director, Twitter, Inc. Member, Board of Pure Tech Health Inc., Member, charitable boards including The MacArthur Foundation; London School of Hygiene and Tropical Medicine (Chairman); and The Carter Center. Member, Board of the Royal College of Art. Member, of the Visiting Committee for the MIT Media Lab; Member, Board of Bridge International Academies (HQ-Kenya). Previous relevant experience: Chief Executive Officer, Pearson PLC 1997-2012. Chief Executive Officer, The Economist Group from 1993-1996. President, The Economist Group US 1985-1993. Lawyer practising in the US 1975-1985. |
| Alberto Terol | Key areas of prior experience: finance, professional services, information technology, hospitality industry. Current external appointments: Non-Executive Director, Indra. Non-Executive Director, OHL. Non Executive Director and Chairman of the Audit Committee, Aktua. Non-Executive Director, Broseta. International Senior Advisor, Centerbridge. Executive Chairman of various family owned companies. Previous relevant experience: Non-Executive Director, N+1 2014-2015. International Senior Advisor, BNP Paribas 2011-2014. Member, Global Executive Committee Deloitte 2007-2009. Managing Partner, EMEA Deloitte 2007-2009. Managing Partner, Global Tax & Legal Deloitte 2007-2009. Member, Global Management Committee Deloitte 2003-2007. Managing Partner, Latin America Deloitte 2003-2007. Managing Partner, Integration Andersen Deloitte 2002–2003, Managing Partner, Europe Arthur Andersen 2001-2002. Managing Partner, Global Tax & Legal Arthur Andersen 1997-2001. Managing Partner, Garrigues 1997-2000. |
| Total number of external independent directors | 9 |
|---|---|
| % of the board | 75% |
List any external independent directors who receive from the company or group any amount or payment other than standard director remuneration or who maintain or have maintained during the period in question a business relationship with the company or any group company, either in their own name or as a significant shareholder, director or senior manager of an entity which maintains or has maintained the said relationship.
If applicable, include a justified statement from the board detailing the reasons why the said director may carry on their duties as an external independent director.
| Name or corporate name of director | Description of the relationship | Justified statement |
|---|---|---|
| – | – | – |
| Name or corporate name of director | Committee notifying or proposing appointment |
|---|---|
| Antonio Vázquez | Nominations Committee |
| Total number of other non-executive directors | 1 |
| % of the total of the board | 8.33% |
List the reasons why these cannot be considered proprietary or external independent directors and detail their relationships with the company, its executives or shareholders.
| Name or corporate name of director | Reasons | Company, executive or shareholder with whom the relationship is maintained |
|---|---|---|
| Antonio Vázquez | He was until the merger between British Airways and Iberia effective date (January 21, 2011) the Executive Chairman of Iberia |
– |
List any changes in the category of each director which have occurred during the year.
| Name or corporate name of director | Date of change | Previous category | Current category |
|---|---|---|---|
| – | – | – | – |
| Number of female directors | % of total directors of each category | |||||||
|---|---|---|---|---|---|---|---|---|
| Year t | Year t-1 | Year t-2 | Year t-3 | Year t | Year t-1 | Year t-2 | Year t-3 | |
| Executive | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Proprietary | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| External independent | 3 | 3 | 2 | 1 | 33.33% | 30.00% | 22.22% | 12.5% |
| Other non-executive | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Total | 3 | 3 | 2 | 1 | 25% | 23.08% | 14.29% | 7.14% |
IAG adopted a Board Diversity policy in September 2012, which was updated in June 2014. IAG's Diversity policy aimed to promote diversity in the Board composition and established the Board's aspirational goal of achieving 25 per cent female representation on the Board by 2015. This target was met by the Company ahead of this time limit.
Following the new Spanish corporate governance code recommendation, the Board has approved on January 2016 a Directors Selection and Diversity policy which supersedes the former Board Diversity policy. The objective of this new Policy is to ensure that the appointments of directors are based on a prior analysis of the Board's needs and favour a diversity of knowledge, experience and gender. This Policy incorporates the former diversity principles while regulating the process for appointing directors. Under this Policy, director appointments are evaluated against the existing balance of skills, knowledge and experience on the Board, with directors asked to be mindful of diversity, inclusiveness and meritocracy considerations when examining nominations to the Board.
The Board recognises the value of diversity as a tool to enrich its discussions and decision-making process. Consequently, it is the Board's objective to create a board whose composition ensures a healthy diversity of opinions, perspectives, skills, experiences, backgrounds and orientations. Specifically, this will include an appropriate gender ratio, as well as including diversity in other senses, subject to the overriding principle of merit and suitability mentioned above.
This will be achieved over time, taking account of the valuable knowledge and experience of the present board members and the value of a more diverse Board.
Accordingly, the Directors Selection and Diversity Policy establishes a new female representation objective of 33 per cent for 2020 following the recommendation included in the final Davies report published in the UK.
The Board, through its Nominations Committee, regularly reviews the percentage of women that sit on the Board and on the Company's Management Committee, as well as the number of women in the Group's workforce worldwide. The IAG Board and Management Committee continue to focus on this important area.
The Nominations Committee leads the process for Board appointments. It evaluates the balance of skills, experience, independence, diversity and knowledge on the Board and, in the light of this evaluation, considers the role and capabilities required for a particular appointment. This evaluation will be made alongside succession plans for directors and takes into consideration any conclusions from the annual review of Board performance.
As further detailed in the following section, the Directors Selection and Diversity Policy states the Company's intention only to engage, so far as practicable, search firms which have signed up to the latest UK Voluntary Code of Conduct for Executive Search Firms (or its international equivalent). This is a voluntary code of conduct to address gender diversity on corporate boards and best practice for the related search processes. The code lays out steps for search firms to follow across the search process, from accepting a brief through to final induction.
When reviewing board appointments, the Board's Policy is to consider candidates from a wide variety of backgrounds, without discrimination based on gender, race, colour, age, social class, beliefs, religion, sexual orientation, disability or other factors.
It is the Nominations Committee's intention to reconcile the achievement of this objective while preserving the general diversity and merit based appointment principles established in IAG's policy.
IAG's Directors Selection and Diversity Policy is published on the Company's website.
The Nominations Committee leads the process for Board appointments. It evaluates the balance of skills, experience, independence, diversity and knowledge in the Board and, in the light of this evaluation, considers the role and capabilities required for a particular appointment. The appointment of new directors is made in accordance with a formal, rigorous and transparent process.
An overriding principle is that all appointments to the Board will be based upon merit and suitability of the candidate to the particular role being filled. As stated in the Directors Selection and Diversity Policy, it is the Board's objective to create a board whose composition ensures a healthy diversity of opinions, perspectives, skills, experiences, backgrounds and orientations. Specifically, this includes an appropriate gender ratio, as well as including diversity in other senses, subject to the overriding principle of merit and suitability mentioned above.
In support of this Policy and, particularly, of the gender ratio objective, IAG has stated that, when conducting a search for a new board member, so far as practicable, it intends only to engage search consultants who have signed up to the UK Voluntary Code of Conduct on gender diversity for executive search firms or an international equivalent.
As previously explained, this is a voluntary code of conduct to address gender diversity on corporate boards and best practice for the related search processes, which lays out steps for search firms to follow across the search process.
According to this code, when taking a specific brief, search firms should look at overall board composition and, in the context of the board's agreed aspirational goals on gender balance and diversity more broadly, explore with the chairman if recruiting women directors is a priority on this occasion.
In addition, when presenting their longlists, search firms should try to ensure that at least 30 per cent of the candidates are women – and, if not, should explicitly justify to the client why they are convinced that there are no other qualified female options, through demonstrating the scope and rigour of their research. Search firms should seek to ensure that the shortlist is appropriately reflective of the longlist, discussing with their clients each woman on the longlist and aiming to have at least one woman whom they would 'strongly recommend' that the client should meet.
Finally, search firms who are signatories to this code should seek to broaden their own databases of potential candidates, and are encouraged to invest time into developing relationships with the pipeline of future female candidates.
This code has been signed up to by over 70 search firms, who collectively account for the vast majority of the board work in the UK. All have committed to following the code's provisions in their board search processes, irrespective of sector, company and organisation and to ensuring that all provisions of the code are embedded in their day to day practices.
Explanation
–
The Nominations Committee regularly reviews the percentage of women that sit on the Board and on the Company's Management Committee. It also monitors the number of women within the Group's workforce worldwide. This information (and the progress made towards achieving greater diversity) is published annually in the Company's annual report.
As previously explained, IAG adopted a Board Diversity policy in September 2012, which was updated in June 2014, that established the Board's aspirational goal of achieving 25 per cent female representation on the Board by 2015. This target was met by the Company ahead of this time frame.
The Board of Directors, at its meeting held on January 28, 2016, approved a new Directors Selection and Diversity Policy which superseded the former Diversity Policy which has established a new female representation objective of 33 per cent for 2020. A detailed explanation of how this Policy promotes the achievement of this objective is included in the two preceding sections.
In addition, IAG's Directors Selection and Diversity Policy establishes the Nominations Committee's obligation to carry out an annual check on compliance with this policy and to set out its findings in the Company's annual corporate governance report.
During 2015, no new directors were appointed to the Board.
There are no significant shareholders with representation on the Board of Directors.
C.1.8 Explain, if applicable, the reasons why proprietary directors have been appointed upon the request of shareholders who hold less than 3% of the share capital.
– –
Name or corporate name of shareholder Reason
Provide details of any rejections of formal requests for board representation from shareholders whose equity interest is equal to or greater than that of other shareholders who have successfully requested the appointment of proprietary directors. If so, explain why these requests have not been entertained.
| Name or corporate name of shareholder | Explanation |
|---|---|
| – | – |
C.1.9 Indicate whether any director has resigned from office before their term of office has expired, whether that director has given the board their reasons and through which channel and, if tendered in writing, list below the reasons given by that director:
– –
Name of director Reasons for resignation
| Name or corporate name of director | Name of listed company | Position | |
|---|---|---|---|
| César Alierta | Telefónica, S.A. | Chairman | |
| César Alierta | China Unicom | Non–Executive Director | |
| Patrick Cescau | Intercontinental Hotels Group |
Non–Executive Chairman | |
| Baroness Kingsmill | Telecom Italia | Non–Executive Director | |
| Baroness Kingsmill | E.ON | Member of the Supervisory Board |
|
| James Lawrence | Smurfit Kappa Group | Non–Executive Director | |
| James Lawrence | Avnet Inc. | Non–Executive Director | |
| Kieran Poynter | British American Tobacco | Non–Executive Director | |
| Dame Marjorie Scardino | Twitter, Inc. | Non–Executive Director | |
| Alberto Terol | Indra Sistemas, S.A. | Non–Executive Director | |
| Alberto Terol | Obrascon Huarte Lain, S.A. | Non–Executive Director |
According to article 17.5 of the Board Regulations, unless otherwise authorised by the Nominations Committee, a director shall not hold more than six other directorships of which no more than four, in the case of non-executive directors, and no more than one, in the case of executive directors, can be in public listed companies. In any event, prior consent from the Nominations Committee is required before an executive director can accept any external directorship appointment.
Asset-holding or pure investment companies are excluded for the purposes of the preceding paragraph. Furthermore, companies belonging to the same group shall be considered as a single company.
| C.1.15 List the total remuneration of the board: |
|
|---|---|
| Board remuneration (thousands of euros) | 15,860 |
| Amount of pension rights accumulated by directors (thousands of euros) | 308 |
| Amount of pension rights accumulated by former directors (thousands of euros) | 5,173 |
| Name or corporate name | Position(s) |
|---|---|
| Keith Williams | Executive Chairman of British Airways |
| Luis Gallego | Executive Chairman of Iberia |
| Robert Boyle | Director of Strategy |
| Alex Cruz | Vueling Chief Executive Officer |
| Ignacio de Torres | Director of Global Services |
| Christopher Haynes | General Counsel |
| Julia Simpson | Chief of Staff |
| Steve Gunning | IAG Cargo Chief Executive Officer |
| Stephen Kavanagh | Aer Lingus Chief Executive Officer |
| Total remuneration received by senior management (thousands of euros) | 21,943 |
www.iairgroup.com 175
| Name or corporate name of director | Name or corporate name of significant shareholder |
Position |
|---|---|---|
| – | – | – |
List, if appropriate, any relevant relationships, other than those included under the previous heading,that link members of the board with significant shareholders and/or their group companies.
| Name or corporate name of director | Name or corporate name of significant shareholder |
Relationship |
|---|---|---|
| – | – | – |
The Board Regulations were modified by the Board of Directors during the meeting held on June 18, 2015 in order to adapt their wording to the reforms introduced by Law 31/2014 amending the Spanish Companies Law to improve corporate governance and to introduce certain technical and systematic improvements.
Further amendments were introduced and approved by the Board of Directors in its meeting held on December 17, 2015, in order to adapt its wording to certain of the recommendations of the new Spanish Good Governance Code for Listed Companies published in February 2015.
The full text of the Board Regulations is published on the Company's website: www.iairgroup.com.
The Shareholders' Meeting or, if applicable, the Board of Directors itself shall be entitled to designate the members of the Board of Directors subject to the current law provisions.
Any vacancies may be covered by the Board of Directors by means of cooption, according to the applicable law, on an interim basis until the next Shareholders' Meeting is held, which shall ratify, as the case may be, the appointments or appoint the persons that are to replace any directors not ratified, or eliminate any vacant positions.
Proposals for the appointment of directors submitted by the Board to the Shareholders' Meeting for consideration, as well as decisions on appointments made by the Board of Directors using the powers of cooption legally attributed to it, shall be in respect of persons that satisfy the legal and Bylaw requirements to hold office as director, are of suitable repute and have appropriate professional skills, experience, knowledge and availability for the exercise of the functions and duties of such office.
Proposals for the appointment or renewal of directors submitted to the Shareholders' Meeting by the Board, as well as provisional appointments by means of cooption, must be approved on the proposal of the Nominations Committee in the case of independent directors and subject to a report from the Nominations Committee in all other cases.
Directors shall hold office for the period set forth in the Bylaws (one year) unless the Shareholders' Meeting resolves on their removal from office or dismissal, or they stand down from office.
In identifying suitable candidates, the Nominations Committee may use open advertising or the services of external advisers to facilitate the search, and consider candidates from a wide range of backgrounds with due regard to diversity, including gender as well as other forms of diversity. Selection will be based on merit and against objective criteria, as well as considering the candidates' ability to commit sufficient time to the role.
In accordance with the recommendation included in the Spanish Good Governance Code for Listed Companies, the Board approved in January 2016 a Directors Selection and Diversity Policy which ensures that appointments are based on a prior analysis of the Board's needs and favours a diversity of knowledge, experience and gender. In particular and as established in this policy, IAG only engages external search consultants who have signed up to the UK Voluntary Code of Conduct on gender diversity for executive search firms or an international equivalent.
At the end of their term of office, directors may be re-elected one or more times for periods of equal duration to that established in the Bylaws.
Proposals for re-election of directors that the Board of Directors resolves to submit to the Shareholders' Meeting shall be subject to a formal preparation process, which must include a proposal made by the Nominations Committee, in the case of independent directors, and the report from the Nominations Committee in all other cases. The Nominations Committee's proposal or report shall be prepared having given 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. To this end, the directors sitting on the Nominations Committee shall be evaluated by the Nominations Committee itself, and each of them shall abstain from participating in any debate or vote that may affect them.
Under the Chairman's leadership, the performance of individual directors, the Board of Directors as a whole and the Board Committees is evaluated at least once a year.
During the reporting period, the Chairman met each Non-Executive Directors individually to discuss their contribution to the Board. In addition to this, the Senior Independent Director met with the other Non-Executive Directors to discuss the performance of the Chairman, and the outcome of this evaluation was reported and considered by the Nominations Committee and by the Board as a whole.
Directors shall cease to hold office when the term of office for which they were appointed expires and they are not re-appointed or whenever so decided by the Shareholders' Meeting.
Notwithstanding the above, a director must place his position at the disposal of the Board of Directors and, at its request, formally resign from office in the cases established in article 16.2 of the Board Regulations.
Directors who stand down before the end of their term of office, due to resignation or for any other reason, must state their reasons in a letter to be sent to all the directors. Without prejudice to the notification of such vacation of office as a price sensitive information communication, the reasons for the same must be explained in the Annual Corporate Governance Report.
The Board of Directors may only propose the removal of an independent director before the end of the mandate established in the Bylaws when it considers there is just cause, following a report by the Nominations Committee. For these purposes, just cause shall be deemed to exist when the director takes up new positions or enters into new obligations that prevent him from dedicating the necessary time to the performance of the duties inherent in his office, breaches the duties inherent in his office or unexpectedly becomes subject to any of the circumstances provided for in article 16.2 of the Board Regulations. The removal may also be proposed as a result of takeover bids, mergers or other similar corporate transactions that determine a material change to the shareholding structure of the Company.
No external evaluation has been carried out in 2015. Nonetheless, the Board and Committees' performance evaluation was conducted internally. The review concluded that the Board had effectively fulfilled its responsibilities during 2015, and the general progress made was unanimously recognised by the Board.
Furthermore, during the reporting period, the Chairman met each non-executive director individually to discuss their contribution to the Board. In addition to this, the Senior Independent Director met with the other non-executive directors to discuss the performance of the Chairman, and the outcome of this evaluation was reported and considered by the Nominations Committee and by the Board as a whole.
Finally, the Chairman completed the performance evaluation of the Chief Executive which was then reported to the Nominations Committee and subsequently to the Remuneration Committee, and the outcome of this evaluation was reported to the Board of Directors for their review.
The Board and Committees' performance evaluation was conducted internally in 2015. The last external evaluation was completed in 2013. The review took the format of a self-assessment survey designed to test directors' opinions and views on a number of matters including: the role and organisation of the Board, Board composition, organisation of meetings, quality of Board debate, knowledge and experience, relationship with management, and progress made against the 2015 action plan.
The Board Secretary prepared a report on the performance evaluation of the Board and each of the Committees. The Board report was considered by the Nominations Committee; with each of the committees' reports and the results of the questionnaires being considered by the different Committees and discussed at the Board meeting held in January 2016. The
review concluded that the Board had effectively fulfilled its responsibilities during 2015, and the general progress made was unanimously recognised by the Board.
The Chairman also met with each director individually to provide feedback on their performance. He also discussed the functioning of the Board as a whole and the contribution expected of each director.
The Board evaluation also included an assessment of performance against the objectives agreed for 2015. Progress made on Board and executive succession planning and talent development was recognised, as well as the actions agreed to improve Board effectiveness.
In accordance with article 16.2 of the Board Regulations, a director must place his position at the disposal of the Board of Directors and, at its request, formally resign from office in the following cases:
| C.1.23 | Are qualified majorities other than those prescribed by law required for any type of decision? | ||||
|---|---|---|---|---|---|
| -------- | ------------------------------------------------------------------------------------------------ | -- | -- | -- | -- |
If applicable, describe the differences.
Description of differences
C.1.24 Indicate whether there are any specific requirements, apart from those relating to the directors, to be appointed chairman of the board:
–
–
Description of requirements
C.1.25 Indicate whether the chairman has the casting vote:
–
Matters where the Chairman has the casting vote
FINANCIAL STATEMENTS
| Age limit for Chief Executive Officers | |
|---|---|
| Age limit for directors |
C.1.27 Indicate whether the bylaws or the board regulations set a limited term of office for external independent directors different from the one established in the applicable law.
No
–
Maximum number of years in office
C.1.28 Indicate whether the bylaws or the board regulations stipulate specific rules on appointing a proxy to the board, the procedures for doing so and, in particular, the maximum number of proxy appointments a director may hold, as well as whether any limit has been established in relation to the categories of director that may be appointed as a proxy, further to the limits imposed by law. If so, give brief details.
In accordance with article 40 of the Bylaws and 10 of the Board Regulations, directors shall make every effort to attend Board meetings.
Notwithstanding the above, all directors may cast their vote through, and grant a proxy to another director, although non-executive directors may only grant a proxy to other non-executive director.
Proxies must be granted in writing, addressed to the Chairman or to the Board Secretary, and must be granted specifically for each meeting. For such purposes, a message addressed to the Chairman or the Secretary by letter, fax, telegram or e-mail shall be valid.
No director may hold more than three proxies, with the exception of the Chairman, who shall not be subject to such limit but may not represent more than half of the members of the Board of Directors.
The director granting the proxy shall endeavour, where possible, to include voting instructions in the proxy letter.
| Number of board meetings | 9 |
|---|---|
| Number of board meetings held without the Chairman's attendance | 0 |
If the chairman is an executive director, indicate the number of meetings held without the presence of an executive director, in person or by proxy, and under the chairmanship of the lead director.
Number of meetings –
Indicate the number of meetings of the various board committees held during the year.
Number of meetings of the Executive or Delegate Committee –
Number of meetings of the Audit and Compliance Committee 7
Number of meetings of the Nomination and Remuneration Committee –
Number of meetings of the Nominations Committee 5
Number of meetings of the Remuneration Committee 4
Number of meetings of the Safety Committee 2
| Number of meetings held with all directors in attendance | 3 |
|---|---|
| % of attendances of the total votes cast during the year | 92.03% |
Identify, where applicable, the person(s) who certified the company's individual and consolidated financial statements prior to their approval by the board.
| Name | Position |
|---|---|
| Willie Walsh | Chief Executive Officer |
| Enrique Dupuy de Lôme | Chief Financial Officer |
In accordance with article 35.4 of the Board Regulations, the Board of Directors shall prepare the Company's financial statements so that such financial statements do not give rise to any restrictions or qualifications by the auditors. This notwithstanding, if the Board of Directors deems it appropriate to prepare the financial statements subject to restrictions or qualifications in the opinion of the auditors, it must clearly explain to shareholders the scope of such restrictions or qualifications and the reasons behind its actions.
The Audit and Compliance Committee has the duty to review the Company's annual financial statements, monitor compliance with legal requirements, the appropriate definition of the scope of consolidation and the correct application of generally accepted accounting principles, as well as reviewing significant financial reporting judgements in the Company's annual accounts.
If the secretary is not a director, complete the following table:
| Name or corporate name of the secretary | Representative |
|---|---|
| Álvaro López-Jorrín | – |
The relations of the Board of Directors with the Company's auditors shall be channelled through the Audit and Compliance Committee.
The Board of Directors shall refrain from engaging any audit firm entitled to be paid by the Company for all services rendered fees in an amount in excess of 10 per cent of such firm's total revenue for the previous year.
With regard to the external auditor, the Audit and Compliance Committee has, among others, the following powers:
In all cases, the declaration of their independence in relation to the entity or entities directly or indirectly related thereto must be received annually from the external auditors, as well as information on the additional services of any kind provided and the corresponding fees received.
During 2015, the Audit and Compliance Committee reviewed the work undertaken by the external auditors and assessed their independence, objectivity and performance. In doing so, it took into account relevant professional and regulatory requirements and the relationship with the auditor as a whole, including the provision of any non-audit services. The Audit and Compliance Committee monitored the auditors' compliance with relevant regulatory, ethical and professional guidance on the rotation of partners, and assessed its qualifications, expertise, resources and the effectiveness of the audit process, including a report from the external auditor on its own internal quality procedures. The Audit and Compliance Committee decided not to tender the audit for the Company for fiscal year 2016.
The Audit and Compliance Committee receives a quarterly report on compliance with the Group's External Auditor Services Policy, which restricts the volume and types of non-audit services that Ernst & Young can provide throughout the Group.
The Board of Directors approved in January 2016 a Policy regarding Communication and Contact with Shareholders, Institutional Investors and Proxy Advisors that regulates the relationship and channels of communication of the Company with shareholders, institutional investors and proxy advisors. This policy complies in full with market abuse regulations and provides an equitable treatment to shareholders in the same position.
In addition, the Company has a Group Standing Instruction on business integrity in order to ensure compliance with competition and anti-bribery legislation. As stated in this Instruction, IAG and its staff are bound by values of integrity and responsibility; the Company is firmly committed to maintaining the highest standards of ethics, honesty, openness and accountability.
This Instruction applies to all staff of IAG and its subsidiary companies and to suppliers and their representatives when working for IAG. A breach of these principles will be managed in accordance with the Company's established disciplinary procedures or contract engagement terms. In accordance with this policy, staff should immediately report any actual or potential breaches of the Instruction to their line managers or, if not appropriate for whatever reason, to the Chief of Staff or General Counsel. All matters will be dealt with in confidence. Timely, appropriate and thorough investigations will be carried out into all cases of actual or suspected breaches whether discovered or reported. There is also mandatory training providing specific guidance on how these policies apply to staff in their respective roles.
This Instruction also prevents the offering or making of payments or the offering or promising of gifts to dishonestly influence a decision or to induce or reward a person for improper performance of their functions or job activity.
The Company has established whistleblowing procedures so that staff can report any malpractice. In addition to this, there is a whistle blower hotline as an alternative for those employees who, for whatever reason, do not feel comfortable using internal procedures. This hotline is an independent, confidential call bureau. All calls are forwarded to the highest level of management within IAG.
Conflict of interest situations are also covered within IAG's employees' regulations, establishing appropriate reporting obligations. If employees become aware of any potential conflicts of interest, these must be disclosed to the Company as soon as possible.
| Outgoing auditor | Incoming auditor | |||
|---|---|---|---|---|
| – | – | |||
| Explain any disagreements with the outgoing auditor and the reasons for the same. | ||||
| No | ||||
| Explanation of the disagreements | ||||
| – | ||||
| C.1.37 | Indicate whether the audit firm performs non-audit work for the company and/or its group. If so, state the amount of fees paid for such work and the percentage they represent of all fees invoiced to the company and/or its group. |
|||
| Yes | ||||
| Company | Group | Total | ||
| Amount of non-audit work | ||||
| (in thousands euros) | 30 | 1,399 | 1,429 | |
| Amount of non-audit work as a % of the total | ||||
| amount billed by the audit firm | 3% | 29% | 24% |
C.1.38 Indicate whether the audit report on the previous year's financial statements is qualified or includes reservations. Indicate the reasons given by the Chairman of the Audit Committee to explain the content and scope of those reservations or qualifications.
–
No
Explanation of reasons
| Company | Group | |
|---|---|---|
| Number of consecutive years | 6 | 6 |
| Company | Group | |
| Number of years audited by current audit firm/Number of years the company's financial statements have been audited (%) |
100% | 100% |
C.1.40 Indicate and give details of any procedures through which directors may receive external advice:
In accordance with article 26 of the Board Regulations, in order to be assisted in the performance of his or her duties, any director may request the hiring of legal, accounting, technical, financial, commercial or other expert advisors, whose services shall be paid for by the Company.
The assignment must deal with specific issues of certain significance and complexity arising during the performance of the director's duties.
The request for an expert to be hired shall be channelled through the Chairman or the Company Secretary, who may subject it to the prior approval of the Board of Directors. Such approval may be denied in well-founded instances, including the following circumstances:
b. Where the cost thereof is not reasonable in light of the significance of the issues and the assets and income of the Company;
c. Where the technical assistance sought may be adequately provided by the Company's own experts and technical personnel; or
Calls to Board meetings always include, unless there is a justified cause, the meeting agenda (which shall indicate any items requiring a resolution or decision by the Board of Directors) and shall be accompanied, as the case may be, by the information deemed necessary. Call notices shall be sent sufficiently in advance to ensure that directors receive them no later than the seven days before the date of the meeting, except in the case of meetings deemed urgent by the Chairman (or by the Deputy Chairman, in the event of absence, illness or inability of the Chairman). This notice period shall not apply to cases in which the Board Regulations stipulate a specific call period.
In addition, in accordance with article 9 of the Board Regulations, prior to the commencement of each fiscal year, the Board of Directors shall set a schedule for its ordinary meetings. This schedule may be modified by a resolution adopted by the Board of Directors or by a decision made by the Chairman, who shall endeavour to notify the modification to the directors not less than five days in advance of the date originally set for the meeting or of the new date set in lieu thereof, if the latter date falls earlier.
Papers for Board meetings are typically distributed to the Board members in the week prior to the relevant meeting.
In this regard, the Chairman shall ensure that the directors receive accurate, appropriate and clear information, in particular about the Company's performance, its strategy, challenges and opportunities in order to enable the Board of Directors to make sound decisions and monitor correctly the Company's performance and shall lead Board of Directors discussions with a view to encouraging effective decision-making and a constructive debate on the performance of the Company, its growth strategy and commercial objectives encouraging the active participation of the directors during meetings and safeguarding their freedom of expression.
In accordance with article 25 of the Board Regulations, a director shall have the broadest powers to obtain information regarding any aspect of the Company, to examine its books, records and documents, to inspect its facilities, and to communicate with the senior managers of the Company. The exercise of such powers of information shall be channelled through the Chairman or the Company Secretary.
In addition, all Board members have access to the Board Secretary and the Group General Counsel for any further information they require. If any of the non–executive directors has any concerns about the running of the Group, they discuss these concerns with one of the executive directors, the Group General Counsel or the Chairman. If their concerns cannot be resolved in this way, then they are recorded in the Board minutes. No such concerns arose during the reporting period.
In accordance with article 28 of the Board Regulations, the Board Committees must receive appropriate and timely training, both in the form of induction programmes for new members and on an on-going basis for all members. The Board Committees shall also arrange for annual evaluations of their own performance, conducted externally at least every three years.
Papers for Committees are typically distributed to their members in the week prior to the relevant meeting.
C.1.42 Indicate and, where appropriate, give details of whether the company has established rules obliging directors to inform the board of any circumstances that might harm the organisation's name or reputation, tendering their resignation as the case may be.
In accordance with article 23.2.c) of the Board Regulations, a director must disclose to the Company any judicial, administrative or other proceedings brought against the director which, because of their significance or characteristics, may seriously reflect upon the reputation of the Company and, in general, any fact or event that may be reasonably material to his or her conduct as a director of the Company. In particular, directors must inform the Company, through the Chairman, if they are charged, become subject to an order for further criminal prosecution upon indictment or if an order for the commencement of an oral trial is issued against them in a criminal proceeding for any crime, and of the occurrence of any other significant procedural milestone in such proceedings. In such case, the Board of Directors shall review the case as soon as practicable and shall adopt the decisions it deems fit, taking into account of the corporate interest.
In addition, in accordance with article 16.2 of the Board Regulations, a director must place his position at the disposal of the Board of Directors and, at its request, formally resign from his or her position:
–
| No | ||
|---|---|---|
| Name of director | Criminal proceedings | Remarks |
| – | – | – |
Indicate whether the board has examined this matter. If so, provide a justified explanation of the decision taken as to whether or not the director should continue to hold office or, if applicable, detail the actions taken or to be taken by the board.
Decision/action taken Justified explanation – –
The following significant agreements contain provisions entitling the counterparties to exercise termination, alteration or other similar rights, in the event of 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.
Number of beneficiaries
12
| Type of beneficiary | Description of the resolution |
|---|---|
| Executive Directors and IAG Management Committee |
There are no express provisions in executive directors and senior executives service contracts with the Company for compensation payable upon termination of those contracts, other than for payments in lieu of notice. The period of notice required from the executive directors and senior executives 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 lump sum in lieu of six months' basic salary is payable within 28 days of the date of termination of employment. A payment in respect of basic salary for the second six months period only becomes payable if, in the Company's reasonable opinion, the executive directors and senior executives have taken reasonable steps to find alternative paid work and then only in six monthly instalments. The Company may reduce the sum payable in respect of any month by any amount earned by the executive directors and senior executives (including salary and benefits) referable to work done in that month. |
|
| Chairman | Antonio Vázquez has a specific agreement if his service contract is terminated for whatever reason. Additional information on this agreement has been provided in the Annual Report on the Remuneration of the Directors. |
Indicate whether these agreements must be reported to and/or authorised by the governing bodies of the company or its group.
| Board of Directors | Shareholders' Meeting | |
|---|---|---|
| Body authorising clauses | X | |
| Yes | No | |
| Is the Shareholders' Meeting informed of such clauses? | X |
| Name | Position | Type |
|---|---|---|
| – | – | – |
| – | – | – |
| % of executive directors | – | |
| % of proprietary directors | – | |
| % of external independent directors | – | |
| % of other non-executive directors | – |
Explain the functions attributed to this committee, describe the procedures and rules governing its organization and operation, and summarize the most important steps taken during the year.
Indicate whether the composition of the executive or delegate committee reflects the participation within the board of the different types of directors:
–
–
If not, explain the composition of the executive or delegate committee
| Name | Position | Type |
|---|---|---|
| James Lawrence | Chairman | Independent |
| Patrick Cescau | Member | Independent |
| Kieran Poynter | Member | Independent |
| Alberto Terol | Member | Independent |
| % of proprietary directors | – |
% of external independent directors 100% % of other non-executive directors –
Explain the functions attributed to this committee, describe the procedures and rules governing its organization and operation, and summarize the most important steps taken during the year.
a) Rules of organisation and operation:
The Audit and Compliance Committee shall be made up of no less than three and no more than five non-executive directors appointed by the Board, with the dedication, capacity and experience necessary to carry out their function. The members of the Audit and Compliance Committee, and particularly its Chairman, shall be appointed in light of their knowledge and experience on accounting, audit and risk management matters, and at least one of them shall have recent and relevant financial experience.
A majority of the members of the Audit and Compliance Committee shall be independent directors and one of them, at least, shall be appointed in light of his knowledge and experience on accounting or audit matters, or both.
The Board of Directors shall designate an Audit and Compliance Committee chairman from among the independent directors on the Audit and Compliance Committee who must be replaced at least every four years and may stand for re-election one year after vacating office. The Secretary or his nominee shall act as secretary to the Audit and Compliance Committee.
The Audit and Compliance Committee shall meet whenever convened by its chairman, at his own initiative, or at the request of at least two of its members and at least once every three months and, in all cases, where the Board of Directors requests the issue of reports, the presentation of proposals or the adoption of resolutions within the scope of its functions.
The Chairman of the Audit and Compliance Committee shall have the power to call committee meetings and to establish the agenda. The Audit and Compliance Committee shall be validly convened without prior call when all of its members are present and unanimously agree to hold a meeting. The call notice for ordinary meetings shall include the agenda, shall be served in writing sufficiently in advance to ensure that members receive it no later than three days before the date of the meeting and shall be authorised by the signature of the Chairman of the Audit and Compliance Committee or the Secretary or whomsoever acts as such. Extraordinary meetings may be called by telephone and the above requirements shall not apply where the Chairman of the Audit and Compliance Committee deems that the circumstances justify it.
The Audit and Compliance Committee shall be validly convened where more than half of its members are present, in person or by proxy, and decisions shall be adopted by an absolute majority of the members present, in person or by proxy.
The Audit and Compliance Committee may call any employee or officer of the Company and may even order them to appear without the presence of any other officer.
b) Functions:
The key function of the Audit and Compliance Committee is to assist the Board of Directors in oversight and control of the Group, regularly checking compliance with the legal provisions and internal regulations applicable to the IAG Group.
The main functions of the Audit and Compliance Committee include:
information on its activities, as well as on any incidents arising; and to check that senior management takes into account the conclusions and recommendations contained in its reports.
f. To monitor and evaluate the Company's interaction with its stakeholder groups.
g. To evaluate all aspects of the non-financial risks the Company is exposed to, including operational, technological, legal, social, environmental, political and reputational risks.
–
State the member of the Audit Committee who has been appointed having regard to his/her knowledge or experience in accounting and/or audit matters and indicate the number of years the Committee chairman has held office.
| Name of director with experience | Kieran Poynter | |
|---|---|---|
| Number of years Committee chairman has held office | 1 | |
| NOMINATION AND REMUNERATION COMMITTEE | ||
| Name | Position | Type |
| – | – | – |
| – | – | – |
| % of proprietary directors | – | |
| % of external independent directors | – | |
| % of other non-executive directors | – |
Explain the functions attributed to this committee, describe the procedures and rules governing its organization and operation, and summarize the most important steps taken during the year.
| Name | Position | Type |
|---|---|---|
| Sir Martin Broughton | Chairman | Independent |
| Antonio Vázquez | Member | Other external |
| Cesar Alierta | Member | Independent |
| Baroness Kingsmill | Member | Independent |
| % of proprietary directors | – |
|---|---|
| % of external independent directors | 75% |
| % of other non-executive directors | 25% |
Explain the functions attributed to this committee, describe the procedures and rules governing its organization and operation, and summarize the most important steps taken during the year.
a) Rules of organisation and operation:
The Nominations Committee shall be made up of no less than three and no more than five non-executive directors appointed by the Board, with the dedication, capacity and experience necessary to carry out their function. A majority of the members of the Nominations Committee shall be independent directors.
The Board of Directors shall designate a Nominations Committee Chairman from among the independent directors forming part of the Committee. The Secretary of the Board of Directors or his or her nominee shall act as Secretary to the Nominations Committee.
The Nominations Committee shall meet whenever convened by its Chairman, at his or her own initiative, or at the request of two or more of its members and at least once every year and, in all cases, where the Board requests the issue of reports, the presentation of proposals or the adoption of resolutions within the scope of its functions.
The main functions of the Nominations Committee include:
I. To ensure that, on appointment, non-executive directors receive a formal letter of appointment setting out clearly what is expected from them in terms of time commitment, committee service and involvement outside Board meetings.
J. To identify directors qualified to fill vacancies on any committee of the Board of Directors (including the Nominations Committee).
The Committee's principal activities during the year were:
| Name | Position | Type |
|---|---|---|
| Dame Marjorie Scardino | Chairwoman | Independent |
| Baroness Kingsmill | Member | Independent |
| María Fernanda Mejía | Member | Independent |
| Alberto Terol | Member | Independent |
| % of proprietary directors | – |
|---|---|
| % of external independent directors | 100% |
| % of other non-executive directors | – |
Explain the functions attributed to this committee, describe the procedures and rules governing its organization and operation, and summarize the most important steps taken during the year.
a) Rules of organisation and operation
The Remuneration Committee shall be made up of no less than three and no more than five non-executive directors appointed by the Board of Directors, with the dedication, capacity and experience necessary to carry out their function. A majority of the members of the Remuneration Committee shall be independent directors.
The Board shall designate a Remuneration Committee Chairman from among the independent directors of the Remuneration Committee. The Chairman of the Board may not be appointed as Remuneration Committee Chairman. The Secretary of the Board or his or her nominee shall act as secretary to the Remuneration Committee.
The Remuneration Committee shall meet whenever convened by its Chairman, at his or her own initiative, or at the request of two or more of its members and at least twice every year and, in all cases, where the Board requests the issue of reports, the presentation of proposals or the adoption of resolutions within the scope of its functions.
The main functions of the Remuneration Committee include:
A. To propose to the Board the system and amount of the annual remuneration for directors, as well as the individual remuneration of the executive directors and the other terms of their contracts.
The Committee's principal activities during the year were:
| Name | Position | Type |
|---|---|---|
| Willie Walsh | Chairman | Executive |
| Antonio Vázquez | Member | Other external |
| Sir Martin Broughton | Member | Independent |
| Kieran Poynter | Member | Independent |
| % of executive directors | 25% | |
| % of proprietary directors | – | |
| % of external independent directors | 50% | |
| % of other non-executive directors | 25% |
Explain the functions attributed to this committee, describe the procedures and rules governing its organization and operation, and summarize the most important steps taken during the year.
a) Rules of organisation and operation
The Safety Committee shall be made up of no less than three and no more than five directors appointed by the Board, with the dedication, capacity and experience necessary to carry out its function.
The Board shall designate a Safety Committee Chairman from among the directors of the Safety Committee. The Secretary or his or her nominee shall act as secretary to the Safety Committee.
The main functions of the Safety Committee include:
The Committee's key topics discussed during the year were:
| Number of female directors | ||||||||
|---|---|---|---|---|---|---|---|---|
| Year t | Year t-1 | Year t-2 | Year t-3 | |||||
| Number | % | Number | % | Number | % | Number | % | |
| Executive Committee | – | – | – | – | – | – | – | – |
| Audit Committee | 0 | 0 | 0 | 0 | 0 | 0 | ||
| Nomination and Remuneration Committee |
– | – | – | – | – | – | – | – |
| Nominations Committee | 1 | 25 | 1 | 25 | 1 | 25 | 1 | 25 |
| Remuneration Committee | 3 | 75 | 3 | 75 | 2 | 66,67 | 1 | 25 |
| Safety Committee | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
The Board committees are governed by the provisions of the Bylaws and the Board Regulations (article 29 of the Board Regulations for the Audit and Compliance Committee, article 30 for the Nominations Committee, article 31 for the Remuneration Committee and article 32 for the Safety Committee). Where no specific provision is made, the Board committees shall be governed, by analogy and where applicable, by the provisions applicable to the Board of the Company.
The above mentioned articles of Board Regulations were modified by the Board during its meeting held on June 18, 2015 in order to adapt its wording to the reforms introduced by Law 31/2014 which modifies the Spanish Companies Law to improve corporate governance and certain technical and systematic improvements.
Further amendments were introduced and approved by the Board in its meeting held on December 17, 2015, in order to adapt its wording to certain of the recommendations of the new Spanish Good Governance Code for Listed Companies published in February 2015.
The Bylaws and the Board Regulations are available on the Company's website: www.iairgroup.com.
The Audit and Compliance Committee prepares an annual report on its activities, which is available on the Company's website within the Annual Report and Accounts.
The Nominations Committee prepares an annual report on its activities, which is available on the Company's website within the Annual Report and Accounts.
The Remuneration Committee prepares an annual report on its activities, which is available on the Company's website within the Annual Report and Accounts.
The Safety Committee prepares an annual report on its activities, which is available on the Company's website within the Annual Report and Accounts.
In accordance with article 3.4 of the Board Regulations, the Board of Directors has the exclusive authority to approve transactions that the Company or companies in its Group entered into with directors, or shareholders that have a significant holding or that are represented by the Board of Directors or with any persons related to them.
The performance by the Company or the companies in the Group of any transaction with directors, with shareholders that have a shareholding equal to or greater than that legally considered significant from time to time or who have proposed the nomination of any Company directors, or with their respective related parties, shall be subject to authorisation from the Board of Directors, following a report by the Audit and Compliance Committee.
The Audit and Compliance Committee has, among other powers, the obligation to report on related transactions or on transactions that entail or may entail a conflict of interest. The Audit and Compliance Committee ensures that transactions between the Company or the companies forming part of the Group with the directors, the shareholders referred to in the preceding paragraph or their respective related persons are carried out under arm's length conditions and with due observance of the principle of equal treatment of shareholders.
Where the transactions fall within the ordinary course of business and are customary or recurring in nature, it is sufficient with the prior general authorisation of the line of operations and its general terms and conditions by the Board, following a report by the Audit and Compliance Committee.
However, no authorisation of the Board of Directors is required for those transactions that simultaneously satisfy the following three conditions: (i) that they are performed by virtue of contracts with standard conditions that are applied en masse to a high number of customers; (ii) that they are performed at prices or rates generally established by the party acting as supplier of the good or service in question; and (iii) that the amount does not exceed 1 per cent of the annual consolidated income of the Group.
The authorisation must be endorsed by the Shareholders' Meeting in the cases established in law and, in particular, where it concerns a transaction with a director valued at more than 10 per cent of corporate assets.
In addition to this, and prior to the Audit and Compliance Committee consideration, shareholder related party transactions are also reviewed by the IAG Management Committee and are reported to the IAG Head of Group Audit and Risk Management.
| Name or corporate name of significant shareholder |
Name or corporate name of the company or its group company |
Nature of the relationship |
Type of transaction | Amount (in thousands of euros) |
|---|---|---|---|---|
| BlackRock Investment Management (UK) |
||||
| BlackRock Inc. | Ltd. | Commercial | Interest received | 477 |
| BlackRock Inc. | BlackRock Investment Management (UK) Ltd. |
Commercial | Other | 47,687 |
| Qatar Airways (Q.C.S.C.) |
Qatar Airways (Q.C.S.C.) |
Commercial | Services rendered | 28,881 |
| Qatar Airways (Q.C.S.C.) |
Qatar Airways (Q.C.S.C.) |
Commercial | Reception of services |
61,177 |
| Name or corporate name of director or senior manger |
Name or corporate name of related party |
Connection | Relationship | Amount (in thousands of euros) |
|---|---|---|---|---|
| – | – | – | – |
In any case, list any intragroup transactions carried out with entities in countries or territories considered to be tax havens.
| Brief description of the | Amount (in thousands | |
|---|---|---|
| Corporate name of the group company | transaction | of euros) |
| – | – | – |
65,665 thousand of euros.
The Board of Directors has the exclusive authority to consider those matters deriving from the duty of loyalty in accordance with the provisions of the law, including actual or potential conflicts of interest involving directors.
As established in article 20 of the Board Regulations, directors shall adopt the required measures to avoid becoming subject to conflicts of interest in accordance with the provisions of the law.
Directors must notify the Board, through the Chairman or the Secretary or Deputy Secretary, of any conflict of interest to which they may be subject.
In case of conflict, the affected director will not participate in the deliberation and voting on any such matters and shall be excluded from the number of members in attendance for the purposes of calculating the quorum and voting majorities. In particular, any director affected by proposals for appointment, reelection or dismissal shall refrain from taking part in the discussions and voting in respect of such matters.
In a conflict of interest situation, independent directors and other directors who are not affected by the potential conflict of interest need to ensure that the Company's interests prevail in such situations, provided that this does not result in any unlawful damage to any shareholder or third party affected thereby.
The Company provides information, as required by the law, on any conflict of interest to which the directors have been subject during the year.
In addition, in accordance with article 33.4 of the Board Regulations, all public requests for delegation of voting powers made in favour of any director shall disclose, where applicable, the existence of a conflict of interest, and shall provide detailed reasons for the direction in which the representative shall vote in the event that no instructions are given by the shareholder, subject always to the provisions of applicable law.
The existing procedures regarding related party transactions have been described in section D.1.
Identify the listed subsidiaries in Spain
Listed subsidiaries
–
Indicate whether they have provided detailed disclosure on the type of activity they engage in, and any business dealings between them, as well as between the subsidiary and other group companies;
–
–
Business dealings between the parent and listed subsidiary, as well as between the subsidiary and other group companies
Indicate the mechanisms in place to resolve possible conflicts of interest between the listed subsidiary and other group companies.
Mechanisms to resolve possible conflicts of interest
The Group has an Enterprise Risk Management Policy approved by the Board on January 28, 2016. This Policy establishes a common framework within the Group to manage and control the financial and non-financial risks the Group is exposed to, establishing the risk level that is considered acceptable.
The Board of Directors has ultimate responsibility for risk management and internal control, including the determination of the nature and extent of the principal risks it is willing to take to achieve its strategic objectives.
The Audit and Compliance Committee reviews all enterprise risk management matters on behalf of the Board. This includes a six monthly IAG risk map review containing a robust assessment of the principal risks facing the Group and how these risks are managed or mitigated to reduce their incidence or their impact. The Audit and Compliance Committee also carries out deep dives on selected risks as and when requested. During such reviews the requirement for any changes to the Board's risk appetite is considered. The Audit and Compliance Committee also monitors and reviews the risk management systems, satisfying itself that they are functioning effectively and that corrective action is being taken where necessary.
Within this common framework, enterprise risk management is led by the Management Committee of IAG supported by the Aer Lingus, British Airways, Iberia and Vueling Management Committees.
Both British Airways and Iberia have well established enterprise risk management systems that ensure that:
a. Each risk is owned by a Senior Manager who is ultimately responsible for its management;
Risks are classified by their source in:
Enterprise risk management in Aer Lingus was well established on its acquisition by IAG in 2015. The risk map was reviewed by the IAG Management Committee in October 2015. There are four risk classifications: stakeholder confidence, cost competitiveness, organisational agility and customer reach. Risks are assessed before mitigation, the inherent risk, and after mitigation, the residual risk. The Aer Lingus Management Committee review considers significant changes to any of the risks, new risks and the adequacy of risk mitigation. Underlying the Aer Lingus Management Committee review there are departmental risk registers allocating risks and mitigating actions to owners.
Enterprise risk management in Vueling is the responsibility of the Vueling Management Committee. A central record of risks is maintained and each risk is owned by a director. The central records contain mitigating actions and how the Vueling Management Committee receives assurance on the risk. The risk classifications are aligned to those in British Airways and Iberia as detailed above.
At the Group level, material risks from the airlines, together with Group wide risks, are maintained in a Group risk map. The IAG Management Committee reviews the Group risk map twice a year in advance of reviews by the Audit and Compliance. The Board of Directors also discusses risk at a number of meetings, including a review of the Group's risk appetite and discussions around strategy and the business plan.
During 2015 the Board considered and adopted 19 risk appetite statements. These statements inform the business, either qualitatively or quantitatively, on the Board's appetite for certain risks. Each risk appetite statement defines how performance will be monitored either on a Group-wide basis or within major projects.
Tax risk is explicitly included within the Group's Enterprise Risk Management Policy. Tax risk is owned by the IAG Head of Tax and is reported to the IAG Management Committee and Audit and Compliance Committee twice a year. Tax risk is mitigated by an IAG Tax Policy which considers engagement between the tax department and the business; compliance with tax obligations; tax planning; reputation; and transparency.
Within Iberia for the first half of 2015, the Compliance and Corporate Risk Manager reported to the Director of Risk and Security, who reported to the Corporate Director who sits on the Iberia Management Committee. Responsibility changed for the second half of 2015 and responsibility was assumed by the Manager Iberia Internal Audit who reported, for the purposes of enterprise risk management, to the Chief Financial Officer who sits on the Iberia Management Committee.
Within British Airways, the Head of Risk Management reports to the Director of People and Legal who sits on the British Airways Management Committee.
Within Aer Lingus, the Corporate Safety and Risk Manager reports to the Chief Executive Officer.
Within Vueling the enterprise risk management process is facilitated by the IAG Head of Group Audit and Risk Management and is owned by the Vueling Management Committee.
The management committees of British Airways, Iberia, Vueling and Aer Lingus review their respective risk maps. The IAG Management Committee together with the Audit and Compliance Committee review the Group risk map.
The Group Treasury Committee manages fuel and foreign exchange risk within the Financial Risk Management Policy approved by the Board of Directors.
The IAG Tax Department manages tax risk. The IAG Head of Risk Management and Internal Audit reports tax risk to the IAG Management Committee and the Audit and Compliance Committee.
The main risks classified by their source are listed below:
The Board has adopted 19 risk appetite statements. These statements inform the business, either qualitatively or quantitatively, on the Board's appetite for certain risks. Each risk appetite statement defines how performance will be monitored either on a Group wide basis or within major projects. Risk tolerance is also considered, but not necessarily quantified, in assessing the risk of new projects when presented to the Board of Directors for approval.
| Risk that occurred during the fiscal year | Circumstances giving rise thereto | Performance of control systems |
|---|---|---|
| Currency fluctuation | The Group is exposed to currency devaluation of cash held in currencies other than the airlines' local currencies that is euro and sterling. This risk is minimised by holding cash in euro and sterling wherever possible, although exchange controls in some markets will from time to time delay conversion and repatriation of funds. This was the case of British Airways which experienced delays in the repatriation of funds from Nigeria during the second half of 2015. |
The commercial policy for selling tickets in Nigeria and the capacity deployed in the market was kept under regular review at the IAG Management Committee together with the Audit and Compliance Committee during the year. At the year-end British Airways held balances of €72 million equivalent in Nigerian Naira. |
| E.6 Main risk |
Explain the response and monitoring plans for the main risks, including tax risks, the company is exposed to. Response and Monitoring Plans |
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|---|---|---|---|---|---|---|
| Competition | The IAG Management Committee devotes one weekly meeting per month to strategy issues. The Group strategy team supports the Management Committee by identifying where resources can be devoted to exploit profitable opportunities. Airline revenue management departments and systems optimise market share and yield through pricing and inventory management activity. |
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| Our strong global market positioning, leadership in strategic markets, alliances, joint businesses, cost competitiveness and diverse customer base continue to address this risk. |
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| We also continually review our product offering and respond through initiatives such as investing in Wi-fi across 90 per cent of the long-haul fleet by early 2019. |
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| The Group's unrelenting focus on the customer, together with our own exploitation of digital technology, reduces the space available in which competitive digital disruptors can operate. |
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| Airline industry | The Group maintains rigorous cost control and targeted product investment to remain competitive. | |||||
| consolidation and deregulation |
The Group has the flexibility to react to market opportunities arising from weakened competitors. Vueling and Iberia Express give additional flexibility in this regard as it can deploy capacity at short notice across Europe. |
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| The IAG Management Committee regularly reviews the commercial performance of joint business agreements and the status of any negotiations between the parties. |
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| Maintaining a leading presence in oneworld and ensuring the alliance attracts and retains the right members is key to safeguarding the network. |
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| Government intervention | The Group's government affairs departments monitor government initiatives, represent the point of view of the Group and forecast likely changes to laws and regulations. |
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| The ability of the Group to comply with and influence any changes in regulations is key to maintaining our operational and financial performance. |
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| IAG continues to talk to the UK Government about the negative effect the imposition of Air Passenger Duty (APD) has on the UK economy. |
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| Airport infrastructure and suppliers |
The Group continues to promote the timely conclusion of the UK Government deliberations on additional runway capacity at London Gatwick and London Heathrow airports. |
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| IAG airlines participates in the slot trading market at Heathrow airport, acquiring slots at reasonable prices when available. |
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| Supplier performance risk is mitigated by active supplier management and contingency plans. We enter into long-term contracts with fuel suppliers wherever this can secure fuel supply at a reasonable cost. Short-term fuel shortages are addressed by contingency plans. |
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| Brand reputation | The Group allocates substantial resources to safety, operational integrity, and new aircraft to maintain its market position. Our 2016 – 2020 Business Plan sees average annual Capital Expenditure of €2.5 billion of which around 80 per cent is directed towards improving, growing and replacing the aircraft fleet. |
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| Economic conditions | The IAG Board and Management Committee review the financial outlook and business performance of the Group through the financial planning process and regular reforecasts. |
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| These reviews are used to drive the Group's financial performance through the management of capacity and the deployment of that capacity in geographic markets, together with cost control, including management of capital expenditure and the reduction of operational and financial leverage. |
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| Employee relations | Human resource departments within the airlines engage in collective bargaining with the many trade unions representing our staff. |
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| Failure of a critical IT system |
Within each operating company system controls, disaster recovery and business continuity arrangements exist to mitigate the risk of a critical system failure. |
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| In 2015 British Airways commenced the implementation of its new customer management system that provides passenger check-in and aircraft loading. This is a critical operational system. 2016 will see the implementation of the system in complex and high volume stations including Gatwick and Heathrow. The project has a strong risk management workstream designed to minimise, but not eliminate, the risk of disruption during implementation. |
| Main risk | Response and Monitoring Plans |
|---|---|
| Pandemic | The Company has comprehensive pandemic business continuity plans. |
| Increases in landing fees and security charges |
The Group engages in regulatory reviews of supplier pricing. |
| Safety/security incident | The corresponding safety committee of each of the airlines of the Group satisfies itself that the airlines have appropriate safety resources and procedures, which include compliance with Air Operator Certificate requirements. Each airline has incident centres, which respond in a structured way in the event of a safety or security incident. |
| Event causing significant network disruption |
Management has robust business continuity plans to mitigate these risks to the extent feasible. |
| Future availability of debt funding |
The IAG Management Committee regularly reviews the Group's financial position and financing strategy. |
| Financial risk | Fuel price risk is partially hedged through the purchase of oil derivatives in forward markets which can generate a profit or a loss. The IAG Management Committee regularly reviews its fuel hedging positions. |
| The Group seeks to reduce foreign exchange exposures arising from transactions in various currencies through a policy of matching, as far as possible, receipts and payments in each individual currency and actively managing the surplus or shortfall through treasury hedging operations. The IAG Management Committee regularly reviews its currency positions. |
|
| When there are delays in the repatriation of cash coupled with the risk of devaluation, risk is mitigated by the review of commercial policy for the route. This may involve capacity reductions and rebalancing the point of sale away from the local market towards the airline's home market and renegotiating supplier contracts to allow payment in local currencies. |
|
| The approach to fuel and currency financial risk management was reviewed by the Audit and Compliance Committee during the year. |
|
| Changes to tax legislation or challenge from tax authorities on the interpretation of legislation |
The Group complies with the tax policy approved by the IAG Board and tax risk is managed by the IAG tax department and reviewed by the Audit and Compliance Committee. The approval of the Company's tax strategy is under the exclusive authority of the Board of Directors. |
| Complexity of the Group governance structure |
The governance structure the IAG Group put in place at the time of the merger had a number of complex features, including nationality structures to protect British Airways' and Iberia's routes and operating licences and merger assurances to preserve the specific interests of those companies. |
| The governance structure continued to work well in 2015. From January 21, 2016, the merger assurances expired. |
|
| Non-compliance by an individual or group of individuals with Competition, Anti-Bribery and Corruption Law |
The Company has comprehensive policies to ensure compliance together with training schemes in place to educate staff in these matters. |
Describe the mechanisms which comprise the internal control over financial reporting (ICFR) risk control and management system at the company.
The IAG Board Regulations determine that the IAG Board of Directors is responsible for control policy and periodic monitoring of internal information and control systems.
This control policy and monitoring is designed to produce reasonable, but not absolute, assurance regarding the safeguarding of assets against unauthorised use or disposition and the maintenance of proper accounting records and the reliability of financial information used throughout the business or for publication. These controls are designed to manage rather than eliminate the risk of failure to achieve business objectives due to circumstances which may reasonably be foreseen and can only provide reasonable but not absolute assurance against material misstatement, errors, losses or fraud.
The Board of Directors of IAG is ultimately responsible for the supervision of the existence and effectiveness of Internal Control over Financial Reporting ("ICFR"). The Board of Directors has delegated the responsibility for the development of effective controls to the Chief Executive and the supervision of the effectiveness of these controls to the Audit and Compliance Committee. The Chief Executive has issued an ICFR policy which requires the IAG Finance Committee to oversee ICFR throughout the Group and delegates responsibility to the relevant Group Operating Company Chief Financial Officers.
The duties of the Audit and Compliance Committee are set out in section C.2.4 of this report. These duties include:
Audit and Compliance Committee members are appointed based on their knowledge and experience of accounting, auditing, risk management and compliance matters. They regularly receive updates on developments and regulatory changes in these areas. The Audit and Compliance Committee also receives regular updates on the Group's ICFR status.
The IAG Disclosure Committee is chaired by the Group General Counsel and includes the Group Chief Financial Officer and the Group Head of Investor Relations. The Committee sits monthly (and on an ad-hoc basis) and supports senior management and the Audit and Compliance Committee by carrying out the following duties related to ICFR:
The IAG Finance Committee sits quarterly and is chaired by the IAG Chief Financial Officer and comprises the IAG Head of Group Financial Reporting and Control, and the Aer Lingus, British Airways, Iberia, Vueling, IAG Cargo, and Avios chief financial officers. The Committee supports senior management and the Audit and Compliance Committee by carrying out the following duties related to ICFR:
The British Airways Finance Committee oversees the implementation of Group accounting policies and procedures within British Airways. It also approves the accounting treatment of proposed transactions and reviews the impact of emerging business issues on the accounts. The Committee is chaired by the British Airways Chief Financial Officer and includes the Head of British Airways Central Finance, the British Airways Treasurer, the IAG Head of Audit UK, and representatives from the British Airways reporting team.
Finance Directorates lead ICFR implementation in Iberia as well as in Vueling. They review and check quarterly financial statements before submission to IAG; and ensure compliance with IAG accounting policies.
The main responsibilities of the Group Financial Reporting and Control Department, as part of the finance function, and reporting to the IAG Chief Financial Officer, include:
The Board is responsible for designating the Company's Chief Executive from among its members, approval of the appointment or removal of individuals to or from the boards of directors of the principal subsidiaries of the Group and the appointment of their chairmen and chief executives. The Board is also responsible for decisions concerning the appointment and removal of the Company's senior executives. Significant changes to the organisation structure are reviewed and approved by the IAG Management Committee.
The authorised structure, including job descriptions defining staff responsibilities, is ultimately controlled by the Chief Executive and delegated to the chief executive officer' of Aer Lingus, British Airways, Iberia, Vueling, IAG Cargo, and Avios. The authorised structure is managed by the Chief of Staff's Human Resources Department in IAG, the Chief People Officer within Aer Lingus, the Director of People and Legal within British Airways, the Director of Human Resources within Iberia and the Director of Corporate Areas within Vueling. The authorised structure of the Company, Aer Lingus, British Airways, Iberia and Vueling is updated and reviewed on an ad hoc basis. In British Airways, Iberia and Vueling it is published on the respective intranet of each company. In Aer Lingus it is available from the Company Secretary.
The "Way of Business" Group instruction sets out standards of conduct expected of staff and the support that will be available to the staff from the IAG Management Team in maintaining the expected level of conduct. The Group instruction also sets out IAG policy on supporting the communities in which it operates and sets out the IAG vision on Corporate Responsibility and the Environment.
The Group instruction, "Way of Business", is cascaded down into Aer Lingus, British Airways, Iberia and Vueling through local policies available on the intranet of each company. Within British Airways this is achieved through British Airways Standing Instruction 2 "Way of Business". Within Iberia and Vueling their respective General Code of Conduct sets out principles and detailed rules governing how board members, managers and employees should act. Minor breaches of the Codes of Conduct are investigated by Line Managers; more significant breaches are investigated by the Reports Committee in Aer Lingus, the Asset Protection team in British Airways, by the Legal Directorate in Iberia and the Legal Counsel in Vueling. Disciplinary action is proposed and administered by line managers in accordance with the employment policies and standards applicable to the individual. The Group Way of Business does not refer specifically to the financial reporting process and instead ICFR responsibilities and expectations are communicated through the IAG ICFR policy.
Under the IAG ICFR policy the IAG Chief Executive delegates responsibility for ICFR to the IAG Chief Financial Officer with a requirement that the chief financial officers of material subsidiaries fully support the IAG Chief Financial Officer. Chief financial officers are expected to delegate responsibility for ICFR for defined processes to named senior managers within their own organisations.
There are whistle-blowing channels available throughout the Group where concerns can be raised on a confidential basis. The Audit and Compliance Committee reviews the effectiveness of whistle-blowing channels on an annual basis. This annual review reviews the volume of reports by category; timeliness of follow-up; responsibility for follow-up and any issues raised of significance to the financial statements. The annual review is coordinated by the Head of Group Audit and Risk Management.
The Company and Iberia use a third-party provider, Ethicspoint, who receives cases online or over the phone on any matter causing concern to the staff member. Within IAG any such cases will be forwarded to the Head of Business Services and the Head of Group Audit and Risk Management for investigation. Within Iberia the whistle-blowing channel is managed by the Compliance Manager within the Legal Directorate who reports cases to a "Complaints Evaluation and Monitoring Group" which defines the response to the case. This group consists of the Head of Legal Affairs, Compliance Manager, and Labour Relations Director.
British Airways uses a third party provider, Safecall, who receives cases over the phone on any matter causing concern to the staff members. Follow up of cases is the responsibility of the British Airways Director of People and Legal who utilises a network of senior managers and directors throughout the business, including the Director of Safety and Security, to investigate the concerns.
Vueling uses a third party provider Navex Global, who intakes cases online. The whistle-blowing channel is managed by Legal Counsel and cases are analysed and investigated by Legal Counsel assisted by internal audit.
Aer Lingus uses Safecall who receives cases via phone or weblink. These are passed for investigation to the Reports Committee which is made up of the Company Secretary, Director of Legal, Director of Change and Engagement, Executive Counsel and Corporate Safety and Risk Manager.
All Company staff have an annual individual training programme that sets out their technical and professional skills training requirements. Achievement of this training plan is monitored twice a year. Within British Airways training is offered on an as needed basis and as required by law or professional standards. Within Iberia and Vueling there is an Annual Training Plan aimed at improving the performance of individuals and groups.
Basic finance and risk management training for IAG and British Airways staff is delivered through eLearning modules. IAG has also delivered classroom based lessons on airline finance basics and interpreting the IAG accounts to widen understanding beyond the finance team and train accountants joining from other industries. IAG offers finance staff sponsorship to study for Master of Business Administration qualifications and targeted technical post graduate qualifications offered by leading business schools. IAG and British Airways offer study leave, financial support and appropriate work experience to staff studying for the Institute of Chartered Accountants, in England and Wales, the Chartered Institute of Management Accountants and the Association of Chartered Certified Accountants.
Iberia often uses external providers to develop financial training related to accounting rules, auditing, internal control and risk management. Managers receive a specific course called "Basic Business Finance" whose goal is to teach financial literacy to people who have little knowledge on the subject. Job specific training requirements are considered on a case by case basis and delivered to groups or individuals, often using external providers.
Within Vueling training courses are planned on a yearly basis including all the activities that have been budgeted for the following year made available to the business units. These activities include general skills training as well as more specific technical training including financial training. Specific training is also suggested by Finance Directorate whenever regulatory or accounting changes arise which impact the financial reporting.
Within Aer Lingus financial training is provided on an ad hoc basis dependant on the requirements of the individual and department. All staff are expected to maintain their accounting technical expertise.
Company finance staff received an average of 3.5 days training in 2015. Members of the IAG Internal Audit team have received on average 1.5 days ICFR training.
Report at least:
The Group's Enterprise Risk Management ("ERM") process assesses the key business risks and mitigating actions facing the Group. In compiling these risks and mitigating actions a close relationship is established between the ERM teams and the finance functions. This involves the finance function feeding into the ERM process and reviewing the output of the process to ensure
that the impact of emerging risks are properly captured within the Financial Statements. This review of the completeness of risks reflected in the Financial Statements is complemented by review of ERM risk maps at the British Airways, Iberia and Vueling' s Management Committee and the IAG Audit and Compliance Committee. The ERM process is well developed within Aer Lingus. Each department including Finance maintains a local risk register maintained by a Risk Champion which feeds the Aer Lingus Corporate Risk Register reviewed by the Aer Lingus Board. Risks related to financial reporting are therefore assessed regularly.
The ERM process is described fully in section E of this report.
The financial risk assessment is the responsibility of the IAG Finance Committee and is updated and documented annually. The assessment provides management with a mechanism for the identification of risks and associated controls relevant to the preparation of the financial report. The risk assessment has two main elements, both of which are reviewed annually by the IAG Finance Committee:
The scope of the consolidation is addressed in two ways. Firstly the establishment of any Special Purpose Vehicles (SPVs) is approved by the IAG Audit and Compliance Committee, who will confirm the requirement for the SPV, consider the governance system of the SPV and consider how the SPV will be accounted for. Secondly, the determination of which entities will be consolidated is considered at the IAG, Aer Lingus, British Airways, Iberia and Vueling group levels. The consolidation is recorded in a single spreadsheet at IAG but changes are determined by IAG, Aer Lingus, British Airways, Iberia and Vueling based on developments in the corporate structure during the year. IAG, Aer Lingus, British Airways and Iberia maintain consolidation hierarchies in their consolidation systems. These hierarchies are subject to access and change controls to ensure their continued integrity. Transactions or Group developments that require new group companies to be formed or acquired are considered at the IAG Finance Committee so that the hierarchies can be updated.
Fraud risk at the Company level is most significant in individual projects, generally acquisitions and disposals. This fraud risk is managed through the individual projects which are staffed with senior professionals from appropriate departments, always including finance, and third party advisors from leading law firms. As the Company, is a holding company with no commercial transactions outside individual projects, the risk of a significant fraud in the day to day transactions of the Company is reduced.
Overall responsibility for coordinating the British Airways response to fraud rests with the Head of Corporate Risk and Compliance. This response includes an Anti-Fraud Policy backed by training and limited by appropriate detective procedures. In Iberia and Vueling employees must comply with the provisions contained in all in-house regulations of the Company based on the applicable laws and, in particular, Compliance with Bribery Laws and the rules regarding Guidance for Corporate Hospitality, Gifts and Entertainment, published on their Intranets.
Indicate the existence of at least the following components, and specify their main characteristics:
F.3.1 Procedures for reviewing and authorising the financial information and description of ICFR to be disclosed to the markets, stating who is responsible in each case and documentation and flow charts of activities and controls (including those addressing the risk of fraud) for each type of transaction that may materially affect the financial statements, including procedures for the closing of accounts and for the separate review of critical judgements, estimates, evaluations and projections.
The Company's Management Committee reviews the financial performance of the Group on a monthly basis. This review examines the previous month's performance, the forecast for the following quarter and the forecast for the full year against the finance plan and the prior year. Movements in key performance indicators such as unit revenue and unit cost statistics are analysed together with the impact of foreign exchange and fuel commodity costs. The analysis is carried out on the Group's four main operating units, Aer Lingus, British Airways, Iberia and Vueling. Consistency of these management accounts with the published quarterly Group accounts leads to a high degree of confidence in the integrity of the published accounts.
The quarterly consolidation process is managed to a pre-agreed timetable and includes reviews and sign offs at key stages in the process. Within Aer Lingus, the Financial Reporting team consolidates and approves the Aer Lingus group information. This is approved by the Aer Lingus Chief Financial Officer prior to submission to IAG. Within British Airways the Finance Business Partners, who are senior finance professionals responsible for each directorate in the business, review and approve consolidation packs listing the financial information required by the IAG consolidation. This information is then consolidated at the British Airways group level and is reviewed and approved by the British Airways Chief Financial Officer before final submission to IAG. Within Iberia the Accounting Department reviews and approves the financial information of the business units together with the business unit's responsible senior managers. This information is consolidated at the Iberia group level and reviewed and approved by the Iberia Chief Financial Officer before final submission to IAG. Within Vueling the Finance Department reviews
and approves the financial information in conjunction with the other responsible department senior managers. This information is reviewed and approved by the Vueling Chief Financial Officer prior to final submission to IAG. These reviews across IAG will ensure that all material business risks have been properly recorded in the accounts, confirm the accounting treatment of judgemental areas and ensure the proper application of new accounting standards and guidance notes.
The IAG consolidation process involves a critical review of Aer Lingus, British Airways, Iberia and Vueling group submissions. For specialist areas, such as treasury, consolidated information is reviewed by subject specialists to identify anomalies, inconsistencies with management accounting information and any inconsistent interpretation of instructions within the Group. The final accounts are reviewed by the Group Head of Reporting and Control together with the Chief Financial Officer. A peer review is also carried out by an experienced finance manager that has not been involved in the latter stages of the consolidation process.
Critical judgements, estimates, evaluations and projections are, as far as possible reviewed before the year-end close process. Where appropriate, management obtains the support of internal or external specialists to conclude on any of these matters. The critical accounting estimates and assumptions include impairment of non-financial assets, pensions and other post-retirement benefits, passenger revenue recognition, income tax, the residual value of assets and the useful life of assets.
The scope of ICFR in IAG has been based on the material subsidiaries being Aer Lingus, British Airways, Iberia, Vueling and Avios. The IAG ICFR model contains a Finance Risk & Control Matrix for the Group that includes entity level controls, IT general controls and 19 main business processes considered relevant to the preparation of the financial statements including:
The design, implementation and maintenance of appropriate systems of ICFR is primarily the responsibility of management with process ownership identified and communicated to the Company, Aer Lingus, British Airways, Iberia, Vueling, and Avios via the IAG ICFR Policy.
ICFR controls including 388 key controls have been defined across the 19 business processes and IT general controls in order to provide reasonable assurance as to the reliability of the financial information disclosed to the markets. Such controls can only provide reasonable and not absolute assurance against material misstatement, errors, losses or fraud. As a result of differences in business processes across the material subsidiaries not all controls are required in all material subsidiaries.
A Risk & Control Matrix maintains a central source of the following ICFR information for each business process:
additional control characteristics identified; preventative or detective; manual or automated; the frequency of operation; and who performs the activity; and
d. Control testing and summary of periodic audit results, including action plan to rectify identified weaknesses.
IAG Global Business Services manage and support IT systems for the Company, British Airways and Iberia. IT systems used by Vueling and Avios Group Limited are managed by the operating companies and use of all systems is subject to the control environments of the host company.
No formal assessment or testing of Aer Lingus IT controls has taken place since the acquisition in August 2015. This exercise will take place during 2016.
The Company's IT systems are run on either British Airways, Iberia, Vueling or Avios systems and are subject to the control environments of the host company. The IAG IT General Controls matrix ("ITGC Matrix") defines the key IT General Controls (ITGC) in place across Group over IT systems that support processes related to the preparation of financial information. The ITGC Matrix is based on the following four processes:
A total of 24 ITGC Matrix key controls have been defined across the four information technologies (IT) processes.
British Airways has established a framework of internal control for the management and administration of IT systems and processes. This framework includes the IT environment, architecture and infrastructure, and applications relevant to ICFR.
The British Airways framework includes documented baseline standards of control as well as IT policies, grouped under the following policy areas:
All applications and systems used by British Airways including those related to ICFR must adhere to the baseline standards as a minimum standard of internal control.
The documented policies and baseline standards for control activity, when taken together, provide clear direction concerning expectations for internal control that are required to cover the inherent risks in the following critical IT system management areas:
FINANCIAL STATEMENTS
An Information Security Department leads, manages and coordinates the dissemination and implementation of information security practice within British Airways. Information is protected based on its value, confidentiality, criticality to the Company, and the risk of loss or compromise.
Security measures and controls are implemented to support availability, integrity and confidentiality of information, and guard against its loss, unauthorised modification, destruction or disclosure. The degree of security protection reflects the value and sensitivity of the information, the nature of the possible threats, the vulnerability to these threats and the loss, harm, or embarrassment that could arise from them. These security measures and controls protect against misuse of British Airways' information resources, where this misuse could cause British Airways, its business partners, customers or employees loss, harm or embarrassment, or where it could lead to a criminal act such as fraud.
Information, computer equipment, software and communications facilities are made available to those who require it in support of British Airways' business operations and access is restricted only to those authorised to do so. Resources are organised and the duties documented, to reduce the risk of unauthorised changes to information, error, theft or fraud and the operation of certain duties is separated to reduce the opportunities for single individuals to misuse data or services.
Access to infrastructure, platforms and applications is managed via clear segregation of duties and access control processes and platform, system and application owners are responsible for keeping their systems free of unauthorised and inappropriate users and access.
External connections to an application are individually identified, verified, recorded and approved by the application owner and controls are established to maintain the security of British Airways' information and information processing facilities that are: accessed, processed, communicated to, or managed by external parties.
The Iberia framework of internal control over IT systems is based on compliance with data protection law and quality certifications over key IT control activities.
a. Demanded by Spanish Data Protection regulation in force
Controls are built around compliance with the Organic Law 15/1999 of December 13 on the Protection of Personal Data and Royal Decree 1720/2007, of December 21, which approves the regulation implementing Organic Law 15/1999 of December 13 on the Protection of Personal Data. The most important security measures implemented as a result of this legislation are:
i) Requirement to have personalised credentials for each user accessing the application. In particular, use of departmental or generic identifiers is forbidden;
ISO 9001: 2008 establishes a set of quality standards and continuous quality management, established by the International Organisation for Standardisation (ISO). These quality standards specify how a supervised company operates, its quality standards, delivery times and service levels. Iberia is ISO 9001: 2008 certified for:
In order to comply with its requirements, there are a number of controls in place at Iberia, aimed at ensuring the integrity of data:
UNE-ISO/IEC 27001: 2007 (Requirements for Information Technology Security Techniques and Information Security Management Systems) specifies the requirements for establishing, implementing, maintaining and improving an information security management system. Iberia is certified in UNE-ISO/IEC 27001: 2007 for iberia.com; employee portal; and data processing centres.
In order to comply with its requirements, there are a number of controls in place at Iberia:
Both UNE-ISO/IEC 27001: 2007 and ISO 9001: 2008 certifications are subject to annual review by Iberia Head of Quality within the Corporate Affairs Directorate and AENOR, the independent quality certification body.
The Vueling control model over IT systems includes the following key processes:
c. Physical access control including restricting access to computer facilities to authorised individuals;
d. Systems development and change management including segregation of development, user acceptance and production environments together with production migration procedures ensuring that testing has been completed and emergency changes have been monitored; and
IT disaster recovery planning requirements are currently being assessed.
The IT Department sits within the Corporate Services Directorate and includes seven managers responsible for IT delivery and business support.
No formal assessment or testing of Aer Lingus IT controls has taken place since acquisition in August 2015. This exercise will take place during 2016.
F.3.3 Internal control policies and procedures for overseeing the management of outsourced activities, and of the appraisal, calculation or valuation services commissioned from independent experts, when these may materially affect the financial statements.
For all outsourced processes, Service Level Agreements (SLA) are defined, agreed and signed in the contract with the vendor. As part of the Global Business Service Project British Airways, Iberia, Avios and Cargo have outsourced financial process support to Accenture. Finance staff maintain a quarterly or half yearly review of outsourced accounts and reconciliations as well as ongoing monitoring of the operational status of outsourced processes.
When the Group outsources relevant processes for the preparation of financial information to an independent expert, it ensures the professional's technical and legal competence. The Group has identified five processes outsourced to independent experts relevant to financial reporting.
Indicate the existence of at least the following components, and specify their main characteristics:
F.4.1 A specific function in charge of defining and maintaining accounting policies (accounting policies area or department) and settling doubts or disputes over their interpretation, which is in regular communication with the team in charge of operations, and a manual of accounting policies regularly updated and communicated to all the company's operating units.
IAG accounting policies are maintained by the Group Financial Reporting and Control department.
F.4.2 Mechanisms in standard format for the capture and preparation of financial information, which are applied and used in all units within the entity or group, and support its main financial statements and accompanying notes as well as disclosures concerning ICFR.
The Group Financial Reporting and Control Department issues reporting instructions at each quarter end.
These instructions establish a timetable for key closing activities such as agreeing intragroup balances, submitting the main accounting results and detailed disclosures. Assumptions to be used for accounting tests such as Weighted Average Cost of Capital and percentage sensitivities on derivative transactions are also determined centrally and included in the instructions. The format of information to be submitted and the entities expected to submit the information is determined within the consolidation system which also includes validation tests for completeness and internal consistency.
Disclosures relating to ICFR are validated by senior accounting professionals identified by the Chief Financial Officers of IAG, Aer Lingus, British Airways, Iberia, Vueling and Avios.
Indicate the existence of at least the following components, describing their main characteristics:
F.5.1 The ICFR monitoring activities undertaken by the Audit Committee and an internal audit function whose competencies include supporting the Audit Committee in its role of monitoring the internal control system, including ICFR. Describe the scope of the ICFR assessment conducted in the year and the procedure for the person in charge to communicate its findings. State also whether the company has an action plan specifying corrective measures for any flaws detected, and whether it has taken stock of their potential impact on its financial information.
The IAG Audit and Compliance Committee reviews all disclosures relating to ICFR and validates the Group's approach to complying with the CNMV's ICFR recommendations. In this respect the Audit and Compliance Committee has been careful to achieve an appropriate balance between the CNMV's ICFR recommendations and the UK Corporate Governance Code approach.
The Internal Audit Department adopts a risk based approach to planning which incorporates financial risk factors. The results of audits are discussed at the British Airways, Iberia and Vueling Boards of Directors and Management Committees and the IAG Audit and Compliance Committee. The implementation of actions to address weaknesses identified by the Internal Audit Department are tracked and follow up audits carried out whenever the overall rating of the original audit was judged to be "deficient" or "seriously deficient".
As previously stated, IAG's ICFR includes the Company, British Airways, Iberia, Vueling, Avios Group Limited and, to a limited scope as a result of acquisition in the second half of 2015, Aer Lingus. In addition to Entity Level Controls and ITGC's, 19 business processes have been identified as having a major impact on financial reporting for 2015 with two in scope for the Company, 18 in scope for British Airways, 15 in scope for Iberia, five in scope for Vueling and four in scope for Aer Lingus.
Across the entities and business processes identified, the 388 key controls are broken down into 309 business process key controls and 79 key IT general controls.
Now that the ICFR implementation project is complete, from 2015 onwards all in-scope processes will be tested annually. However, due to the acquisition of Aer Lingus taking place in the second half of 2015, testing of Aer Lingus processes has been limited to four processes.
No material weaknesses were detected. A total of three significant weaknesses and 48 weaknesses were detected. Action plans were put in place with process owners to address each internal control weakness and will be tracked by Internal Audit.
F.5.2 A discussion procedure whereby the auditor (pursuant to TAS), the internal audit function and other experts can report any significant internal control weaknesses encountered during their review of the financial statements or other assignments, to the company's senior management and its Audit Committee or Board of Directors. State also whether the entity has an action plan to correct or mitigate the weaknesses found.
The Company's external auditors attend the Audit and Compliance Committee meetings and report on significant control weaknesses identified during their work. No significant control weaknesses were identified by the external auditors in 2015.
The Head of Group Audit and Risk Management also attends the Audit and Compliance Committee meetings and submits his report directly to the Audit and Compliance Committee. The Head of Group Audit and Risk Management reports to the Chief Financial Officer, the Chairman of the Audit and Compliance Committee. The implementation of internal audit recommendations is tracked by the Audit and Compliance Committee.
None.
State whether:
F.7.1 The ICFR information supplied to the market has been reviewed by the external auditor, in which case the corresponding report should be attached. Otherwise, explain the reasons for the absence of this review.
The ICFR information supplied to the market has been reviewed by the external auditors, and their auditor report is at the end of this Annual Corporate Governance Report.
Indicate the degree of the company's compliance with the recommendations of the Good Governance Code of Listed Companies.
Should the company not comply with any of the recommendations or comply only in part, include a detailed explanation of the reasons so that shareholders, investors and the market in general have enough information to assess the company's behaviour. General explanations are not acceptable.
IAG considers that it does not comply with this recommendation because of the restrictions included in the Bylaws of the Company in relation to the ownership of shares. This is a partial non-compliance because these restrictions derive directly from the ownership and control restrictions set out in the applicable law or in the bilateral air transport treaties signed by Spain and the United Kingdom and are not simply determined discretionarily by the Company.
This policy should be disclosed on the company's website, complete with details of how it has been put into practice and the identities of the relevant interlocutors or those charged with its implementation.
When a board approves the issuance of shares or convertible securities without pre-emptive subscription rights, the company should immediately post a report on its website explaining the exclusion as envisaged in company legislation.
Listed companies drawing up the following reports on a voluntary or compulsory basis should publish them on their website well in advance of the annual general meeting, even if their distribution is not obligatory:
a) Report on auditor independence.
Such conditions and procedures should encourage shareholders to attend and exercise their rights and be applied in a non-discriminatory manner.
In pursuing the corporate interest, it should not only abide by laws and regulations and conduct itself according to principles of good faith, ethics and respect for commonly accepted customs and good practices, but also strive to reconcile its own interests with the legitimate interests of its employees, suppliers, clients and other stakeholders, as well as with the impact of its activities on the broader community and the natural environment.
The results of the prior analysis of board needs should be written up in the nomination committee's explanatory report, to be published when the general meeting is convened that will ratify the appointment and re-election of each director.
The director selection policy should pursue the goal of having at least 30% of total board places occupied by women directors before the year 2020.
The nomination committee should run an annual check on compliance with the director selection policy and set out its findings in the annual corporate governance report.
This criterion can be relaxed:
However, when the company does not have a large market capitalisation, or when a large cap company has shareholders individually or concertedly controlling over 30 percent of capital, independent directors should occupy, at least, a third of board places.
The removal of independent directors may also be proposed when a takeover bid, merger or similar corporate transaction alters the company's capital structure, provided the changes in board membership ensue from the proportionality criterion set out in recommendation 16.
The moment a director is indicted or tried for any of the offences stated in company legislation, the board of directors should open an investigation and, in light of the particular circumstances, decide whether or not he or she should be called on to resign. The board should give a reasoned account of all such determinations in the annual corporate governance report.
When the board makes material or reiterated decisions about which a director has expressed serious reservations, then he or she must draw the pertinent conclusions. Directors resigning for such causes should set out their reasons in the letter referred to in the next recommendation.
The terms of this recommendation also apply to the secretary of the board, even if he or she is not a director.
The board of directors regulations should lay down the maximum number of company boards on which directors can serve.
For reasons of urgency, the chairman may wish to present decisions or resolutions for board approval that were not on the meeting agenda. In such exceptional circumstances, their inclusion will require the express prior consent, duly minuted, of the majority of directors present.
Directors should be regularly informed of movements in share ownership and of the views of major shareholders, investors and rating agencies on the company and its group.
The chairman, as the person charged with the efficient functioning of the board of directors, in addition to the functions assigned by law and the company's bylaws, should prepare and submit to the board a schedule of meeting dates and agendas; organise and coordinate regular evaluations of the board and, where appropriate, the company's chief executive officer; exercise leadership of the board and be accountable for its proper functioning; ensure that sufficient time is given to the discussion of strategic issues, and approve and review refresher courses for each director, when circumstances so advise.
The evaluation of board committees should start from the reports they send the board of directors, while that of the board itself should start from the report of the nomination committee.
Every three years, the board of directors should engage an external facilitator to aid in the evaluation process. This facilitator's independence should be verified by the nomination committee.
Any business dealings that the facilitator or members of its corporate group maintain with the company or members of its corporate group should be detailed in the annual corporate governance report.
The process followed and areas evaluated should be detailed in the annual corporate governance report.
d) The internal control and reporting systems to be used to control and manage the above risks, including contingent liabilities and offbalance-sheet risks.
When there are vacancies on the board, any director may approach the nomination committee to propose candidates that it might consider suitable.
They should include at least the following terms:
The Board of Directors of IAG, under its powers of self-organisation, considers it appropriate to have a Safety Committee in order to exercise a high level overview of each airline's safety performance and of any important issues that may affect the industry, although responsibility for safety matters belongs to each of the Group's airlines. This Committee is governed by the same principles as all Board Committees and has a clear majority of non-executive directors.
However, the Committee's composition is not compliant with the Code's recommendation as an executive director, the Chief Executive, is a member of this Committee, being also its chairman. The Board believes this to be appropriate in the current circumstances for the following reasons:
Furthermore, as a counterbalance, the remaining Committee members are senior directors of IAG, currently the Chairman of the Board, the Senior Independent Director and one of the members of the Audit and Compliance Committee.
Finally, it has to be taken into consideration that safety is a highly regulated area that is subject to strict reporting requirements to the local regulatory authorities of each airline and to regular external audit reviews.
g) Responsible communication practices that prevent the manipulation of information and protect the company's honour and integrity.
The company should report on corporate social responsibility developments in its directors' report or in a separate document, using an internationally accepted methodology.
The company may consider the share-based remuneration of non-executive directors provided they retain such shares until the end of their mandate. This condition, however, will not apply to shares that the director must dispose of to defray costs related to their acquisition.
In particular, variable remuneration items should meet the following conditions:
IAG Remuneration Policy complies with this recommendation as it is designed to ensure that variable rewards reflect the professional performance of the beneficiaries and includes appropriate limits and technical safeguards. The performance measures used include a balanced mix of financial measures as well as personal performance against individual objectives. Although IAG remuneration framework promotes long-term value creation and ensures, through individual performance, compliance with IAG's mission and values, it does not include concrete non-financial criteria in the sense required by letter b) of this Recommendation 58. IAG is examining options to improve the focus on the long-term sustainability of the Company, including through the individual objectives and the introduction of more specific non-financial performance measures within its reward framework in future years.
The above condition will not apply to any shares that the director must dispose of to defray costs related to their acquisition.
Specifically indicate whether the company is subject to corporate governance legislation from a country other than Spain and, if so, include the compulsory information to be provided when different to that required by this report.
This annual corporate governance report was adopted by the company's Board of Directors at its meeting held on February 25, 2016.
List whether any directors voted against or abstained from voting on the approval of this Report.
Name or corporate name of director that did not vote in favour of approving this report Reasons (voted against, abstention, non-attendance) Explain the reasons
As a consequence of the conversion request in relation to the issue of convertible bonds named "€390,000,000 1.75 per cent. convertible bonds due 2018", the Company has increased its share capital on January 2016, through the issuance of 881,456 ordinary shares.
As a consequence of the foregoing, the total share capital of the Company on the date of this report is €1,020,479,989.50, divided into 2,040,959,979 ordinary shares with a nominal value of €0.50 each share.
Below is a breakdown of the information included in table of section A.3
a) Directors' conditional awards
During 2015, Willie Walsh and Enrique Dupuy de Lôme held awards over ordinary shares of the Company under the Company's Performance Share Plan ("IAG PSP").
The value attributed to the Company's ordinary shares in accordance with the plan rules on the date of the IAG PSP 2015 award was 550 pence.
| Director | Plan | Date of award | Number of awards at January 1, 2015 |
Awards vesting during the year |
Awards lapsed during the year |
Awards made during the year |
Number of awards at December 31, 2015 |
|---|---|---|---|---|---|---|---|
| Willie Walsh | IAG PSP 2012 |
August 3, 2012 |
1,024,844 | 874,191 | 150,653 | 0 | 0 |
| IAG PSP 2013 |
March 6, 2013 |
684,647 | 0 | 0 | 0 | 684,647 | |
| IAG PSP 2014 |
March 6, 2014 |
379,310 | 0 | 0 | 0 | 379,310 | |
| Total | – | – | 2,088,801 | 874,191 | 150,653 | 0 | 1,063,957 |
| Director | Plan | Date of award | Number of awards at January 1, 2015 |
Awards vesting during the year |
Awards lapsed during the year |
Awards made during the year |
Number of awards at December 31, 2015 |
| Enrique Dupuy de Lôme | IAG PSP 2012 |
August 3, 2012 |
372,670 | 317,887 | 54,783 | 0 | 0 |
| IAG PSP 2013 |
March 6, 2013 |
248,963 | 0 | 0 | 0 | 248,963 | |
| IAG PSP 2014 |
March 6, 2014 |
137,931 | 0 | 0 | 0 | 137,931 | |
| Total | – | – | 759,564 | 317,887 | 54,783 | 0 | 386,894 |
b) Share options
The following directors held nil-cost options over ordinary shares of the Company granted under the IAG PSP.
| Date of grant 2015 |
price the year |
the year | the year from |
Exercisable Expiry date |
December 31, 2015 |
|
|---|---|---|---|---|---|---|
| Willie Walsh 2015 – – – – 309,091 2020 |
May 28, | January 1, | December 31, 2024 |
309,091 |
| Director | Date of grant | Number of options at January 1, 2015 |
Exercise price |
Options exercised during the year |
Options lapsed during the year |
Options granted during the year |
Exercisable from |
Expiry date | Number of options at December 31, 2015 |
|---|---|---|---|---|---|---|---|---|---|
| Enrique | |||||||||
| Dupuy de | May 28, | January 1, | December | ||||||
| Lôme | 2015 | – | – | – | – | 112,364 | 2020 | 31, 2024 | 112,364 |
c) Incentive Award Deferral Plan
During 2015, Willie Walsh and Enrique Dupuy de Lôme owned awards over ordinary shares of the Company granted under the IADP (Incentive Award Deferral Plan) ("IAG IADP").
The value attributed to the Company's ordinary shares in accordance with the plan rules on the date of the IAG IADP 2015 award was 550 pence.
| Director | Plan | Date of award | Number of awards at January 1, 2015 |
Awards released |
during the year Date of vesting | Awards lapsed during the year |
Awards made during the year |
Number of awards at December 31, 2015 |
|---|---|---|---|---|---|---|---|---|
| IAG IADP | August 3, | August 3, | ||||||
| Willie Walsh | 2012 | 2012 | 93,773 | 93,773 | 2015 | 0 | 0 | 0 |
| IAG IADP 2014 |
March, 6, 2014 |
149,353 | 0 | March 6, 2017 |
0 | 0 | 149,353 | |
| IAG IADP 2015 |
May 28, 2015 |
0 | 0 | March 8, 2018 |
0 | 151,111 | 151,111 | |
| Total | – | – | 243,126 | 93,773 | – | 0 | 151,111 | 300,464 |
| Director | Plan | Date of award | Number of awards at January 1, 2015 |
Awards released |
during the year Date of vesting | Awards lapsed during the year |
Awards made during the year |
Number of awards at December 31, 2015 |
| Enrique Dupuy de Lôme |
IAG IADP 2012 |
August 3, 2012 |
37,267 | 37,267 | August 3, 2015 |
0 | 0 | 0 |
| IAG IADP 2013 |
March 6, 2013 |
62,241 | 0 | March 6, 2016 |
0 | 0 | 62,241 | |
| IAG IADP 2014 |
March 6, 2014 |
50,862 | 0 | March 6, 2017 |
0 | 0 | 50,862 | |
| IAG IADP 2015 |
May 28, 2015 |
0 | 0 | March 8, 2018 |
0 | 50,252 | 50,252 |
For the year to December 31, 2015, the €:£ exchange rate applied is 1.3742.
C.1.3 Pursuant to Spanish Companies Law, on January 21, 2016, Mr. Antonio Vázquez has become an independent director since five years will have elapsed since his removal as Executive Chairman of Iberia prior to the merger with British Airways.
Total – – 150,370 37,267 – 0 50,252 163,355
The Group's related-party transactions included total sales to associate companies of 8,473 thousand of euros and total purchases from associate companies of 57,192 thousands of euros.
The Company is 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 as amended from time to time.
During the year the Company considers it has complied with all the provisions of the UK 2014 Corporate Governance Code but for the following matter: The service contract for Mr. Antonio Vázquez does not comply with the recommendation that notice periods should be set at one year or less so as to limit any payment on exit. Details can be found in the Directors' Remuneration Report.
The Company believes that, notwithstanding this exception, it has a robust governance structure.
Iberia, representing IAG, has joined the Code of Good Tax Practices approved by Spain's Forum of Big Companies.
| Name and address | Principal activity |
Country of Incorporation |
Percentage of equity owned |
|---|---|---|---|
| AERL Holding Limited | |||
| 2 World Business Centre, Newall Road, London Heathrow Airport, | |||
| Hounslow, TW6 2SF | England | 100% | |
| Aer Lingus 2009 DCS Trustee Limited | Republic of | ||
| Dublin Airport, Dublin | Ireland | 100% | |
| Aer Lingus Beachey Limited Penthouse Suite, Analyst House, Peel Road, Isle of Man, IM1 4LZ |
Isle of Man | 100% | |
| Aer Lingus Group Plc* | Airline | Republic | |
| Dublin Airport, Dublin | operations | of Ireland | 100% |
| Aer Lingus Group DAC | Republic | ||
| Dublin Airport, Dublin | of Ireland | 100% | |
| Aer Lingus Limited | Republic | ||
| Dublin Airport, Dublin | of Ireland | 100% | |
| Aer Lingus Northern Ireland Limited | Northern | ||
| Aer Lingus Base, Belfast City Airport, Sydenham Bypass, Belfast, BT3 9JH | Ireland | 100% | |
| Aer Lingus (Ireland) Limited | Republic | ||
| Dublin Airport, Dublin | of Ireland | 100% | |
| ALG Trustee Limited | Republic | ||
| Astral Towers, Betts Way, London Road, Crawley, West Sussex, RH10 9XY | of Ireland | 100% | |
| Avios Group (AGL) Limited* | Airline | ||
| Astral Towers, Betts Way, London Road, Crawley, West Sussex, RH10 9XY | marketing | England | 100% |
| Avios South Africa Proprietary Limited | South | ||
| 34 Whitley Road, Unit B, 3rd Floor, Melrose Arch, Melrose North, Johannesburg | Africa | 100% | |
| BA and AA Holdings Limited* | Holding | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | company | England | 100% |
| BA Call Centre India Private Limited (callBA) F-42, East of Kailash, New-Delhi, 110065 |
India | 100% | |
| BA Cityflyer Limited* | Airline | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | operations | England | 100% |
| BA European Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB |
England | 100% | |
| BA Healthcare Trust Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| BA Number One Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| BA Number Two Limited | |||
| 13 Castle Street, St Helier, JE4 5UT | Jersey | 100% | |
| Bealine Plc | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| bmibaby Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| Binter Finance B.V. | |||
| Prins Bernhardplein 200, Amsterdam, 1097 JB | Netherlands | 100% | |
| BritAir Holdings Limited* | Holding | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | company | England | 100% |
| British Airways Plc* | Airline | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | operations | England | 100% |
| British Airways (BA) Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| British Airways (No 1) Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% |
FINANCIAL STATEMENTS
| Name and address | Principal activity |
Country of Incorporation |
Percentage of equity owned |
|---|---|---|---|
| British Airways 777 Leasing Limited* | Aircraft | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | financing | England | 100% |
| British Airways Associated Companies Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB |
England | 100% | |
| British Airways Avionic Engineering Limited* | Aircraft | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | maintenance | England | 100% |
| British Airways Capital Limited | |||
| Queensway House, Hilgrove Street, St Helier, JE1 1ES | Jersey | 100% | |
| British Airways E-Jets Leasing Limited* | Aircraft | ||
| Canon's Court, 22 Victoria Street, Hamilton, HM 12 | financing | Bermuda | 100% |
| British Airways Employee Benefit Trustees (Jersey) Limited | |||
| Queensway House, Hilgrove Street, St Helier, JE1 1ES | Jersey | 100% | |
| British Airways Finance (Jersey) Limited Partnership 13 Castle Street, St Helier, JE4 5UT |
Jersey | 100% | |
| British Airways Holdings B.V. | |||
| Atrium, Strawinskylaan 3105, Amsterdam, 1077 ZX | Netherlands | 100% | |
| British Airways Holdings Limited* | Holding | ||
| 13 Castle Street, St Helier, JE4 5UT | company | Jersey | 100% |
| British Airways Holidays Limited* | Package | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | holidays | England | 100% |
| British Airways Interior Engineering Limited* | Aircraft | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | maintenance | England | 100% |
| British Airways Leasing Limited* | Aircraft | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | financing | England | 100% |
| British Airways Maintenance Cardiff Limited* | Aircraft | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | maintenance | England | 100% |
| British Airways Pension Trustees (No 2) Limited Whitelocke House, 2-4 Lampton Road, Hounslow, Middlesex, TW3 1HU |
England | 100% | |
| British Midland Airways Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| British Midland Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| Cargosur, S.A. | |||
| Calle Martínez Villergas 49, Madrid, 28027 | Spain | 100% | |
| Deutsche BA Holding GmbH | |||
| Brienner Strasse 28, Munich, 80333 | Germany | 100% | |
| Diamond Insurance Company Limited | |||
| 1st Floor, Rose House, 51-59 Cicular Road, Douglas, IM1 1RE | Isle of Man | 100% | |
| Dirnan Insurance Company Limited Canon's Court, 22 Victoria Street, Hamilton, Bermuda, HM 12 |
Bermuda | 100% | |
| Easthills Limited | |||
| Fourth Floor, Quest House, 125-135 Staines Road, Middlesex, TW3 3JB | England | 100% | |
| Flyline Tele Sales & Services GmbH | |||
| Hermann Koehl-Strasse 3, Bremen, 28199 | Germany | 100% | |
| IAG Cargo Limited* | |||
| Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, | Air freight | ||
| Hounslow, TW6 2JS | operations | England | 100% |
| IAG GBS Limited | |||
| 2 World Business Centre, Newall Road, London Heathrow Airport, | |||
| Hounslow, TW6 2SF | England | 100% |
| Name and address | Principal activity |
Country of Incorporation |
Percentage of equity owned |
|---|---|---|---|
| IAG GBS Poland sp z.o.o. | |||
| ul. Armii Krajowej 28, Krakow, 30-150 | Poland | 100% | |
| Iberia Express, S.A.* Calle Alcañiz 23, Madrid, 28006 |
Airline operations |
Spain | 100% |
| Iberia México, S.A.* | Storage and | ||
| Ejército Nacional 436, 9th Floor, Colonia Chapultepec-Morales, | custody | ||
| Mexico City, 11570 | services | Mexico | 100% |
| Iberia Tecnología, S.A.* | Aircraft | ||
| Calle Martínez Villergas 49, Madrid, 28027 | maintenance | Spain | 100% |
| Iberia Líneas Aéreas de España, S.A. Operadora* | Airline | ||
| Calle Martínez Villergas 49, Madrid, 28027 | operations and | ||
| maintenance | Spain | 100% | |
| Illiad Inc | |||
| Suite 1300, 1105 N Market Street, PO Box 8985, Wilmington, Delaware, 19899 | USA | 100% | |
| Openskies SASU* 3 Rue le Corbusier, Rungis, 94150 |
Airline operations |
France | 100% |
| Overseas Air Travel Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB |
England | 100% | |
| Remotereport Trading Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| Santain Developments Limited | Republic | ||
| Dublin Airport, Dublin | of Ireland | 100% | |
| Shinagh Limited | Republic | ||
| Dublin Airport, Dublin | of Ireland | 100% | |
| Speedbird Insurance Company Limited* | |||
| Canon's Court, 22 Victoria Street, Hamilton, HM 12 | Insurance | Bermuda | 100% |
| Teleflight Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 100% | |
| The Plimsoll Line Limited* | Holding | ||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | company | England | 100% |
| Veloz Holdco, S.L. | |||
| Pla de l'Estany 5, Parque de Negocios Mas Blau II, El Prat de Llobregat, Barcelona, 08820 |
Spain | 100% | |
| Vueling Airlines, S.A.* Pla de l'Estany 5, Parque de Negocios Mas Blau II, El Prat de Llobregat, |
Airline | ||
| Barcelona, 08820 | operations | Spain | 99.48% |
| British Mediterranean Airways Limited | |||
| Waterside, PO Box 365, Harmondsworth, UB7 0GB | England | 99% | |
| Compañía Auxiliar al Cargo Exprés, S.A.* | Cargo | ||
| Centro de Carga Aérea, Parcela 2-5 Nave 6, Madrid, 28042 | transport | Spain | 75% |
| Iberia Desarrollo Barcelona, S.L.* | Airport | ||
| Torre Tarragona, Planta 15, Calle Tarragona 161, | infrastructure | ||
| Barcelona, 08014 | development | Spain | 75% |
| Sociedad Auxiliar Logística Aeroportuaria, S.A.* | Cargo | ||
| Centro de Carga Aérea, Parcela 2-5 Nave 6, Madrid, 28042 | transport | Spain | 75% |
* Principal subsidiaries.
FINANCIAL STATEMENTS
| Name and address | Country of Incorporation |
Percentage of equity owned |
|---|---|---|
| Associates | ||
| Handling Guinea Ecuatorial S.A. | Equatorial | |
| Malabo Bioko Norte International Airport, Apartado de Correos 92, Malabo | Guinea | 51% |
| Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A. Avenida de Vantroi y Final, Aeropuerto de Jose Martí, Ciudad de la Habana |
Cuba | 50% |
| Empresa Logística de Carga Aérea, S.A. Carretera de Wajay km 15, Aeropuerto de Jose Martí, Ciudad de la Habana |
Cuba | 50% |
| Madrid Aerospace Services, S.L. Calle Verano 9, Polígono Industrial Las Monjas, Torrejón de Ardoz, 28850, Madrid |
Spain | 50% |
| Multiservicios Aeroportuarios, S.A. Avenida de Manoteras 46, 2nd Floor, 28050, Madrid |
Spain | 49% |
| Dunwoody Airline Services (Holdings) Limited Building 70, Argosy Road, East Midlands Airport, Castle Donnington, Derby, DE74 2SA |
England | 40% |
| Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. José Ortega y Gasset 22, 3rd Floor, 28006, Madrid |
Spain | 43.5% |
| Serpista, S.A. Cardenal Marcelo Spínola 10, 28016, Madrid |
Spain | 39% |
| Grupo Air Miles España, S.A. Avenida de Bruselas 20, Alcobendas, 28108, Madrid |
Spain | 25% |
| Joint ventures | ||
| Propius Holding Limited PO Box 309, Ugland House, Grand Cayman, K41-1104 |
Cayman Islands |
33.3% |
The Group's principal available-for-sale financial assets are as follows:
| Country of | Percentage of equity |
Shareholders funds |
Profit/(loss) before tax |
||
|---|---|---|---|---|---|
| Name and address | incorporation | owned | Currency | (million) | (million) |
| Associates | |||||
| Servicios de Instrucción de Vuelo, S.L. | |||||
| Camino de la Muñoza 2, Madrid, 28042 | Spain | 19.90% | Euro | 39 | 2 |
| The Airline Group Limited | |||||
| Brettenham House South, 5th Floor, Lancaster Place, | Pound | ||||
| London, WC2N 7EN | England | 16.68% | sterling | 256 | 24 |
| South | |||||
| Comair Limited | South | African | |||
| 1 Marignane Drive, Bonaero Park, 1619, Johannesburg | Africa | 11.50% | Rand | 1,166 | 301 |
| Adquira España, S.A. | |||||
| Plaza Cronos, 1 – 4th Floor, Madrid, 28037 | Spain | 10.00% | Euro | 7 | 1 |
At a meeting held on February 25, 2016, the Directors of International Consolidated Airlines Group, S.A. confirmed that to the best of their knowledge the Consolidated Financial Statements for the year to December 31, 2015 were prepared in accordance with International Financial Reporting Standards ('IFRS'), as adopted by the European Union, and other provisions in the regulatory framework applicable to the Group, offer a true and fair view of the assets, liabilities, financial situation, cash flows and the results of International Consolidated Airlines Group, S.A. and of the companies that fall within the consolidated group taken as a whole, and the Consolidated Management Report includes an accurate analysis of the required information also in accordance with the Financial Conduct Authority's DTR 4.1 (English regulation) including an indication of important events in the year, a description of the principal risks and uncertainties and a list of material related party transactions.
February 25, 2016
| ERNST & | JAIG, S.L. | |
|---|---|---|
| Rafael Ráe | Marinez |
| Total Group operations | 20151,2 | 20142 | 20132 | 20122 | 20113 | |
|---|---|---|---|---|---|---|
| Traffic and capacity | ||||||
| Available seat km (ASK) | million | 272,702 | 251,931 | 230,573 | 219,172 | 213,193 |
| Revenue passenger km (RPK) | million | 221,996 | 202,562 | 186,304 | 176,102 | 168,617 |
| Cargo tonne km (CTK) | million | 5,293 | 5,453 | 5,653 | 6,080 | 6,156 |
| Passengers carried | '000 | 88,333 | 77,334 | 67,224 | 54,600 | 51,687 |
| Tonnes of cargo carried | '000 | 874 | 897 | 928 | 1,011 | 1,050 |
| Sectors | 660,438 | 599,624 | 538,644 | 453,100 | 437,411 | |
| Block hours | hours | 1,867,905 | 1,712,506 | 1,573,900 | 1,419,601 | 1,388,514 |
| Operations | ||||||
| Average manpower equivalent | 60,862 | 59,484 | 60,089 | 59,574 | 56,791 | |
| Aircraft in service at year end | 529 | 459 | 431 | 377 | 348 | |
| Aircraft utilisation – Longhaul | ||||||
| (average hours per aircraft per day) | hours | 13.5 | 13.5 | 13.3 | 13.6 | 13.6 |
| Aircraft utilisation – Shorthaul (average hours per aircraft per day) |
hours | 9.1 | 8.8 | 8.4 | 8.2 | 8.5 |
| Punctuality – within 15 minutes | % | 80.2 | 80.9 | 79.2 | 77.2 | 76.6 |
| Regularity | % | 99.4 | 99.5 | 99.0 | 99.0 | 99.0 |
| Financial | ||||||
| Passenger unit revenue per ASK (PASK) | €cents | 7.46 | 7.08 | 7.05 | 7.01 | 6.41 |
| Passenger revenue per RPK | €cents | 9.17 | 8.80 | 8.73 | 8.73 | 8.11 |
| Cargo revenue per CTK | €cents | 19.35 | 18.19 | 18.98 | 20.02 | 19.33 |
| Total traffic revenue per ATK (RASK) | €cents | 65.11 | 60.45 | 57.1 | 53.59 | 49.47 |
| (\$cents/ | ||||||
| Average fuel price | US gallon) | 175.86 | 300.16 | 314.15 | 320.33 | 289.04 |
| Fuel cost per ASK | €cents | 2.23 | 2.38 | 2.58 | 2.78 | 2.38 |
| Operating profit before depreciation, amortisation and rentals (EBITDAR) |
€million | 4,301 | 3,137 | 2,258 | 1,480 | 1,867 |
| Total operating expenditure excluding | ||||||
| fuel per ASK (CASK) | €cents | 5.3 | 5.08 | 5.18 | 5.49 | 5.06 |
| Operating margin | % | 10.2 | 6.9 | 4.1 | (0.1) | 3.0 |
| Lease adjusted operating margin | % | 11.2 | 7.8 | 5.0 | 0.7 | 3.8 |
| Total operating expenditure per ASK | €cents | 7.53 | 7.45 | 7.77 | 8.28 | 7.44 |
| Total operating expenditure per ATK | €cents | 62.52 | 60.33 | 58.97 | 58.60 | 52.76 |
| Dividend cover | times | 3.8 | n/a | n/a | n/a | n/a |
| Interest cover* | times | 8.2 | 6.4 | 2.8 | (0.2) | 4.7 |
| Net debt | €million | 2,774 | 1,673 | 1,489 | 1,889 | 1,148 |
| Equity* | €million | 7,328 | 3,793 | 4,216 | 2,978 | 4,312 |
| Adjusted gearing | % | 54 | 51 | 50 | 51 | 44 |
| Adjusted net debt to EBITDAR | times | 1.9 | 1.9 | 2.5 | 3.6 | 2.3 |
1 Aer Lingus Group plc results have been consolidated from August 18, 2015.
2 Financial data for the full year to December 31, 2015, 2014, 2013 and 2012 is based on the consolidated results of the Group, before exceptional items.
3 The full year's data to December 31, 2011 is based on the combined results of operations of British Airways Plc and Iberia Líneas Aéreas de España S.A Operadora.
* Restated for amendment to IAS19 'Employee benefits' accounting standard.
n/a: not available
| Adjusted aircraft operating leases | Aircraft operating lease costs multiplied by 0.67 |
|---|---|
| Adjusted earnings per share | Earnings are based on results before exceptional items, after tax adjusted for earnings attributable to equity holders and interest on convertible bonds, divided by the weighted average number of ordinary shares, adjusted for the dilutive impact of the assumed conversion of the bonds and employee share schemes outstanding |
| Adjusted gearing | Adjusted net debt, divided by adjusted net debt and adjusted equity |
| Adjusted net debt | Net debt plus capitalised operating aircraft lease costs |
| Available seat kilometres (ASK) | The number of seats available for sale multiplied by the distance flown |
| Available tonne kilometres (ATK) | The number of tonnes of capacity available for the carriage of load (passenger and cargo) multiplied by the distance flown |
| Block hours | 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 that generate revenue (freight and mail) carried multiplied by the distance flown |
| Dividend cover | The number of times profit for the year covers the dividends paid and proposed |
| EBITDAR | Operating profit before depreciation, amortisation and rental charges |
| Earnings per share (EPS) | Earnings are based on results after exceptional items, after tax adjusted for earnings attributable to equity holders and interest on convertible bonds, divided by the weighted average number of ordinary shares, adjusted for the dilutive impact of the assumed conversion of the bonds and employee share schemes outstanding. |
| Equity free cash flow | EBITDA less cash tax, cash interest and capital expenditure |
| Interest cover | The number of times profit before taxation and net interest expense and interest income cover the net interest expense and interest income |
| Invested capital | Fleet net book value adjusted for inflation (fleet gross book value multiplied by a cost factor ((1 + asset inflation) ^ asset age and multiplied by net depreciation rate) plus net book value of remaining tangible fixed assets plus lease rentals multiplied by 8 |
| Lease adjusted operating margin | Operating result less aircraft operating lease cost plus adjusted aircraft operating lease costs divided by revenue |
| Manpower equivalent | Number of employees adjusted for part-time workers, overtime and contractors |
| Merger effective date | January 21, 2011, the date British Airways and Iberia signed a merger agreement to create International Airlines Group |
|---|---|
| Net debt | Current and long-term interest-bearing borrowings less other current interest bearing deposits and cash and cash equivalents |
| Net depreciation rate | Gross book value divided by net book value |
| Operating margin | Operating profit/(loss) as a percentage of total revenue |
| Overall load factor | RTK expressed as a percentage of ATK |
| Passenger load factor | RPK expressed as a percentage of ASK |
| Punctuality | The industry's standard, measured as the percentage of flights departing within 15 minutes of schedule |
| Regularity | The percentage of flights completed to flights scheduled, excluding flights cancelled for commercial reasons |
| Return on invested capital (RoIC) | Return on invested capital is defined as operating profit before exceptional items adjusted for lease and inflation divided by invested capital |
| Revenue passenger kilometres (RPK) | The number of passengers that generate revenue carried multiplied by the distance flown |
| Revenue passenger kilometres (RPK) | The number of passengers that generate revenue carried multiplied by the distance flown |
| Passenger unit revenue per ASK (PASK) | Passenger revenue divided by ASK |
| Passenger revenue per RPK (yield) | Passenger revenue divided by RPK |
| Revenue tonne kilometres (RTK) | The revenue load in tonnes multiplied by the distance flown |
| Sector | A one-way revenue flight |
| Total capital | Total equity plus net debt |
| Total Group revenue per ASK (RASK) | Total group revenue divided by ASK |
| Total operating expenditure excluding fuel per ASK |
Total operating expenditure excluding fuel divided by ASK |
| Total operating expenditure per ASK (CASK) |
Total operating expenditure divided by ASK |
| Total traffic revenue per ATK | Revenue from total traffic (passenger and cargo) divided by ATK |
International Consolidated Airlines Group, S.A El Caserío, Iberia Zona Industrial nº 2 (La Muñoza) Camino de La Muñoza, s/n, 28042 Madrid, Spain.
Madrid Commercial Registrar tomo 27312, folio 11, hoja M-492129 C.I.F. A85845535
International Airlines Group 2 World Business Centre Newall Road London Heathrow Airport Hounslow TW6 2SF, UK
Registered in England & Wales: BR014868
Computershare Investor Services PLC
For enquiries relating to shares held through the Corporate Sponsored Nominee (UK share register):
Tel: +44 370 702 0110
Email: [email protected]
Online: www.investorcentre.co.uk/iag
UK: +44 20 8564 2900; or
Spain: +34 91 312 6440
Institutional investors: [email protected]
Private shareholders: [email protected]
IAG has a Sponsored Level 1 American Depositary Receipt (ADR) facility that trades on the OTC market in the US (see www.otcmarkets.com). Deutsche Bank is the ADR depositary bank.
For shareholder enquiries, contact: Deutsche Bank Trust Company Americas c/o American Stock Transfer & Trust Company Peck Slip Station P.O. Box 2050 New York, NY 10272-2050, USA
Email: [email protected]
Toll free: +1 800 301 3517
International: +1 718 921 8137
Online: www.adr.db.com
Financial year end: December 31, 2015 Q1 results: April 29, 2016 Half year results: July 29, 2016 Q3 results: October 28, 2016
Other key dates can be found on our website: www.iagshares.com
UK shareholders with a small number of shares may like to consider donating their shares to charity under ShareGift, administered by Orr Mackintosh Foundation. Details are available from the UK Registrar.
Certain statements included in this report are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
Forward-looking statements can typically be identified by the use of forward-looking terminology, such as "expects", "may", "will", "could", "should", "intends", "plans", "predicts", "envisages" or "anticipates" and include, without limitation, any projections relating to results of operations and financial conditions of International Consolidated Airlines Group S.A. and its subsidiary undertakings from time to time (the 'Group'), as well as plans and objectives for future operations, expected future revenues, financing plans, expected expenditures and divestments relating to the Group and discussions of the Group's business plan. All forward-looking statements in this report are based upon information known to the Group on the date of this report. The Group undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
It is not reasonably possible to itemise all of the many factors and specific events that could cause the forward-looking statements in this report to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating in the global economy. Further information on the primary risks of the business and the risk management process of the Group is set out in the risk management and risk factors section of the report.
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