ANNUAL FINANCIAL STATEMENTS

2017

LIABILITY STATEMENT OF DIRECTORS

LIABILITY STATEMENT OF DIRECTORS FOR THE PURPOSES ENVISAGED UNDER ARTICLE 8.1.b OF SPANISH ROYAL DECREE 1362/2007 OF 19 OCTOBER (REAL DECRETO 1362/2007).

At a meeting held on February 22, 2018, the Directors of International Consolidated Airlines Group, S.A. (the "Company") state that, to the best of their knowledge, the individual and consolidated financial statements for the year to December 31, 2017, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole, and that the individual and consolidated management reports include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with the description of the principal risks and uncertainties that they face.

February 22, 2018

Antonio Vázquez Romero Chairman	William Matthew Walsh Chief Executive Officer
Marc Jan Bolland	Patrick Jean Pierre Cescau
Enrique Dupuy de Lôme Chávarri	James Arthur Lawrence
María Fernanda Mejía Campuzano	Kieran Charles Poynter
Emilio Saracho Rodríguez de Torres	Marjorie Morris Scardino
Lucy Nicola Shaw	Alberto Terol Esteban

Risk.	Our response to the risk
Recoverability of investments in subsidiaries (€7,485 million, FY16: €6,724 million) Management's assessment of the recoverable amount of investments in subsidiaries requires significant judgment in forecasting cash flow projections of each investment, together with the discount rates, long-term economic growth rates, fuel prices and exchange rates. Changes to these assumptions can have a significant impact on the available headroom and any impairment that may be required. Refer to notes 4 and 8 of the financial statements.	Our procedures included the following: We considered the reasonableness of management's business plans. Specifically, whether fuel price and foreign exchange assumptions are reasonable in light of current market data. We tested the appropriateness of management's key assumptions. We performed an evaluation of the alignment of long-term growth rates with our view of long-term inflation and GDP growth for the regions in which the different investments operate and considered whether discount rates were within acceptable ranges. We involved a valuation specialist to assist in the evaluation of the discount rates used to discount future cash flows in each of the different investment. We considered the accuracy of forecasts used in previous years against actual results. We verified the impairment calculations adjusted for net debt to determine the equity value. We have reviewed and challenged management's sensitivity analysis to evaluate whether a reasonable change in the key assumptions for any of the investments would cause the carrying amounts to exceed the recoverable amounts. We assessed the appropriateness of the related disclosures.

Financial statements for the year to December 31, 2017

	Balance sheet at December 31, 2017	1
	Income statement for the year to December 31, 2017	2
	Statement of changes in equity for the year to December 31, 2017	3
	Cash flow statement for the year to December 31, 2017	5
	Notes to the financial statements for the year to December 31, 2017	6
	MANAGEMENT REPORT FOR THE YEAR TO DECEMBER 31, 2017

STATEMENT OF DIRECTORS' RESPONSIBILITIES

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Balance sheet at December 31, 2017 (Expressed in thousands of euros)

ASSETS NON-CURRENT ASSETS 7.727.730 7.721.698 Intangible assets 6 1.253 33 Property, plant and equipment 7 51.936 1.171 Investments in Group companies Equity instruments 8 7.485.461 6.723.688 Loan receivable from Group companies 9,16 179.720 991.494 Non-current financial assets Equity instruments 9 605 - Other financial asset 9 2.351 22 6.404 5.290 Deferred tax asset 12 802.588 CURRENT ASSETS 645.289 Trade and other receivables Clients, Group companies 9,16 93.206 65.483 Current tax receivable 12 192.860 122.910 Other receivables 9 4.703 2.878 Investments in Group companies Loan receivable from Group companies 9,16 2.814 2.903 Current financial investments Other financial assets 9 - 70.010 Derivatives 9 9.139 - Cash and cash equivalents Cash 9,10 207.991 328.402 Cash equivalents 9,10 134.576 210.002 TOTAL ASSETS 8.373.019 8.524.286 EQUITY AND LIABILITIES EQUITY 7.129.327 7.533.181 SHAREHOLDERS' FUNDS Capital Registered share capital 11 1.028.994 1.066.494 6.021.802 6.103.978 Share premium 11 Reserves Legal and statutory reserves 11 179.196 123.274 Other reserves 11 (536.749) (164.700) Own shares and equity holdings 11 (76.737) (95.335) 596.469 559.221 Profit for the year 3 Interim dividend 3 (256.178) (233.251) Other equity instruments 11 172.867 172.730 VALUATION ADJUSTMENTS Currency differences 11 (337) 770 LIABILITIES NON-CURRENT LIABILITIES 1.121.239 902.522 Non-current debt Bond and other marketable securities 918.239 899.522 9 Group companies, non-current 9,16 200.000 - Deferred tax liability 12 3.000 3.000 CURRENT LIABILITIES 122.453 88.583 Short term provisions 9 - 143 Current debt Bond and other marketable securities 9 4.375 4.375 Trade and other payables Suppliers, Group companies 9,16 42.780 17.497 Various creditors 5.096 2.629 9 Payroll accruals 9 14.139 10.221 Other amounts due to tax authorities 12 56.063 53.718 TOTAL EQUITY AND LIABILITIES 8.373.019 8.524.286	Note	2017	2016

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Income statement for the year to December 31, 2017

(Expressed in thousands of euros)

	Note	2017	2016

Continuing operations
Revenue from operations		701.348	637.988
Rendering of services to Group companies	13,16	65.425	66.843
Dividend income	16	635.923	571.145
Employee costs	13	(53.807)	(47.253)
Wages, salaries and other costs		(45.590)	(39.119)
Social security costs		(8.217)	(8.134)

Other operating expenses		(18.132)	(16.270)
External services received		(16.005)	(13.666)
Other operating expenses		(2.127)	(2.604)

OPERATING PROFIT		629.409	574.465

Finance income		2.261	7.717
Marketable securities and other financial instruments
Receivable from debt with Group companies and associates	13	2.164	7.467
Receivable from third parties	13	97	250
Finance costs		(28.050)	(34.857)
Payable on debt with Group companies and associates	13	(2.567)	-
Payable on debt with third parties	13	(25.483)	(34.857)

Change in fair value of financial instruments		(14.814)	-

Currency differences		(1.367)	(38)

NET FINANCE INCOME/(EXPENSE)		(41.970)	(27.178)

PROFIT BEFORE TAX		587.439	547.287

Taxes	12	9.030	11.934

PROFIT FOR THE YEAR		596.469	559.221

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Statement of changes in equity for the year to December 31, 2017 (Expressed in thousands of euros)

A) Statement of other comprehensive income

	Note	2017	2016

PROFIT FOR THE YEAR	3	596.469	559.221

Income and expenses recognised directly in equity
Currency differences		(1.107)	(4.298)

TOTAL INCOME AND EXPENSES RECOGNISED DIRECTLY IN EQUITY	11	(1.107)	(4.298)

TOTAL INCOME AND EXPENSES RECOGNISED		595.362	554.923

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Statement of changes in equity for the year to December 31, 2017 (Expressed in thousands of euros)

B) Statement of changes in equity

	Issued share	Share		Own shares and	Profit for	Interim	Other equity	Valuation
	capital	premium	Reserves	equity holdings	the year	Dividend	instruments	adjustments 1	TOTAL
BALANCE AT DECEMBER 31, 2015	1.020.039	5.866.678	(153.143)	(112.399)	412.003	(202.539)	245.407	5.068	7.081.114
Total recognised income and expense	-	-	-	-	559.221	-	-	(4.298)	554.923
Transactions with shareholders and owners	46.455	237.300	(97.747)	17.064	-	(233.251)	(108.181)	-	(138.360)
Acquisition of treasury shares	-	-	-	(24.786)	-	-	-	-	(24.786)
Vesting of share-based payment schemes	-	-	(36.380)	41.850	-	-	(36.297)	-	(30.827)
Equity portion of convertible bond issued	46.455	343.323	44.656	-	-	-	(71.884)	-	362.550
Dividend	-	(106.023)	(106.023)	-	-	(233.251)	-	-	(445.297)
Other movements in equity	-	-	-	-	-	-	35.504	-	35.504
Cost of share-based payments (note 17)	-	-	-	-	-	-	35.504	-	35.504
Appropriation of prior year profit	-	-	209.464	-	(412.003)	202.539	-	-	-
BALANCE AT DECEMBER 31, 2016	1.066.494	6.103.978	(41.426)	(95.335)	559.221	(233.251)	172.730	770	7.533.181
Total recognised income and expense	-	-	-	-	596.469	-	-	(1.107)	595.362
Transactions with shareholders and owners	(37.500)	9	(724.282)	18.598	-	(256.178)	(32.166)	-	(1.031.519)
Capital reductions	(37.500)	-	(463.726)	500.000	-	-	-	-	(1.226)
Acquisition of treasury shares	-	-	-	(500.000)	-	-	-	-	(500.000)
Vesting of share-based payment schemes	-	-	1.038	18.598	-	-	(32.166)	-	(12.530)
Equity portion of convertible bond issued	-	9	-	-	-	-	-	-	9
Dividend	-	-	(261.594)	-	-	(256.178)	-	-	(517.772)
Other movements in equity	-	-	-	-	-	-	32.303	-	32.303
Cost of share-based payments (note 17)	-	-	-	-	-	-	32.303	-	32.303
Appropriation of prior year profit	-	-	325.970	-	(559.221)	233.251	-	-	-
Compensation of prior year losses	-	(82.185)	82.185	-	-	-	-	-	-
BALANCE AT DECEMBER 31, 2017	1.028.994	6.021.802	(357.553)	(76.737)	596.469	(256.178)	172.867	(337)	7.129.327

¹ Relates to currency translation adjustments only.

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Cash flow statement for the year to December 31, 2017

(Expressed in thousands of euros)

	Note	2017	2016
CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year before tax
Profit from continuing operations		587.439	547.287
Adjustments to profit Finance income Dividend income Finance expenses Change in fair value of financial instruments Currency differences	13 16 13	(2.261) (635.923) 28.050 14.814 1.367	(7.717) (571.145) 34.857 - 38
Changes in working capital Trade and other payables Trade and other receivables Other current liabilities Other current assets		15.150 (58.705) (138) 15.480	1.729 (59.890) (28) -
Other cash flows from operating activities Interest paid Taxation paid Dividend received from Group companies Share-based payments		(2.467) (60.039) 502.450 12.138	(1.070) (73.622) 435.380 29.727
CASH FLOW FROM OPERATING ACTIVITIES		417.355	335.546
CASH FLOWS FROM INVESTING ACTIVITIES Amounts paid Purchase of intangible assets Purchase of property, plant and equipment Amount paid to Group companies	6 7	- (51.156) (97.146)	(6.996) - (69.845)
Amounts received Transfer of property, plant and equipment to Group companies Decrease in other current financial assets Investment in Group companies Interest received Amount received from Group companies	7	- 70.010 84.088 148 200.000	781 24.999 78.103 467 170.000
CASH FLOWS FROM INVESTING ACTIVITIES		205.944	197.509
CASH FLOWS FROM FINANCING ACTIVITIES Receipts and payments on equity instruments Acquisition of treasury shares Repayment of equity instruments		(500.000) (4.375)	(24.788) (7.753)
Receipts and payments on financial liabilities Issue Due to Group companies		200.000	-
Dividend payments and receipts from other equity instruments Dividend paid		(512.360)	(441.531)
CASH FLOWS FROM FINANCING ACTIVITIES		(816.735)	(474.072)
IMPACT OF EXCHANGE DIFFERENCES		(2.401)	(181)
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(195.837)	58.802
Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year	9,10 9,10	538.404 342.567	479.602 538.404

Notes to the financial statements

1. CORPORATE INFORMATION AND ACTIVITY

International Consolidated Airlines Group S.A. (hereinafter the 'Company' or '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. (hereinafter 'Vueling') was acquired on April 26, 2013 and Aer Lingus Group DAC (hereinafter 'Aer Lingus') was acquired on August 18, 2015. The objective and main activity, among others, of the Company is the acquisition, ownership, management and disposal of shares or other equity interests in other companies, provision of management services to those companies, and significant Group investments including aircraft procurement.

IAG is a Spanish Private Law entity, incorporated for an indefinite period by virtue of a public deed granted before the Public Notary of Madrid Ignacio Martínez-Gil Vich on December 17, 2009 under number 3.866 of his files, with its registered office in Madrid, at El Caserío, Iberia Zona Industrial nº 2 (La Muñoza), Camino de La Muñoza, s/n, 28042, Madrid, Spain and entered at the Madrid Mercantille Registry with registration number M-492129 in Volume 27312, Book 0, Section 8, Folio 11.

IAG holds a premium listing on the FTSE's UK index series. 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').

During the year the Company carried out a share buyback programme as part of its corporate finance strategy to return cash to its shareholders while reinvesting in the business and managing leverage. The programme total was €500.000.000 and it was completed in December 2017. Under this programme, the Company acquired 74.999.449 ordinary shares, which were subsequently cancelled.

During 2017, the Group incorporated FLY LEVEL S.L. and FLYLEVEL UK Limited (hereinafter 'LEVEL') and IAG Connect Limited (hereinafter 'IAG Connect'), with a 100 per cent investment by the Company.

IAG is the parent Company of British Airways, Iberia, Vueling, IAG Cargo Ltd (hereinafter 'IAG Cargo'), Veloz Holdco, S.L.U. (hereinafter 'Veloz'), IAG GBS, AERL Holding Limited (hereinafter 'AERL Holding'), LEVEL and IAG Connect all collectively defined as the 'Group'. The Group presents consolidated financial statements separately.

The Company's presentation currency is euro. The United Kingdom ('UK') branch's functional currency is pound sterling as this is the currency of the economic environment in which it operates.

2. BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS

Applicable financial reporting framework

The financial statements have been prepared in accordance with the accounting principles approved by Royal Decree 1514/2007, of November 16, which was amended in 2016 by Royal Decree 602/2016 of December 2, and the remaining prevailing mercantile law.

These financial statements have been prepared by the Directors of the Company for submission for approval at the General Shareholders' Meeting, where it is expected they will be approved without modification.

The Company has net assets of €7.129.327.000 (2016: €7.533.181.000) on the Balance sheet and recorded a €596.469.000 profit for the year (2016: €559.221.000 profit). The Directors are of the opinion that the working capital available to the Company is sufficient for the foreseeable future. The Directors have prepared the financial statement on the going concern basis.

The figures shown in these financial statements are presented in thousands of euros unless otherwise indicated.

2.1 True and fair view

The accompanying financial statements have been prepared from the Company's accounting records in accordance with prevailing Spanish accounting legislation to give a true and fair view of its equity, financial position and reserves. The cash flow statement has been prepared to present fairly the origin and usage of monetary assets such as cash and cash equivalents.

2.2 Comparative information

According to corporate law the prior year information in the Balance sheet, Income statement, Statement of other comprehensive income, Statement of changes in equity and Cash flow statement is presented for comparison purposes, in addition to figures for 2017. The notes to the financial statements also include quantitative information for the prior year, unless an accounting standard specifies that it is not necessary. The financial statements for the prior year include reclassifications that were made to conform to the current year presentation.

Notes to the financial statements continued

2. BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS continued

2.3 Critical accounting estimates and assumptions

The Directors have prepared the financial statements using estimates and assumptions based on historical experience and various other factors that affect the reported value of the assets and liabilities, and are considered reasonable under the circumstances. The carrying amount of assets and liabilities, which is not readily apparent from other sources, was established on the basis of these estimates. The Directors are not aware of any specific risks that might significantly alter the value of the assets or liabilities in the following year and, therefore, it considers that it is not necessary to make estimates of uncertainty at the end of the reporting period.

Impairment of investments in Group companies

The Company assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Equity investments in Group companies are tested annually for impairment. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amounts of equity investments have been determined based on the future cash flows of the related cash generating units (CGUs), which require the use of estimates and assumptions, including five year business plan assumptions, long-term growth rates and discount rates.

Impairment losses can be reversed and recognised in the Income statement if there is any indication that the impairment loss no longer exists. The reversal is limited to the carrying value of the asset that would have been recognised on the reversal date had the original impairment not occurred.

Share-based payments

The Company 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 in respect of employees of the Company, 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.

3. APPROPRIATION OF PROFIT

The Company recorded a profit of €596.469.000 (2016: €559.221.000).

Accordingly, the Company's Directors will submit the following proposed appropriation of the 2017 result for approval at the Shareholders' Meeting:

	2017	2016
Proposed appropriation:
Profit for the year	596.469	559.221

	596.469	559.221
Appropriation to:
Legal reserves	26.603	55.922
Interim dividend	256.178	233.251
Final dividend (corresponding to a fixed dividend of 14,5 € cents per share;	298.408	261.594
total amount considering all the 2.057.989.294 shares outstanding on the date hereof)
Voluntary reserve (remaining amount of the profit for the year after the above referred distributions)	15.280	8.454
	596.469	559.221

Notes to the financial statements continued

3. APPROPRIATION OF PROFIT continued

3.1 Interim dividend

On October 26, 2017 the Board of Directors approved an interim dividend of 12,5 € cents per share. The interim cash dividend was paid on December 4, 2017 for a total amount (net of withholding tax of €48.674.000) of €207.504.000. The withholding tax was paid from December 2017.

In accordance with article 277 of the Spanish Corporations Law, the following table shows the statement issued by the Directors to substantiate that the Company had sufficient liquidity to distribute the interim dividend (expressed in thousands of euros):

Accounting statement	Nine months to September 30, 2017
	Amount (€ thousand)
Net profit (after estimated tax) for the period from January 1 to September 30, 2017	396.415
Losses from prior years	Nil
Mandatory allocations to reserves	(34.103)
Distributable income for the period	362.312

Proposed interim dividend (maximum amount) 257.528

Liquidity statement (funds available for distribution)
Cash and cash equivalents	530.240
Available credits	100.000
Estimation of additional net funds available until the payment date of the proposed interim dividend	(90.000)
Total estimated funds available at the payment date of the proposed interim dividend	540.240

3.2 Final dividend

On February 22, 2018 IAG's Board of Directors proposed a distribution in cash of a final dividend of 14,5 € cents per share. The proposed final dividend is subject to approval at the annual general meeting and subject to approval, is recognised as a liability on that date.

The proposed final dividend would be distributed from net profit for the year to December 31, 2017.

	2017	2016
Cash dividends on ordinary shares declared
Interim dividend for 2017 of 12,5 € cents per share (2016: 11 € cents per share)	256.178	233.251
Final dividend for 2016 of 12,5 € cents per share (2015: 10 € cents per share)	261.594	212.046

Proposed dividends on ordinary shares
Final dividend of 14,5 € cents per share	298.408

3.3 Limitations on the distribution of the profit

The Company is obliged to transfer 10 per cent of the profit for the year to a legal reserve until this reserve reaches an amount at least equal to 20 per cent of share capital. Unless the balance of the reserve exceeds this amount, it cannot be distributed to shareholders. The distributable reserves at December 31, 2017 are €6.100.333.000 (2016: €6.101.563.000).

Once the guidance provided by the law or the statutes has been covered, dividends can only be distributed from profit for the year, or from distributable reserves, if the value of equity is not or, does not become as a result of the distribution, lower than share

Notes to the financial statements continued

3. APPROPRIATION OF PROFIT continued

capital. In this case, the profit charged directly to equity cannot be distributed, directly or indirectly. If losses from previous years existed, that make the Company's equity lower than share capital, the profits would be used to compensate those losses.

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES

The main recognition and measurement accounting policies applied in the preparation of the 2017 financial statements are the following:

4.1 Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Company. All other lease arrangements are classified as operating leases.

For operating leases total minimum payments, measured at inception, are charged to the Income statement in equal annual amounts over the period of the lease.

4.2 Intangible assets

Intangible assets are stated at acquisition price or development cost, less accumulated amortisation and impairment losses.

The Company recognises costs incurred to acquire and develop computer software that is separable from an item of related hardware as intangible assets. These are amortised from the date the system is available for use and amortised on a straight-line basis generally over a period of five years with certain specific software developments amortised over a period of up to 10 years.

4.3 Property, plant and equipment

Property, plant and equipment is stated at historical cost less accumulated depreciation and impairment losses.

The Company depreciates property, plant and equipment on a straight-line basis at annual rates over their useful economic lives. The estimated useful economic lives of property, plant and equipment are as follows:

Computer equipment: 4 years

Fixtures and fittings: 15 years

4.3.1 Pre-delivery payments

Pre-delivery payments are made to secure the Company's place in the delivery timetable for aircraft to its subsidiaries and are capitalised as work-in-progress as they are made and transferred to fleet within property, plant and equipment when the aircraft is delivered, which constitutes part of the purchase price of the aircraft.

4.4 Impairment of non-financial assets

Equity investments in Group companies 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 amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less cost to sell and equity value, which is based on the future cash flows of the related CGUs. Non-financial assets other than goodwill that have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

4.5 Financial assets and financial liabilities

4.5.1 Financial assets

Recognition and measurement

a) Other current interest-bearing deposits

Other current interest-bearing deposits, principally comprising funds held with banks and other financial institutions, are carried at amortised cost using the effective interest method.

b) Investments in Group companies

Equity investments in Group companies include investments in entities over which the Company has control. On initial recognition the investments are measured at fair value, which generally is equal to the fair value of the consideration paid, plus directly

Notes to the financial statements continued

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES continued

attributable transaction costs. Equity investments are subsequently measured at cost less, where appropriate, provisions for impairment, or distributions received recognised against the cost of the investment.

c) Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets including listed and unlisted investments, excluding interests in subsidiaries and 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 other comprehensive income is recognised in the income statement. 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.

d) Derivatives

Derivative financial instruments are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured at their fair value. The resulting gain or loss arising from remeasurement is recognised in the Income statement unless the derivative financial instrument has been designated as a hedge of a highly probable expected future cash flow and is assessed as effective, when gains and losses are recognised in equity.

e) Impairment of financial assets

The Company assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.

The carrying amount of financial assets is adjusted to the Income statement when there is objective evidence of actual impairment.

To determine an impairment loss, the Company assesses the loss of individual as well as groups of assets with similar risk characteristics.

Debt instruments

There is objective evidence that debt instruments (trade receivables and loans) are impaired when an event has occurred after the initial recognition of the instrument that has a negative impact on related estimated future cash flows.

The Company classifies as impaired assets (doubtful exposures) debt instruments for which there is objective evidence of impairment, which refers primarily to the existence of unpaid balances, non-compliance issues, refinancing and data which evidences the possible irrecoverability of total agreed upon future cash flows or collection delays.

The reversal of an impairment loss is recognised in the Income statement. Such reversal is limited to the carrying amount of the financial asset that would have been recognised on the reversal date had no impairment loss been recognised.

Equity instruments

There is objective evidence that equity instruments are impaired when one or more events have occurred after initial recognition that indicate that the cost of the investment in equity instruments may not be recovered due to a prolonged or significant decline in fair value.

For investments in Group companies, joint ventures and associates, the reversal of an impairment loss is recognised in the Income statement and is limited to the carrying value of the investment that would have been recognised on the reversal date had the original impairment not occurred, whereas an impairment loss recognised in previous years from available-for-sale financial assets cannot be reversed.

4.5.2 Financial liabilities

Trade and other payables and borrowings

On initial recognition, the financial liabilities included in this category are recognised at fair value, which unless there is information to the contrary, is the transaction price, which will be equal to the fair value of the consideration received adjusted by directly attributable transaction costs. However, trade and other payables maturing within 12 months where there is no contractual interest rate can be measured at their nominal value when the effect of discounting is not material.

Subsequent to initial measurement, financial liabilities in this category are measured at amortised cost. However, other payables maturing within 12 months which, as indicated above, are initially recognised at their nominal value, continue to be recognised at that amount.

4.5.3 Derecognition of financial assets and liabilities

Financial assets are derecognised in the Company's balance sheet when the contractual rights on the financial assets' cash flows have expired or when they are transferred, as long as the risks and rewards from its ownership are substantially transferred. The Company derecognises a financial liability when the obligation is extinguished.

Notes to the financial statements continued

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES continued

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 is recognised in the Income statement.

4.5.4 Convertible debt

Convertible bonds are classified as compound instruments, consisting of a liability and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt, and is subsequently recorded at an amortised cost basis using the effective interest method until extinguished on conversion or maturity of the convertible bonds, and is recognised within Bond and other securities payable. 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 Other equity instruments on the Balance sheet 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 amounts 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 amount and the interest paid is added to the carrying amount of the liability.

4.6 Treasury shares

Shares in the Company purchased and held directly by the Company are classified as Treasury shares and shown as deductions from Shareholders' funds at cost. When these shares are cancelled, Share capital is reduced by the nominal value of the cancelled shares, with an increase in the Redeemed capital reserve. No gain or loss is recognised in the Income statement on the purchase, sale, issue or cancellation of equity shares.

4.7 Cash and cash equivalents

Cash and cash equivalents includes cash in hand and deposits with any qualifying financial institution repayable on demand or maturing within three months of the date of acquisition and which are subject to an insignificant risk of change in value.

4.8 Foreign currency translation

Transactions in foreign currencies are initially recorded in the functional currency of the branch using the spot exchange rate ruling at the date of the transaction. At each balance sheet date, monetary assets and liabilities denominated in foreign currencies are retranslated into euro at the rate 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.

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 is recognised in the Income statement.

4.9 Corporate tax

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on the legislation in force.

Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions:

Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
In respect of taxable temporary differences associated with investments in subsidiaries or associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and
Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised.

4.10 Deferred tax

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 legislation in force.

Notes to the financial statements continued

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES continued

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.

4.11 Revenue and expense recognition

Revenue and expenses are recognised on an accrual basis, regardless of when the resulting monetary or financial flow arises.

4.12 Provisions for liabilities and charges

Provisions are made when an obligation exists for a present liability in respect of a past event and where the amount of the obligation can be reliably estimated. Restructuring provisions are made for direct expenditures of a business reorganisation where the plans are sufficiently detailed and well advanced and where appropriate communication to those affected has been undertaken at the balance sheet date.

If the effect is material, expected future cash flows are discounted using a 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.

4.13 Long-term liabilities with personnel

A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company 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. Current service costs are recognised within the Income statement in the year in which they arise. At each financial year end, accrued contributions payable are recognised in the Balance sheet.

4.14 Share-based payment transactions

The Company operates a number of equity-settled, share-based payment plans, under which the Company awards equity instruments 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 (note 17). The resulting cost is adjusted to reflect expected and actual levels of vesting, and is charged to the Income statement over the vesting period.

At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions, and accordingly the number of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the Income statement with a corresponding entry in equity.

4.15 Dividends

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.

4.16 Related parties

Related party transactions are carried out at an arm's length basis and recorded according to the accounting policies set out in this note.

4.17 Classification of assets and liabilities between current and non-current

Assets and liabilities are presented in the Balance sheet as either current or non-current. The assets and liabilities are classified as current when linked to the normal operating cycle of the Company.

When an asset or liability is not linked to the normal operating cycle but the Company expects the asset or liability to mature or liquidate, or plans to dispose of the asset or liability within 12 months, then these are also classified as current when they are maintained for the purposes of operations, or the instrument is related to cash and cash equivalents.

Any asset or liability whose use is restricted to beyond one year is classified as non-current.

4.18 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the Balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Notes to the financial statements continued

5. LEASES

The Company has a leased property in Madrid which was entered into by Iberia and sub-leased to the Company. The lease and sub-lease expire in one year. The Company also has an office in London which is leased from British Airways. The lease expires in two years.

The annual cost of the lease and sub-lease contracts is €749.000 (2016: €649.000). The amount of future minimum lease payment is €745.000 (2016: €776.000) for less than one year, and €411.000 (2016: €1.005.203) for between one and five years.

6. INTANGIBLE ASSETS

The details and movements of the item that comprises this section are:

	System development
Cost
Balance at January 1, 2016	4.170
Additions	6.996
Transfer to Group companies	(10.563)
Exchange movements	(570)
Balance at December 31, 2016	33
Additions	10.225
Transfer to Group companies	(9.256)
Exchange movements	251
Balance at December 31, 2017	1.253

In 2017 and 2016, the system development intangible assets are not amortised until ready for use. The transfer to Group companies is made at cost.

7. PROPERTY, PLANT AND EQUIPMENT

The details and movements of the items that comprise this section are:

	Furniture and fittings	Equipment	Work-in progress¹	Total
Cost
Balance at January 1, 2016	45	99	1.952	2.096
Transfer to Group companies	-	-	(781)	(781)
Balance at December 31, 2016	45	99	1.171	1.315
Additions	-	-	51.156	51.156
Transfer to Group companies	-	-	(391)	(391)
Balance at December 31, 2017	45	99	51.936	52.080
Depreciation
Balance at January 1, 2016	(45)	(99)	-	(144)
Charge for the year	-	-	-	-
Balance at December 31, 2016	(45)	(99)	-	(144)
Charge for the year	-	-	-	-
Balance at December 31, 2017	(45)	(99)	-	(144)

Net book value at December 31, 2017	-	-	51.936	51.936

Notes to the financial statements continued

7. PROPERTY, PLANT AND EQUIPMENT continued

¹Relates to pre-delivery payments and options made on aircraft. During the year, the Company transferred options on 2 aircraft to Group companies (2016: 3) and made new pre-delivery payments on 3 aircraft (2016: nil).

Capital expenditure authorised and contracted for but not provided for in the accounts amounts to €178 million (December 2016: nil). The capital expenditure is denominated in US dollars, and as such is subject to changes in exchange rates. The outstanding commitments relate to fleet purchases.

The transfer to Group companies is made at cost.

8. EQUITY INVESTMENTS IN GROUP COMPANIES

The details and movement of individual items that comprise this section are:

	January 1	Additions	Distribution received	December 31
2017
Equity instruments
Cost	6.906.851	846.002	-	7.752.853
Distribution received	(183.163)	-	(84.229)	(267.392)
	6.723.688	846.002	(84.229)	7.485.461
2016
Equity instruments
Cost	6.906.851	-	-	6.906.851
Distribution received	(105.060)	-	(78.103)	(183.163)
	6.801.791	-	(78.103)	6.723.688

8.1 Description of the main movements

On October 19, 2017 and December 29, 2017, the Company received €57.336.000 and €26.893.000 respectively from Iberia representing a distribution out of share premium which has been recognised against the cost of investment.

On March 21, 2017 the majority of the outstanding loan balance between the company and AERL Holding was extinguished with AERL Holding issuing 760 million ordinary shares of €1 at a premium of 10 cents per share in consideration for the release of AERL Holding's obligation to repay the loan principal amount of €836 million.

On November 3, 2017 and December 19, 2017 the Company invested €3.000 and €10.000.000 in the equity of FLY LEVEL S.L. which is a 100 per cent owned subsidiary.

Prior year movements

On December 23, 2016, the Company received €78.103.000 from Iberia representing a distribution out of share premium which has been recognised against the cost of investment.

Notes to the financial statements continued

8. EQUITY INVESTMENTS IN GROUP COMPANIES continued

8.2 Overview of investments

Information at December 31 on the Group companies, prepared in accordance with International Financial Reporting Standards, is as follows:

	Business activity	Percentage of ownership¹	Capital	Operating profit/(loss)	Profit/(loss) after tax for the year	Other equity	Dividend received during the year	Total shareholders' equity	Net book value €'000
2017
€'000
Iberia	Passenger air transport Passenger	100%	743.420	208.218	250.418	732.286	-	1.726.124	2.463.921
Aer Lingus	air transport Passenger	Indirect³	32.662	269.333	239.074	657.907	-	929.643
Vueling	air transport Holding	Indirect²	29.905	188.294	120.481	111.252	-	261.638
Veloz AERL	company Holding	100%	33	-	60.756	9.739	(31.000)	39.528	20.139
Holding	company Passenger	100%	760.000	1.679	192.090	44.982	(125.000)	872.072	836.000
LEVEL	air transport	100%	3	(7.872)	(6.357)	10.000	-	3.646	10.003
£'000
British	Passenger
Airways	air transport Cargo air	100%	290.000	1.680.000	1.403.000	4.701.000	(420.000)	5.974.000	4.155.398
IAG Cargo	transport Business	100%	-	2.020	1.555	(35)	-	1.520
IAG GBS	services eCommerce	100%	1	(16.517)	(17.977)	172	-	(17.806)
IAG Connect	platform	100%	-	(1.135)	(917)	-	-	(917)
Polish złoty '000
IAG GBS Poland	Business services	1%⁴	-	14.985	15.932	(13.909)	-	2.023
Other Group companies			n/a	n/a	n/a	n/a	n/a	n/a
									7.485.461

1 IAG holds a direct investment of 90,02 per cent in British Airways and a direct investment of 86,45 per cent in Iberia. The remaining indirect investment by IAG is represented by the cross-holdings between British Airways and Iberia.

The Company holds 49,9 per cent of the total nominal share capital and the total number of voting rights in IB Opco Holding, S.L. (and thus, indirectly, in Iberia Líneas Aéreas de España, S.A. Operadora), such stake having almost 100 per cent of the economic rights in these companies. The remaining shares, representing 50,1 per cent of the total nominal share capital and the total number of voting rights belong to a Spanish company incorporated for the purposes of implementing the Iberia nationality structure.

The Company holds 49,9 per cent of the total number of voting rights and 99,65 per cent of the total nominal share capital in British Airways Plc, such stake having almost 100 per cent of the economic rights. The remaining nominal share capital and voting rights, representing 0,35 per cent and 50,1 per cent respectively, correspond to a trust established for the purposes of implementing the British Airways nationality structure.

²IAG holds an indirect investment of 99,50 per cent in Vueling through its subsidiaries Iberia (45,85 per cent) and Veloz (53,65 per cent).

³IAG holds an indirect investment of 100 per cent in Aer Lingus through its subsidiary AERL Holding.

⁴IAG holds a direct investment of 1 per cent in IAG GBS Poland and an indirect investment of 99 per cent through IAG GBS.

IAG holds a direct investment of 100 per cent in IAG Connect Limited.

IAG holds a direct investment of 100 per cent in FLY LEVEL S.L. and FLYLEVEL UK Limited.

British Airways' registered office is at Waterside, PO Box 365, Harmondsworth, London, UB7 0GB, United Kingdom. The main activity of British Airways is the operation of international and domestic air services for the carriage of passengers and cargo. In addition it provides ancillary services, BA Holidays and aircraft maintenance services.

Iberia's registered office is at Calle Martínez Villergas 49, 28027, Madrid, Spain. The main business of Iberia is the operation of international and domestic air services for the carriage of passengers and cargo. In addition it provides ancillary services including aircraft maintenance services.

Notes to the financial statements continued

8. EQUITY INVESTMENTS IN GROUP COMPANIES continued

Veloz's registered office is at Parque de Negocios Mas Blau II Pla de l'Estany 5, 08820 El Prat de Llobregat, Barcelona, Spain. The main business of Veloz consists of the acquisition and holding of shares or equity interests in Vueling, as well as the management and disposition of such equity interests.

IAG Cargo's registered office is at Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, Middlesex, TW6 2JS, United Kingdom. The principal activity of IAG Cargo is commercial sales, support and management services in the provision of air freight on the British Airways, Iberia and Aer Lingus networks.

IAG GBS's registered office is at Waterside (HAA2), PO Box 365, Speedbird Way, Harmondsworth, Middlesex, UB7 0GB, United Kingdom. The principal activity is the provision of business services to the IAG Group.

IAG GBS Poland's registered office is at ul. Opolska 114, 31-323 Kraków, Poland. The principal activity is the provision of business services to the IAG Group.

AERL Holding's registered office is at Waterside (HAA2), PO Box 365, Speedbird Way, Harmondsworth, Middlesex, UB7 0GB, United Kingdom. The principal activity is acquisition and holding of equity interests in Aer Lingus Group DAC and the management and disposition of such equity interests.

FLYLEVEL UK Limited's registered office is at Waterside (HAA2), PO Box 365, Speedbird Way, Harmondsworth, Middlesex, UB7 0GB, United Kingdom. The principal activity is the operation of international air services for the carriage of passengers and cargo, including ancillary services.

FLY LEVEL S.L.'s registered office is at Camino de la Muñoza s/n, El Caserío, Iberia zona Industrial no 2, 28042 Madrid, Spain. The principal activity is passenger air transport.

IAG Connect Limited's registered office is at Dublin Airport, County Dublin, Republic of Ireland. The principal activity is the provision of the Group's inflight eCommerce platform.

In accordance with article 155 of the Spanish Companies Law (Ley de Sociedades de Capital), the Company has duly notified the abovementioned subsidiaries of the acquisitions of its share capital.

8.3 Impairment review

The principal equity investments in Group companies comprise British Airways, Iberia, Veloz (the holding company of Vueling) and AERL Holding (the holding company of Aer Lingus).

Basis for calculating recoverable amount

The recoverable amounts of investments are based on the future cash flows of the related CGUs.

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 reflect all restructuring of the business that has been approved by the Board and which can be executed by Management under existing agreements.

Key assumptions

For each of the CGUs, the key assumptions used in the calculations of recoverable amounts are as follows:

		2017
Per cent	British Airways	Iberia	Veloz	AERL Holding
Lease adjusted operating margin	15	10-14	12-15	15
Average ASK growth per annum	2	8	10	5
Long-term growth rate	2,3	2,0	2,0	2,0
Pre-tax discount rate	8,5	9,8	10,6	7,8

		2016
Per cent	British Airways	Iberia	Veloz	AERL Holding
Lease adjusted operating margin	12-15	8-14	7-15	12-15
Average ASK growth per annum	2	4	7	8
Long-term growth rate	2,5	2,0	2,0	2,0
Pre-tax discount rate	8,5	9,8	10,6	7,8

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 2022. 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.

Notes to the financial statements continued

8. EQUITY INVESTMENTS IN GROUP COMPANIES continued

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). 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's. It is derived from the weighted average cost of capital (WACC). The WACC takes into consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by airline investors and the cost of debt is broadly based on the Group's interest-bearing borrowings. CGU specific risk is incorporated by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects the timing of future tax flows.

Summary of results

No impairment of the Company's investments was considered necessary in 2017 or 2016. Additional sensitivities have been considered for each CGU. No reasonable possible change in the key assumptions for any of the CGUs would cause the carrying amounts of the investments to exceed the recoverable amounts.

9. FINANCIAL INSTRUMENTS

9.1 Financial assets

Details of the Company's financial assets at December 31, 2017 and December 31, 2016 by nature and classification for measurement purposes is as follows:

At December 31, 2017	Loans and receivables	Assets at fair value through profit or loss	Available-for sale	Total
Non-current assets
Loan receivable from Group company (note 16.1)	179.720	-	-	179.720
Investments in other equity instruments (note 9.1.3)	-	-	605	605
Other financial assets	2.351	-	-	2.351
	182.071	-	605	182.676
Current assets
Trade and other receivables (note 9.1.1)	97.909	-	-	97.909
Loan receivable from Group company (note 16.1)	2.814	-	-	2.814
Derivatives	-	9.139	-	9.139
Cash and cash equivalents (note 10)	342.567	-	-	342.567
	443.290	9.139	-	452.429

At December 31, 2016	Loans and receivables	Assets at fair value through profit or loss	Available-for sale	Total
Non-current assets
Loan receivable from Group company (note 16.1)	991.494	-	-	991.494
Other financial assets	22	-	-	22
	991.516	-	-	991.516
Current assets
Trade and other receivables (note 9.1.1)	68.361	-	-	68.361
Loan receivable from Group company (note 16.1)	2.903	-	-	2.903
Current investments (note 9.1.2)	70.010	-	-	70.010
Cash and cash equivalents (note 10)	538.404	-	-	538.404
	679.678	-	-	679.678

Notes to the financial statements continued

9. FINANCIAL INSTRUMENTS continued

9.1.1 Trade and other receivables

The breakdown of trade and other receivables at December 31 is as follows:

	2017	2016
Current
Receivables from Group companies (note 16.1)	93.206	65.483
Other receivables	4.703	2.878
	97.909	68.361

9.1.2 Current investments

The breakdown of current investments at December 31 is as follows:

	2017	2016
Current
Interest-bearing deposits	-	70.010
	-	70.010

9.1.3 Non-current investments in other equity instruments.

The breakdown of non-current investments in other equity instruments at December 31 is as follows:

	2017	2016
Cost
Unlisted investments	605	-
	605	-

9.2 Financial liabilities

As at December 31, 2017 the Company held current and non-current financial liabilities amounting to €1.184.629.000 (2016: €934.244.000). The financial liabilities consist of:

At December 31, 2017	Loans and payables	Total
Non-current liabilities
Bond and other marketable securities	918.239	918.239
Group companies (note 16.1)	200.000	200.000
	1.118.239	1.118.239
Current liabilities
Trade and other payables (note 9.2.1)	19.235	19.235
Payables with Group companies (note 16.1)	42.780	42.780
Bond and other marketable securities	4.375	4.375
	66.390	66.390

Notes to the financial statements continued

9. FINANCIAL INSTRUMENTS continued

At December 31, 2016	Loans and payables	Total
Non-current liabilities
Bond and other marketable securities	899.522	899.522
	899.522	899.522
Current liabilities
Trade and other payables (note 9.2.1)	12.850	12.850
Payables with Group companies (note 16.1)	17.497	17.497
Bond and other marketable securities	4.375	4.375
	34.722	34.722

Two senior unsecured bonds convertible into ordinary shares of IAG were issued by the Group in November 2015; €500 million fixed rate 0,25 per cent raising net proceeds of €494 million and due in 2020, and €500 million fixed rate 0,625 per cent raising net proceeds of €494 million and due in 2022. The conversion price for both tranches was set at a premium of 62,5 per cent over the Group's share price on the date of issuance. The Group holds an option to redeem each convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. Upon issue of these convertible instruments, the Company recorded a debt of €883.690.000, corresponding to the present value of future payments of interest and nominal discounted at the rate of a similar convertible bond without a conversion option. At December 31, 2017, the debt value amounts to €922.614.000. The option value was evaluated by deducting the debt value on issue from the total nominal amount and was recorded in Other equity instruments on the Balance sheet.

Prior year movements

In May 2013, the Group issued a €390 million fixed rate convertible bond, raising net proceeds of €386 million, which holds a coupon rate of 1,75 per cent and is convertible into ordinary shares at the option of the holder before or upon maturity in May 2018. The conversion price was set at a premium of 35 per cent on the Group's share price on the date of issuance. The Group held an option to redeem the convertible bond at its principal amount, together with accrued interest, upon fulfilment of certain pre-determined criteria. Upon issue of this convertible instrument, the Company recorded a debt of €312.018.000, corresponding to the present value of future payments of interest and nominal discounted at the rate of a similar convertible bond without a conversion option. At December 31, 2015, the debt value amounted to €349.825.000.

In early 2016 certain bondholders requested conversion of the €390 million fixed rate convertible bond, resulting in the issuance of 929.102 shares. Following the announcement by the Group that it had exercised its option to redeem all of its outstanding €390 million 1,75 per cent convertible bonds, in June 2016 all remaining bondholders exercised their option to exchange their convertible bonds for ordinary shares, resulting in the issuance of 91.981.118 new shares. An accelerated interest charge of €32.476.000 was recognised directly in equity, and on extinguishment of the bond liability a total of €390 million was recognised as share capital and share premium.

9.2.1 Trade and other payables

The breakdown of trade and other payables at December 31 is as follows:

	2017	2016
Current Trade and other payables
Various creditors	5.096	2.629
Payroll accruals	14.139	10.221
	19.235	12.850

Notes to the financial statements continued

9. FINANCIAL INSTRUMENTS continued

9.2.2 Average payment days to suppliers

The information on average period for payment to suppliers in commercial transactions at December 31, 2017 is as follows:

Days	2017	2016
Average days for payment to suppliers	45	57
Ratio of transactions paid	46	59
Ratio of transactions outstanding for payment	31	21

	2017	2016
Total payments made	69.598	44.026
Total payments outstanding	2.461	2.657

9.3 Short term provisions

The provision as at December 31 is as follows:

	January 1	Exchange adjustment	Additions	Utilised during the year	Released of unused amounts	December 31
Restructuring provision	(143)	5	-	113	25	-
	(143)	5	-	113	25	-

10. CASH AND CASH EQUIVALENTS

The cash and cash equivalents as at December 31 is as follows:

	2017	2016
Cash at bank	207.991	328.402
Cash equivalents	134.576	210.002
	342.567	538.404

At December 31, 2017 and 2016, the Company had no outstanding bank overdrafts.

There are no restrictions for the disposal of these amounts.

Notes to the financial statements continued

11. EQUITY – CAPITAL AND RESERVES

11.1 Share capital

At December 31, 2017, the share capital of the Company amounts to 1.028.994.371,50 euros, divided into 2.057.989.294 ordinary shares of the same class and series and with a nominal value of 0,50 euro each, fully subscribed and paid.

Details of shareholders and their equity at December 31 is as follows:

Per cent	2017	2016
Significant shareholders:
Qatar Airways (Q.C.S.C.)	20,739	20,010
Capital Research and Management Company	10,378	9,967
Europacific Growth Fund	5,215	5,032
BlackRock Inc	3,235	3,105
Invesco Limited	2,059	2,007
Lansdowne Partners International Limited	2,032	2,749
Standard Life Investments (Holdings) Limited	-	5,875
Other shareholders	56,342	51,255
	100	100

The share capital and premium for the Company is as follows:

	Number of shares	Ordinary shares	Share premium
	'000s	€'000	€'000
At December 31, 2016	2.132.989	1.066.494	6.103.978
Capital reductions	(75.000)	(37.500)	-
Compensation of prior year losses1	-	-	(82.185)
Transaction cost related to bond conversion	-	-	9
At December 31, 2017	2.057.989	1.028.994	6.021.802

¹Offset of prior years' losses against share premium.

11.2 Reserves and prior year results

Details of any movements through reserves for the years to December 31 is as follows:

	January 1	Appropriation of prior year profit	Compensation of prior year losses	Vesting of share based payments	Conversion of bond	Dividend	Cancellation of treasury shares	Redeemed capital reserve	December 31
2017 Legal reserve	123.274	55.922	-	-	-	-	-	-	179.196
Other reserve	(82.515)	270.048	-	1.038	-	(261.594)	(501.226)	37.500	(536.749)
Prior year losses	(82.185)	-	82.185	-	-	-	-	-	-
	(41.426)	325.970	82.185	1.038	-	(261.594)	(501.226)	37.500	(357.553)
2016 Legal reserve	82.074	41.200	-	-	-	-	-	-	123.274
Other reserve	(102.687)	117.919	-	(36.380)	44.656	(106.023)	-	-	(82.515)
Prior year losses	(132.530)	-	50.345	-	-	-	-	-	(82.185)
	(153.143)	159.119	50.345	(36.380)	44.656	(106.023)	-	-	(41.426)

Notes to the financial statements continued

11. EQUITY – CAPITAL AND RESERVES continued

According to the Spanish Companies Law, the legal reserve is not distributable to shareholders until it exceeds 20 per cent of the share capital, and may only be used in the case that no other reserves are available to offset losses. This reserve may also be used to increase the share capital in excess of 10 per cent of the increased capital stock.

As permitted by the Spanish Companies law, the Company may decrease its share capital without granting its creditors the right of objection legally contemplated in connection with such capital reduction if it records from unrestricted reserves a reserve for redeemed capital for an amount equal to the nominal value of the cancelled shares. This reserve can only be used if the same requirements as those applicable to the reduction of share capital are met.

11.3 Equity – valuation reserve

A breakdown of movements through the valuation reserve for the years to December 31 is as follows:

	January 1	Valuation adjustment	December 31
2017
Currency translation differences	770	(1.107)	(337)
	770	(1.107)	(337)
2016
Currency translation differences	5.068	(4.298)	770
	5.068	(4.298)	770

The currency differences include the impact of converting the functional currency of the UK branch into the Company's presentation currency.

11.4 Treasury shares

The Company has authority to acquire its own shares, subject to specific conditions. The treasury shares balance consists of shares held directly by the Company. During the year to December 31, 2017 the Company purchased directly 74.999.449 shares, which were held as treasury shares, as part of its €500.000.000 share buyback programme launched in March 2017 (see note 11.1). These shares were bought at a weighted average price of €6,67 per share. On completion of the programme these treasury shares were cancelled. At December 31, 2017 the Company held 9.941.000 shares (2016: 12.474.000) which represents 0,49 per cent of the issued share capital of the Company.

In February 2018, the Group also announced its intention to carry out a €500 million share buyback programme during the course of 2018 as part of its corporate finance strategy to return cash to shareholders while reinvesting in the business and managing leverage.

	January 1	Purchase of treasury shares	Cancellation of treasury shares	Share-based payment scheme vesting	December 31
2017
Treasury shares	(95.335)	(500.000)	500.000	18.598	(76.737)
	(95.335)	(500.000)	500.000	18.598	(76.737)
2016
Treasury shares	(112.399)	(24.786)	-	41.850	(95.335)
	(112.399)	(24.786)	-	41.850	(95.335)

11.5 Other equity instruments

The detail of balances related to other equity instruments at December 31 is as follows:

	January 1	Equity instruments movement for the year	December 31
2017
Cost of share-based payments (note 17)	154.070	32.303	186.373
Vesting of share-based payment	(82.278)	(32.166)	(114.444)
Equity portion of convertible bond issue (note 9.2)	100.938	-	100.938
	172.730	137	172.867
2016
Cost of share-based payments (note 17)	118.566	35.504	154.070
Vesting of share-based payment	(45.981)	(36.297)	(82.278)
Equity portion of convertible bond issue (note 9.2)	172.822	(71.884)	100.938
	245.407	(72.677)	172.730

Notes to the financial statements continued

12. TAXES

12.1 Current taxes

The detail of balances related to tax assets and liabilities at December 31 is as follows:

	2017	2016
Other debt with public administrations:
Current tax receivable	(192.860)	(122.910)
Social security payable	8.586	10.456
Value added tax receivable	(2.326)	(2.848)
Withholding tax payable on interim dividend	47.477	43.262
	(139.123)	(72.040)

The reconciliation of accounting profit to taxable profit is as follows:

	2017	2016
Profit for the year from continuing operations	596.469	559.221
Current tax	(11.032)	(6.597)
Deferred tax	(847)	(97)
Adjustments in respect of prior years	2.849	(5.240)
Profit before tax	587.439	547.287

Permanent differences	(635.923)	(574.123)
Timing differences	6.022	2.218
Taxable loss	(42.462)	(24.618)

The reconciliation between the accounting profit and tax credit is as follows:

			2017			2016
	Total	Spain	UK	Total	Spain	UK

Profit before tax	587.439	587.100	339	547.287	540.618	6.669
Tax at the standard rates in Spain and the UK	(146.841)	(146.774)	(67)	(136.488)	(135.154)	(1.334)
Permanent differences	158.720	158.980	(260)	143.182	143.530	(348)
Adjustment in respect of prior years	(2.849)	(1.719)	(1.130)	5.240	6.137	(897)

Tax credit/(charge)	9.030	10.487	(1.457)	11.934	14.513	(2.579)

Notes to the financial statements continued

12. TAXES continued

Income and expenses recognised directly in reserves is as follows:

Income and expenses recognised directly in reserves
	2017				2016
Total	Spain	UK	Total	Spain	UK

(256.602)	(287.166)	30.564	(99.023)	(62.727)	(36.296)
65.678	71.791	(6.113)	22.941	15.682	7.259
(63.815)	(71.791)	7.976	(18.608)	(10.434)	(8.174)
(124)	-	(124)	38	-	38
					(877)
	1.739	-		1.739 4.371	5.248

From January 1, 2015 onwards the Spanish companies IAG, Vueling, Veloz, Avios Spanish branch, IAG GBS Spanish branch and IAG Cargo Spanish branch filed consolidated tax returns as part of the Spanish tax unity (0061/15, pursuant to title VII, Chapter VI of the Spanish Corporate Income Tax Law set forth in the Law 27/2014 of 27 November 2014). FLY LEVEL S.L. also joined the tax unity on 7 November 2017. IAG will be responsible for filing consolidated tax returns with these other companies that belong to this tax unity.

As at December 31, 2017 the corporation tax receivables balance is €192.900.000 (2016: €122.900.000), of which €185.200.000 is due from the Spanish Tax Authority (2016: €117.700.000), nil is due from other companies of the UK tax group (2016: €1.200.000) and €7.700.000 is due from other companies of the IAG Spanish tax unity (2016: €4.000.000).

Under prevailing tax regulations, tax returns may not be considered final until they have either been inspected by tax authorities or until the four-year inspection period has expired. In December 2015 the Spanish Tax Authority opened audits into all corporate income tax, VAT and withholding taxes for which the Company is liable, covering the preceding four years. The Company's directors currently consider that €600.000 tax contingencies (2016: €600.000) arise as a result of potentially varying interpretations of the tax legislation applicable to the Company's transactions.

12.1.2 Taxable loss

The taxable loss for the year to December 31, arises between the UK and Spain as follows:

			2017			2016
	Total	Spain	UK	Total	Spain	UK
Profit before tax	587.439	587.100	339	547.287	540.618	6.669
Permanent differences	(635.923)	(635.923)	-	(595.116)	(595.116)	-
Timing differences	6.022	-	6.022	2.218	-	2.218
Taxable loss	(42.462)	(48.823)	6.361	(45.611)	(54.498)	8.887

12.2 Deferred tax asset

The detail and movements of balances related to deferred tax assets at December 31 is as follows:

		Variations reflected in
	January 1	Income statement	Equity	Exchange difference	December 31
2017
Temporary differences on share-based payments	5.290	648	958	(492)	6.404
	5.290	648	958	(492)	6.404
2016
Temporary differences on share-based payments	9.906	443	(3.863)	(1.196)	5.290
	9.906	443	(3.863)	(1.196)	5.290

Notes to the financial statements continued

12. TAXES continued

The deferred tax asset has been booked at the UK tax rate of 19 per cent (2016: 19 per cent).

12.3 Deferred tax liability

The deferred tax liability balance, related to temporary differences on unremitted earnings was €3.000.000 (2016: €3.000.000) which was booked at the Spanish tax rate of 25 per cent (2016: 25 per cent).

12.4 Unrecognised tax losses

The Company has €31,8 million of tax losses and other temporary differences that arose in Spain in 2014 before the tax unity was formed. These are not recognised.

13. INCOME AND EXPENSES

13.1 Revenue

The Company has a sole activity as described in note 1, which is the acquisition, ownership, management and disposal of shares or other equity interests in other companies and provision of management services to those companies. The distribution of management service revenue for the year to December 31, from continuing operations by geographical segments can be represented by the following information:

	2017	2016
Revenue by area of geographical sale:
UK	65.425	66.843
	65.425	66.843

13.2 Finance income and costs

The breakdown of finance income and cost is as follows:

	2017	2016
Finance income
Receivable from third parties	97	250
Receivable from debt with Group companies and associates	2.164	7.467
	2.261	7.717
Finance costs
Payable on debt with Group companies and associates	(2.567)	-
Payable interest on convertible bond and other securities payables	(23.092)	(33.761)
Payable to third parties	(2.391)	(1.096)
	(28.050)	(34.857)

Notes to the financial statements continued

13. INCOME AND EXPENSES continued

13.3 Employee costs

The breakdown of personnel expenses is as follows:

	2017	2016
Wages, salaries and other costs
Salaries and wages	32.531	26.535
Cost of share-based payments (note 17)	13.059	12.584

Social security costs
Social security	4.916	4.607
Other social costs	3.301	3.527
	53.807	47.253

The Company offers a defined contribution pension plan to all IAG employees. The contributions paid into the defined contribution scheme during the year to December 31, 2017 totalled €3.301.000 (2016: €3.527.000), and have been recognised in other social costs.

14. FOREIGN CURRENCY

IAG is a Spanish Company with a UK branch which has a pound sterling functional currency. The breakdown of assets and liabilities of the UK branch, all denominated in pound sterling, is as follows:

Pound sterling '000	2017	2016
Assets
Intangible assets	1.108	28
Investment in other equity instruments	535	-
Current tax receivable	-	1.159
Deferred tax asset	10.025	8.624
Amounts owed by Group companies	84.937	51.632
Other receivables	11.963	1.327
Cash and cash equivalents	25.177	13.630
	133.745	76.400

Liabilities
Current tax liability	3.813	-
Other taxes and social security	8.676	8.378
Payroll accruals	15.105	10.899
Amounts due from Group companies	29.798	-
	57.392	19.277

Net assets	76.353	57.123

Notes to the financial statements continued

14. FOREIGN CURRENCY continued

The Income statement, all denominated in '000 pound sterling, of the branch is as follows:

Pound sterling '000	2017	2016
Revenue	57.083	44.955
Finance income	170	424
Employee costs	(42.900)	(24.980)
Other costs	(14.159)	(14.677)
Finance costs	(5)	(313)
Profit for the year before tax	189	5.409

15. FINANCIAL RISK MANAGEMENT

The nature of the Company's business model and its ability to pay dividends to shareholders means the Company is primarily exposed to capital and credit risk.

Credit risk

Credit risk arises if a supplier or other counterparty to a financial instrument fails to meet its contractual obligations. The Company is primarily exposed to financial counterparty credit risk by means of money market investments and deposits placed with banks and to a lesser extent accounts receivable. Exposure in this area is mitigated by the fact that all cash investments are subject to the IAG Group Treasury counterparty credit exposure policy which establishes limits and monitors the group wide exposure to banks.

The carrying amount of financial assets represents the maximum exposure to credit risk.

Market risk

The Company undertakes external foreign exchange derivatives trading activity to mitigate the exposure arising from potential dividends received in currencies other currency than the euro.

Liquidity risk

The Company has money market deposits with banks for the purpose of managing liquidity risk exposure. Given the short-term availability of such deposits, a maturity analysis of the Company's financial assets is not considered relevant.

The Company had undrawn borrowing facilities of €100.000.000 with a maturity of one year. Borrowings under this facility are at prevailing EURIBOR rates with an agreed 45 basis points margin. There were no draw downs during the year.

Capital risk

The Company'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 future returns to shareholders.

Notes to the financial statements continued

16. RELATED PARTY TRANSACTIONS

The Company has the following related parties at December 31, 2017:

	Nature of relationship
British Airways Plc	Other Group companies
Iberia Líneas Aéreas de España S.A. Operadora	Other Group companies
Veloz Holdco, S.L.U.	Other Group companies
IAG Cargo Ltd	Other Group companies
Vueling Airlines, S.A.	Other Group companies
IAG GBS Ltd	Other Group companies
IAG GBS Poland sp. z o.o.	Other Group companies
AERL Holding Limited	Other Group companies
Aer Lingus Group DAC	Other Group companies
Avios Group (AGL) Limited	Other Group companies
IAG Connect	Other Group companies
FLY LEVEL S.L.	Other Group companies
FLYLEVEL UK Limited	Other Group companies
Black Rock Inc.	Significant shareholder
Capital Research and Management Company	Significant shareholder
Europacific Growth Fund	Significant shareholder
Invesco Limited	Significant shareholder
Lansdowne Partners International Limited	Significant shareholder
Qatar Airways (Q.C.S.C.)	Significant shareholder
Key management personnel	Directors and Management Committee

16.1 Related entities

The following transactions took place with related parties for the financial years to December 31:

	2017	2016
Revenue from operations
Rendering of services to Group companies	65.425	66.843
Dividend income received from Group companies	635.923	571.145

Purchases of services
Purchases from Group companies	8.291	8.299

Transfer of assets to Group companies	9.647	11.344

Notes to the financial statements continued

16. RELATED PARTY TRANSACTIONS continued

Year end balances

	2017	2016
Receivables from related parties
Amounts owed by Group companies	93.206	65.483
Loan receivable from Group companies	182.534	994.397

Payables to related parties
Amounts owed to Group companies	42.780	17.497
Loan payable to Group companies	200.000	-

Deposits with significant shareholders	-	50.000

Ordinary transactions with Group companies were carried out at an arm's length basis according with the Group's transfer pricing policies. Outstanding balances that relate to trading balances are placed on intragroup accounts with payment terms of 90 days.

Non-current loans owed by Group companies bear market rates of interest in accordance with the intragroup loan agreements.

In 2015, IAG GBS borrowed €3.291.000 from IAG, bearing interest at 0,90 basis points over the 6 month LIBOR rate. Accrued interest receivable for the year was €44.000 (2016: €33.000). The loan is for general treasury management purposes. As at December 31, 2017 the borrowed balance was €2.814.000 which is repayable in 2018.

In 2015, AERL Holding borrowed €804.568.000 from IAG, bearing interest at a rate of 0,90 basis points over the 6 month EURIBOR rate. The purpose of this loan was for consideration and expenses relating to the acquisition of Aer Lingus. During the year, AERL Holding repaid €836.000.000 of the loan principal by issuing ordinary shares for the same amount. In addition, IAG made payments on behalf of AERL Holding of €97.146.000, received a distribution on behalf of AERL Holding of €200.000.000 and received a dividend declared by AERL Holding of €125.000.000. Interest receivable for the year was €1.184.000. As at December 31, 2017 the amount outstanding on the loan was €34.218.000 (2016: €846.927.000), which is repayable in 2021. IAG is also a guarantor for AERL Holding on an external loan of €150.000.000.

In 2013, Veloz borrowed €149.705.000 from the Company for the purpose of the increase in the Group's shareholding in Vueling. The holding was 99,50 per cent at December 31, 2017. Accrued interest receivable for the year was €935.000 (2016: €1.183.000). As at December 31, 2017 the borrowed balance was €145.502.000 (2016: €144.567.000), which is repayable in 2019.

In 2017, the Company borrowed €200.000.000 from Iberia for general corporate purposes, bearing interest at 1,75 basis points over the 6 month euro mid swap rate. Accrued interest payable for the year was €2.567.000. As at December 31, 2017 the borrowed balance was €200.000.000 which is repayable in 2022.

16.2 Board of Directors and Management Committee remuneration

A breakdown of the remuneration received by the Board of Directors and Management Committee for the years to December 31 is as follows:

	2017	2016

Board of Directors
Salaries (fixed and variable)	7.989	5.822
Benefits in kind	755	724
Life insurance policies	17	19
Pension contributions	-	12
	8.761	6.577

Management Committee
Salaries (fixed and variable)	15.344	8.656
Benefits in kind	1.428	1.374
Life insurance policies	21	25
Pension contributions	23	63
	16.816	10.118

The pension obligation outstanding, which represents the transfer value of the accrued pension was nil (2016: nil) for the Board of Directors and €4.405.000 (2016: €4.403.000) for the Management Committee.

Notes to the financial statements continued

16. RELATED PARTY TRANSACTIONS continued

At December 31, 2017 and 2016, no advances or loans had been given to members of the Board of Directors.

The Directors have also confirmed that they hold no positions and carry out no duties in companies with identical, similar or complementary activities to those of the Company, nor do they perform activities on their own behalf or on behalf of third parties that are identical, similar or complementary to those of the Company.

17. SHARE-BASED PAYMENTS

The Company operates share-based payment schemes as part of the total remuneration package provided to employees. These schemes comprise both share option schemes where employees acquire shares at nil cost and share award plans whereby shares are issued to employees at no cost, subject to the achievement by the Group of specified performance targets.

IAG Performance Share Plan

The IAG Performance Share Plan is granted to senior executives and managers of the Group who are most directly involved in shaping and delivering business success over the medium to long term. In 2014, a conditional award of shares was subject to the achievement of a variety of performance conditions, which vest after three years subject to the employee remaining employed by the Group. From 2015, the 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 award made in 2014 vested based 50 per cent on achievement of IAG's TSR performance targets relative to the MSCI European Transportation Index, and 50 per cent based on achievement of earnings per share targets.

The awards made in 2015 to 2017 will vest based one-third on achievement of IAG's TSR performance targets relative to the MSCI European Transportation Index, one-third based on achievement of earnings per share targets, and one-third based on achievement of return on invested capital targets.

IAG Incentive Award Deferral Plan

The IAG Incentive Award Deferral Plan (IADP) is granted to qualifying employees based on performance and service tests. It will be awarded when an incentive award is triggered subject to the employee remaining in employment with the Group for three years after the grant date. The relevant population will receive 50 per cent of their incentive award up front in cash, and the remaining 50 per cent in shares after three years through the IADP.

Share-based payment schemes summary

	Outstanding at January 1, 2017	Granted number	Lapsed number	Vested number	Outstanding at December 31, 2017	Exercisable December 31, 2017
	000s	000s	000s	000s	000s	000s
Incentive Award Deferral Plan	2.394	319	51	770	1.892	-
Performance Share Plan	5.501	2.327	1.288	1.071	5.469	-
	7.895	2.646	1.339	1.841	7.361	-

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 options were granted, used the following weighted average assumptions:

	2017	2016
Weighted average fair value (£)	3,66	2,27
Expected share price volatility (per cent)	35	30
Expected comparator group volatility (per cent)	20	20
Expected comparator correlation (per cent)	65	60
Expected life of options (years)	4,8	4,8
Share price at date of grant (£)	5,46	5,41

Notes to the financial statements continued

17. SHARE-BASED PAYMENTS continued

Volatility was calculated with reference to the Company's weekly share price movement. The expected volatility reflects the assumption that the historical movement is indicative of future trends, which may also not necessarily be the actual outcome. The fair value of 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 Company recognised a share-based payments charge of €13.059.000 for the year to December 31, 2017 (2016: €12.584.000). A credit of €32.303.000 (2016: €35.504.000) representing the total Group charge was recognised in Reserves including the deferred tax asset credit of €958.000 (2016: charge of €3.863.000) and corporation tax recoverable on share vesting of €782.000 (2016: €2.986.000). Group companies are recharged for the grants made to employees of those Group companies.

18. OTHER DISCLOSURES

18.1 Employee numbers

	Number of employees at year end			Average number
Professional category	Men	Women	Total	of employees
2017
Management Committee	8	2	10	10
All other employees	75	55	130	136
	83	57	140	146
2016
Management Committee	8	1	9	9
All other employees	78	49	127	137
	86	50	136	146

There are no employees with a disability greater than 33 per cent.

At December 31, 2017, the Board consisted of 12 people, including 9 men and 3 women (2016: 12 people, including 9 men and 3 women).

18.2 Audit fees

The fees for audit and non-audit services provided by the auditor of the Company's and Group's financial statements, Ernst & Young S.L., is as follows:

	2017	2016

Fees for the audit of the financial statements	557	476
Other audit related services	142	148
All other services	27	33
	726	657

Information on services provided to the Company and its subsidiaries by Ernst & Young S.L. and other network firms is included in the Group's consolidated financial statements.

18.3 Information on environmental issues

The undersigned, as Directors of the Company, hereby state that the accounting records relating to these financial statements do not contain any item of an environmental nature that should be included pursuant to point 5 of the Valuation Standard 4ª Financial Statements, or Section 3 of the Spanish National Chart of Accounts (Royal Decree 1514/2010, of 16 November).

19. POST BALANCE SHEET EVENTS

There have been no post balance sheet events subsequent to the year end that require disclosure in the accounts.

Management report for the year to December 31, 2017

MANAGEMENT REPORT

International Consolidated Airlines Group, known as International Airlines Group or IAG is the parent company of British Airways, Iberia, Vueling, Aer Lingus, IAG Cargo, IAG GBS, LEVEL and IAG Connect. The Group was formed on January 21, 2011 when the merger between British Airways and Iberia was completed. During 2017, the Group incorporated FLY LEVEL S.L., FLYLEVEL UK Limited and IAG Connect Limited, which are 100 per cent owned by IAG.

Business review

IAG is a Spanish registered company with its Board meetings held in Spain. IAG operates a head office through its UK branch in London, with an average staff of 134 (2016: 134) managing key support functions for the Group. The Company's focus is on the Group strategy, synergies, digital and connectivity, and support of finance, legal and communications functions as well as the administration of the Company.

Costs in relation to work carried out for the operating companies of the Group are recharged back to those companies. The Company does not aim to make any substantial profits on such transactions.

It is expected that the IAG Company will remain relatively small within the Group, whilst continuing to provide support to the operating companies where required and providing leadership for the Group strategy.

IAG's mission is to be the leading international airline group. This means we will:

Win the customer through service and value across our global network;
Deliver higher returns to our shareholders through leveraging cost and revenue opportunities across the Group;
Attract and develop the best people in the industry;
Provide a platform for quality international airlines, leaders in their markets, to participate in consolidation; and
Retain the distinct cultures and brands of the individual airlines.

By accomplishing our mission, IAG will help to shape the future of the industry, set new standards of excellence and provide sustainability, security and growth.

IAG's strategic priorities are as follows:

Strengthening a portfolio of world-class brands and operations
Growing global leadership positions
Enhancing the common integrated platform

IAG is committed to creating a supportive and inclusive environment for all employees, as well as to ensuring equal development opportunities. The 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.

Finance review

Income statement

Revenue which is derived from charging the airline companies for the services that IAG provides to them, totalled €65 million for the year to December 31, 2017 (2016: €67 million). Such services cover financial control over treasury policy, treasury support including hedging, financing and refinancing, major capital investments, co-ordination and delivery support of the synergies and general management of the Group. At constant currency revenue in 2017 increased by €4 million predominantly due to recharge of increased employee costs related to the operating companies.

The Company received dividend income from British Airways, Veloz and AERL Holding totalling €636 million during the year (2016: €571 million from British Airways and Veloz).

The Company's expenses are split between employee costs, services received and other operating expenses.

Employee costs for the year are €54 million (2016: €47 million). At constant currency employee costs, excluding costs related to share-based payment schemes have increased by 22 per cent. The increase is due to higher costs related to employee incentive schemes.

The share-based payment charge and related social security costs of €15 million included in employee costs is in line with 2016.

Services received largely relate to supporting the key departments, whilst other expenses reflect the cost of operating the IAG offices and IT costs, as well as the costs supporting the listing across the CNMV and UKLA.

Interest expense in the year on the convertible bonds totalled €25 million. The decrease in finance income relates to interest on loans with Group companies, which, in line with repayment terms, have been outstanding for the whole year. Non-operating expenses in 2017 also includes €15 million of losses on derivatives entered into by the Company not qualifying for hedge accounting.

Profit before tax for the year was €587 million (2016: €547 million).

The taxation credit of €9 million (2016: €12 million) reflects:

the losses surrendered by the Company to IAG's Spanish tax group for payment at the tax rate of 25 per cent,
UK tax on the profits of the Company's UK branch at the tax rate of 19,25 per cent, and
the recognition of the deferred tax asset from the share-based payment charge at the tax rate of 19 per cent.

The profit after tax for the year from continuing operations is €596 million (2016: €559 million).

Balance sheet

The main Balance sheet item is IAG's investment in its subsidiaries. IAG's investments in British Airways and Iberia were created at the time of the merger on January 21, 2011 and amounted to €6.208 million. During 2017, distributions were received from Iberia totalling €84 million which have been recognised against the cost of the investment, as they were paid out of share premium. Additionally, during the year, the majority of the outstanding loan balance between the Company and AERL Holding was capitalised and the Company also made an investment of €10 million into FLY LEVEL S.L. At the year end IAG held an investment of €4.155 million in British Airways, €2.464 million in Iberia, €836 million in AERL Holding, €20 million in Veloz and €10 million in LEVEL, totalling €7.485 million, and also holds the investment in GBS Group, IAG Cargo and IAG Connect.

Prior year movements in investments

During 2016, a distribution was received from Iberia totalling €78 million which was recognised against the cost of the investment.

Treasury shares

During the year, the Company purchased a total of 75 million ordinary shares as part of its €500 million share buyback programme which was launched in March 2017. The programme was part of the Company's corporate finance strategy to return cash to its shareholders while reinvesting in the business and managing leverage. On completion of the programme these treasury shares were cancelled. In 2016, 3,3 million ordinary shares were purchased in order to settle the future vesting of share-based payment plans for a cost of €25 million.

A total number of 2,6 million shares vested during the year in relation to 2014 share-based payment schemes. The total amount of the Company's treasury shares as at December 31, 2017 accounts for 0,49 per cent (2016: 0,58 per cent) of the total issued capital at that date.

Dividends

On October 26, 2017 IAG's Board of Directors approved the distribution in cash of an interim dividend of 12,5 € cents per share.

On February 22, 2018 IAG's Board of Directors proposed a distribution in cash of a final dividend of 14,5 € cents per share. The proposed final dividend is subject to approval at the annual general meeting and is not recognised as a liability at December 31, 2017. The proposed final dividend would be distributed from net profit for the year to December 31, 2017.

Post balance sheet events

Other than the dividend, there have been no post balance sheet events subsequent to the year end that require disclosure in the accounts.

Research and development

The Company does not undertake any research or development activity.

Financial risk management

The nature of the Company's business model and ability to pay dividends to shareholders means the Company is primarily exposed to capital and credit risk. The Company'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 future returns to shareholders.

Principal risks and uncertainties

The Directors of the Company believe that the risks and uncertainties described below are the ones that may have the most significant impact on the day to day operations of IAG as a parent company. These risks are considered by the IAG management team as part of its wider consideration of Group risks under the IAG Enterprise Risk Management framework. The list is not intended to be exhaustive

Failure of a critical IT system

We are dependent on IT systems for most of our key business processes. System controls, disaster recovery and business continuity arrangements exist to mitigate the risk of a critical system failure. The Group will continue to identify world class partners to work with and increase resilience through migration to a hybrid cloud platform.

Financial risk - counterparty credit risk

The Company 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. Exposure in this area is mitigated by the fact that all money market deposits are subject to the IAG Group Treasury counterparty credit policy which establishes limits and monitors the group wide exposure to banks.

Group Governance Structure

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. The governance structure is being extended to other Group airlines. IAG could face a challenge to its ownership and control structure. IAG will continue to engage with the relevant regulatory bodies as appropriate regarding the Group structure.

Non-compliance with key regulation including competition, bribery and corruption law

The Company is exposed to the risk of individual employees' or groups of employees' unethical behaviour resulting in reputational damage, fines or losses. The Company has clear frameworks in place including comprehensive Group-wide policies designed to ensure compliance. There are mandatory training programmes in place to educate employees in these matters.

Compliance professionals specialising in Competition Law legislation support and advise our businesses.

Reputation

As a listed entity in Spain and the United Kingdom, and as owner of British Airways, Iberia, Vueling, Aer Lingus, Avios and LEVEL, the Company is exposed to reputation risk and consequent impact to the Group's brands. This is mitigated through a Disclosure Committee that meets monthly to consider the adequacy and accuracy of external communications. The Company's communications department also works closely with the operating companies to ensure consistency in external communications.

Tax

The Company is exposed to systemic tax risks arising from either changes to tax legislation or a challenge by tax authorities on interpretation of tax legislation. There is a reputational risk that the Group's tax affairs are questioned by the media or other representative bodies. The Group adheres to the Tax Policy approved by the IAG Board and is committed to complying with all tax laws, to acting with integrity in all tax matters and to working openly with tax authorities. Tax risk is managed by the IAG tax department and overseen by the Board through the Audit and Compliance Committee.

ANNUAL CORPORATE GOVERNANCE REPORT

The 2017 Spanish Annual Corporate Governance Report of International Consolidated Airlines Group, S.A., prepared according to Circular 5/2013, of June 12, of the Spanish National Stock Exchange Commission (as amended by Circular 7/2015, of December 22) is part of this Management Report and, from the date of the publication of the 2017 Financial Statements, is available in the Spanish National Stock Exchange Commission website and in the International Consolidated Airlines Group, S.A. website, being incorporated by reference to this report as appropriate.

FORMULATION OF THE INDIVIDUAL FINANCIAL STATEMENTS AND OF THE INDIVIDUAL MANAGEMENT REPORT FOR THE YEAR 2017

The Board of Directors of International Consolidated Airlines Group, S.A., in compliance with the provisions of Article 253 of the Capital Companies Law and of Article 37 of the Commercial Code, proceeded to formulate on February 22, 2018 the Individual Financial Statements and the Individual Management Report of the mentioned company for the year to December 31, 2017, which appear in the attached documents preceding this sheet.

In witness whereof, the members of the Board of Directors of International Consolidated Airlines Group, S.A. signed below on February 22, 2018:

Antonio Vázquez Romero Chairman	William Matthew Walsh Chief Executive Officer




Marc Jan Bolland	Patrick Jean Pierre Cescau




Enrique Dupuy de Lôme Chávarri	James Arthur Lawrence



María Fernanda Mejía Campuzano	Kieran Charles Poynter




Emilio Saracho Rodríguez de Torres	Marjorie Morris Scardino

Lucy Nicola Shaw Alberto Terol Esteban

Risk	Our response to the risk
Passenger and Other revenue recognition, (€20,245 million and €1,643 million, FY16: €19,924 million and €1,621 million) The accounting for passenger revenue is susceptible to management override through the recording of manual journal entries either in the underlying ledgers or as a consolidation journal, the override of IT systems to accelerate revenue recognition, or the manipulation of inputs used to calculate ticket breakage. We consider this to be a risk across all the segments within the Group. The accounting for the Group's frequent flyers programmes, including those recorded in other revenue, is subject to management estimates and assumptions. These assumptions are based on historical experience combined with an understanding of current circumstances. Refer to note 2 of the consolidated financial statements.	Our procedures included the following: We tested the design and operation of the key controls in the passenger revenue processes at each of the Group airlines. We tested the general IT controls to confirm that they were preventative of unauthorised system override. We tested a sample of passenger fickets to ensure that the revenue was recognised in the correct period. We identified and tested material manual postings to r passenger revenue. We validated the inputs into the passenger breakage calculations by re-running key reports and checked the completeness and accuracy of the underlying data. We tested and determined the appropriateness of the assumptions utilised in calculating the fair value and the redemption profile (the number of points expected to be redeemed and the period over which this is expected to occur) of the Group's frequent flyer programmes.
Valuation of British Airways and Iberia's employee obligations (€28,846 million, FY16: €29,492 million) The valuation of these balances requires significant levels of judgement and technical expertise to select appropriate valuation assumptions. Changes in a number of the key assumptions (discount rate, price inflation, salary increases, retirement assumptions and demographic assumptions) can have a material impact on the valuation of the pension obligations. British's Airways APS and NAPS defined benefit pension scheme liabilities amount to €27,666m (2016: €28,412 million) within the net pension deficit of €502m (2016: €2,010 million). Iberia's commitments with employees amount to €1,180 million (2016: €1,080million). Refer to notes 2, 24 and 31 of the consolidated financial statements.	We involved internal pension actuaries to assist in the evaluation of the assumptions used in the valuation of the Group's long term employee obligations. The procedures performed included the following: We understood the key assumptions used and the process followed to develop those. This included a meeting with British Airways' external actuaries. We compared the key inputs and methodologies used to independent sources, current market information and expectations. We compared the assumptions applied to those used in ٠ the prior year and understood the basis for any changes. We independently checked a sample of the scheme ٠ membership data provided to the actuaries to the pension plan membership records We evaluated the independence and qualification of management's external actuaries involved in the valuation process. We assessed the adequacy of the related disclosures.
The assessment of the carrying value of goodwill and acquired indefinite life intangible assets (€2,362 million, FY16: €2,398 million) The annual impairment test of goodwill and indefinite life intangibles within the different Group' Cash Generating Units (CGUs) requires significant judgment in forecasting cash flow projections of each CGU, together with the discount rates, long-term economic growth rates, fuel prices and exchange rates. Changes to these assumptions can have a significant impact on the available headroom and any impairment that may be required, as can assumptions applied when identifying CGUs.	Our procedures included the following: We considered the reasonableness of management's business plans. Specifically, whether fuel price and foreign exchange assumptions are reasonable in light of current market data. We tested the appropriateness of management's key ٠ assumptions. We performed an evaluation of the alignment of long-term growth rates with our view of long- term inflation and GDP growth for the regions in which the different CGUs operate and considered whether discount rates were within acceptable ranges. We involved a valuation specialist to assist in the evaluation of the discount rates used to discount future cash flows in each of the different CGUs.

Risk	Dur response to the risk
Refer to notes 2 and 15 of the consolidated financial statements.	We considered the accuracy of forecasts used in previous. years against actual results. We verified the impairment calculations. Furthermore, we reviewed and challenged management's sensitivity analysis to evaluate whether a reasonable change in the key assumptions for any of the Group's CGUs would cause the carrying amounts to exceed the recoverable amounts. We assessed the appropriateness of the related disclosures.
Valuation of the aircraft maintenance obligations (€1,125 million, FY16: €1,201 million) The Group operates aircraft which are owned or held under finance or operating lease arrangements. Liabilities for maintenance costs are incurred during the term of the lease in respect of aircraft leased under operating leases. These arise from legal and contractual obligations relating to the condition of the aircraft when it is returned to the lessor.	Our procedures included the following: We obtained and inspected the engine, airframe and other asset lease agreements to check the completeness of the liabilities for obligations at the hand back at the end of the lease. We understood the estimation processes and tested management's calculations of maintenance expenses including assessing the appropriateness of the assumptions for the timing of the maintenance work and we compared the valuation of maintenance expenses to
These provisions require complex judgements and estimates including considerations of aircraft utilisation, expected maintenance intervals, future maintenance costs and the aircraft's conditions.	historic invoices, third-party price lists and/or agreed maintenance contracts.
Refer to notes 2 and 24 of the consolidated financial statements.

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. AND SUBSIDIARIES

Consolidated financial statements for the year ended December 31, 2017

Consolidated income statement

				Year to December 31
		Before			Before
		exceptional items	Exceptional	Total	exceptional items	Exceptional	Total
€ million Passenger revenue	Note	2017 20,245	items	2017 20,245	2016 19,924	items	2016 19,924
Cargo revenue		1,084		1,084	1,022		1,022
Other revenue		1,643		1,643	1,621		1,621
Total revenue	3	22,972		22,972	22,567		22,567
Employee costs	4, 7	4,740	248	4,988	4,731	93	4,824
Fuel, oil costs and emissions charges	4	4,610		4,610	4,873	(42)	4,831
Handling, catering and other operating costs		2,700	14	2,714	2,664		2,664
Landing fees and en-route charges		2,151		2,151	2,151		2,151
Engineering and other aircraft costs		1,773	19	1,792	1,701		1,701
Property, IT and other costs		915	7	922	870		870
Selling costs		982		982	896		896
Depreciation, amortisation and impairment	5	1,184		1,184	1,287		1,287
Aircraft operating lease costs	5	888		888	759		759
Currency differences		14		14	100		100
Total expenditure on operations		19,957	288	20,245	20,032	51	20,083
Operating profit	3	3,015	(288)	2,727	2,535	(51)	2,484

Finance costs	8	(225)		(225)	(279)		(279)
Finance income	8	45		45	33		33
(Loss)/profit on sale of property, plant and
equipment and investments		(30)		(30)	67		67
Net gain related to available-for-sale
financial assets	17	7		7	4		4
Share of profits in investments accounted for using the equity method	16	3		3	6		6
Realised losses on derivatives not qualifying
for hedge accounting		(19)		(19)	(7)		(7)
Unrealised (losses)/gains on derivatives not
qualifying for hedge accounting		(14)		(14)	67		67
Net financing (charge)/credit relating to
pensions	31	(28)		(28)	12		12
Net currency retranslation credits/(charges)		27		27	(25)		(25)
Total net non-operating costs		(234)		(234)	(122)		(122)
Profit before tax		2,781	(288)	2,493	2,413	(51)	2,362
Tax	9	(538)	66	(472)	(423)	13	(410)
Profit after tax for the year		2,243	(222)	2,021	1,990	(38)	1,952

Attributable to:
Equity holders of the parent		2,223		2,001	1,969		1,931
Non-controlling interest		20		20	21		21
		2,243		2,021	1,990		1,952

Basic earnings per share (€ cents)	10	106.4		95.8	94.9		93.0
Diluted earnings per share (€ cents)	10	102.8		92.6	90.2		88.5

Consolidated statement of other comprehensive income

		Year to December 31
€ million	Note	2017	2016
Items that may be reclassified subsequently to net profit
Cash flow hedges:
Fair value movements in equity	30	101	(182)
Reclassified and reported in net profit	30	27	793
Available-for-sale financial assets:
Fair value movements in equity	30	9	4
Currency translation differences	30	(146)	(506)
Items that will not be reclassified to net profit
Remeasurements of post-employment benefit obligations	30	739	(1,807)
Total other comprehensive income for the year, net of tax		730	(1,698)
Profit after tax for the year		2,021	1,952
Total comprehensive income for the year		2,751	254

Total comprehensive income is attributable to:
Equity holders of the parent		2,731	233
Non-controlling interest	30	20	21
		2,751	254

Items in the consolidated Statement of other comprehensive income above are disclosed net of tax.

Consolidated balance sheet

		December 31,	December 31,
€ million	Note	2017	2016
Non-current assets Property, plant and equipment	12	11,846	12,227
Intangible assets	15	3,018	3,037
Investments accounted for using the equity method	16	30	29
Available-for-sale financial assets	17	79	73
Employee benefit assets	31		1,028
Derivative financial instruments	26	1,023	169
Deferred tax assets	9	145	526
Other non-current assets	18	521	499
		376	17,588
Current assets		17,038
Non-current assets held for sale	14	–	38
Inventories		432	458
Trade receivables	18	1,494	1,405
Other current assets	18	958	899
Current tax receivable	9	258	228
Derivative financial instruments	26	405	329
Other current interest-bearing deposits	19	3,384	3,091
Cash and cash equivalents	19	3,292	3,337
		10,223	9,785
Total assets		27,261	27,373
Shareholders' equity
Issued share capital	27	1,029	1,066
Share premium	27	6,022	6,105
Treasury shares	28	(77)	(96)
Other reserves	30	115	(1,719)
Total shareholders' equity		7,089	5,356
Non-controlling interest	30	307	308
Total equity		7,396	5,664
Non-current liabilities
Interest-bearing long-term borrowings	22	6,401	7,589
Employee benefit obligations	31	792	2,363
Deferred tax liability	9	531	176
Provisions for liabilities and charges	24	2,113	1,987
Derivative financial instruments	26	114	20
Other long-term liabilities	21	222	238
		10,173	12,373
Current liabilities
Current portion of long-term borrowings	22	930	926
Trade and other payables	20	3,766	3,305
Deferred revenue on ticket sales		4,159	4,145
Derivative financial instruments	26	111	88
Current tax payable	9	179	101
Provisions for liabilities and charges	24	547	771
		9,692	9,336
Total liabilities		19,865	21,709
Total equity and liabilities		27,261	27,373

Consolidated cash flow statement

		Year to December 31
€ million	Note	2017	2016
Cash flows from operating activities
Operating profit after exceptional items		2,727	2,484
Depreciation, amortisation and impairment	5	1,184	1,287
Movement in working capital working		582	83
Increase in trade and other receivables, prepayments, inventories and current assets		(282)	(592)
Increase in trade and other payables, deferred revenue on ticket sales and current liabilities		864	675
Payments related to restructuring	24	(248)	(206)
Employer contributions to pension schemes	31	(899)	(936)
Pension scheme service costs	31	233	196
Provision and other non-cash movements		264	203
Interest paid		(122)	(185)
Interest received		29	37
Tax paid		(237)	(318)
Net cash flows from operating activities		3,513	2,645

Cash flows from investing activities
Acquisition of property, plant and equipment and intangible assets		(1,490)	(3,038)
Sale of property, plant and equipment and intangible assets		306	1,737
Proceeds from sale of investments		17	–
Increase in other current interest-bearing deposits		(432)	(450)
Other investing movements		55	2
Net cash flows from investing activities		(1,544)	(1,749)
Cash flows from financing activities
Proceeds from long-term borrowings		178	1,317
Repayment of borrowings		(148)	(515)
Repayment of finance leases		(825)	(615)
Acquisition of treasury shares	28	(500)	(25)
Distributions made to holders of perpetual securities and other		(21)	(20)
Dividend paid		(512)	(442)
Net cash flows from financing activities		(1,828)	(300)

Net increase in cash and cash equivalents		141	596
Net foreign exchange differences		(186)	(168)
Cash and cash equivalents at 1 January		3,337	2,909
Cash and cash equivalents at year end	19	3,292	3,337

Interest-bearing deposits maturing after more than three months	19	3,384	3,091
Cash, cash equivalents and other interest-bearing deposits	19	6,676	6,428

Consolidated statement of changes in equity

For the year to December 31, 2017

€ million	Issued share capital (note 27)	Share premium (note 27)	Treasury shares (note 28)	Other reserves (note 30)	Retained earnings	Total shareholders' equity	Non controlling interest (note 30)	Total equity
January 1, 2017	1,066	6,105	(96)	(2,671)	952	5,356	308	5,664
Profit for the year	–	–	–	–	2,001	2,001	20	2,021
Other comprehensive income for the year
Cash flow hedges reclassified and reported in net profit:
Passenger revenue	–	–	–	84	–	84	–	84
Fuel and oil costs	–	–	–	(38)	–	(38)	–	(38)
Currency differences	–	–	–	(19)	–	(19)	–	(19)
Net change in fair value of cash flow hedges	–	–	–	101	–	101	–	101
Net change in fair value of available-for-sale financial assets	–	–	–	9	–	9	–	9
Currency translation differences	–	–	–	(146)	–	(146)	–	(146)
Remeasurements of post employment benefit obligations	–	–	–	–	739	739	–	739
Total comprehensive income for the year	–	–	–	(9)	2,740	2,731	20	2,751
Cost of share-based payments	–	–	–	–	34	34	–	34
Vesting of share-based payment schemes	–	–	19	–	(33)	(14)	–	(14)
Acquisition of treasury shares	–	–	(500)	–	–	(500)	–	(500)
Dividend	–	–	–	–	(518)	(518)	–	(518)
Cancellation of share capital	(37)	–	500	37	(500)	–	–	–
Dividend of a subsidiary	–	–	–	–	–	–	(1)	(1)
Transfer in Company reserves	–	(83)	–	–	83	–	–	–
Distributions made to holders of
perpetual securities	–	–	–	–	–	–	(20)	(20)
December 31, 2017	1,029	6,022	(77)	(2,643)	2,758	7,089	307	7,396

Consolidated statement of changes in equity

For the year to December 31, 2016

€ million	Issued share capital (note 27)	Share premium (note 27)	Treasury shares (note 28)	Other reserves (note 30)	Retained earnings	Total shareholders' equity	Non controlling interest (note 30)	Total equity
January 1, 2016	1,020	5,867	(113)	(2,708)	1,160	5,226	308	5,534
Profit for the year	–	–	–	–	1,931	1,931	21	1,952
Other comprehensive income for the year
Cash flow hedges reclassified and reported in net profit:
Passenger revenue	–	–	–	(57)	–	(57)	–	(57)
Fuel and oil costs	–	–	–	918	–	918	–	918
Currency differences	–	–	–	(68)	–	(68)	–	(68)
Net change in fair value of cash flow hedges	–	–	–	(182)	–	(182)	–	(182)
Net change in fair value of available-for-sale financial assets	–	–	–	4	–	4	–	4
Currency translation differences	–	–	–	(506)	–	(506)	–	(506)
Remeasurements of post employment benefit obligations	–	–	–	–	(1,807)	(1,807)	–	(1,807)
Total comprehensive income for the year	–	–	–	109	124	233	21	254
Cost of share-based payments	–	–	–	–	35	35	–	35
Vesting of share-based payment schemes	–	–	42	–	(73)	(31)	–	(31)
Acquisition of treasury shares	–	–	(25)	–	–	(25)	–	(25)
Dividend	–	(106)	–	–	(339)	(445)	–	(445)
Issue of ordinary shares related to
conversion of convertible bond	46	344	–	(72)	45	363	–	363
Dividend of a subsidiary	–	–	–	–	–	–	(1)	(1)
Distributions made to holders of
perpetual securities	–	–	–	–	–	–	(20)	(20)
December 31, 2016	1,066	6,105	(96)	(2,671)	952	5,356	308	5,664

Notes to the consolidated financial statements

For the year to December 31, 2017

1. Background and general information

International Consolidated Airlines Group S.A. (hereinafter 'International Airlines Group', 'IAG' or the 'Group') is a leading European airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora (hereinafter 'British Airways' and 'Iberia' respectively) completed a merger transaction becoming the first two airlines of the Group. Vueling Airlines S.A. ('Vueling') was acquired on April 26, 2013, and Aer Lingus Group Plc ('Aer Lingus') on August 18, 2015. A list of the subsidiaries of the Group is included in the Group investments section.

IAG shares are traded on the London Stock Exchange's main market for listed securities and also on the stock exchanges of Madrid, Barcelona, Bilbao and Valencia (the 'Spanish Stock Exchanges'), through the Spanish Stock Exchanges Interconnection System (Mercado Continuo Español).

2 Significant accounting policies

Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union (IFRSs as endorsed by the EU). The consolidated financial statements are rounded to the nearest million unless otherwise stated. These financial statements have been prepared on a historical cost convention except for certain financial assets and liabilities, including derivative financial instruments and 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. In order to provide additional information on the nature of non-operating items included in the Income statement, the Group has included an additional line to separate the unrealised movements on open derivatives from realised gains and losses.

The Group's financial statements for the year to December 31, 2017 were authorised for issue, and approved by the Board of Directors on February 22, 2018.

The Directors have considered the business activities, the Group's principal risks and uncertainties, and the Group's financial position, including cash flows, liquidity position and available committed facilities. The Directors consider that the Group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial statements.

Consolidation

The Group financial statements include the financial statements of the Company and its subsidiaries, each made up to December 31, together with the attributable share of results and reserves of associates and joint ventures, adjusted where appropriate to conform to the Group's accounting policies.

Subsidiaries are consolidated from the date of their acquisition, which is the date on which the Group obtains control and continue to be consolidated until the date that such control ceases. Control exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The Group applies the acquisition method to account for business combinations. The consideration paid is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries that are not held by the Group and are presented separately within equity in the consolidated Balance sheet. Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the Income statement.

Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and liabilities assumed.

All intra-group account balances, including intra-group profits, are eliminated in preparing the consolidated financial statements.

Segmental reporting

Operating segments are reported in a manner consistent with how resource allocation decisions are made by the chief operating decision-maker. The chief operating decision-maker, who is responsible for resource allocation and assessing performance of the operating segments, has been identified as the IAG Management Committee.

Foreign currency translation

a Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the functional currency, being the currency of the primary economic environment in which the entity operates. In particular, British Airways and Avios have a functional currency of pound sterling. The Group's consolidated financial statements are presented in euros, which is the Group's presentation currency.

2 Significant accounting policies continued

b Transactions and balances

Transactions in foreign currencies are initially recorded in the functional currency using the rate of exchange prevailing on the date of the transaction. Monetary foreign currency balances are translated into the functional currency at the rates ruling at the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at balance sheet exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income statement, except where hedge accounting is applied. Foreign exchange gains and losses arising on the retranslation of monetary assets and liabilities classified as non-current on the Balance sheet are recognised within 'Net currency retranslation credits/(charges)' in the Income statement. All other gains and losses arising on the retranslation of monetary assets and liabilities are recognised in operating profit.

c Group companies

Property, plant and equipment

Property, plant and equipment is held at cost. The Group has a policy of not revaluing property, plant and equipment. Depreciation is calculated to write off the cost less the estimated residual value on a straight-line basis, over the economic life of the asset. Residual values, where applicable, are reviewed annually against prevailing market values for equivalently aged assets and depreciation rates adjusted accordingly on a prospective basis.

a Capitalisation of interest on progress payments

Interest attributed to progress payments, 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.

b Fleet

All aircraft are stated at the fair value of the consideration given after taking account of manufacturers' credits. Fleet assets owned or held on finance leases are depreciated at rates calculated to write down the cost to the estimated residual value at the end of their planned operational lives (which is the shorter of their useful life or lease term) on a straight-line basis. Depreciation rates are specific to aircraft type, based on the Group's fleet plans, within overall parameters of 23 years and 5 per cent residual value for shorthaul aircraft and 25 years and 5 per cent residual value for longhaul aircraft.

Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of five years and the remaining economic life of the aircraft.

Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as property, plant and equipment and generally depreciated in line with the fleet to which they relate.

Major overhaul expenditure, including replacement spares and labour costs, is capitalised and amortised over the average expected life between major overhauls. All other replacement spares and other costs relating to maintenance of fleet assets (including maintenance provided under 'pay-as-you-go' contracts) are charged to the Income statement on consumption or as incurred respectively.

c Other property, plant and equipment

Provision is made for the depreciation of all property, plant and equipment. Property, with the exception of freehold land, is depreciated over its expected useful life over periods not exceeding 50 years, or in the case of leasehold properties, over the duration of the lease if shorter, on a straight-line basis. Equipment is depreciated over periods ranging from 4 to 20 years.

d Leased assets

Where assets are financed through finance leases, under which substantially all the risks and rewards of ownership are transferred to the Group, the assets are treated as if they had been purchased outright. The amount included in the cost of property, plant and equipment represents the aggregate of the capital elements payable during the lease term. The corresponding obligation, reduced by the appropriate proportion of lease payments made, is included in borrowings.

The amount included in the cost of property, plant and equipment is depreciated on the basis described in the preceding paragraphs on fleet and the interest element of lease payments made is included as an interest expense in the Income statement.

Total minimum payments, measured at inception, under all other lease arrangements, known as operating leases, are charged to the Income statement in equal annual amounts over the period of the lease. In respect of aircraft, certain operating lease arrangements allow the Group to terminate the leases after a limited initial period, without further material financial obligations. In certain cases the Group is entitled to extend the initial lease period on predetermined terms; such leases are described as extendable operating leases.

In determining the appropriate lease classification, the substance of the transaction rather than the form is considered. Factors considered include but are not limited to the following: whether the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at the price that is sufficiently lower than the fair value on exercise date; the lease term is for the major part of the economic life of the asset; and the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

Intangible assets

a Goodwill

Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration paid over the net fair value of the identifiable assets and liabilities of the acquiree. Where the net fair value of the identifiable assets and liabilities of the acquiree is in excess of the consideration paid, a gain on bargain purchase is recognised immediately in the Income statement.

For the purpose of assessing impairment, goodwill is grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Goodwill is tested for impairment annually and whenever indicators exist that the carrying value may not be recoverable.

b Brands

Brands arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. Long established brands that are expected to be used indefinitely are not amortised but assessed annually for impairment.

c Customer loyalty programmes

Customer loyalty programmes arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. A customer loyalty programme with an expected useful life is amortised over the expected remaining useful life. Established customer loyalty programmes that are expected to be used indefinitely are not amortised but assessed annually for impairment.

d Landing rights

Landing rights acquired in a business combination are recognised at fair value at the acquisition date. Landing rights acquired from other airlines are capitalised at cost.

Capitalised landing rights based outside the EU are amortised on a straight-line basis over a period not exceeding 20 years. Capitalised landing rights based within the EU are not amortised, as regulations provide that these landing rights are perpetual.

e Contract based intangibles

Contract based intangibles acquired in a business combination are recognised initially at fair value at the acquisition date and amortised over the remaining life of the contract.

f Software

The cost to purchase or develop computer software that is separable from an item of related hardware is capitalised separately and amortised on a straight-line basis generally over a period not exceeding five years, with certain specific software developments amortised over a period of up to 10 years.

g Emissions allowances

Purchased emissions allowances are recognised at cost. Emissions allowances are not revalued or amortised but are tested for impairment whenever indicators exist that the carrying value may not be recoverable.

Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the value by which the asset's carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less cost to sell and value-in-use. Non-financial assets other than goodwill that were subject to an impairment are reviewed for possible reversal of the impairment at each reporting date.

a Property, plant and equipment

The carrying value is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable and the cumulative impairment losses are shown as a reduction in the carrying value of property, plant and equipment.

b Intangible assets

Intangible assets are held at cost and are either amortised on a straight-line basis over their economic life, or they are deemed to have an indefinite economic life and are not amortised. Indefinite life intangible assets are tested annually for impairment or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable.

Investments in associates and joint ventures

An associate is an undertaking in which the Group has a long-term equity interest and over which it has the power to exercise significant influence. Where the Group cannot exercise control over an entity in which it has a shareholding greater than 51 per cent, the equity interest is treated as an associated undertaking.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.

Investments in associates and joint ventures are accounted for using the equity method, and initially recognised at cost. The Group's interest in the net assets of associates and joint ventures is included in Investments accounted for using the equity method in the Balance sheet and its interest in their results is included in the Income statement, below operating result. The attributable results of those companies acquired or disposed of during the year are included for the periods of ownership.

2 Significant accounting policies continued

Financial instruments

a Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets including listed and unlisted investments, excluding interests in associates and joint ventures. 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.

b Other interest-bearing deposits

Other interest-bearing deposits, principally comprising funds held with banks and other financial institutions, are carried at amortised cost using the effective interest method.

c Derivative financial instruments and hedging activities

Derivative financial instruments, comprising interest rate swap agreements, foreign exchange derivatives and fuel hedging derivatives (including options, swaps and futures) are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss arising from remeasurement depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged (as detailed below under cash flow hedges). The 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.

d Cash flow hedges

Changes in the fair value of derivative financial instruments are reported in the Income statement, 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, are recorded in equity. Gains and losses recorded in equity are reflected in the Income statement when either the hedged cash flow impacts the Income statement or the hedged item is no longer expected to occur.

Certain loan repayment instalments denominated in US dollars, euros, Japanese yen and Chinese yuan are designated as cash flow hedges of highly probable future foreign currency revenues. Exchange differences arising from the translation of these loan repayment instalments are recorded in equity and subsequently reflected in the Income statement when either the future revenue impacts income or its occurrence is no longer expected to occur.

e Convertible debt

Convertible bonds are classified as compound instruments, consisting of a liability and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt, and is subsequently recorded at an amortised cost basis using the effective interest method until extinguished on conversion or maturity of the bonds, and is recognised within Interest-bearing borrowings. The difference between the proceeds of issue of the convertible bond and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in Equity portion of convertible bond in Other reserves and is not subsequently remeasured.

Issue costs are apportioned between the liability and equity components of the convertible bonds where appropriate based on their relative carrying values at the date of issue. The portion relating to the equity component is charged directly against equity.

The interest expense on the liability component is calculated by applying the effective interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this value and the interest paid is added to the carrying amount of the liability.

f Impairment of financial assets

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.

Employee benefit plans

a Pension obligations

The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior years.

Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The Group's net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years. The benefit is discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate is the yield at the balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations approximating those of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the net obligation calculation results in an asset for the Group, the recognition of an asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan ('the asset ceiling'). The fair value of the plan assets is based on market price information and, in the case of quoted securities, is the published bid price. The fair value of insurance policies which exactly match the amount and timing of some or all benefits payable under the scheme are deemed to be the present value of the related obligations. Longevity swaps are measured at their fair value.

Current service costs are recognised within employee costs in the year in which they arise. Past service costs are recognised in the event of a plan amendment or curtailment, or when the Group recognises related restructuring costs or severance obligations. The net interest is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the period to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest and other expenses related to the defined benefit plans are recognised in the Income statement. Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling (excluding interest) and the return on plan assets (excluding interest), are recognised immediately in Other comprehensive income. Remeasurements are not reclassified to the Income statement in subsequent periods.

b Severance obligations

Severance obligations are recognised when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises a provision for severance payments when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without realistic possibility of withdrawal, or providing severance payments as a result of an offer made to encourage voluntary redundancy.

Other employee benefits are recognised when there is deemed to be a present obligation.

Taxation

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.

Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
In respect of taxable temporary differences associated with investments in subsidiaries or associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and
Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised.

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.

2 Significant accounting policies continued

Inventories

Inventories, including aircraft expendables, are valued at the lower of cost and net realisable value. Such cost is determined by the weighted average cost method. Inventories include mainly aircraft spare parts, repairable aircraft engine parts and fuel.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits with any qualifying financial institution repayable on demand or maturing within three months of the date of acquisition and which are subject to an insignificant risk of change in value.

Share-based payments

The Group operates a number of equity-settled, share-based payment plans, under which the Group awards equity instruments of the Group for services rendered by employees. The fair value of the share-based payment plans is measured at the date of grant using a valuation model provided by external specialists. The resulting cost, as adjusted for the expected and actual level of vesting of the plan, is charged to the Income statement over the period in which the options vest. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions, and accordingly the number of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the Income statement with a corresponding entry in equity.

Provisions

Provisions are made when an obligation exists for a present liability in respect of a past event and where the amount of the obligation can be reliably estimated.

Employee leaving indemnities and other employee provisions are recorded for flight crew who, meeting certain conditions, have the option of being placed on reserve or of taking early retirement. The Group is obligated to remunerate these employees until they reach the statutory retirement age. The calculation is performed by independent actuaries using the projected unit credit method.

Other employee related provisions are recognised for direct expenditures of business reorganisation such as severance payments (restructuring provisions) where plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken at the balance sheet date.

Revenue recognition

Passenger and cargo revenue is recognised when the transportation service has been provided. Passenger tickets net of discounts are recorded as deferred revenue on ticket sales in current liabilities 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.

Customer loyalty programmes

The Group operates five loyalty programmes: Executive Club, Iberia Plus, Avios, Vueling Club and Aer Club. The customer loyalty programmes award travellers Avios points to redeem for various rewards, primarily redemption travel, including flights, hotels and car hire. 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 difference between the consideration received and the amount deferred is recognised on the issuance of the points. 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 awards for which points can be redeemed.

Exceptional items

Exceptional items are those that in management's view need to be separately disclosed by virtue of their size or incidence. The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of business combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale, disposal or impairment of an investment in a business.

Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash items such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step acquisition losses.

Critical accounting judgements, estimates and assumptions

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These judgements, estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results in the future may differ from judgements and estimates upon which financial information has been prepared. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised 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.

Estimates

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows.

a Employee benefit obligations, employee leaving indemnities, other employee related restructuring provisions

The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined using actuarial valuations. Actuarial valuations involve making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these schemes, such assumptions are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in notes 24 and 31. The Group determines the assumptions to be adopted in discussion with qualified actuaries. In respect of future pension increases in the Airways Pension Scheme, following legal proceedings the Group has appealed the initial judgement that the Trustee has the power to award discretionary increases to pensions in payment in the 2013/14 scheme year. Further information on these proceedings is disclosed in note 32. The sensitivity to changes in pension increase assumptions is disclosed in note 31.

Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected direct expenditures of reorganisation based on plans which are sufficiently detailed and advanced.

b Revenue recognition

At December 31, 2017 the Group recognised €4,159 million in respect of deferred revenue on ticket sales (2016: €4,145 million) of which €1,217 million (2016: €1,287 million) related to customer loyalty programmes.

Passenger revenue is recognised when the transportation is provided. Ticket sales that are not expected to be used ('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 determines 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 the mix and fair value of the award credits. A one point change in the assumption on the percentage of points not expected to be redeemed will increase or reduce the amount recognised as revenue in the year by less than €10 million.

2 Significant accounting policies continued

c Income taxes

The Group is subject to income taxes in numerous jurisdictions. Estimates are required when 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 assessments. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

The Group recognises deferred income tax assets only to the extent that it is probable that the taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Management consider the operating performance in the current year and the future projections of performance laid out in the approved business plan in order to assess the probability of recoverability. The Business plan relies on the use of assumptions, estimates and judgements in respect of future performance and economics. The deferred income tax asset recognised at December 31, 2017 was €521 million (2016: €526 million). Further information on current and deferred tax liabilities is disclosed in note 9.

d Impairment of non-financial assets

The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and intangible assets with indefinite economic lives are tested for impairment annually and at other times when such indicators exist. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates and assumptions as disclosed in note 15.

Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.

e Residual values and useful lives of assets

The Group estimates useful lives and residual values of property, plant and equipment, including fleet assets based on network plans and recoverable values. Useful lives and residual values are reassessed annually, taking into consideration the latest fleet plans and other business plan information. Information on the net book values of property, plant and equipment and related depreciation charges is disclosed in note 12.

Judgement

Engineering and other aircraft costs

The Group has a number of contracts with service providers to replace or repair engine parts and other maintenance checks. 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. Aircraft maintenance obligations are based on aircraft utilisation, expected maintenance intervals, future maintenance costs and the aircraft's condition. At December 31, 2017, the Group recognised €1,125 million in respect of maintenance, restoration and handback provisions (2016: €1,201 million). Information on movements on the provision is disclosed in note 24.

Changes in accounting policy and disclosures

a New and amended standards adopted by the Group

The Group has adopted IAS 7 (Amendment) 'Statement of cash flows' for the first time in the year to December 31, 2017. The amendment requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. The Group has addressed this requirement by providing a reconciliation between the opening and closing balances of assets and liabilities included in the Group's definition of net debt (note 19). This includes a reconciliation of liabilities arising from financing activities.

Other amendments adopted for the first time in the year to December 31, 2017 have not resulted in a significant change to the financial position or performance of the Group, or to presentation and disclosures in the Group financial statements.

b New standards, amendments and interpretations not yet effective

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 on the date they become mandatory:

IFRS 15 'Revenue from contracts with customers'; effective for periods beginning on or after January 1, 2018. The standard establishes a 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 goods and services and at a point when the performance obligations associated with these goods and services have been satisfied.

The Group has identified the following changes to revenue recognition on adoption of the standard:

Passenger revenue revenue associated with ancillary services that is currently recognised when paid, such as administration fees, will be deferred to align with the recognition of revenue associated with the related travel.
Cargo revenue interline cargo revenue will be presented gross rather than net of related costs as IAG is considered to be principal rather than agent in these transactions.
Other revenue loyalty revenue associated with the redemption of Avios points with third parties will be presented net of the related costs as IAG is considered to be agent rather than principal in these transactions. In addition, revenue associated with maintenance activities and holiday revenue with performance obligations that are fulfilled over time, will be deferred (with the related costs) and recognised over the performance obligation period.

The Group expects to apply the standard on a fully retrospective basis. On adoption of the standard, the adjustment to retained earnings at January 1, 2017 is expected to be a charge of €27 million. For the year to December 31, 2017, adjustments to reflect the new standard are expected to be: reduction to revenue €31 million, and reduction to operating costs €27 million, resulting in a reduction in operating profit of €4 million. As at December 31, 2017, assets will reduce by €29 million and liabilities increase by €1 million.

IFRS 9 'Financial Instruments'; effective for periods beginning on or after January 1, 2018. The standard amends the classification and measurement models for financial assets and adds new requirements to address the impairment of financial assets. It also introduces a new hedge accounting model to more closely align hedge accounting with risk management strategy and objectives. The standard will allow the Group to hedge account for specific risk components of its fuel purchases, such as crude oil price risk. It also requires movements in the time value of options (currently recognised in the Income statement) to be recognised in Other comprehensive income as they are considered to be a cost of hedging. The standard requires companies to make an election on whether gains and losses on equity instruments measured at fair value should be recognised in the Income statement or Other comprehensive income, with no recycling. On adoption of the standard, the Group expects the following changes:

Financial assets will be classified as at 'amortised cost', 'fair value through profit and loss', or 'fair value through other comprehensive income'. The Group has reviewed its existing classifications and confirmed that most financial assets will continue to be recognised at amortised cost. Equity investments, previously classified as available-for-sale will be classified as financial assets at fair value through Other comprehensive income, with no recycling of gains and losses.

The new impairment model will be applied to trade receivables and other financial assets. Any adjustment to existing provisions on transition will not be material.

The Group will continue to undertake hedging activity in line with its financial risk management objectives and policies. The following changes to hedge accounting will be adopted:

Non-financial components of price risk may be designated in a hedge relationship;
Movements in the time value of options will be classified as cost of hedging; and
Hedge effectiveness assessments will be aligned to the requirements of IFRS 9.

The amounts recognised in the Income statement in respect of derivatives not qualifying for hedge accounting will reduce.

On adoption of the standard, to reflect the change in accounting for the time value of options, there will be a reclassification of accumulated post-tax gains of €38 million from retained earnings to unrealised gains and losses in Other reserves at January 1, 2017. Comparative information in the Income statement in respect of the year to December 31, 2017 will be adjusted to reflect a reduction in unrealised losses on derivatives not qualifying for hedge accounting of €42 million, a reduction in net currency retranslation charges of €11 million and an increase in the tax charge of €12 million, with an offsetting movement in Other comprehensive income. Other changes to hedge accounting will be applied prospectively.

2 Significant accounting policies continued

IFRS 16 'Leases'; effective from January 1, 2019. The new standard eliminates the classification of leases as either operating leases or finance leases and instead introduces a single lessee accounting model. The Group has a number of operating leases for assets including aircraft, property and other equipment. Details of the Group's operating lease commitments are disclosed in note 23.

The Group is currently assessing the impact of the new standard and expects its implementation to have a significant impact on the financial statements from the date of adoption. The main changes will be as follows:

1. The amounts recognised as assets and liabilities on adoption of IFRS 16 will be subject to a number of judgements, estimates and assumptions. This includes:
a. Judgements when reviewing current agreements (such as agreements for terminal capacity) to determine whether they contain leases as defined under the new standard.
b. Assumptions used to calculate the discount rate to apply to lease obligations, which is likely to be based on the incremental borrowing rate for the estimated lease term.
c. Estimation of the lease term, including options to extend the lease where the Group is reasonably certain to extend.
1. Interest-bearing borrowings and non-current assets will increase on implementation of the standard as obligations to make future payments under leases currently classified as operating leases will be recognised on the Balance sheet, along with the related 'right-of-use' asset. It is expected that lease obligations, which are predominantly US dollar denominated, will be recognised at the exchange rate ruling on the date of adoption and the appropriate incremental borrowing rate at that date, with the related 'right-of-use' asset recognised at the exchange rate ruling at the commencement of the lease. a.Judgements when reviewing current agreements (such as agreements for terminal capacity) to determine whether they incremental borrowing rate for the estimated lease term. the allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes as or not
1. There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are replaced with depreciation and lease interest expense.
1. The Group's Alternative Performance Measures will also be impacted. These comprise Operating profit and lease adjusted operating margin; Adjusted earnings per share; EBITDAR; Return on Invested Capital; Adjusted net debt to EBITDAR; Adjusted gearing; and Equity free cash flow. The definitions of these metrics will be reviewed on adoption of IFRS 16 to ensure that they continue to measure the outcome of the Group's strategy and monitor performance against long-term planning targets.

For future reporting periods after adoption, foreign exchange movements on lease obligations, which are predominantly denominated in US dollars, will be remeasured at each balance sheet date, however the right-of-use asset will be recognised at the historic exchange rate. This will create volatility in the Income statement.

IFRIC Interpretation 23 'Uncertainty over tax treatments' (not yet endorsed by the EU); effective for periods beginning on or after January 1, 2019. The interpretation clarifies application of recognition and measurement requirements in IAS 12 'Income Taxes' when there is uncertainty over income tax treatments. The Group is currently assessing the impact of the interpretation.

There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will have a material effect on the reported income or net assets of the Group.

The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.

3 Segment information

a Business segments

The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments, and has been identified as the IAG Management Committee (IAG MC).

The Group has a number of entities which are managed as individual operating companies including airline and platform functions. Each airline operates its network operations as a single business unit and the IAG MC assesses performance based on measures including operating profit, and makes resource allocation decisions for the airlines based on network profitability, primarily by reference to the passenger markets in which the companies operate. The objective in making resource allocation decisions is to optimise consolidated financial results.

The Group has determined its operating segments based on the way that it treats its businesses and the manner in which resource allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes as reportable operating segments. Avios and LEVEL are also operating segments but do not exceed the quantitative thresholds to be reportable and management has concluded that there are currently no other reasons why they should be separately disclosed.

The platform functions of the business primarily support the airline operations. These activities are not considered to be reportable operating segments as they either earn revenues incidental to the activities of the Group and resource allocation decisions are made based on the passenger business, or are not reviewed by the IAG MC and are included within Other Group companies.

For the year to December 31, 2017

			2017
€ million	British Airways	Iberia	Vueling	Aer Lingus	Other Group companies	Total
Revenue
External revenue	13,850	4,451	2,125	1,857	689	22,972
Inter-segment revenue	479	400	–	2	459	1,340
Segment revenue	14,329	4,851	2,125	1,859	1,148	24,312
Depreciation, amortisation and impairment	(860)	(182)	(20)	(77)	(45)	(1,184)
Operating profit before exceptional items	1,996	376	188	269	186	3,015
Exceptional items (note 4)	(108)	(180)	–	–	–	(288)
Operating profit after exceptional items	1,888	196	188	269	186	2,727
Net non-operating costs						(234)
Profit before tax						2,493

Total assets	18,872	6,108	1,515	1,976	(1,210)	27,261
Total liabilities	(12,100)	(4,382)	(1,253)	(1,046)	(1,084)	(19,865)

Includes eliminations on total assets of €13,031 million and total liabilities of €2,744 million.

For the year to December 31, 2016

	2016
€ million	British Airways	Iberia	Vueling	Aer Lingus	Other Group companies	Total
Revenue
External revenue	13,889	4,233	2,065	1,766	614	22,567
Inter-segment revenue	469	353	–	–	452	1,274
Segment revenue	14,358	4,586	2,065	1,766	1,066	23,841

Depreciation, amortisation and impairment	(950)	(215)	(19)	(75)	(28)	(1,287)

Operating profit before exceptional items	1,786	271	60	233	185	2,535
Exceptional items (note 4)	(93)	–	–	–	42	(51)
Operating profit after exceptional items	1,693	271	60	233	227	2,484
Net non-operating costs						(122)
Profit before tax						2,362

Total assets	19,530	5,752	1,562	1,771	(1,242)	27,373
Total liabilities	(14,503)	(4,197)	(1,240)	(865)	(904)	(21,709)

Includes eliminations on total assets of €13,327 million and total liabilities of €3,725 million.

3 Segment information continued

b Geographical analysis

Revenue by area of original sale

	Year to December 31
€ million	2017	2016
UK	7,655	7,877
Spain	3,561	3,632
USA	3,694	3,534
Rest of world	8,062	7,524
	22,972	22,567

Assets by area

December 31, 2017

€ million	Property, plant and equipment	Intangible assets
UK	9,013	1,171
Spain	2,050	1,241
USA	1	6
Rest of world	782	600
	11,846	3,018

December 31, 2016

€ million	Property, plant and equipment	Intangible assets
UK	9,608	1,196
Spain	1,877	1,236
USA	20	18
Rest of world	722	587
	12,227	3,037

4 Exceptional items

	Year to December 31
€ million	2017	2016
Restructuring costs1	288	144
Employee costs2	–	(51)
Pre-acquisition cash flow hedge impact3	–	(42)
Recognised in expenditure on operations	288	51
Total exceptional charge before tax	288	51
Tax on exceptional items	(66)	(13)
Total exceptional charge after tax	222	38

1 Restructuring costs

British Airways has embarked on a series of transformation proposals to develop a more efficient and cost effective structure. The overall costs of the programme principally comprise employee severance costs and includes other directly associated costs such as onerous lease provisions and asset write down costs. Costs incurred in the year to December 31, 2017 in respect of this programme amount to €108 million (2016: €144 million), with a related tax credit of €21 million (2016: €27 million).

In the year to December 31, 2017, €180 million of restructuring costs were recognised at Iberia, related to the announcement of a new Transformation Plan. A related tax credit of €45 million was also recognised.

In the year to December 31, 2016:

2 Employee costs

During the year to December 31, 2016 the Group made changes to the US PRMB (Post-Retirement Medical Benefits) to further bring the level of benefits in line with national trends seen in the US. This scheme is accounted for in a similar way to a defined benefit plan, so any reduction in benefit results in the recognition of a past service gain when the plan amendment occurs. This change has resulted in a one-off gain in employee costs of €51 million in the year to December 31, 2016, and a related tax charge of €9 million.

3 Pre-acquisition cash flow hedge impact

Under IFRS 3 Business combinations, gains or losses on cash flow hedges acquired should not be recycled to the income statement but recognised in equity. Following the acquisition of Aer Lingus, IAG continued to unwind the cash flow fuel hedges acquired in reported fuel expense. For the year to December 31, 2016, a credit of €42 million was recognised as an exceptional item, reversing the impact of unwinding the cash flow hedges to arrive at the total Fuel, oil costs and emissions charges. A related tax charge of €5 million was also recognised.

5 Expenses by nature

Operating profit is arrived at after charging

Depreciation, amortisation and impairment of non-current assets:

€ million	2017	2016
Owned assets	641	739
Finance leased aircraft	382	391
Other leasehold interests	41	39
Amortisation of intangible assets	120	104
Impairment on intangible assets	–	14
	1,184	1,287
Operating leases costs:
€ million	2017	2016
Minimum lease rentals – aircraft	888	759
– Property and equipment	224	226
Sub-lease rentals received	(1)	(2)
	1,111	983
Cost of inventories:
€ million	2017	2016
Cost of inventories recognised as an expense, mainly fuel	3,176	3,966

6 Auditors' remuneration

The fees for audit and non-audit services provided by the auditor of the Group's consolidated financial statements and of certain individual financial statements of the consolidated companies, Ernst & Young S.L., and by companies belonging to Ernst & Young's network, were as follows:

€'000	2017	2016
Fees payable for the audit of the Group and individual accounts	3,648	3,313
Fees payable for other services:
Audit of the Group's subsidiaries pursuant to legislation	569	541
Other services pursuant to legislation	465	440
Other services relating to taxation	–	1
Other assurance services	467	604
Services relating to information technology	–	5
Services relating to corporate finance transactions	296	90
All other services	3	22
	5,448	5,016

The audit fees payable are approved by the Audit and Compliance Committee and have been reviewed in the context of other companies for cost effectiveness. A description of the work of the Audit and Compliance Committee is set out in the Report of the Audit and Compliance Committee and includes an explanation of how objectivity and independence is safeguarded when non-audit services are provided.

7 Employee costs and numbers

€ million	2017	2016
Wages and salaries	3,155	3,136
Social security costs	486	491
Costs related to pension scheme benefits	370	276
Cost of share-based payments	34	36
Other employee costs1	943	885
Total employee costs	4,988	4,824

1 Other employee costs include allowances and accommodation for crew.

The number of employees during the year and at December 31 was as follows:

		2017		2016
		December 31, 2017			December 31, 2016
	Average number of employees	Number of employees	Percentage of women	Average number of employees	Number of employees	Percentage of women
Senior executives	166	190	24%	215	188	23%
Ground employees:
Managerial	2,334	2,296	43%	2,532	2,452	42%
Non-managerial	32,572	32,877	35%	33,313	33,519	35%
Technical crew:
Managerial	6,644	6,595	11%	6,257	6,404	11%
Non-managerial	21,706	22,036	68%	21,070	21,074	68%
	63,422	63,994		63,387	63,637

8 Finance costs and income

a Finance costs

€ million	2017	2016
Interest expense on:
Bank borrowings	(20)	(29)
Finance leases	(116)	(141)
Provisions unwinding of discount	(20)	(21)
Other borrowings	(75)	(90)
Capitalised interest on progress payments	7	3
Change in fair value of cross currency swaps	(1)	(1)
	(225)	(279)

b Finance income

€ million	2017	2016
Interest on other interest-bearing deposits	28	33
Other finance income	17	–
	45	33
c Net financing (charge)/credit relating to pensions
€ million	2017	2016

Net financing (charge)/credit relating to pensions (28) 12

9 Tax

a Tax charges

Tax (charge)/credit in the Income statement, Other comprehensive income and Statement of changes in equity:

For the year to December 31, 2017

	Income	Other comprehensive	Statement of changes
€ million	statement	income	in equity	Total
Current tax
Movement in respect of prior years	12	–	–	12
Movement in respect of current year	(413)	114	1	(298)
Total current tax	(401)	114	1	(286)
Deferred tax
Movement in respect of prior years	(8)	–	–	(8)
Movement in respect of current year	(61)	(307)	2	(366)
Rate change	(2)	12	–	10
Total deferred tax	(71)	(295)	2	(364)
Total tax	(472)	(181)	3	(650)

Current tax in Other comprehensive income all relates to employee retirement benefit plans and current tax in the Statement of changes in equity all relates to share-based payments.

9 Tax continued

For the year to December 31, 2016

€ million	Income statement	Other comprehensive income	Statement of changes in equity	Total
Current tax
Movement in respect of prior years	13	–	–	13
Movement in respect of current year	(325)	143	10	(172)
Total current tax	(312)	143	10	(159)
Deferred tax
Movement in respect of prior years	(11)	–	1	(10)
Movement in respect of current year	(130)	158	(7)	21
Rate change	43	(40)	–	3
Total deferred tax	(98)	118	(6)	14
Total tax	(410)	261	4	(145)

Current tax in Other comprehensive income all relates to employee retirement benefit plans and current tax in the Statement of changes in equity all relates to share-based payment schemes (€5 million) and finance costs (€5 million).

Current tax asset/(liability)

€ million	Opening balance	Movement in respect of prior years	Movement in respect of current year	Cash	Exchange movements	Closing balance
2017	127	12	(298)	237	1	79
2016	(45)	13	(172)	318	13	127

Current tax asset is €258 million (2016: €228 million) and current tax liability is €179 million (2016: €101 million).

Deferred tax asset/(liability)

€ million	Opening balance	Movement in respect of prior years	Movement in respect of current year	Rate change	Exchange movements and other	Closing balance
2017	350	(8)	(366)	10	4	(10)
2016	297	(10)	21	3	39	350

The deferred tax asset is €521 million (2016: €526 million) and all arises in Spain. A reversal of €86 million on the deferred tax asset is expected within one year and the remainder beyond one year. The deferred tax liability is €531 million (2016: €176 million).

b Deferred tax

For the year to December 31, 2017

€ million	Opening balance	Movement in respect of prior years	Movement in respect of current year	Rate change	Exchange movements and other	Closing balance
Fixed assets	(1,065)	–	4	–	32	(1,029)
Employee leaving indemnities and other employee related provisions	372	–	3	–	(1)	374
Tax losses carried forward	407	6	(65)	–	4	352
Fair value losses recognised on cash flow hedges	68	2	(24)	1	(8)	39
Employee benefit plans	441	(4)	(293)	9	(13)	140
Tax assets in relation to tax credits and deductions	78	–	–	–	–	78
Share-based payment schemes	13	–	3	–	(1)	15
Foreign exchange	9	(7)	1	–	(1)	2
Other items	27	(5)	5	–	(8)	19
Total deferred tax	350	(8)	(366)	10	4	(10)

Within tax in Other comprehensive income is a tax charge of €24 million (2016: €187 million) that may be reclassified subsequently to the Income statement and a tax charge of €283 million (2016: tax credit of €345 million) that may not. Within tax in Other comprehensive income arising from tax rate changes is a tax credit of €1 million (2016: charge of €12 million) that may be reclassified subsequently to the Income statement and a tax credit of €9 million (2016: charge of €28 million) that may not.

For the year to December 31, 2016

€ million	Opening balance	Movement in respect of prior years	Movement in respect of current year	Rate change	Exchange movements	Closing balance
Fixed assets	(1,208)	(7)	(8)	45	113	(1,065)
Employee leaving indemnities and other employee related provisions	472	1	(99)	(1)	(1)	372
Tax losses carried forward	410	16	(9)	(1)	(9)	407
Fair value losses recognised on cash flow hedges	298	(2)	(192)	(12)	(24)	68
Employee benefit plans	168	–	332	(28)	(31)	441
Tax assets in relation to tax credits and deductions	78	–	–	–	–	78
Share-based payment schemes	22	1	(8)	–	(2)	13
Foreign exchange	8	(4)	6	–	(1)	9
Other items	49	(15)	(1)	–	(6)	27
Total deferred tax	297	(10)	21	3	39	350

Within tax in Other comprehensive income is a tax charge of €187 million that may be reclassified subsequently to the Income statement and a tax credit of €345 million that may not. Within tax in Other comprehensive income arising from tax rate changes is a tax charge of €12 million that may be reclassified subsequently to the Income statement and a tax charge of €28 million that may not.

Detailed deferred tax movement in respect of current year in the Income statement, Other comprehensive income and Statement of changes in equity

For the year to December 31, 2017

	Income	Other comprehensive	Statement of changes in
€ million	statement	income	equity	Total
Fixed assets	4	–	–	4
Employee leaving indemnities and other employee related provisions	3	–	–	3
Tax losses carried forward	(65)	–	–	(65)
Fair value losses recognised on cash flow hedges	–	(24)	–	(24)
Employee benefit plans	(10)	(283)	–	(293)
Share-based payment schemes	1	–	2	3
Foreign exchange	1	–	–	1
Other items	5	–	–	5
Total deferred tax	(61)	(307)	2	(366)

For the year to December 31, 2016

	Income	Other comprehensive	Statement of changes in
€ million	statement	income	equity	Total
Fixed assets	(8)	–	–	(8)
Employee leaving indemnities and other employee related provisions	(99)	–	–	(99)
Tax losses carried forward	(9)	–	–	(9)
Fair value losses recognised on cash flow hedges	(5)	(187)	–	(192)
Employee benefit plans	(13)	345	–	332
Share-based payment schemes	(1)	–	(7)	(8)
Foreign exchange	6	–	–	6
Other items	(1)	–	–	(1)
Total deferred tax	(130)	158	(7)	21

9 Tax continued

c Reconciliation of the total tax charge/(credit) in the Income statement

The tax charge is calculated at the domestic rates applicable to profits or losses in the main countries of operation. The tax charge on the profit for the year to December 31, 2017 and 2016 is lower than the notional tax charge.

The differences are explained below:

€ million	2017	2016
Accounting profit before tax	2,493	2,362

Tax calculated at 25 per cent in Spain (2016: 25 per cent), 19.25 per cent in the UK (2016: 20 per cent)
and 12.5 per cent in Ireland (2016: 12.5 per cent)1	480	466
Effects of:
Non-deductible expenses - recurring items	6	12
Current year tax assets not recognised	4	4
Tax rate changes	2	(43)
Other items	(1)	(2)
Employee benefit plans accounted for net of withholding tax	(4)	(6)
Euro preferred securities accounted for as non-controlling interests	(4)	(12)
Adjustments in respect of prior years	(4)	(2)
Investment credit	(7)	(7)
Non-deductible expenses - non-recurring	–	9
Previously unrecognised tax assets	–	(9)
Tax charge in the income statement	472	410

1 The expected tax charge is arrived at by aggregating the expected tax charges arising in each company in the Group. It changes each year as tax rates and profit mix change.

d Other taxes

The Group also contributed tax and related revenues through payment of transaction and payroll related taxes and charges. A breakdown of these other taxes and charges paid during the year is as follows:

€ million	2017	2016
Payroll related taxes	478	495
UK Air Passenger Duty	838	848
Other ticket taxes and charges	1,694	1,626
	3,010	2,969

The reduction in UK air passenger duty paid reflects foreign exchange movements and not a reduction in underlying payments.

e Factors that may affect future tax charges

Unrecognised temporary differences

€ million	2017	2016
Spanish corporate income tax losses and other temporary differences	47	47
UK capital losses arising before the change in ownership of the UK Group in 2011	36	34
UK capital losses arising after the change in ownership of the UK Group in 2011	8	8
UK capital losses arising on properties that were eligible for Industrial Buildings Allowances	283	296
Corporate income tax losses outside of the countries of main operation	179	170

None of the unrecognised temporary differences have an expiry date.

Unrecognised temporary differences - investment in subsidiaries and associates

No deferred tax liability has been recognised in respect of €2,044 million (2016: €170 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.

UK tax rate changes

The main rate of corporation tax applicable from April 1, 2020 is reducing from 18 per cent to 17 per cent. This will reduce the Group's future current tax charge. The deferred tax on temporary differences and tax losses at December 31, 2017 was calculated at the rate applicable to the year in which the temporary differences and tax losses are expected to reverse.

Tax audits

The Group files income tax returns in many jurisdictions throughout the world. Tax returns contain matters that are subject to potentially differing interpretations of tax laws and regulations, which may give rise to queries from and disputes with tax authorities. The resolution of these queries and disputes can take several years but the Group does not currently expect any material impact on the Group's financial position or results of operations to arise from such resolution. The extent to which there are open queries and disputes depends upon the jurisdiction and the issue.

10 Earnings per share

€ million 2017	2016
Earnings attributable to equity holders of the parent for basic earnings 2,001	1,931
Interest expense on convertible bonds 17	26
Diluted earnings attributable to equity holders of the parent for diluted earnings per share 2,018	1,957
2017 Number '000	2016 Number '000
Weighted average number of ordinary shares in issue1 2,088,489	2,075,568
Assumed conversion on convertible bonds 72,418	115,688
Dilutive employee share schemes outstanding 18,446	19,734
Weighted average number for diluted earnings per share 2,179,353	2,210,990
1 Includes 34 million as the weighted average impact for 74,999,449 treasury shares purchased in the share buyback programme (note 27).
€ cents 2017	2016
Basic earnings per share 95.8	93.0
Diluted earnings per share 92.6	88.5

The calculation of basic and diluted earnings per share before exceptional items is included in the Alternative performance measures section.

11 Dividends

€ million	2017	2016
Cash dividend declared
Interim dividend for 2017 of 12.5 € cents per share (2016: 11 € cents per share)	256	233
Final dividend for 2016 of 12.5 € cents per share	262	–

Proposed cash dividend

Final dividend for 2017 of 14.5 € cents per share	298
---------------------------------------------------	-----

The proposed dividend would be distributed from net profit for the year to December 31, 2017.

Proposed dividends on ordinary shares are subject to approval at the Annual General Meeting and subject to approval are recognised as a liability on that date.

12 Property, plant and equipment

€ million	Fleet	Property	Equipment	Total
Cost
Balance at January 1, 2016	22,875	2,481	1,651	27,007
Additions	2,739	31	123	2,893
Disposals	(2,957)	(5)	(50)	(3,012)
Reclassifications	(178)	–	(21)	(199)
Exchange movements	(2,740)	(297)	(170)	(3,207)
Balance at December 31, 2016	19,739	2,210	1,533	23,482
Additions	1,290	52	102	1,444
Disposals	(532)	(31)	(101)	(664)
Reclassifications	(2)	–	–	(2)
Exchange movements	(797)	(88)	(50)	(935)
December 31, 2017	19,698	2,143	1,484	23,325
Depreciation and impairment
Balance at January 1, 2016	11,058	1,143	1,076	13,277
Charge for the year	1,016	64	89	1,169
Disposals	(1,309)	(5)	(27)	(1,341)
Reclassifications	(140)	–	(9)	(149)
Exchange movements	(1,430)	(149)	(122)	(1,701)
Balance at December 31, 2016	9,195	1,053	1,007	11,255
Charge for the year	924	57	83	1,064
Disposals	(242)	(26)	(78)	(346)
Exchange movements	(412)	(44)	(38)	(494)
December 31, 2017	9,465	1,040	974	11,479

Net book values
December 31, 2017	10,233	1,103	510	11,846
December 31, 2016	10,544	1,157	526	12,227
Analysis at December 31, 2017
Owned	4,044	1,028	401	5,473
Finance leased	5,231	4	62	5,297
Progress payments	958	71	47	1,076
Property, plant and equipment	10,233	1,103	510	11,846
Analysis at December 31, 2016
Owned	3,930	1,114	409	5,453
Finance leased	6,000	4	57	6,061
Progress payments	614	39	60	713
Property, plant and equipment	10,544	1,157	526	12,227
The net book value of property comprises:

€ million			2017	2016
Freehold			464	494
Long leasehold improvements			315	331
Short leasehold improvements1			324	332
Property			1,103	1,157

1 Short leasehold improvements relate to leasehold interests with duration of less than 50 years.

At December 31, 2017 bank and other loans of the Group are secured on fleet assets with a cost of €938 million (2016: €1,071 million) and letters of credit of €260 million in favour of the British Airways Pension Trustees are secured on certain aircraft (2016: €273 million).

13 Capital expenditure commitments

Capital expenditure authorised and contracted for but not provided for in the accounts amounts to €12,137 million (December 31, 2016: €14,022 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 €12,056 million for the acquisition of 92 Airbus A320s (from 2018 to 2022), 21 Airbus A321s (from 2018 to 2020), 4 Airbus A330s (in 2018), 43 Airbus A350s (from 2018 to 2022) and 17 Boeing 787s (from 2018 to 2023).

14 Non-current assets held for sale

At December 31, 2017, there were no non-current assets held for sale (2016: €38 million).

Assets held for sale with a net book value of €38 million were disposed of during the year to December 31, 2017. €15 million related to the Group's investment in Propius Holdings Limited and €23 million related to the sale of five Airbus A340-300 aircraft. These were classified as non-current assets held for sale at December 31, 2016 and presented within the Aer Lingus and Iberia operating segments.

15 Intangible assets and impairment review

a Intangible assets

€ million	Goodwill	Brand	Customer loyalty programmes	Landing rights1	Other2	Total
Cost
Balance at January 1, 2016	605	451	253	1,684	905	3,898
Additions	–	–	–	–	154	154
Disposals	–	–	–	–	(19)	(19)
Reclassifications	–	–	–	–	20	20
Exchange movements	(7)	–	–	(128)	(100)	(235)
Balance at December 31, 2016	598	451	253	1,556	960	3,818
Additions	–	–	–	1	174	175
Disposals	–	–	–	–	(24)	(24)
Exchange movements	(2)	–	–	(38)	(34)	(74)
December 31, 2017	596	451	253	1,519	1,076	3,895
Amortisation and impairment
Balance at January 1, 2016	249	–	–	86	368	703
Charge for the year	–	–	–	6	98	104
Impairment charge recognised during the year3	–	–	–	14	–	14
Reclassifications	–	–	–	–	9	9
Exchange movements	–	–	–	(8)	(41)	(49)
Balance at December 31, 2016	249	–	–	98	434	781
Charge for the year	–	–	–	6	114	120
Disposals	–	–	–	–	(5)	(5)
Exchange movements	–	–	–	(3)	(16)	(19)
December 31, 2017	249	–	–	101	527	877
Net book values
December 31, 2017	347	451	253	1,418	549	3,018
December 31, 2016	349	451	253	1,458	526	3,037

1 The net book value includes non-EU based landing rights of €106 million (2016: €113 million) that have a definite life. The remaining life of these landing rights is 18 years.

2 Other intangible assets consist primarily of software with a net book value of €473 million (2016: €474 million), and also include purchased emissions allowances.

3 The impairment charge of €14 million in 2016 relates to landing rights associated with British Airwaysʾ Openskies operation, €11 million of which related to landing rights in the EU that have an indefinite life.

15 Intangible assets and impairment review continued

b Impairment review

The carrying amounts of intangible assets with indefinite life and goodwill allocated to cash generating units (CGUs) of the Group are:

€ million	Goodwill	Landing rights	Brand	Customer loyalty programmes	Total
2017
Iberia
January 1 and December 31, 2017	–	423	306	–	729
British Airways
January 1, 2017	49	771	–	–	820
Additions	–	1	–	–	1
Exchange movements	(2)	(34)	–	–	(36)
December 31, 2017	47	738	–	–	785
Vueling
January 1 and December 31, 2017	28	89	35	–	152
Aer Lingus
January 1 and December 31, 2017	272	62	110	–	444
Avios
January 1 and December 31, 2017	–	–	–	253	253
December 31, 2017	347	1,312	451	253	2,363
		Landing		Customer loyalty
€ million	Goodwill	rights	Brand	programmes	Total

2016
Iberia January 1 and December 31, 2016	–	423	306	–	729

British Airways January 1, 2016	56	901	–	–	957
Impairment	–	(11)	–	–	(11)
Exchange movements	(7)	(119)	–	–	(126)
December 31, 2016	49	771	–	–	820

Vueling January 1 and December 31, 2016	28	89	35	–	152

Aer Lingus
January 1 and December 31, 2016	272	62	110	–	444
Avios
January 1 and December 31, 2016	–	–	–	253	253

Basis for calculating recoverable amount

The recoverable amounts of CGUs have been measured based on their value-in-use.

Value-in-use is calculated using a discounted cash flow model, 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 the Board approves five year business plans. Business plans were approved in the fourth quarter of the year. The business plan cash flows used in the value-in-use calculations reflect all restructuring of the business that has been approved by the Board and which can be executed by Management under existing agreements.

Key assumptions

For each of the CGUs the key assumptions used in the value-in-use calculations are as follows:

	2017
Per cent	British Airways	Iberia	Vueling	Aer Lingus	Avios
Lease adjusted operating margin	15	10–14	12–15	15	n/a1
Average ASK growth per annum	2	8	10	5	n/a1
Long-term growth rate	2.3	2.0	2.0	2.0	2.0
Pre-tax discount rate	8.5	9.8	10.6	7.8	9.1

			2016
Per cent	British Airways	Iberia	Vueling	Aer Lingus	Avios
Lease adjusted operating margin	12–15	8–14	7–15	12–15	n/a1
Average ASK growth per annum	2	4	7	8	n/a1
Long-term growth rate	2.5	2.0	2.0	2.0	2.4
Pre-tax discount rate	8.5	9.8	10.6	7.8	9.1

1 Lease adjusted operating margin and ASK growth per annum assumptions are not applicable for the Avios loyalty reward business, which conducts business with partners both within and outside IAG.

ASK growth is the average annual increase over the Business plan, based on planned network growth and taking into account Management's expectation of the market.

15 Intangible assets and impairment review continued

The long-term growth rate is calculated for each CGU based on the forecasted weighted average exposure in each primary market using gross domestic product (GDP) (source: Oxford Economics). The airline's network plans are reviewed annually as part of the Business plan and reflect Management's plans in response to specific market risk or opportunity.

Pre-tax discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and underlying risks of its primary market. The discount rate calculation is based on the circumstances of the airline industry, the Group and the CGU. It is derived from the weighted average cost of capital (WACC). The WACC takes into consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by airline investors and the cost of debt is broadly based on the Group's interest-bearing borrowings. CGU specific risk is incorporated by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects the timing of future tax flows.

Summary of results

In 2017, Management reviewed the recoverable amount of each of its CGUs and concluded the recoverable amounts exceeded the carrying values. Sensitivities have been considered for each CGU. Reducing long-term growth rates to zero, increasing pre-tax discount rates by 4 points, and increasing the fuel price by 40 per cent, does not result in any impairment.

16 Investments

a Investments in subsidiaries

The Group's principal subsidiaries at December 31, 2017 are listed in the Group investments section.

All subsidiary undertakings are included in the consolidation. There have been no significant changes in ownership interests of subsidiaries during the year.

The total non-controlling interest at December 31, 2017 is €307 million which largely comprises €300 million of 6.75 per cent fixed coupon euro preferred securities issued by British Airways Finance (Jersey) L.P. (note 30).

British Airways Employee Benefit Trustee (Jersey) Limited, a wholly-owned subsidiary of British Airways, governs the British Airways Plc Employee Share Ownership Trust (the Trust). The Trust is not a legal subsidiary of IAG; however, it is consolidated within the Group results.

b Investments accounted for using the equity method

The share of assets, liabilities, revenue and profit of the Group's associates and joint ventures, which are included in the Group's financial statements, are as follows:

€ million	2017	2016
Total assets	96	88
Total liabilities	(68)	(61)
Revenue	86	52
Profit for the year	3	6

The detail of the movement in Investments accounted for using the equity method is shown as follows:

€ million	2017	2016
At beginning of year	29	41
Share of retained profits	3	6
Additions	2	–
Disposals	(2)	–
Exchange movements	1	–
Dividends received	(3)	(3)
Reclassification	–	(15)
	30	29

At December 31, 2017 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, 2017 the investment in Sociedad Conjunta para la Emision y Gestion de Medios de Pago EFC, S.A. exceeded 50 per cent ownership by the Group (50.5 per cent). The entity is treated as a joint venture as decisions regarding its strategy and operations require the unanimous consent of the parties who share control, including IAG.

17 Available-for-sale financial assets

Available-for-sale financial assets include the following:

€ million	2017	2016
Listed securities
Comair Limited	23	15
Unlisted securities	56	58
	79	73

The net gain relating to available-for-sale financial assets was €7 million (2016: €4 million).

18 Trade and other receivables

€ million	2017	2016
Amounts falling due within one year
Trade receivables	1,557	1,469
Provision for doubtful receivables	(63)	(64)
Net trade receivables	1,494	1,405
Prepayments and accrued income	764	717
Other non-trade debtors	194	182
	2,452	2,304
Amounts falling due after one year
Prepayments and accrued income	297	313
Other interest-bearing deposits (greater than one year)	66	114
Other non-trade debtors	13	72
	376	499
Movements in the provision for doubtful trade receivables were as follows:
€ million	2017	2016
At beginning of year	64	84
Provision for doubtful receivables	15	7
Unused amounts reversed	(1)	(1)
Receivables written off during the year	(13)	(23)
Exchange movements	(2)	(3)
	63	64
The ageing analysis of net trade receivables is as follows:
€ million	2017	2016
Neither past due date nor impaired	1,171	1,017
< 30 days	117	235
30 - 60 days	153	96
> 60 days	53	57
Net trade receivables	1,494	1,405
Trade receivables are generally non-interest-bearing and on 30 days terms (2016: 30 days).

19 Cash, cash equivalents and other current interest-bearing deposits

€ million	2017	2016
Cash at bank and in hand	1,963	2,021
Short-term deposits falling due within three months	1,329	1,316
Cash and cash equivalents	3,292	3,337
Other current interest-bearing deposits maturing after three months	3,384	3,091
Cash, cash equivalents and other interest-bearing deposits	6,676	6,428

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, 2017 the Group had no outstanding bank overdrafts (2016: 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, 2017 Aer Lingus held €43 million of restricted cash (2016: €47 million) within interest-bearing deposits maturing after more than three months to be used for employee related obligations.

a Net debt

Movements in net debt were as follows:

€ million	Balance at January 1, 2017	Cash flows	Exchange movements	Other non cash	Balance at December 31, 2017
Bank and other loans	(1,913)	138	26	(75)	(1,824)
Finance leases	(6,602)	657	424	14	(5,507)
Interest-bearing borrowings	(8,515)	795	450	(61)	(7,331)
Cash and cash equivalents	3,337	141	(186)	–	3,292
Other current interest-bearing deposits	3,091	432	(139)	–	3,384
	(2,087)	1,368	125	(61)	(655)

20 Trade and other payables

€ million	2017	2016
Trade creditors	2,135	1,776
Other creditors	926	910
Other taxation and social security	238	218
Accruals and deferred income	467	401
	3,766	3,305

Average payment days to suppliers - Spanish Group companies

Days	2017	2016
Average payment days for payment to suppliers	37	31
Ratio of transactions paid	38	30
Ratio of transactions outstanding for payment	35	53

€ million	2017	2016
Total payments made	4,879	4,600
Total payments outstanding	140	86

21 Other long-term liabilities

€ million	2017	2016
Non-current trade creditors	3	4
Accruals and deferred income	219	234
	222	238

22 Long-term borrowings

a Current
€ million	2017	2016
Bank and other loans	183	149
Finance leases	747	777
	930	926

b Non-current
€ million	2017	2016
Bank and other loans	1,641	1,764
Finance leases	4,760	5,825
	6,401	7,589

Banks and other loans are repayable up to the year 2027. Bank and other loans of the Group amounting to €539 million (2016: €613 million) are secured on aircraft. Finance leases are all secured on aircraft or property, plant and equipment.

22 Long-term borrowings continued

c Bank and other loans

Bank and other loans comprise the following:

€ million	2017	2016
€500 million fixed rate 0.25 per cent convertible bond 20201	472	463
€500 million fixed rate 0.625 per cent convertible bond 20221	450	441
Floating rate euro mortgage loans secured on aircraft2	278	304
€200 million fixed rate unsecured bonds3	200	200
Floating rate euro syndicate loan secured on investments4	148	176
Fixed rate US dollar mortgage loans secured on aircraft5	117	157
Fixed rate Chinese yuan mortgage loans secured on aircraft6	68	87
Fixed rate unsecured US dollar loans7	49	–
Floating rate pound sterling mortgage loans secured on aircraft8	27	53
Fixed rate unsecured euro loans with the Spanish State (Department of Industry)9	15	18
Floating rate US dollar mortgage loans secured on aircraft10	–	12
European Investment Bank sterling loans secured on certain property11	–	2
	1,824	1,913
Less current instalments due on bank and other loans	(183)	(149)

1 Two senior unsecured bonds convertible into ordinary shares of IAG were issued by the Group in November 2015; €500 million fixed rate 0.25 per cent raising net proceeds of €494 million and due in 2020, and €500 million fixed rate 0.625 per cent raising net proceeds of €494 million and due in 2022. The Group holds an option to redeem each convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The bonds contain dividend protection, and a total of 72,417,846 options related to the bonds were outstanding from issuance and at December 31, 2017.

1,641 1,764

2 Floating rate euro mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.17 and 1.17 per cent. The loans are repayable between 2024 and 2027.
3 €200 million fixed rate unsecured bonds between 2.5 to 3.75 per cent coupon repayable between 2018 and 2027.
4 Floating rate euro syndicate loan secured on investments is secured on specific assets of the Group and bears interest of 1.375 per cent plus 3 month EURIBOR. The loan is repayable in 2020.
5 Fixed rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 3.81 and 4.76 per cent. The loans are repayable between 2021 and 2026.
6 Fixed rate Chinese yuan mortgage loans are secured on specific aircraft assets of the Group and bear interest of 5.20 per cent. The loans are repayable in 2022.
7 Fixed rate unsecured US dollar loans bearing interest between 1.98 to 2.37 per cent. The loans are repayable in 2023.
8 Floating rate pound sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of 1.07 per cent. The loans are repayable between 2018 and 2019.
9 Fixed rate unsecured euro loans with the Spanish State (Department of Industry) bear interest of between nil and 5.68 per cent and are repayable between 2018 and 2026.
10 Floating rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of 3.66 per cent. The loans were repaid in 2017.
11 European Investment Bank pound sterling loan is secured on certain property assets of the Group and bears interest of 0.50 per cent. The loan was repaid in 2017.

d Total loans and finance leases

Million 2017	2016
Loans
Bank:
US dollar \$196	\$176
Euro €440	€498
Pound sterling £25	£47
Chinese yuan CNY 525	CNY 623
€702	€809

Fixed rate bonds:
Euro €1,122	€1,104
€1,122	€1,104

Finance leases
US dollar \$2,882	\$3,246
Euro €2,296	€2,343
Japanese yen ¥63,978	¥63,614
Pound sterling £258	£527
€5,507	€6,602

€7,331	€8,515

e Obligations under finance leases

The Group uses finance leases principally to acquire aircraft. These leases have both renewal and purchase options, at the option of the Group. Future minimum finance lease payments under finance leases are as follows:

€ million	2017	2016
Future minimum payments due:
Within one year	875	905
After more than one year but within five years	2,783	3,339
In five years or more	2,464	3,070
	6,122	7,314
Less: finance charges	(615)	(712)
Present value of minimum lease payments	5,507	6,602
The present value of minimum lease payments is analysed as follows:
Within one year	747	777
After more than one year but within five years	2,409	2,938
In five years or more	2,351	2,887
	5,507	6,602

23 Operating lease commitments

The Group has entered into commercial leases on certain properties, equipment and aircraft. These leases have durations ranging from less than one year to 14 years for aircraft and less than one year to 21 years for property, plant and equipment. One ground lease has a remaining lease of 128 years. Certain leases contain options for renewal.

The aggregate payments, for which there are commitments under operating leases, fall due as follows:

		2017
€ million	Fleet	Property, plant and equipment	Total	Fleet	Property, plant and equipment	Total
Within one year	802	190	992	975	158	1,133
Between one and five years	2,559	340	2,899	2,970	233	3,203
Over five years	1,789	1,962	3,751	1,918	2,060	3,978
	5,150	2,492	7,642	5,863	2,451	8,314

23 Operating lease commitments continued

Sub-leasing

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 six years and the assets are surplus to the Group's requirements. Future minimum rentals receivable under non-cancellable operating leases are €8 million (2016: €12 million) with €7 million (2016: €7 million) falling within one year, €1 million (2016: €5 million) between one and five years and nil (2016: nil) over five years.

24 Provision for liabilities and charges

	1,125	727	599	140	69	2,660
Non-current	993	486	538	60	36	2,113
Current	132	241	61	80	33	547
Analysis:
Net book value December 31, 2017	1,125	727	599	140	69	2,660
Exchange differences	(128)	(4)	(3)	(3)	(1)	(139)
Unwinding of discount	3	2	14	1	–	20
Release of unused amounts	(38)	(17)	(3)	(34)	(26)	(118)
Utilised during the year	(268)	(248)	(24)	(125)	(126)	(791)
Provisions recorded during the year	355	302	22	112	139	930
Net book value January 1, 2017	1,201	692	593	189	83	2,758
€ million	Restoration and handback provisions	Restructuring provisions	Employee leaving indemnities and other employee related provisions	Legal claims provisions	Other provisions	Total

Restoration and handback provisions

The provision for restoration and handback costs is maintained to meet the contractual maintenance and return conditions on aircraft held under operating leases. The provision also includes an amount relating to leased land and buildings where restoration costs are contractually required at the end of the lease. Where such costs arise as a result of capital expenditure on the leased asset, the restoration costs are capitalised. The provision is a long-term provision, typically covering the leased asset term which is up to 14 years for aircraft.

Restructuring

The Group recognises a provision for targeted voluntary severance schemes. 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 0.08 per cent. The payments related to this provision will continue in the next ten years.

During the year the Group recognised a provision of €108 million in relation to the restructuring plans at British Airways (note 4). Further costs related to this provision are expected to be incurred in 2018 and the payments will be made over a maximum of five years.

In 2017, a provision of €180 million was also recognised at Iberia in relation to the new Transformation Plan (note 4). The payments related to the provision are expected to be incurred over more than ten years.

At December 31, 2017, €719 million of this provision related to collective redundancy programmes (2016: €674 million).

Employee leaving indemnities and other employee related provisions

This provision includes employees leaving indemnities relating to staff under various contractual arrangements.

The Group recognises a provision relating to flight crew who having met certain conditions, have the option of being placed on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement. The Group is required to remunerate these employees until they reach the statutory retirement age, and an initial provision was recognised based on an actuarial valuation. The provision was reviewed at December 31, 2017 with the use of independent actuaries using the projected unit credit method, based on a discount rate consistent with the iBoxx index of 1.40 per cent and 0.08 per cent depending on whether the employees are currently active or not, the PERM/F-2000P mortality tables, and assuming a 1.50 per cent annual increase in the Consumer Price Index (CPI). This is mainly a long-term provision. The amount relating to this provision was €542 million at December 31, 2017 (2016: €524 million). credit a

Legal claims provisions

Legal claims provisions includes:

Amounts for multi-party claims from groups or employees on a number of matters related to its operations, including claims for additional holiday pay and for age discrimination;
Provisions related to tax assessment; and
Amounts related to investigations by a number of competition authorities in connection with alleged anti-competitive activity concerning the Group's passenger and cargo businesses. The provision includes the payment of €104 million for the reissued fine in March 2017 against British Airways. The final amount required to pay the remaining claims and fines is subject to uncertainty (note 32).

Other provisions

Other provisions includes:

Amounts for passengers whose flights were significantly delayed and are entitled to receive compensation. This provision is largely a current provision and is expected to have amounts both utilised and provided for each year. This provision has been reassessed based on the historic level of claims;
During 2017 a €65 million provision was recognised on additional compensation fees and baggage claims related to operational disruption at British Airways due to a power failure.
A provision for the Emissions Trading Scheme that represents the excess of CO2 emitted on flights within the EU in excess of the EU Emission Allowances granted; and
A provision related to unfavourable fleet contracts.

25 Financial risk management objectives and policies

The Group is exposed to a variety of financial risks: market risk (including fuel price risk, foreign currency risk and interest rate risk), counterparty risk, liquidity risk and capital risk. Further information on the Group's financial instruments exposed to these risks is included in note 26. The Board approves the key strategic principles and the risk appetite, defining the amount of risk that the Group is prepared to retain. The Group's Financial Risk Management programme focuses on the unpredictability of financial markets and seeks to minimise the risk of incremental costs arising from adverse financial market movements.

Financial risks are managed under the overall oversight of the Group Treasury department. Fuel price fluctuations, euro-US dollar and sterling-US dollar exchange rate volatility represents the largest financial risks facing the Group. Other currencies as well as interest rate risk are also the subject of the Financial Risk Management programme. The IAG Management Committee approves the Group hedging profile and delegates to the operating company Risk Committee to agree on the degree of flexibility in applying the levels as defined by the IAG Management Committee. Each operating company Risk Committee meets at least once a month to review and approve a mandate to place hedging cover in the market including the instruments to be used.

The Group Treasury department provides a quarterly report on the hedging position to the IAG Management Committee and the Audit and Compliance Committee. The Board reviews the strategy and risk appetite once a year.

a Fuel price risk

The Group is exposed to fuel price risk. The Group's fuel price risk management strategy aims to provide protection against sudden and significant increases in fuel prices while ensuring that the Group is not competitively disadvantaged in the event of a substantial fall in the price. The current Group strategy is to hedge a proportion of fuel consumption for the next twelve quarters, within certain defined limits.

Within the strategy, the Financial Risk Management programme allows for the use of a number of derivative instruments available on over the counter (OTC) markets with approved counterparties.

The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in fuel prices, with all other variables held constant, on result before tax and equity:

	2017			2016
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	41	1,142	30	73	1,006
(30)	(48)	(1,039)	(30)	(114)	(855)

25 Financial risk management objectives and policies continued

b Foreign currency risk

The Group presents its consolidated financial statements in euros, has functional entities in euro and pound sterling, and conducts business in a number of different countries. Consequently the Group is exposed to currency risk on revenue, purchases and borrowings that are denominated in a currency other than the functional currency of the entity. The currencies in which these transactions are denominated are primarily euro, US dollar and pound sterling. The Group generates a surplus in most currencies in which it does business. The US dollar is an exception as fuel purchases, maintenance expenses and debt repayments denominated in US dollars typically create a deficit.

The Group has a number of strategies to hedge foreign currency risk. The operational US dollar short position is subject to the same governance structure as the fuel hedging strategy set out above. The current Group strategy, as approved by the IAG Management Committee, is to hedge a proportion of up to three years of US dollar exposure, within certain defined limits.

British Airways utilises its US dollar, euro, Japanese yen and Chinese yuan debt repayments as a hedge of future US dollar, euro, Japanese yen and Chinese yuan revenues. Iberia's balance sheet assets and liabilities in US dollars are hedged through a rolling programme of swaps and US dollar financial assets that eliminate the profit and loss volatility arising from revaluation of these items into euros. Vueling and Aer Lingus manage their net position in US dollars using derivative financial instruments.

The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in the US dollar, sterling, Japanese yen and Chinese yuan exchange rates, with all other variables held constant, on result before tax and equity:

	Strengthening/ (weakening) in US dollar rate per cent	Effect on result before tax € million	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	Strengthening/ (weakening) in Chinese yuan rate per cent	Effect on result before tax € million	Effect on equity € million
2017	10	(2)	253	10	(36)	232	10	(2)	(45)	10	–	(7)
	(10)	6	(72)	(10)	35	(233)	(10)	2	45	(10)	–	7
2016	10	9	(29)	10	(39)	277	10	(3)	(50)	10	1	(8)
	(10)	(9)	73	(10)	40	(277)	(10)	3	50	(10)	(1)	8

c Interest rate risk

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, 75 per cent of the Group's borrowings were at fixed rates and 25 per cent were at floating rates.

All cash deposits are generally on tenors less than one year. The interest rate is predominantly fixed for the tenor of the deposit.

The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in the US dollar, euro and sterling interest rates, on result before tax and equity:

	Strengthening/ (weakening) in US interest rate Basis points	Effect on result before tax € million	Effect on equity € million	Strengthening/ (weakening) in euro interest rate Basis points	Effect on result before tax € million	Effect on equity € million	Strengthening/ (weakening) in sterling interest rate Basis points	Effect on result before tax € million	Effect on equity € million
2017	50	(1)	–	50	(6)	–	50	3	–
	(50)	1	–	(50)	6	–	(50)	(3)	–
2016	50	(1)	7	50	(11)	–	50	10	–
	(50)	1	(8)	(50)	12	–	(50)	(10)	–

d Counterparty risk

The Group is exposed to counterparty risk to the extent of non-performance by its counterparties in respect of financial assets receivable. The Group has policies and procedures in place to minimise the risk by placing credit limits on each counterparty. These policies and procedures are coordinated through the Group Treasury department. The Risk Committee also reviews the application of the policies and procedures by British Airways, Iberia, Vueling and Aer Lingus. The Group monitors counterparty credit limits and defaults of counterparties, incorporating this information into credit risk controls. Treasury activities include placing money market deposits, fuel hedging and foreign currency transactions, which could lead to a concentration of different credit risks with the same counterparty. This risk is managed by allocation of exposure limits for the counterparty to British Airways, Iberia, Vueling and Aer Lingus. Exposures at the activity level are monitored on a daily basis and the overall exposure limit for the counterparty is reviewed at least monthly using available market information such as credit ratings. Sovereign risk is also monitored, country concentration and sovereign credit ratings are monitored by the Group Treasury department and reported to the Audit and Compliance Committee quarterly.

Each operating company invests surplus cash in interest-bearing accounts, time deposits, and money market funds, 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.

At December 31, 2017 the Group's credit risk position, allocated by region, in respect of treasury managed cash and derivatives was as follows:

		Mark-to-market of treasury controlled financial instruments allocated by geography
Region	2017	2016
United Kingdom	42%	36%
Spain	1%	1%
Ireland	2%	1%
Rest of Eurozone	33%	38%
Rest of world	22%	24%

e Liquidity risk

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 using committed credit lines.

At December 31, 2017 the Group had undrawn revolving credit facilities of €16 million (2016: €17 million). The Group held undrawn uncommitted money market lines of €28 million (2016: €30 million).

The Group held undrawn general and committed aircraft financing facilities:

	2017
Million	Currency	€ equivalent
Euro facilities expiring between January and October 2018	€217	217
US dollar facility expiring December 2021	\$1,164	985
US dollar facility expiring June 2022	\$1,053	891

25 Financial risk management objectives and policies continued

		2016
Million	Currency	€ equivalent
Euro facilities expiring between January and October 2017	€215	215
US dollar facility expiring December 2021	\$1,164	1,117
US dollar facility expiring June 2022	\$1,030	988

The following table categorises the Group's (outflows) and inflows in respect of financial liabilities and derivative financial instruments into relevant maturity groupings based on the remaining period at December 31 to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and include interest.

	Within 6	6-12	1-2	2-5	More than 5	Total
€ million	months	months	years	years	years	2017
Interest-bearing loans and borrowings:
Finance lease obligations	(426)	(449)	(801)	(1,982)	(2,464)	(6,122)
Fixed rate borrowings	(31)	(58)	(99)	(1,224)	(77)	(1,489)
Floating rate borrowings	(29)	(76)	(85)	(144)	(150)	(484)
Trade and other payables	(3,454)	–	(15)	–	–	(3,469)
Derivative financial instruments (assets):
Aircraft lease hedges	–	–	1	–	–	1
Forward contracts	43	10	8	2	–	63
Fuel derivatives	207	141	112	22	–	482
Currency options	2	–	2	–	–	4
Derivative financial instruments (liabilities):
Forward contracts	(49)	(56)	(75)	(35)	–	(215)
Fuel derivatives	(2)	–	–	–	–	(2)
Currency options	(2)	(2)	(3)	(1)	–	(8)
December 31, 2017	(3,741)	(490)	(955)	(3,362)	(2,691)	(11,239)

€ million	Within 6 months	6-12 months	1-2 years	2-5 years	More than 5 years	Total 2016
Interest-bearing loans and borrowings:
Finance lease obligations	(376)	(529)	(982)	(2,357)	(3,070)	(7,314)
Fixed rate borrowings	(72)	(31)	(70)	(737)	(649)	(1,559)
Floating rate borrowings	(34)	(67)	(105)	(198)	(181)	(585)
Trade and other payables	(3,049)	–	(16)	–	–	(3,065)
Derivative financial instruments (assets):
Aircraft lease hedges	18	–	–	–	–	18
Forward contracts	93	85	93	5	–	276
Fuel derivatives	68	65	55	12	–	200
Currency options	2	2	2	–	–	6
Derivative financial instruments (liabilities):
Aircraft lease hedges	(14)	–	–	–	–	(14)
Forward contracts	(23)	(2)	(7)	–	–	(32)
Fuel derivatives
	(38)	(24)	(12)	–	–	(74)

f Offsetting financial assets and liabilities

The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements.

The Group enters into derivative transactions under ISDA (International Swaps and Derivatives Association) documentation. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding are aggregated into a single net amount that is payable by one party to the other.

December 31, 2017

€ 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 offset in the balance sheet	Net amount
Financial assets
Derivative financial assets	551	(1)	550	(5)	545
Financial liabilities
Derivative financial liabilities	226	(1)	225	(5)	220
December 31, 2016
€ million	Gross value of financial instruments1	Financial instruments that are offset under netting agreements1	Net amounts of financial instruments in the balance sheet	Related amounts not offset in the balance sheet	Net amount
Financial assets
Derivative financial assets	531	(33)	498	(14)	484
Financial liabilities
Derivative financial liabilities	141	(33)	108	(14)	94

1 The gross value of financial instruments and the financial instruments that are offset under netting agreements have been amended from the figures presented in 2016, with no impact on the Balance sheet.

g Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern to maintain an optimal capital structure, to reduce the cost of capital and to provide returns to shareholders.

The Group monitors capital on the basis of the adjusted gearing ratio. For the year to December 31, 2017, the adjusted gearing ratio was 45 per cent (2016: 51 per cent). The definition and calculation for this performance measure is included in the Alternative performance measures section.

Further detail on liquidity and capital resources and capital risk management is disclosed in the financial review.

26 Financial instruments

a Financial assets and liabilities by category

The detail of the Group's financial instruments at December 31, 2017 and December 31, 2016 (excluding investments accounted for under the equity method) by nature and classification for measurement purposes is as follows:

December 31, 2017

		Financial assets
€ million	Loans and receivables	Derivatives used for hedging	Available-for sale	Non-financial assets	Total carrying amount by balance sheet item
Non-current assets
Available-for-sale financial assets	–	–	79	–	79
Derivative financial instruments	–	145	–	–	145
Other non-current assets	200	–	–	176	376
Current assets
Trade receivables	1,494	–	–	–	1,494
Other current assets	337	–	–	621	958
Derivative financial instruments	–	405	–	–	405
Other current interest-bearing deposits	3,384	–	–	–	3,384
Cash and cash equivalents	3,292	–	–	–	3,292

	Financial liabilities
€ million	Loans and payables	Derivatives used for hedging	Non-financial liabilities	Total carrying amount by balance sheet item
Non-current liabilities
Interest-bearing long-term borrowings	6,401	–	–	6,401
Derivative financial instruments	–	114	–	114
Other long-term liabilities	15	–	207	222
Current liabilities
Current portion of long-term borrowings	930	–	–	930
Trade and other payables	3,454	–	312	3,766
Derivative financial instruments	–	111	–	111

December 31, 2016

		Financial assets
€ million	Loans and receivables	Derivatives used for hedging	Available-for sale	Non-financial assets	Total carrying amount by balance sheet item
Non-current assets
Available-for-sale financial assets	–	–	73	–	73
Derivative financial instruments	–	169	–	–	169
Other non-current assets	267	–	–	232	499
Current assets
Trade receivables	1,405	–	–	–	1,405
Other current assets	304	–	–	595	899
Non-current assets held for sale	–	–	–	38	38
Derivative financial instruments	–	329	–	–	329
Other current interest-bearing deposits	3,091	–	–	–	3,091
Cash and cash equivalents	3,337	–	–	–	3,337
		Financial liabilities
€ million		Loans and payables	Derivatives used for hedging	Non-financial liabilities	Total carrying amount by balance sheet item
Non-current liabilities
Interest-bearing long-term borrowings		7,589	–	–	7,589
Derivative financial instruments		–	20	–	20
Other long-term liabilities		16	–	222	238
Current liabilities
Current portion of long-term borrowings		926	–	–	926

Trade and other payables 3,049 – 256 3,305 Derivative financial instruments – 88 – 88

26 Financial instruments continued

b Fair value of financial assets and financial liabilities

The fair values of the Group's financial instruments are disclosed in hierarchy levels depending on the nature of the inputs used in determining the fair values 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 present 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 these instruments.

The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:

Level 1: The fair value of listed asset investments classified as available-for-sale and listed interest-bearing borrowings is based on market value at the balance sheet date.

Level 2: The fair value of derivatives and other interest-bearing borrowings is determined as follows:

Forward currency transactions and over-the-counter fuel derivatives 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.
The fair value of the Group's interest-bearing borrowings including leases is determined by discounting the remaining contractual cash flows at the relevant market interest rates at the balance sheet date.

Level 3: Unlisted investments are predominantly measured at historic cost less accumulated impairment losses.

The carrying amounts and fair values of the Group's financial assets and liabilities, excluding investments accounted for under the equity method, at December 31, 2017 are as follows:

	Fair value
€ million	Level 1	Level 2	Level 3	Total	value Total
Financial assets
Available-for-sale financial assets	23	–	56	79	79
Derivative financial assets:
Aircraft lease hedges1	–	1	–	1	1
Forward contracts1	–	63	–	63	63
Fuel derivatives1	–	482	–	482	482
Currency option contracts1	–	4	–	4	4
Financial liabilities
Interest-bearing loans and borrowings:
Finance lease obligations	–	5,639	–	5,639	5,507
Fixed rate borrowings	1,079	287	–	1,366	1,371
Floating rate borrowings	–	453	–	453	453
Derivative financial liabilities:
Forward contracts2	–	215	–	215	215
Fuel derivatives2	–	2	–	2	2
Currency option contracts2	–	8	–	8	8

1 Current portion of derivative financial assets is €405 million.

2 Current portion of derivative financial liabilities is €111 million.

The carrying amounts and fair values of the Group's financial assets and liabilities, excluding investments accounted for under the equity method, at December 31, 2016 are set out below:

	Fair value
€ million	Level 1	Level 2	Level 3	Total	Total
Financial assets
Available-for-sale financial assets	15	–	58	73	73
Derivative financial assets:
Aircraft lease hedges1	–	5	–	5	5
Forward contracts1	–	252	–	252	252
Fuel derivatives1	–	212	–	212	212
Currency option contracts1	–	29	–	29	29
Financial liabilities
Interest-bearing loans and borrowings:
Finance lease obligations	–	6,823	–	6,823	6,602
Fixed rate borrowings	1,020	286	–	1,306	1,366
Floating rate borrowings	–	547	–	547	547
Derivative financial liabilities:
Aircraft lease hedges2	–	1	–	1	1
Cross currency swaps2	–	1	–	1	1
Forward contracts2	–	32	–	32	32
Fuel derivatives2	–	74	–	74	74

1 Current portion of derivative financial assets is €329 million.

2 Current portion of derivative financial liabilities is €88 million.

There have been no transfers between levels of fair value hierarchy during the year.

The financial instruments listed in the previous table are measured at fair value for reporting purposes with the exception of the interest-bearing borrowings.

26 Financial instruments continued

c Level 3 financial assets reconciliation

The following table summarises key movements in Level 3 financial assets:

€ million	December 31, 2017	December 31, 2016
Opening balance for the year	58	65
Additions	1	–
Exchange movements	(3)	(7)
Closing balance for the year	56	58

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 investment remains classified as a Level 3 financial asset due to the valuation criteria applied not being observable.

d Hedges

Cash flow hedges

At December 31, 2017 the Group's principal risk management activities that were hedging future forecast transactions were:

Future loan repayment instalments in foreign currency, hedging foreign exchange risk on revenue cash inflows;
Forward crude, gas oil and jet kerosene derivative contracts, hedging price risk on fuel cash outflows; and
Foreign exchange contracts, hedging foreign exchange risk on revenue cash inflows and certain operational payments.

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, 2017

	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, 2017
Debt repayments to hedge future revenue	40	42	63	162	279	586
Forward contracts to hedge future payments	15	47	67	33	–	162
Hedges of future fuel purchases	(212)	(140)	(100)	(22)	–	(474)
Currency options to hedge future payments	(1)	1	1	–	–	1
	(158)	(50)	31	173	279	275
Related deferred tax credit						(44)
Total amount included within equity						231

The notional values of the significant financial instruments used as cash flow hedges were as follows:

December 31, 2017

€ million	Notional principal amounts (in local currency)
To hedge future currency revenues in euros	€488
To hedge future currency revenues in US dollars	\$377
To hedge future currency revenues in pounds sterling	£175
To hedge future operating payments in US dollars	\$6,945
Hedges of future fuel purchases	\$4,186
Interest rate swaps:	246
- Floating to fixed (US dollars)	\$156
- Floating to fixed (euro)	€246
Debt repayments to hedge future revenue:	\$2,511
- US dollars	\$2,511
- Euro	€1,922
- Japanese yen	¥60,805
- Chinese yuan	CNY 525

December 31, 2016

	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, 2016
Debt repayments to hedge future revenue	34	77	108	239	361	819
Forward contracts to hedge future payments	(65)	(76)	(73)	(4)	–	(218)
Hedges of future fuel purchases	(24)	(44)	(48)	(11)	–	(127)
Hedges of future aircraft operating leases	(3)	–	–	–	–	(3)
Currency options to hedge future payments	(2)	(7)	(5)	–	–	(14)
	(60)	(50)	(18)	224	361	457
Related deferred tax credit						(73)
Total amount included within equity						384

December 31, 2016

€ million	Notional principal amounts (in local currency)
To hedge future currency revenues in euros	€480
To hedge future currency revenues in US dollars	\$174
To hedge future currency revenues in pounds sterling	£88
To hedge future operating payments in US dollars	\$3,037
Hedges of future fuel purchases	\$4,304
Cross currency swaps:
- Floating to fixed (US dollars)	\$57
- Floating to fixed (euro)	€17
- Fixed to floating (US dollars)	\$340
Debt repayments to hedge future revenue:
- US dollars	\$2,798
- Euro	€2,111
- Japanese yen	¥60,577
- Chinese yuan	CNY 623

The ineffective portion recognised in the Income statement during year on cash flow hedges was a gain of €7 million (2016: gain of €36 million).

The Group has no significant fair value hedges at December 31, 2017 and 2016.

27 Share capital and share premium

Alloted, called up and fully paid	Number of shares 000s	Ordinary share capital € million	Share premium € million
January 1, 2017: Ordinary shares of €0.50 each	2,132,989	1,066	6,105
Cancellation of ordinary shares of €0.50 each	(74,999)	(37)	–
Prior years' losses offset1	–	–	(83)
December 31, 2017	2,057,990	1,029	6,022

1 Offset of prior years' losses that are included in the Company's separate balance sheet, against share premium.

During the year IAG carried out a share buyback programme as part of its corporate finance strategy to return cash to shareholders while reinvesting in the business and managing leverage. The programme total was €500 million and it was completed in December 2017. Under this programme, IAG acquired 74,999,449 ordinary shares, which were subsequently cancelled. The weighted average impact of these shares in issuance during the year was 34 million (note 10).

28 Treasury shares

IAG has authority to acquire its own shares, subject to specific conditions as set out in the Corporate governance section.

The treasury shares balance consists of shares held directly by the Group. During the year to December 31, 2017, IAG purchased directly 74,999,449 shares, which were held as treasury shares, as part of its €500 million share buyback programme launched in March 2017 (note 27). These shares were bought at a weighted average price of €6.67 per share. On completion of the programme, these treasury shares were cancelled. A total of 2.6 million shares were issued to employees during the year as a result of vesting of employee share schemes. At December 31, 2017 the Group held 9.9 million shares (2016: 12.5 million), which represented 0.49 per cent of the Issued share capital of the Company.

29 Share-based payments

The Group operates share-based payment schemes as part of the total remuneration package provided to employees. These schemes comprise both share option schemes where employees acquire shares at nil-cost and share award plans whereby shares are issued to employees at no cost, subject to the achievement by the Group of specified performance targets.

a IAG Performance Share Plan

The IAG Performance Share Plan (PSP) is granted to senior executives and managers of the Group who are most directly involved in shaping and delivering business success over the medium to long term. In 2014, a conditional award of shares was subject to the achievement of a variety of performance conditions, which vest after three years subject to the employee remaining employed by the Group. From 2015, the awards were made as nil-cost options, and also had a two-year additional holding period after the end of the performance period, before vesting takes place. The award made in 2014 vests based 50 per cent on achievement of IAG's TSR performance targets relative to the MSCI European Transportation Index, and 50 per cent based on achievement of earnings per share targets. The awards made from 2015 will vest based one-third on achievement of IAG's TSR performance targets relative to the MSCI European Transportation Index, one-third based on achievement of earnings per share targets, and one-third based on achievement of Return on Invested Capital targets.

b IAG Incentive Award Deferral Plan

c Share-based payment schemes summary

	19,735	6,554	3,502	4,350	18,437	60
Incentive Award Deferral Plans	5,681	657	125	1,914	4,299	17
Performance Share Plans	14,054	5,897	3,377	2,436	14,138	43
	'000s	'000s	'000s	'000s	'000s	'000s
	Outstanding at January 1, 2017	Granted number	Lapsed number	Vested number	Outstanding at December 31, 2017	Vested and exercisable December 31, 2017

The fair value of equity-settled share-based payment plans determined using the Monte-Carlo valuation model, taking into account the terms and conditions upon which the plans were granted, used the following assumptions:

	December 31, 2017	December 31, 2016
Expected share price volatility (per cent)	35	30
Expected comparator group volatility (per cent)	20	20
Expected comparator correlation (per cent)	65	60
Expected life of options (years)	4.8	4.8
Weighted average share price at date of grant (£)	5.46	5.41
Weighted average fair value (£)	3.66	2.27

Volatility was calculated with reference to the Group's weekly pound sterling share price volatility. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The fair value of the PSP also takes into account a market condition of TSR as compared to strategic competitors. No other features of share-based payment plans granted were incorporated into the measurement of fair value.

The Group recognised a share-based payment charge of €33 million for the year to December 31, 2017 (2016: €36 million).

30 Other reserves and non-controlling interests

For the year to December 31, 2017

Retained earnings	Unrealised gains and losses1	Currency translation2	Equity portion of convertible bond3	Merger reserve4	Redeemed capital reserve5	Total other reserves	Non controlling interest6
952	(299)	(6)	101		–	(1,719)	308
2,001	–	–	–	–	–	2,001	20


–	84	–	–	–	–	84	–
–	(38)	–	–	–	–	(38)	–
–	(19)	–	–	–	–	(19)	–
–	101	–	–	–	–	101	–
–	9	–	–	–	–		–
							–
							–
							–
							–
							–
							–
							(1)
							–
–	–	–	–	–	–		(20)
2,758	(162)	(152)	101		37	115	307
	– 739 34 (33) (518) (500) – 83	– – – – – – – –	(146) – – – – – – –	– – – – – – – –	Other reserves (2,467) – – – – – – – – (2,467)	– – – – – 37 – –	9 (146) 739 34 (33) (518) (463) – 83 –

30 Other reserves and non-controlling interests continued

For the year to December 31, 2016

				Other reserves
€ million	Retained earnings	Unrealised gains and losses1	Currency translation2	Equity portion of convertible bond3	Merger reserve4	Redeemed capital reserve5	Total other reserves	Non controlling interest6
January 1, 2016	1,160	(914)	500	173	(2,467)	–	(1,548)	308
Profit for the year	1,931	–	–	–	–	–	1,931	21
Other comprehensive income for the year
Cash flow hedges reclassified and reported in net profit:
Passenger revenue	–	(57)	–	–	–	–	(57)	–
Fuel and oil costs	–	918	–	–	–	–	918	–
Currency differences	–	(68)	–	–	–	–	(68)	–
Net change in fair value of cash flow hedges	–	(182)	–	–	–	–	(182)	–
Net change in fair value of available for-sale financial assets	–	4	–	–	–	–	4	–
Currency translation differences	–	–	(506)	–	–	–	(506)	–
Remeasurements of post-employment benefit obligations	(1,807)	–	–	–	–	–	(1,807)	–
Cost of share-based payments	35	–	–	–	–	–	35	–
Vesting of share-based payment schemes	(73)	–	–	–	–	–	(73)	–
Equity portion of convertible bond issued	45	–	–	(72)	–	–	(27)	–
Dividend	(339)	–	–	–	–	–	(339)	–
Dividend of a subsidiary	–	–	–	–	–	–	–	(1)
Distributions made to holders of perpetual securities	–	–	–	–	–	–	–	(20)
December 31, 2016	952	(299)	(6)	101	(2,467)	–	(1,719)	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 non-euro functional currency subsidiaries and investments accounted for under the equity method into the Group's reporting currency of euros. The movement through this reserve is affected by the fluctuations in the pound sterling to euro foreign exchange translation rate.

3 The equity portion of convertible bond reserve represents the equity portion of convertible bonds issued. At December 31, 2017, this related to the €500 million fixed rate 0.25 per cent convertible bond and the €500 million fixed rate 0.625 per cent convertible bond (note 22). At January 1, 2016 this also related to the €390 million fixed rate 1.75 per cent convertible bond. The equity portion of this bond was transferred to retained earnings on conversion during the year to December 31, 2016.

4 The merger reserve originated from the merger transaction between British Airways and Iberia. The balance represents the difference between the fair value of the Group on the transaction date, and the fair value of Iberia and the book value of British Airways (including its reserves).

5 The redeemed capital reserve represents the nominal value of the decrease in share capital, relating to cancelled shares.

6 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.

31 Employee benefit obligations

The Group operates a variety of post-employment benefit arrangements, covering both defined contribution and defined benefit schemes. The Group also has a scheme for flight crew who meet certain conditions and therefore have the option of being placed on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement (note 24).

Defined contribution schemes

The Group operates a number of defined contribution schemes for its employees.

Costs recognised in respect of defined contribution pension plans in Spain, UK and Ireland for the year to December 31, 2017 were €135 million (2016: €132 million).

Defined benefit schemes

i APS and NAPS

The principal funded defined benefit pension schemes within the Group are the Airways Pension Scheme (APS) and the New Airways Pension Scheme (NAPS), both of which are in the UK and are closed to new members. APS has been closed to new members since 1984 and NAPS closed to new members in 2003. On December 8, 2017, British Airways announced that it intends to open a new defined contribution pension scheme on April 1, 2018, replacing the principal defined contribution scheme (the British Airways Retirement Plan) and NAPS, which will close to future accrual on March 31, 2018. British Airways has offered a range of transition options to NAPS members. The NAPS liabilities are expected to fall as a result of the closure, because deferred pensions are assumed to rise in line with the Consumer Price Index (CPI) whereas salary growth for active members is assumed to rise in line with pay rises and promotions, which are assumed to be higher. The impact of the closure on the liabilities will only be known once members have selected their transition option, expected to be in March 2018. The changes are subject to the NAPS Trustee agreeing to amend the scheme's rules to enable closure to future accrual, and therefore have not been reflected in the financial statements for the year to December 31, 2017. The Group is committed to recovery plan payments of €339 million per year to NAPS until 2027, plus additional payments of up to €170 million per year, depending on British Airways' cash balance at the end of March each year.

The benefits provided under APS are based on final average pensionable pay and, for the majority of members, are subject to inflationary increases in payment in line with the Government's Pension Increase (Review) Orders (PIRO), which are based on CPI. The 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, with pension increases also based on PIRO, subject to a cap of a maximum of five per cent in any given year.

As reported in previous years, the Trustee of APS has proposed an additional discretionary increase above CPI inflation for pensions in payment for the year to March 31, 2014. British Airways challenged the decision as it considers the Trustee has no power to grant such increases, and initiated legal proceedings to determine the legitimacy of the discretionary increase. The outcome of the legal proceedings was issued in May 2017, that concluded the Trustee does have the power to grant discretionary increases, whilst reiterating they must take into consideration all relevant factors. The Group has appealed the judgment and awaits an appeal hearing, expected to be in May 2018. The payment of the 2013/14 discretionary increase is subject to an injunction as a result of British Airways' appeal. The delayed 2015 triennial valuation will be completed once the outcome of the appeal is known. British Airways is committed to an existing recovery plan, which sees deficit payments of €62 million per annum until March 2023.

APS and NAPS are governed by separate Trustee Boards. Although APS and NAPS have separate Trustee Boards, much of the business of the two schemes is common. Most main Board and committee meetings are held in tandem although each Trustee Board reaches its decisions independently. There are three sub committees which are separately responsible for the governance, operation and investments of each scheme. British Airways Pension Trustees Limited holds the assets of both schemes on behalf of their respective Trustees.

31 Employee benefit obligations continued

Deficit payment plans are agreed with the Trustee of each scheme every three years based on the actuarial valuation (triennial valuation) rather than the IAS 19 accounting valuation. The latest deficit recovery plan was agreed on the March 31, 2012 position with respect to APS and March 31, 2015 with respect to NAPS (note 31i). The actuarial valuations performed at March 31, 2012 and March 31, 2015 are different to the valuation performed at December 31, 2017 under IAS 19 'Employee benefits' mainly due to timing differences of the measurement dates and to the specific scheme assumptions in the actuarial valuation compared with IAS 19 guidance used in the accounting valuation assumptions.

ii Other plans

British Airways provides certain additional post-retirement healthcare benefits to eligible employees in the US through the US Post-Retirement Medical Benefit plan (US PRMB) which is considered to be a defined benefit scheme. In addition, Aer Lingus operates certain defined benefit plans, both funded and unfunded.

The defined benefit plans expose the Group to actuarial risks, such as longevity risk, interest rate risk, inflation risk, and market (investment) risk including currency risk.

iii Cash payments

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, 2017 net of service costs were €666 million (2016: €740 million) being the employer contributions of €899 million (2016: €936 million) less the current service cost of €233 million (2016: €196 million) (note 31b).

a Employee benefit schemes recognised on the Balance Sheet

	2017
€ million	APS	NAPS	Other1	Total
Scheme assets at fair value	9,185	19,558	429	29,172
Present value of scheme liabilities	(7,606)	(20,060)	(697)	(28,363)
Net pension asset/(liability)	1,579	(502)	(268)	809
Effect of the asset ceiling2	(570)	–	–	(570)
Other employee benefit obligations	–	–	(8)	(8)
December 31, 2017	1,009	(502)	(276)	231
Represented by:
Employee benefit assets				1,023
Employee benefit obligations				(792)
				231

	2016
€ million	APS	NAPS	Other1	Total
Scheme assets at fair value Present value of scheme liabilities	9,637 (8,036)	18,366 (20,376)	445 (781)	28,448 (29,193)
Net pension asset/(liability) Effect of the asset ceiling2	1,601 (580)	(2,010) –	(336) –	(745) (580)
Other employee benefit obligations	–	–	(10)	(10)
December 31, 2016	1,021	(2,010)	(346)	(1,335)
Represented by: Employee benefit assets Employee benefit obligations				1,028 (2,363) (1,335)

1 The present value of scheme liabilities for the US PRMB was €15 million at December 31, 2017 (2016: €18 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 Trustee.

b Amounts recognised in the Income statement

Pension costs charged to operating result are:

€ million	2017	2016
Defined benefit plans:
Current service cost	233	196
Past service cost1	2	(52)
	235	144
Defined contribution plans	135	132
Pension costs recorded as employee costs	370	276

1 In 2016, includes a past service gain of €51 million in respect of the US PMRB, which was classified as an exceptional item.

Pension costs charged/(credited) as finance costs are:

€ million	2017	2016
Interest income on scheme assets	(730)	(952)
Interest expense on scheme liabilities	743	921
Interest expense on asset ceiling	15	19
Net financing expense/(income) relating to pensions	28	(12)

c Remeasurements recognised in the Statement of other comprehensive income

€ million	2017	2016
Return on plan assets excluding interest income	(1,698)	(3,370)
Remeasurement of plan liabilities from changes in financial assumptions	530	5,624
Remeasurement of plan liabilities for changes in demographic assumptions	–	131
Remeasurement of experience losses/(gains)	274	(268)
Remeasurement of the APS asset ceiling	2	81
Exchange movements	(7)	56
Pension remeasurements (credited)/charged to Other comprehensive income	(899)	2,254

31 Employee benefit obligations continued

d Fair value of scheme assets

A reconciliation of the opening and closing balances of the fair value of scheme assets is set out below:

€ million	2017	2016
January 1	28,448	28,342
Interest income	730	952
Return on plan assets excluding interest income	1,698	3,370
Employer contributions1	881	906
Employee contributions	101	111
Benefits paid	(1,324)	(1,315)
Exchange movements	(1,362)	(3,918)
December 31	29,172	28,448

1 Includes employer contributions to APS of €109 million (2016: €112 million) and to NAPS of €748 million (2016: €763 million), of which deficit funding payments represented €104 million for APS (2016: €106 million) and €516 million for NAPS (2016: €638 million).

For both APS and NAPS, the Trustee has ultimate responsibility for decision making on investments matters, including the assetliability 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 achieve these objectives. The committee also deals with the monitoring of performance and activities, including work on developing the strategic benchmark to improve the risk return profile of the scheme where possible, as well as having a trigger based dynamic governance process to be able to take advantage of opportunities as they arise. The investment committee reviews the existing investment restrictions, performance benchmarks and targets, as well as continuing to develop the de-risking and liability hedging portfolio.

Both schemes use derivative instruments for investment purposes and to manage exposures to financial risks, such as interest rate, foreign exchange and liquidity risks arising in the normal course of business. Exposure to interest rate risk is managed through the use of Inflation-Linked Swap contracts. Foreign exchange forward contracts are entered into to mitigate the risk of currency fluctuations. For NAPS, a strategy exists to provide protection against the equity market downside risk by reducing some of the upside participation.

Scheme assets held by all defined benefit schemes operated by the Group at December 31 comprise:

€ million	2017	2016
Return seeking investments – equities
UK	2,646	3,049
Rest of world	6,677	7,495
	9,323	10,544
Return seeking investments – other
Private equity	777	825
Property	1,906	1,783
Alternative investments	1,023	1,204
	3,706	3,812
Liability matching investments
UK fixed bonds	4,885	3,850
Rest of world fixed bonds	95	116
UK index-linked bonds	7,614	6,690
Rest of world index-linked bonds	177	128
	12,771	10,784
Other
Cash and cash equivalents	670	511
Derivatives	178	228
Insurance contract	1,770	1,872
Longevity swap	(109)	(35)
Other	863	732
	29,172	28,448

All equities and bonds have quoted prices in active markets.

For APS and NAPS, the composition of the scheme assets is:

	December 31, 2017		December 31, 2016
€ million	APS	NAPS	APS	NAPS
Return seeking investments	742	12,074	1,582	12,565
Liability matching investments	6,428	6,240	5,936	4,728
	7,170	18,314	7,518	17,293
Insurance contract and related longevity swap	1,637	–	1,811	–
Other	378	1,244	308	1,073
Fair value of scheme assets	9,185	19,558	9,637	18,366

The strategic benchmark for asset allocations differentiates 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, 2017, the benchmark for APS, expressed as a percentage of the assets excluding the insurance contract, was 9.5 per cent (2016: 19 per cent) in return seeking assets and 90.5 per cent (2016: 81 per cent) in liability matching investments; and for NAPS the benchmark was 65 per cent (2016: 68 per cent) in return seeking assets and 35 per cent (2016: 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 (2016: 24 per cent) of the pensioner liabilities for an agreed list of members. The insurance contract is based on future increases to pensions in line with inflation and will match future obligations on that basis for that part of the scheme. The insurance contract can only be used to pay or fund employee benefits under the scheme. With effect from June 2010, the Trustee of APS also secured a longevity swap contract with Rothesay Life, which covers 20 per cent (2016: 20 per cent) of the pensioner liabilities for the same members covered by the insurance contract above. The value of the contract is based on the difference between the value of the payments expected to be received under this contract and the pensions payable by the scheme under the contract. During 2017, the Trustee of APS secured two additional longevity swap contracts, one with Canada Life and one with Partner Reinsurance covering 13 per cent and 8 per cent respectively of the pensioner liabilities as at January 1, 2017 (the commencement date of the contracts). The principal increases to pensions in payment under the contract are based on RPI inflation.

e Present value of scheme liabilities

A reconciliation of the opening and closing balances of the present value of the defined benefit obligations is set out below:

€ million	2017	2016
January 1	29,193	27,670
Current service cost	233	196
Past service cost	2	(52)
Interest expense	743	921
Remeasurements - financial assumptions	530	5,624
Remeasurements - demographic assumptions	–	131
Remeasurements of experience losses/(gains)	274	(268)
Benefits paid	(1,324)	(1,315)
Employee contributions	101	111
Exchange movements	(1,389)	(3,825)
December 31	28,363	29,193

The defined benefit obligation comprises €28 million (2016: €33 million) arising from unfunded plans and €28,335 million (2016: €29,160 million) from plans that are wholly or partly funded.

31 Employee benefit obligations continued

f Effect of the asset ceiling

A reconciliation of the effect of the asset ceiling representing the IAS 19 irrecoverable surplus in APS is set out below:

€ million	2017	2016
January 1	580	561
Interest expense	15	19
Remeasurements	2	81
Exchange movements	(27)	(81)
December 31	570	580

g Actuarial assumptions

The principal assumptions used for the purposes of the actuarial valuations were as follows:

		2017			2016
Per cent per annum	APS	NAPS	Other schemes	APS	NAPS	Other schemes
Discount rate1	2.45	2.55	1.6 – 3.6	2.60	2.70	1.5 – 4.1
Rate of increase in pensionable pay2	3.15	3.15	2.5 – 3.6	3.20	3.20	3.0 – 3.7
Rate of increase of pensions in payment3	2.05	2.05	0.0 – 3.5	2.10	2.10	0.4 – 3.5
RPI rate of inflation	3.15	3.15	2.5 – 3.1	3.20	3.20	3.0 – 3.2
CPI rate of inflation	2.05	2.05	1.75 – 3.0	2.10	2.10	1.75 – 3.0

1 Discount rate is determined by reference to the yield on high quality corporate bonds of currency and term consistent with the scheme liabilities.

2 Rate of increase in pensionable pay is assumed to be in line with long-term market inflation expectations. The inflation rate assumptions for NAPS and APS are based on the difference between the yields on index-linked and fixed-interest long-term government bonds.

3 It has been assumed that the rate of increase of pensions in payment will be in line with CPI for APS and NAPS. The APS Trustee has proposed an additional discretionary increase of 20 basis points for the year to March 31, 2014, a decision that British Airways has challenged. British Airways initiated legal proceedings to determine the legitimacy of the additional increase. The proposed discretionary increase is not included in the assumptions above.

Rate of increase in healthcare costs is based on medical trend rates of 6.5 per cent grading down to 5.0 per cent over seven years (2016: 6.75 per cent to 5.0 per cent over seven years).

In the UK, mortality rates are calculated using the standard SAPS mortality tables produced by the CMI for APS and NAPS. The standard mortality tables were selected based on the actual recent mortality experience of members and were adjusted to allow for future mortality changes. The current longevities underlying the values of the scheme liabilities were as follows:

Mortality assumptions	2017	2016
Life expectancy at age 60 for a:
– male currently aged 60	28.4	28.3
– male currently aged 40	29.7	29.5
– female currently aged 60	30.2	30.1
– female currently aged 40	32.8	32.6

At December 31, 2017, the weighted-average duration of the defined benefit obligation was 12 years for APS (2016: 12 years) and 20 years for NAPS (2016: 20 years).

In the US, mortality rates were based on the RP-14 mortality tables.

h Sensitivity analysis

Reasonable possible changes at the reporting date to significant actuarial assumptions, holding other assumptions constant, would have affected the present value of scheme liabilities by the amounts shown:

		Increase in scheme liabilities
€ million	APS	NAPS	Other schemes
Discount rate (decrease of 10 basis points)	91	396	8
Future salary growth (increase of 10 basis points)	1	68	1
Future pension growth (increase of 10 basis points)	68	317	1
Future mortality rate (one year increase in life expectancy)	339	577	2

Although the analysis does not take into account the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown.

i Funding

Pension contributions for APS and NAPS were determined by actuarial valuations made at March 31, 2012 and March 31, 2015 respectively, using assumptions and methodologies agreed between the Group and Trustee of each scheme. At the date of the actuarial valuation, the actuarial deficits of APS and NAPS amounted to €932 million and €3,818 million respectively. In order to address the deficits in the schemes, the Group has also committed to the following undiscounted deficit payments:

€ million	APS	NAPS
Within 12 months	62	339
2-5 years	249	1,359
5-10 years	16	1,612
Total expected deficit payments for APS and NAPS	327	3,310

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 scheme, subject to withholding taxes that would be payable by the Trustee. This determination has been made independently for each scheme. As such, no additional liability is required.

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 €593 million in employer contributions and deficit payments to its two significant post-retirement benefit plans in 2018. This is made up of €62 million and €339 million of deficit payments for APS and NAPS respectively as agreed at the latest triennial valuations. In addition, ongoing employer contributions for 2018 would be €5 million for APS and €187 million for NAPS if the NAPS scheme is not closed for future accrual. This excludes any additional deficit contribution that may become due depending on British Airways' cash balance at March 31, 2018. The Group expects to pay €283 million in 2019, having provided collateral on certain payments to APS and NAPS, which at December 31, 2017 amounted to €283 million (2016: €296 million). This amount would be payable in the event that the pension schemes are not fully funded on a conservative basis, with a gilts-based discount rate on January 1, 2019 as determined by the scheme actuary.

Until September 2019, if British Airways pays a dividend to IAG higher than 35 per cent of profit after tax it will either provide the scheme with a guarantee for 100 per cent of the amount above 35 per cent or 50 per cent of that amount as an additional cash contribution.

32 Contingent liabilities and guarantees

The Group has certain contingent liabilities which at December 31, 2017 amounted to €93 million (December 31, 2016: €124 million). No material losses are likely to arise from such contingent liabilities. The Group also has the following claims:

Cargo

The European Commission issued a decision in which it found that British Airways, and 10 other airline groups, had engaged in cartel activity in the air cargo sector (Original Decision). British Airways was fined €104 million. Following an appeal, the decision was subsequently partially annulled against British Airways (and annulled in full against the other appealing airlines) (General Counsel Judgment), and the fine was refunded in full. British Airways appealed the partial annulment to the Court of Justice, but that appeal was rejected.

In parallel, the European Commission chose not to appeal the General Counsel Judgment, and instead adopted a new decision in March 2017 (new decision). The new decision re-issued fines against all the participating carriers, which match those contained in the Original Decision. British Airways has therefore again been fined €104 million. British Airways has appealed the New Decision to the General Counsel again (as have other carriers).

A large number of claimants have brought proceedings in the English courts to recover damages from British Airways which, relying on the findings in the Commission decisions, they claim arise from the alleged cartel activity. 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.

British Airways is also party to similar litigation in a number of other jurisdictions including Germany, the Netherlands and Canada together with a number of other airlines. At present, the outcome of the proceedings is unknown. In each case, the precise effect, if any, of the alleged cartelising activity on the claimants will need to be assessed.

Pensions

The Trustees of the Airways Pension Scheme (APS) have proposed an additional discretionary increase above CPI for pensions in payment for the year to March 31, 2014. British Airways has challenged the decision, as it considers the Trustees have no power to grant such increases, and initiated legal proceedings to determine the legitimacy of the discretionary increase. The outcome of the legal proceedings was issued in May 2017, which concluded the Trustees do have the power to grant discretionary increases, whilst reiterating they must take into consideration all relevant factors, and ignore irrelevant factors. The Group has appealed the judgment and awaits an appeal hearing, currently expected to be mid-2018. Payment of the 2013/14 discretionary increase is subject to an injunction as a result of British Airways appeal. The delayed 2015 triennial valuation will be completed once the outcome of the appeal is known.

Guarantees

British Airways has provided collateral on certain payments to its pension schemes, APS and NAPS, which at December 31, 2017 amounted to €283 million (December 31, 2016: €296 million). This amount would be payable in the event that the pension schemes are not fully funded on a conservative basis with a gilts-based discount rate on January 1, 2019 and will be determined by the scheme actuary.

In addition, a guarantee amounting to €260 million (2016: €273 million) was issued by a third party in favour of APS, triggered in the event of British Airways' insolvency.

The Group also has other guarantees and indemnities entered into as part of the normal course of business, which at December 31, 2017 are not expected to result in material losses for the Group.

33 Related party transactions

The following transactions took place with related parties for the financial years to December 31:

€ million	2017	2016
Sales of goods and services
Sales to associates1	7	7
Sales to significant shareholders2	48	39
Purchases of goods and services
Purchases from associates3	58	49
Purchases from significant shareholders2	109	60

Receivables from related parties
Amounts owed by associates4	2	2
Amounts owed by significant shareholders5	1	1
Payables to related parties
Amounts owed to associates6	3	4
Amounts owed to significant shareholders5	3	–

1 Sales to associates: Consisted primarily of sales for airline related services to Dunwoody Airline Services (Holding) Limited (Dunwoody) of €6 million (2016: €7 million) and an amount of less than €1 million to Multiservicios Aeroportuarios, S.A. and Serpista, S.A. (2016: less than €1 million to Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. and Handling Guinea Ecuatorial, S.A.)

2 Sales to and purchases from significant shareholders: Related to interline services and wet leases with Qatar Airways.

3 Purchases from associates: Mainly included €35 million of airport auxiliary services purchased from Multiservicios Aeroportuarios, S.A. (2016: €33 million), €13 million of handling services provided by Dunwoody (2016: €10 million) and €9 million of maintenance services received from Serpista, S.A. (2016: €6 million).

4 Amounts owed by associates: For airline related services rendered, and included balances with Dunwoody of €1 million (2016: €1 million) and €1 million of services provided to Multiservicios Aeroportuarios, S.A., Serpista, S.A. and Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A. (2016: €1 million for Handling Guinea Ecuatorial, S.A., Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. and Iber-America Aerospace, LLC).

5 Amounts owed by and to significant shareholders: Related to Qatar Airways.
6 Amounts owed to associates: Consisted primarily of €1 million due to Dunwoody (2016: €1 million), €2 million to Serpista, S.A. (2016: €1 million) and less than €1 million to Multiservicios Aeroportuarios, S.A. (2016: €2 million).

During the year to December 31, 2017 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 (2016: €7 million) in relation to the costs of the Pension Protection Fund levy.

The Group has transactions with related parties that are conducted in the normal course of the airline business, which include the provision of airline and related services. All such transactions are carried out on an arm's length basis.

For the year to December 31, 2017, the Group has not made any provision for doubtful debts arising relating to amounts owed by related parties (2016: nil).

33 Related party transactions continued

Significant shareholders

In this instance, significant shareholders are those parties who have the power to participate in the financial and operating policy decisions of the Group, as a result of their shareholdings in the Group, but who do not have control over these policies.

At December 31, 2017 the Group had cash deposit balances with shareholders holding a participation of between 3 to 5 per cent, of €90 million (2016: €189 million).

Board of Directors and Management Committee remuneration

Compensation received by the Group's Board of Directors and Management Committee, in 2017 and 2016 is as follows:

€ million	December 31, 2017	December 31, 2016
Base salary, fees and benefits
Board of Directors' remuneration	9	7
Management Committee remuneration	17	10
	26	17

At December 31, 2017 the Board of Directors includes remuneration for two Executive Directors (December 31, 2016: two Executive Directors). The Management Committee includes remuneration for ten members (December 31, 2016: nine members).

The Company provides life insurance for all executive directors and the Management Committee. For the year to December 31, 2017 the Company's obligation was €38,000 (2016: €44,000).

At December 31, 2017 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating to the current members of the Management Committee totalled €4 million (2016 : €4 million).

No loan or credit transactions were outstanding with Directors or offices of the Group at December 31, 2017 (2016: nil).

Subsidiaries

Aer Lingus
Name and address	Principal activity	Country of Incorporation	Percentage of equity owned
Aer Lingus 2009 DCS Trustee Limited Dublin Airport, Dublin		Republic of Ireland	100%
Aer Lingus Beachey Limited
Penthouse Suite, Analyst House, Peel Road, Isle of Man, IM1 4LZ		Isle of Man	100%
Aer Lingus Group DAC* Dublin Airport, Dublin	Holding company	Republic of Ireland	100%
Aer Lingus Limited*		Republic of
Dublin Airport, Dublin	Airline operations	Ireland	100%
Aer Lingus (NI) Limited Aer Lingus Base, Belfast City Airport, Sydenham Bypass, Belfast, BT3 9JH		Northern Ireland	100%
Aer Lingus (Ireland) Limited Dublin Airport, Dublin		Republic of Ireland	100%
ALG Trustee Limited
Dublin Airport, Dublin		Isle of Man	100%
Dirnan Insurance Company Limited
Canon's Court, 22 Victoria Street, Hamilton, Bermuda, HM 12		Bermuda	100%
Santain Developments Limited		Republic of
Dublin Airport, Dublin		Ireland	100%
Shinagh Limited		Republic of
Dublin Airport, Dublin		Ireland	100%
Avios		Country of	Percentage of
Name and address		Incorporation	equity owned
Avios South Africa Proprietary Limited Block C, 1 Marignane Drive, Bonaero Park, Gauteng, 1619		South Africa	100%
Remotereport Trading Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB		England	100%
British Airways
Name and address	Principal activity	Country of Incorporation	Percentage of equity owned
Avios Group (AGL) Limited* Astral Towers, Betts Way, London Road,
Crawley, West Sussex, RH10 9XY	Airline marketing	England	100%
BA and AA Holdings Limited* Waterside, PO Box 365, Harmondsworth, UB7 0GB	Holding company	England	100%
BA Call Centre India Private Limited (callBA) F-42, East of Kailash, New Delhi, 110065		India	100%
BA Cityflyer Limited*
Waterside, PO Box 365, Harmondsworth, UB7 0GB	Airline 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% BritAir Holdings Limited* Waterside, PO Box 365, Harmondsworth, UB7 0GB Holding company England 100%

British Airways continued

Name and address	Principal activity	Country of Incorporation	Percentage of equity owned
British Airways (BA) Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB		England	100%
British Airways 777 Leasing Limited*
Waterside, PO Box 365, Harmondsworth, UB7 0GB	Aircraft financing	England	100%
British Airways Associated Companies Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB		England	100%

British Airways Avionic Engineering Limited* Waterside, PO Box 365, Harmondsworth, UB7 0GB	Aircraft maintenance	England	100%
British Airways Capital Limited
Queensway House, Hilgrove Street, St Helier, JE1 1ES		Jersey	100%
British Airways E-Jets Leasing Limited*
Canon's Court, 22 Victoria Street, Hamilton, HM 12	Aircraft financing	Bermuda	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*
13 Castle Street, St Helier, JE4 5UT	Holding company	Jersey	100%
British Airways Holidays Limited*
Waterside, PO Box 365, Harmondsworth, UB7 0GB	Package holidays	England	100%
British Airways Interior Engineering Limited*
Waterside, PO Box 365, Harmondsworth, UB7 0GB	Aircraft maintenance	England	100%
British Airways Leasing Limited* Waterside, PO Box 365, Harmondsworth, UB7 0GB	Aircraft financing	England	100%
British Airways Maintenance Cardiff Limited*
Waterside, PO Box 365, Harmondsworth, UB7 0GB	Aircraft 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%
Diamond Insurance Company Limited
1 st Floor, Rose House, 51-59 Circular Road, Douglas, IM1 1RE		Isle of Man	100%
Flyline Tele Sales & Services GmbH
Hermann Koehl-Strasse 3, Bremen, 28199		Germany	100%
Gatwick Ground Services Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB		England	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%
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%
British Mediterranean Airways Limited
Waterside, PO Box 365, Harmondsworth, UB7 0GB		England	99%

Iberia

Name and address	Principal activity	Country of Incorporation	Percentage of equity owned
Binter Finance B.V.
Prins Bernhardplein 200, Amsterdam, 1097 JB		Netherlands	100%
Compañía Explotación Aviones Cargueros Cargosur, S.A.
Calle Martínez Villergas 49, Madrid, 28027		Spain	100%
Compañía Operadora de Corto y Medio Radio Iberia
Express, S.A.* Calle Alcañiz 23, Madrid, 28006	Airline operations	Spain	100%

Iberia México, S.A.* Ejército Nacional 436, 9th Floor, Colonia Chapultepec-Morales, Mexico City, 11570	Storage and custody services	Mexico	100%
Iberia Tecnología, S.A.* Calle Martínez Villergas 49, Madrid, 28027	Holding company	Spain	100%
Compañía Auxiliar al Cargo Exprés, S.A.*
Centro de Carga Aérea, Parcela 2-5 Nave 6, Madrid, 28042	Cargo transport	Spain	75%
Iberia Desarrollo Barcelona, S.L.*	Airport infrastructure
Torre Tarragona, Planta 15, Calle Tarragona 161, Barcelona, 08014	development	Spain	75%
Auxiliar Logística Aeroportuaria, S.A.*	Airport logistics
Centro de Carga Aérea, Parcela 2-5 Nave 6, Madrid, 28042	and cargo terminal management	Spain	75%
IAG Cargo Limited Name and address		Country of Incorporation	Percentage of equity owned
Zenda Group Limited
Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, Middlesex, TW6 2JS		England	100%
International Consolidated Airlines Group S.A.		Country of	Percentage of
Name and address	Principal activity	Incorporation	equity owned
AERL Holding Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB		England	100%
British Airways Plc*
Waterside, PO Box 365, Harmondsworth, UB7 0GB	Airline operations	England	100%1
FLY LEVEL, S.L. El Caserío, Iberia Zona Industrial nº 2 (La Muñoza), Camino de
La Muñoza, s/n, 28042 Madrid		Spain	100%
FLYLEVEL UK Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB		England	100%
IAG Cargo Limited*
Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, TW6 2JS	Air freight operations	England	100%
IAG Connect Limited		Republic of
Waterside, PO Box 365, Harmondsworth, UB7 0GB		Ireland	100%
IAG GBS Limited*	IT, finance
Waterside, PO Box 365, Harmondsworth, UB7 0GB	and procurement services	England	100%
IAG GBS Poland sp z.o.o.*	IT, finance
ul. Opolska 114, Krakow, 31 -323	and procurement services	Poland	100%
IB Opco Holding, S.L. Calle Martínez Villergas 49, Madrid, 28027	Holding company	Spain	100%2
Iberia Líneas Aéreas de España, S.A. Operadora*
Calle Martínez Villergas 49, Madrid, 28027	Airline operations and maintenance	Spain	100%2

International Consolidated Airlines Group S.A. continued

		Country of	Percentage of
Name and address	Principal activity	Incorporation	equity owned
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, Barcelona, 08820	Airline operations	Spain	99.5%
* Principal subsidiaries

1 The Group holds 49.9% of the total number of voting rights and 99.65% of the total nominal share capital in British Airways Plc, such stake having almost 100% of the economic rights. The remaining nominal share capital and voting rights, representing 0.35% and 50.1% respectively, correspond to a trust established for the purposes of implementing the British Airways nationality structure.

2 The Group holds 49.9% of both the total nominal share capital and the total number of voting rights in IB Opco Holding, S.L. (and thus, indirectly, in Iberia Líneas Aéreas de España, S.A. Operadora), such stake having almost 100% of the economic rights in these companies. The remaining shares, representing 50.1% of the total nominal share capital and the total number of voting rights belong to a Spanish company incorporated for the purposes of implementing the Iberia nationality structure.

Investments accounted for using the equity method

		Percentage
Name and address	Country of Incorporation	of equity owned
Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A.
José Ortega y Gasset 22, 3rd Floor, 28006, Madrid	Spain	50.5%
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%
Multiservicios Aeroportuarios, S.A.
Avenida de Manoteras 46, 2nd Floor, 28050, Madrid	Spain	49%
Dunwoody Airline Services Limited
Building 552 Shoreham Road East, London Heathrow Airport, Hounslow, TW6 3UA	England	40%
Serpista, S.A.
Cardenal Marcelo Spínola 10, 28016, Madrid	Spain	39%
Programa Travel Club Agencia de Seguros Exclusiva, S.L.
Avenida de Bruselas 20, Alcobendas, 28108, Madrid	Spain	27%
Viajes Ame, S.A.
Avenida de Bruselas 20, Alcobendas, 28108, Madrid	Spain	27%
Air Miles España, S.A.
Avenida de Bruselas 20, Alcobendas, 28108, Madrid	Spain	26.7%

Available-for-sale financial assets

The Group's principal available-for-sale financial assets are as follows:

Name and address	Country of Incorporation	Percentage of equity owned	Currency	Shareholder's funds (million)	Profit/(loss) before tax (million)
Servicios de Instrucción de Vuelo, S.L.
Camino de La Muñoza 2, Madrid, 28042	Spain	19.9%	Euro	46	3
The Airline Group Limited
Brettenham House South, 5th Floor, Lancaster Place, London,			Pound
WC2N 7EN	England	16.7%	sterling	287	22
Comair Limited	South		South
1 Marignane Drive, Bonaero Park, 1619, Johannesburg	Africa	11.5%	African rand	1,543	435
Adquira España, S.A.
Plaza Cronos, 1 - 4th Floor, Madrid, 28037	Spain	10.0%	Euro	7	1

Alternative performance measures

The performance of the Group is assessed using a number of alternative performance measures (APMs), some of which have been identified as key performance indicators of the Group. The Group's results are presented both before and after exceptional items. Exceptional items are those that in management's view need to be separately disclosed by virtue of their size and incidence. Exceptional items are disclosed in note 4 of the consolidated financial statements. In addition, the Group's results are described using certain measures that are not defined under IFRS and are therefore considered to be APMs. These APMs are used to measure the outcome of the Group's strategy based on 'Unrivalled customer proposition', 'Value accretive and sustainable growth' and 'Efficiency and innovation'. Further information on why these APMs are used is provided in the Key performance indicators section. The definition of each APM presented in this report, together with a reconciliation to the nearest measure prepared in accordance with IFRS is presented below.

Operating profit and lease adjusted operating margin

Operating profit is the Group operating result before exceptional items.

Lease adjusted operating margin is operating profit adjusted for leases as a percentage of revenue. The lease adjustment reduces the fleet rental charge to 0.67 of the annual reported charge. This is to reflect the embedded interest expense component in leases; 0.67 is a commonly used ratio in the airline industry.

€ million	2017	2016	2015
Operating profit before exceptional items	3,015	2,535	2,335
Aircraft operating lease costs	888	759	659
Aircraft operating lease costs multiplied by 0.67	(595)	(509)	(442)
	3,308	2,785	2,552
Revenue	22,972	22,567	22,858
Lease adjusted operating margin	14.4%	12.3%	11.2%

Adjusted earnings per share

Earnings are based on results before exceptional items after tax and adjusted for earnings attributable to equity holders and interest on convertible bonds, divided by the weighted average number of ordinary shares, adjusted for the dilutive impact of the assumed conversion of the bonds and employee share schemes outstanding.

€ million	2017	2016	2015
Earnings attributable to equity holders of the parent	2,001	1,931	1,495
Exceptional items	222	38	23
Earnings attributable to equity holders of the parent before exceptional items	2,223	1,969	1,518
Interest expense on convertible bonds	17	26	25
Adjusted earnings	2,240	1,995	1,543
Weighted average number of shares used for diluted earnings per share	2,179,353	2,210,990	2,159,937
Weighted average number of shares used for basic earnings per share	2,088,489	2,075,568	2,034,197
Adjusted earnings per share (€ cents)	102.8	90.2	71.4

Basic earnings per share before exceptional items (€ cents)	106.4	94.9	74.6

EBITDAR

EBITDAR is calculated as operating profit before exceptional items, depreciation, amortisation and impairment and aircraft operating lease costs.

€ million	2017	2016	2015
Operating profit before exceptional items	3,015	2,535	2,335
Depreciation, amortisation and impairment	1,184	1,287	1,307
Aircraft operating lease costs	888	759	659
EBITDAR	5,087	4,581	4,301

Return on Invested Capital

Return on Invested Capital (RoIC) is defined as EBITDAR, less adjusted aircraft operating lease costs, fleet depreciation charge adjusted for inflation, and the depreciation charge for other property, plant and equipment, divided by invested capital. It is expressed as a percentage.

The lease adjustment reduces aircraft operating lease costs to 0.67 of the annual reported charge. The inflation adjustment is applied to the fleet depreciation charge and is calculated using a 1.5 per cent inflation rate over the weighted average age of the on balance sheet fleet to allow for inflation and efficiencies of new fleet.

Invested capital is the fleet net book value at the balance sheet date, excluding progress payments for fleet not yet delivered and adjusted for inflation, plus the net book value of the remaining property, plant and equipment plus annual aircraft operating lease costs multiplied by 8. Intangible assets are excluded from the calculation.

€ million	2017	2016	20152
EBITDAR	5,087	4,581	4,463
Less: Aircraft operating lease costs multiplied by 0.67	(595)	(509)	(463)
Less: Depreciation charge for fleet assets multiplied by inflation adjustment	(1,133)	(1,231)	(1,277)
Less: Depreciation charge for other property, plant and equipment	(140)	(153)	(162)
	3,219	2,688	2,561
Invested capital
Fleet book value excluding progress payments	9,275	9,930	11,090
Inflation adjustment1	1.23	1.21	1.16
	11,374	12,048	12,883
Net book value of other property, plant and equipment	1,613	1,683	1,798

Return on Invested Capital 16.0% 13.6% 12.7%

1 Presented to two decimal places and calculated using a 1.5 per cent inflation rate over the weighted average age of the on balance sheet fleet (2017 13.7 years; 2016 12.9 years). This calculation was revised in 2016 to reflect the average age of on balance sheet aircraft, weighted based on market reference prices for replacement aircraft in USD. 2015 calculation was based on the accumulated depreciation and current year fleet depreciation as a proxy for weighted average age but was impacted by the foreign exchange fluctuations in period end book values and date of acquisition by the airline versus manufacture date.

Aircraft operating lease costs multiplied by 8 7,104 6,072 5,520

20,091 19,803 20,201

2 In 2015, the definition of invested capital excluded all progress payments. 2015 comparatives have not been restated. 2015 comparatives include annualised operating profit, rental charges and depreciation charges for Aer Lingus.

Adjusted net debt to EBITDAR

Adjusted net debt is calculated as long-term borrowings, less cash and cash equivalents and other current interest-bearing deposits, plus annual aircraft operating lease costs multiplied by 8. This is divided by EBITDAR to arrive at adjusted net debt to EBITDAR. 2015 has been adjusted to include annualised results for Aer Lingus.

€ million	2017	2016	2015
Interest-bearing long-term borrowings	7,331	8,515	8,630
Cash and cash equivalents	(3,292)	(3,337)	(2,909)
Other current interest-bearing deposits	(3,384)	(3,091)	(2,947)
Net debt	655	2,087	2,774
Aircraft operating lease costs multiplied by 8	7,104	6,072	5,736
Adjusted net debt	7,759	8,159	8,510
EBITDAR	5,087	4,581	4,463
Adjusted net debt to EBITDAR	1.5	1.8	1.9

Adjusted gearing

The Group monitors capital on the basis of the adjusted gearing ratio. Adjusted gearing is defined as adjusted net debt divided by adjusted net debt and adjusted equity and is expressed as a percentage. Adjusted equity is reported equity adjusted for the cumulative charge to reserves following the amendment to IAS 19 'Employee benefits' accounting standard, up to a maximum of €2,077 million, representing the adjustment to equity on adoption of the amendment to the standard.

€ million	2017	2016	2015
Adjusted net debt	7,759	8,159	8,510
Equity	7,396	5,664	5,534
IAS 19 cumulative charge to reserves (post-tax)	2,077	2,077	1,794
Adjusted equity	9,473	7,741	7,328
Adjusted net debt plus adjusted equity	17,232	15,900	15,838
Adjusted gearing	45%	51%	54%

Equity free cash flow

Equity free cash flow is EBITDA less cash tax, cash interest paid and received and cash capital expenditure net of proceeds from sale of property, plant and equipment and intangible assets. EBITDA is calculated as operating profit before exceptional items, depreciation, amortisation and impairment.

€ million	2017	2016	2015
Operating profit before exceptional items	3,015	2,535	2,335
Depreciation, amortisation and impairment	1,184	1,287	1,307
EBITDA	4,199	3,822	3,642

Interest paid	(122)	(185)	(197)
Interest received	29	37	48
Tax paid	(237)	(318)	(245)
Acquisition of property plant and equipment and intangible assets	(1,490)	(3,038)	(2,040)
Proceeds from sale of property, plant and equipment and intangible assets	306	1,737	273
Equity free cash flow	2,685	2,055	1,481

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. AND SUBSIDIARIES

Consolidated management report for the year ended December 31, 2017

A Group portfolio built to maximise value

IAG's vision is to be the world's leading airline group, maximising sustainable value creation for its shareholders and customers. Its business model makes it wellpositioned to achieve this in an increasingly competitive and fast-paced environment.

At IAG we don't believe in one-size-fits-all and, through the Group structure, IAG's diverse set of airlines and associated businesses can together deliver an unrivalled customer proposition across the full spectrum of travel occasions.

The Group portfolio sits on a common integrated platform driving efficiency and simplicity while still allowing each operating company to achieve its individual performance targets and maintain its unique identity.

Unique operating companies targeting specific customer needs and geographies

The Group portfolio of world-class operations and brands offers distinct customer propositions, from full service longhaul to low-cost shorthaul carriers, each focused on identifiable geographies, markets and customer segments. The Group structure enables the operating companies to enhance customer centricity in their specific segments while collectively providing strong competition to other airlines in the market. This allows IAG airlines to become leaders in their respective markets with the flexibility to adapt rapidly to changing dynamics.

The Group's governance model further supports portfolio delivery with IAG setting financial targets, directing corporate strategy and overseeing performance while keeping financial and operational accountability at the individual company level.

Industry consolidation and leadership

IAG believes the industry is too fragmented and that airline consolidation will continue to be a critical enabler for sustainable industry improvements on both a European and a global scale.

IAG continually evaluates the market for value accretive growth opportunities to reinforce existing or develop new leadership positions, further shareholder returns and serve customer demand. IAG actively responds through acquisitions, partnerships, organic growth and network development, as demonstrated this year through the launch of LEVEL, the commencement of 38 new routes and the acquisition of slots at London Gatwick.

IAG is deliberately structured to allow consolidation and organic options associated with new operating companies to be assessed and developed without unnecessarily distracting the existing operating companies from executing their own business objectives.

Common integrated platform

IAG continues to enhance its integrated platform which enables the Group's airlines to share best practices effectively, generate efficiencies and benefit from standardised processes. IAG's scale, strength and strategic governance deliver cost-effective and scalable systems that support simplification and drive ongoing

revenue improvement opportunities and enhanced service delivery.

Through a partnering approach with the operating companies, IAG's Global Business Services (GBS) continues to produce significant cost benefits for the business through centralised and higher quality back office functions. As a result, IAG has successfully leveraged cost and revenue opportunities and beaten its synergy targets year-on-year, helping the Group deliver consistently higher returns to its shareholders. The platform also supports additional Group revenue generation and customer loyalty through Avios, its shared global reward currency and through IAG Cargo.

The integrated platform is actively supported by IAG Digital, which works across critical business areas to identify, evaluate and implement digital disruption opportunities that better address customer needs (new services and products) and drive step changes in efficiencies.

IAG's strategic priorities

As the IAG model has both grown and matured since its formation in January 2011, the Group has continued to evolve its strategic priorities which currently include:

Strengthening a portfolio of world-class brands and operations 1

We achieve this by

ensuring our operating companies collectively deliver an unrivalled proposition able to fulfil customers' needs across the full spectrum of travel occasions;
using consolidation and developing organic options to differentiate the Group from its competitors and ensure customer demands are met where they are currently underserved;
deepening customer centricity to win a disproportionate share in each customer segment.

Our activity in 2017

Throughout 2017 IAG undertook a focused review of its customers' emotional and functional needs, identifying a clear view of customer and travel occasion segmentation to better leverage the Group portfolio and ensure each airline is centred on fulfilling the needs and capturing a disproportionate share of its respective markets. Net Promoter Score (NPS) targets to provide a consistent and comparable measure of our customers' satisfaction were also established among the airlines.

With a greater understanding of customers' needs and expectations, 2017 saw significant investment in customer product across the Group portfolio focused on strengthening current customer propositions and positioning IAG brands to be leaders in their respective market segments. This investment included commencing both shorthaul and longhaul Wi-Fi roll-out, improved catering and amenity offerings, aircraft refurbishment, the launch of premium economy on Iberia, opening of new lounges, updated apps and web-browser experiences and transformations to the customer journey at the airport including greater automation at London Heathrow Terminal 5 to reduce queuing and focused development of the Dublin hub to support Aer Lingus' market leading NPS performance and future growth opportunities.

IAG also launched its new low-cost longhaul airline brand, LEVEL, which successfully started operations from Barcelona in June 2017. LEVEL has allowed IAG to address a new customer segment by offering a price sensitive leisure focused proposition that democratises travel opportunities.

Our priorities for 2018

IAG is committed to strengthening its customer focus to ensure its operating companies further adapt and focus their business models to reflect and meet customer expectations. Customer product improvements will be ongoing with full deployment of premium economy across Iberia, the opening of new lounges, entry into service of new generation aircraft, improved end-to-end digital experiences and the continued roll-out of Wi-Fi and seat power across the Group's fleet.

Additional LEVEL services from Paris and Barcelona will also be introduced in 2018 and LEVEL will be developed into an independent operating airline with its own management team to ensure customer focused development and growth.

2 Growing global leadership positions

We achieve this by

pursuing value accretive organic and inorganic growth options to reinforce existing or pursue new global leadership positions;
attracting and developing the best people in the industry;
setting the industry standard for environmental stewardship, safety and security.

Our activity in 2017

IAG reinforced its leadership positions in its home markets of London, Madrid, Barcelona, Dublin and Rome with the addition of 38 new routes including the introduction of LEVEL longhaul routes from Barcelona. The Group continued to optimise its longhaul network and customer proposition together with its joint business partners and Iberia successfully joined IAG's Siberian joint business.

The Group was also able to strengthen its position across Europe, taking advantage of consolidation opportunities with the acquisition of slots at London Gatwick. Disappointingly IAG was unable to secure its acquisition of assets from NIKI after insolvency proceedings moved from Germany to Austria, but remains interested in pursuing organic growth in the region. Operational challenges for competitors also boosted IAG airlines' performance.

Following its successful campaigning for the industry to agree on a global deal to address carbon emissions and its initiatives to improve its own efficiency, IAG was recognised by the Carbon Disclosure Project as a global leader for its actions to combat environmental risks worldwide, working to cut emissions, mitigate climate risks and develop a low-carbon economy. The Group's safety record in 2017 was also noted with several IAG airlines listed in the top 20 safest airlines for their respective categories by AirlineRatings.com.

Our priorities for 2018

Sustainable value accretive growth will be a priority for the Group with the launch of further new routes, aircraft up-gauging, additional frequencies and improved connections at hub airports. Longhaul expansion is focused on the Group's key markets in North and South America, but will also see growing demand being served in South East and North Asia, and opportunities for growth are also being explored in Africa.

British Airways will grow significantly at London Gatwick following the acquisition of slots, strengthening and expanding its network offering in Europe.

IAG will continue to prioritise its assessment of consolidation opportunities in Europe to further enhance its existing portfolio and shape industry consolidation where value accretive targets are identified. LEVEL's operations will also be developed and expanded during 2018.

Enhancing the common integrated platform

We achieve this by

reducing costs and improving efficiency by leveraging Group scale and synergy opportunities;
engaging in Group-wide innovation and digital mindset to enhance productivity and best serve our customers;
driving incremental value with external business-tobusiness services.

Our activity in 2017

The Group renewed its focus on deepening and accelerating cost reduction programmes whilst also ensuring customer value creation. Further efficiencies and cost savings from the common platform were realised and both Aer Lingus and Vueling were fully integrated into the GBS platform. Vueling and Aer Lingus also adopted Avios as their loyalty currency through the relaunch of their respective loyalty programmes. The Group continued to harmonise the fleet with increased focus prior to the start of deliveries of the Airbus A320neos. Maintenance opportunities were pursued with simplified management structures at British Airways and Iberia and optimisation of external spend.

IAG Cargo successfully launched Zenda, a crossborder shipping product for e-commerce, and a new interactive and Wi-Fi connected in-flight experience was launched on LEVEL services. Digital innovation was promoted through the launch of New Distribution Capability (NDC) and two successful 'Hangar 51' accelerator programmes, providing investment and partnering opportunities with ambitious and driven start-ups. Automated systems were also tested and implemented effectively, such as the Mototok aircraft tugs. Mototok is a high tech electrical aircraft push back tug that uses radio remote control.

Our priorities for 2018

In 2018 IAG will focus on moving away from order-centric airline systems to a customer-centric process by building on NDC and focusing on 'shop, order, pay'. It will focus on developing capabilities to support data customisation and data analytics, and continue investment in on-demand ancillaries, machine-driven pricing and automating the business above and below the wing.

Focusing on sustainable returns

We delivered healthy results and we achieved our customer satisfaction target. We are building on our strengths to generate sustainable returns to our shareholders and to exceed their expectations.

items was €2,243 million, up 12.7 per cent versus 2016. The increase reflects a very good operating profit performance.

The adjusted EPS measure was also improved by the share buyback programme which decreased the weighted average number of shares.

from an increase in the notional capitalised value of aircraft operating leases.

cent RoIC.

The result marked a significant step in achieving a sustainable 15 per

benefiting from fuel tailwinds and from management cost saving initiatives. This reflects the Group's drive towards achieving a competitive and efficient cost base with improved productivity and non-

fuel cost savings.

We use key performance indicators (KPIs) to assess and to monitor the Group's performance against our strategy and our long-term goals1 . We evaluate opportunities based on the strategic objectives of the Group and using the KPIs to identify and generate sustainable value for our shareholders. Our financial metrics are before exceptional items and include lease related adjustments commonly used to analyse the airline industry.

These adjustments improve the understanding of the Group's performance and the comparability between periods.

A customer measure, Net Promoter Score (NPS), was introduced in the 2017 annual incentive plan at the Group level. We believe customer satisfaction is an important lead indicator of the Group financial performance and is now one of the Group's KPIs.

Through this year's business planning cycle, we set out our targets for the period 2018–2022. We reiterated our RoIC and lease adjusted operating margin targets in a higher growth environment. We are aiming to generate on average c.€6.5 billion EBITDAR and €2.5 billion equity free cash flow per annum over the period 2018-2022.

Adjusted net debt to EBITDAR

Definition and purpose A A A

Adjusted net debt to EBITDAR is calculated as long-term borrowings plus capitalised operating aircraft lease costs less current interestbearing deposits and cash and cash equivalents divided by EBITDAR2 . We use this measure to monitor our leverage and to assess financial headroom through the same lens as financial institutions.

Performance

In 2017 the Group's financial headroom rose as adjusted net debt to EBITDAR decreased to 1.5 from 1.8 in 2016 with both adjusted net debt and EBITDAR improving.

Adjusted net debt reduced by €400 million to €7,759 million from a stronger cash position and lower long-term borrowings partially offset by an increase in the notional aircraft operating lease debt.

Performance

Definition and purpose EBITDAR is the Group operating profit before exceptional items, depreciation, amortisation and impairment and aircraft operating lease costs. It is an indicator of the profitability of the business and of the core operating cash flows generated by our business model. This measure is not impacted by the financing structure of our aircraft.

4,581 4,301

5,087

2015 2016 2017 2018/22

* Last year's goals for 2016-2020

(average

c€5.3bn*

EBITDAR increased €506 million versus last year reflecting the Group's profitable growth as the EBITDAR margin improved circa 2 points with ASKs up 2.6 per cent and contributing to increasing our operating cash flows.

EBITDAR (€m) Equity free cash flow (€m)

Definition and purpose

Equity free cash flow is defined as EBITDA before exceptional items less cash tax, cash interest paid and received and cash capital expenditure net of proceeds from sale of property, plant and equipment and intangible assets. It reflects the cash generated by the business that is available to return to our shareholders, to improve leverage and to undertake inorganic growth opportunities.

Performance

The Group's equity free cash flow rose €630 million to €2,685 million in 2017 due to the increase in EBITDAR and EBITDA before exceptional items and slightly lower net CAPEX. The Group's equity free cash flow was above our long term planning goal reflecting a low CAPEX year with three aircraft delivered on balance sheet. The Group continues to focus on its capital discipline and flexibility.

Net Promoter Score

Definition and purpose

NPS is a non-financial metric which measures the likelihood of a customer recommending an IAG operating carrier. Our goal is not simply customer satisfaction, but building a base of promoters. Positive customer experience and advocacy drive competitive advantage, leading to faster organic growth and lower costs.

Performance R

The IAG target has been reached in 2017. Strong punctuality performance across the Group, in addition to customer service initiatives have been key to meeting the target.

1 IAG reviewed its long-term planning objectives as part of the Group's Business Plan process and defined goals for the next five years for the Group and for each operating company. For each of the objectives, the Business Plan is based on a number of assumptions relevant to our industry, including economic growth in our strategic markets, fuel price and foreign exchange rates. The goals and targets of the Group are therefore subject to risk. For a list of the risks to our business, refer to the Risk management and principal risk factors section.

2 In 2015, the full year results of Aer Lingus were included in the calculation of RoIC and adjusted net debt to EBITDAR.

3 The Group measure is the weighted average of NPS scores from each airline based on passengers numbers. It is calculated from April 1, 2017.

Engaging in Group-wide innovation and an agile mind-set

The IAG Platform has been established. We accomplished what we said we would do: built a platform allowing us to exploit revenue and cost synergies that the operating companies could not achieve alone. Whilst we have already extracted significant value for the Group, the teams continue to develop innovative and agile initiatives.

IAG Platform

A key element of our business model is the IAG Platform including the wellestablished IAG Cargo and Avios, businesses. The Platform also includes IAG GBS, which delivers IT, procurement, and finance support, and develops Group initiatives in maintenance and digital.

Global Business Services (GBS)

Leveraging the benefits of an efficient and competitive platform whilst developing agility and innovation

IT

GBS Group IT achieved its target of €90 million cost savings on a like for like basis at the end of 2017, a year earlier than anticipated. The first full year of services has transformed the operating model of end user computing, service operations and networks in British Airways, Iberia, Aer Lingus, IAG Cargo and Avios.

As part of the strategy to introduce cloud-based world-class solutions, a contract has been signed for the colocation of the Group hybrid cloud platform with BT.

Group IT has introduced a new way of working through product-based teams with digital partners that will enable speed to market through an iterative and agile approach, and maximise the new hybrid cloud infrastructure.

Cybersecurity is, and will continue to be, a priority across the Group. In 2018, IT will leverage the expertise of strategic global partners to help ensure early detection of risk threats through an enhanced 24/7 Security Operations Centre. Anti-robotic website protection, penetration testing and scans for all operating companies will be supporting Payment Card Industry (PCI) compliance and General Data Protection Regulation

(GDPR) readiness. The expertise of our world-class global partners will help to deliver resilience and a scalable IT platform for the Group, enhancing our disaster recovery service. This will include the mitigation of obsolescence of the technology stack and a stable, workable plan for the migration of critical core business applications.

Procurement

The transformation of procurement into a centralised function was completed in 2016. In 2017, the teams finalised the integration of the requirements from Vueling, Aer Lingus and LEVEL into the Group model and continued to leverage the Group scale. Group procurement delivered more than €200 million (of non-fuel) cost savings across the Group in 2017.

Main achievements:

the restructure of the Iberia Airbus A340 engine maintenance contract to provide more focused service requirements and a reduction in costs;
the set-up of global framework agreements with several of our strategic IT partners to deliver application support to the Group, improving resilience;
the delivery of programmes to provide harmonised seats in economy and premium economy cabins for the airlines, as well as delivery of business class products for Iberia and Aer Lingus. Group procurement also continues to support British Airways in its plans to replace its Club World seat.

In 2018, Group procurement will launch new tools to drive further synergies, and streamline and automate processes such as a new procurement platform and a supplier relationship management system. These will provide a common and more automated approach to assessing our suppliers to better address Corporate Social Responsibility, resilience and legislative requirements.

Finance

MRO / Fleet IAG Connect Digital

GBS Finance continued to focus on the simplification, harmonisation and automation of processes, constantly looking for cost synergies.

Main achievements include:

the launch of a common system platform for the Group;
the development of a specific GBS risk control matrix, improving transparency of the service performance and reporting framework;
the renegotiation of the delivery of services with Accenture for finance and operational procurement activities.

IAG Connect

Launching .air

During 2017, the responsibility for the Group's in-flight connectivity strategy and roll-out has moved to a new subsidiary company, IAG Connect, to bring scale and efficiency to the Group's in-flight connectivity through an e-commerce platform. The Group's in-flight connectivity portal was launched in June with the start of LEVEL operations. The portal, named '.air' offers entertainment, shopping and Wi-Fi and allows customers to pair their smartphone or tablet to the seatback

screen to pay for on-board purchases. The .air portal started the initial roll-out on Iberia and British Airways in the fourth quarter of 2017, celebrated through a partnership with Visa. By 2019, 90 per cent of IAG's airlines' fleet will be fitted with a high quality connection. The .air portal will continue to evolve with new functionality and partnerships. It is built in a modular way, enabling the airlines to tailor the offer to suit their individual customer propositions.

Maintenance, repair and overhaul (MRO) and Fleet

In MRO, the Group's strategy has been defined for each maintenance activity and is in execution phase to close the gap to market. Initiatives delivered to date have closed half of the gaps identified, focusing on three areas: achievement of a best in class performance, footprint reduction and optimisation of supplier spend.

Aircraft Fleet

Number in service with Group companies

Main achievements include:

a 10 per cent headcount reduction through productivity gains, consolidation and outsourcing;
the simplification of management structures at British Airways and Iberia;
the implementation of lean processes in British Airways and Iberia to reduce cost and turnaround times;
the closure of British Airways paint hangar and component facilities activities in London;
the consolidation of Iberia component shops in Madrid Barajas airport into Iberia owned premises;
the outsourcing of line maintenance activities in outstations (19 stations in Europe); and the consolidation of those activities in North America and Group hubs;
the reduction in supplier spend by 10 per cent jointly with GBS through a review and alignment of contact specification for the activities of line maintenance and component repair.

In addition to the delivery of the current strategy, the teams continue to evaluate further consolidation and outsourcing opportunities to ensure robustness and market competitiveness going forward.

In Fleet, the Group continues harmonisation plans with increased focus on the Airbus A320neos which will be delivered from 2018.

	On balance sheet fixed assets	Off balance sheet operating leases	Total December 31, 2017	Total December 31, 2016	Changes since December 31, 2016	Future deliveries	Options
Airbus A318	1	–	1	2	(1)	–	–
Airbus A319	22	42	64	65	(1)	–	–
Airbus A320	71	147	218	227	(9)	98	128
Airbus A321	28	23	51	47	4	21	–
Airbus A330-200	7	10	17	14	3	4	3
Airbus A330-300	5	10	15	14	1	–	–
Airbus A340-600	11	6	17	17	–	–	–
Airbus A350	–	–	–	–	–	43	52
Airbus A380	12	–	12	12	–	–	7
Boeing 747-400	36	–	36	37	(1)	–	–
Boeing 757-200	1	2	3	3	–	–	–
Boeing 767-300	8	–	8	8	–	–	–
Boeing 777-200	41	5	46	46	–	–	–
Boeing 777-300	9	3	12	12	–	–	–
Boeing 787-8	9	–	9	8	1	3	12
Boeing 787-9	7	9	16	16	–	2	6
Boeing 787-10	–	–	–	–	–	12	–
Embraer E170	6	–	6	6	–	–	–
Embraer E190	9	6	15	14	1	–	–
Group total	283	263	546	548	(2)	183	208

As well as those aircraft in service the Group also holds 5 aircraft (2016: 9) not in service.

Building an effective risk management culture

The Board of Directors has overall responsibility for ensuring that IAG has an appropriate risk management framework, including the determination of the nature and extent of risk it is willing to take to achieve its strategic objectives. It has oversight of the Group's operations to ensure that internal controls are in place and operate effectively. Management is responsible for the execution of the agreed plans. IAG has an Enterprise Risk Management (ERM) policy which has been reviewed and approved by the Board again in October 2017.

This policy sets the framework for 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 its best practices are shared across the Group.

Risk owners are responsible for identifying risks in their area of responsibility. All risks are assessed for likelihood and impact against the Group Business Plan and strategy. Key controls and mitigations are documented including appropriate response plans.

Every risk has appropriate Management Committee oversight.

Risk management professionals ensure that the framework is embedded across the Group. They maintain risk maps for each operating company and at the IAG Group level, and ensure consistency over the risk management process.

Risk maps are reviewed by each operating company's 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. Each operating company's management committee confirms to its operating company board as to the identification, quantification and management of risks within its operating company as a whole annually.

The management committee of each operating company escalates risks that have Group impact or require Group consideration in line with the Group ERM framework.

At the Group level, key risks from the operating companies, together with Group-wide risks, are maintained in a Group risk map. The IAG Management Committee reviews the Group risk map twice during the year in advance of reviews by the Audit and Compliance Committee in accordance with the April 2016 UK Corporate Governance Code and the Spanish Good Governance Code for Listed Companies.

The IAG Board of Directors discussed risk at a number of meetings in addition to the risk map review, including a review of the assessment of Group performance against its risk appetite.

IAG has 19 risk appetite statements which inform the business, either qualitatively or quantitatively, on the Board's appetite for certain risks. Each risk appetite statement formalises how performance is monitored either on a Group-wide basis or within major projects. These statements were reviewed for relevance and appropriateness of tolerances at the year end and it was confirmed to the Board that the Group continued to operate within each of the risk appetite statements.

The highly regulated and commercially competitive environment, together with the businesses' operational complexity, exposes the Group to a number of risks. We remain focused on mitigating these risks at all levels in the business although many remain outside our control; for example, changes in political and economic environment, government regulation, events outside of our control causing operational disruption, fuel price and foreign exchange volatility.

Risks are grouped into four categories: strategic, business and operational, financial, and compliance and regulatory risks.

Guidance is provided below on the key risks that may threaten the Group's business model, future performance, solvency and liquidity.

Where there are particular circumstances that mean that the risk is more likely to materialise, those circumstances are described below.

The list is not intended to be exhaustive.

Risk management framework

Strategic risks

Open competition and markets are in the long-term best interests of the airline industry, consumers and IAG has a high appetite for continued deregulation and consolidation. The Group seeks to minimise the risk that government intervention or the regulation of monopoly suppliers can have.

In general the Group's strategic risk was stable during the year with continued competitor capacity growth being monitored and assessed within the Group.

Business and operational risks

The safety and security of customers and employees is a fundamental value. The Group balances the resources devoted

Key: Risk trend

to building resilience into operations and the impact of disruption on customers.

Cyber risk and data security continues to be a risk focus area with new regulations coming into force in 2018. The Group has led the response to defences and incident response plans for each operating company.

Financial risks

IAG balances the relatively high business and operational risks inherent in its business through adopting a low appetite for financial risk. This conservative approach involves maintaining adequate cash balances and substantial committed financing facilities. There are clear hedging policies for fuel price and currency risk exposure which explicitly consider appetite for fluctuations in cash

Link to strategy

world-class brands and operations Growing positions

global leadership Enhancing the common integrated platform 3

and profitability resulting from market movements.

However, the Group is also careful to understand its hedging positions compared to competitors to ensure that it is not commercially disadvantaged by being over-hedged in a favourable market.

In 2017 events in the political and economic landscape continued to create uncertainty, increasing the volatility of the fuel price and foreign exchange.

Compliance and regulatory

The Group has no tolerance for breaches of legal and regulatory requirements.

Strategic
Risk	Risk context	Management and mitigation
Airports and infrastructure	IAG is dependent on and may be affected by infrastructure decisions or changes in policy by governments, regulators or other entities which impact operations but	London Heathrow has no spare runway capacity. In October 2016, the UK government confirmed a third runway expansion proposal at Heathrow and IAG continues to promote an efficient, cost effective, ready to use and fit for purpose solution is developed.
are outside of the Group's control. 1 3	The Group's airlines participate in the slot trading market at London Heathrow Airport; acquiring slots at reasonable prices when available. IAG announced in November that it is completing the acquisition of a new slot portfolio at London Gatwick.
	IAG is dependent on the oil industry making sufficient investment in the	The Group enters into long-term contracts with fuel suppliers to secure fuel supply at a reasonable cost.
our flight operations can be delivered as scheduled. IAG is dependent on the performance of suppliers such as airport operators, border control and caterers.	fuel supply infrastructure to ensure that	Short-term fuel shortages are addressed by contingency plans.
		Capacity issues are regularly reviewed by the IAG Management Committee and form part of the annual Business Plan.
	Supplier performance risks are mitigated by active supplier management and contingency plans.
Brand reputation	The Group's brands have significant commercial value. Erosion of the brands, through either a single event or a series	Each brand is supported by initiatives within the Group Business Plan, where capital expenditure is reviewed and approved by the Board of Directors.
of events, may adversely impact the Group's leadership position with customers and ultimately affect future revenue and profitability. 1 If the Group does not meet the expectations of its customers and does not engage effectively to maintain their	The Group has undertaken a significant review of the portfolio of brands within IAG to understand customer preferences and better position its offerings.
	emotional attachment, then the Group	There are multiple product investments across the Group's brands to enhance on-board product, ancillaries, lounges and customer experience. Success of these investments is measured, including a review of Net Promoter Score (NPS).
	may face brand erosion and loss of market share.	The Group allocates substantial resources to safety, operational integrity and new aircraft to maintain its market position.

Strategic
Risk	Risk context	Management and mitigation
Competition	The markets in which the Group operates are highly competitive. The Group faces direct competition on its routes, as well as from indirect flights, charter services	The IAG Management Committee devotes one weekly meeting per month to strategic issues. The Board of Directors discusses strategy throughout the year and dedicates two days per year to review the Group's strategic plans.
1 2	and other modes of transport. Competitor capacity growth in excess of demand growth could materially impact margins. Some competitors have lower cost structures or have other competitive	The Group strategy team supports the Management Committee by identifying where resources can be devoted to exploit profitable opportunities. The airlines' revenue management departments and systems optimise market share and yield through pricing and inventory management activity.
	advantages such as government support or benefits from insolvency protection.	The Group is continually reviewing its product offerings and responds through initiatives to improve the customer experience. IAG launched LEVEL in 2017, operating from Barcelona and with operations planned from Paris in 2018.
		The Group's strong global market positioning, leadership in strategic markets, alliances, joint businesses, cost competitiveness and diverse customer base continue to address competition risk.
Consolidation and deregulation	Although the airline industry is competitive, we believe that the customer would benefit	The Group maintains rigorous cost control and targeted product investment to remain competitive.
	from further consolidation. Failing airlines can be rescued by government support, delaying the opportunity for more efficient airlines to capture market share and	The Group has the flexibility to react to market opportunities arising from weakened competitors, such as the acquisition of a new slot portfolio at London Gatwick.
2	expand. Mergers and acquisitions amongst competitors have the potential to adversely affect our market position and revenue.	The portfolio of brands provides flexibility in this regard as capacity can be deployed at short notice as needed.
Joint business arrangements such as the agreements with American Airlines, JAL and Qatar Airways include delivery risks such as realising planned synergies and agreeing the deployment of additional capacity within the joint business. Any failure of a joint business or a joint business partner could adversely impact our business.		The IAG Management Committee regularly reviews the commercial performance of joint business agreements.
	The Group has a number of franchise partners that feed traffic into our hubs or major outstations. Any failure of a franchise partner will reduce traffic feed.
	The Group is reliant on the other members of the oneworld alliance to help safeguard the network.	The Group maintains a leading presence in oneworld to ensure that the alliance attracts and retains the right members, which is key to ongoing development of the network.
Digital disruption	Competitors, or new entrants to the travel market, may use digital technology and more effectively disrupt the Group's	The Group's focus on the customer experience, together with the Group's exploitation of digital technology, reduces the impact digital disruptors can have.
	business model or technology disruptors may use tools to position themselves between our brands and our customers.	The Group continues to develop platforms such as the New Distribution Capability, changing distribution arrangements and moving from indirect to direct channels.
1 2 3		The Hangar 51 programme ran for the second year creating early engagement and leverage new opportunities with start-ups and digital technology disruptors.
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. Changes in such restrictions may have a negative impact on margins.	The Group's government affairs department monitors government initiatives, represents the Group's interest and forecasts likely changes to laws and regulations.
2 3	Regulation of the airline industry covers many of our activities including route flying rights, airport landing rights, departure taxes, security and environmental controls. Excessive taxes or increases in regulation may impact on the operational and financial performance of the Group.	The Group's ability to comply with and influence changes to regulations is key to maintaining operational and financial performance. The Group continues to monitor and discuss the negative impacts of government policies such as the imposition of Air Passenger Duty (APD).

Business and operational

The IAG Management Committee regularly reviews cyber risk and supports Group-wide initiatives to enhance defences and The Committee ensures that the Group is up to date with industry There is oversight of critical systems and suppliers to ensure that the Group understands the data it holds, that it is secure and A GDPR programme is in place and actions are underway to confirm compliance with the new regulations effective May 2018. The fast moving nature of this risk means that the Group will Management has business continuity plans to mitigate this risk to






In May, British Airways suffered a power failure to its primary data centre, which led to severe disruption to its customers and flights.
Management have identified the root causes of the incident and reviewed their business operations and continuity plans to

System controls, disaster recovery and business continuity arrangements exist to mitigate the risk of a critical system failure.
The Group will continue to identify world class partners to work with and increase resilience through migration to a hybrid

The Group engages in regulatory reviews of supplier pricing, such as the UK Civil Aviation Authority's periodic review of charges at
The Group is active both at an EU policy level and in consultations with airports covered by the EU Airport Charges Directive.
In some cases, regulation provides some assurance that such
Collective bargaining takes place on a regular basis with the Group's human resources departments with a significant level of negotiation across the Group's operating companies.
Management focuses on leveraging employee expertise and ensuring the development of talent. Succession planning is in place across all operating companies and we aim to move our

Business and operational

Risk	Risk context	Management and mitigation
Political and economic conditions	IAG remains sensitive to political and economic conditions in the markets globally. Deterioration in either a domestic market or the global economy may have a material impact on the Group's financial position, while foreign exchange and interest rate movements create volatility.	The IAG Board of Directors and the Management Committee review the financial outlook and business performance of the Group through the financial planning process and regular reforecasts. These reviews are used to drive the Group's financial performance through the management of capacity and the deployment of that capacity in geographic markets, together with cost control, including management of capital expenditure and the reduction of operational and financial leverage.
1 2		External economic outlook, fuel prices and exchange rates are carefully considered when developing strategy and plans and are regularly reviewed by the Board of Directors and IAG Management Committee as part of the monitoring of financial and business performance.
		There is continued uncertainty in 2018 with upward pressure on fuel price and the changing political landscape.
		Following the UK's decision to leave the EU, the Group continues to evaluate potential changes to ensure that all airlines within the Group are able to operate effectively during any transition. The Group believes that a comprehensive EU/UK air transport agreement will be agreed. The Group has had extensive engagement with all relevant regulators/governments and is confident that it will comply with the EU and the UK ownership and control rules post-Brexit. IAG is a Spanish company, its airlines have long-established AOCs and substantive businesses in Ireland, France, Spain and the UK and IAG has had other structures and protections in its by-laws since it was set up in 2011. At this stage, the Group does not believe that Brexit will have a significant impact on the business in the long-term. However, as for many other industries, there will continue to be some uncertainty, particularly if an EU/UK transitional deal is not agreed. Among other things, this could have a negative impact on investor sentiment towards the European airline sector.
Safety/security incident 2	The safety and security of our customers and employees are fundamental values for the Group. A failure to prevent or respond effectively to a major safety or security incident may adversely impact the Group's brands, operations and financial performance.	The corresponding safety committees of each of the airlines of the Group satisfy themselves that it has the appropriate resources and procedures which include compliance with Air Operator Certificate requirements. Incident centres respond in a structured way in the event of a safety or security incident.
Financial
Debt funding	The Group has substantial debt that will need to be repaid or refinanced. The Group's ability	The IAG Management Committee regularly reviews the Group's financial position and financing strategy.
2 3	to finance ongoing operations, committed aircraft orders and future fleet growth plans is vulnerable to various factors including financial market conditions and financial institutions' appetite for secured aircraft financing.	The Group continues to have good access to a range of financing solutions. The Group's high cash balances and committed financing facilities mitigate the risk of short-term interruptions to the aircraft financing market.
Financial risk	Volatility in the price of oil and petroleum products can have a material impact on our operating results.	Fuel price risk is partially hedged through the purchase of oil derivatives in forward markets. The objective of the hedging programme is to increase the predictability of cash flows and profitability. The IAG Management Committee regularly reviews its fuel and currency positions.
2 3	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 and actively managing the surplus or shortfall through treasury hedging operations.
		The approach to financial risk management is set out in note 25 to the Group financial statements.
	The Group is exposed to currency devaluation of cash held in currencies other than the airlines' local currencies of euro and sterling.	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.

Financial
Risk	Risk context	Management and mitigation
Financial risk	Interest rate risk arises on floating rate debt and floating rate leases.	The impact of rising interest rates is mitigated through structuring selected new debt and lease deals at fixed rates throughout their term. The approach to interest rate risk management and proportions of fixed and floating debt is set out in note 25 to the Group financial statements.
2 3	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 risk management, interest rate risk management, proportions of fixed and floating debt management and financial counterparty credit risk management and the Group's exposure by geography is set out in note 25 to the Group financial statements.
Tax 2 3	The Group is exposed to systemic tax risks arising from either changes to tax legislation or a challenge by tax authorities on interpretation of tax legislation. There is a reputational risk that the Group's tax affairs are questioned by the media or other representative bodies.	The Group adheres to the Tax Policy approved by the IAG Board and is committed to complying with all tax laws, to acting with integrity in all tax matters and to working openly with tax authorities. Tax risk is managed by the IAG Tax Department and is overseen by the Board through the Audit and Compliance Committee.
Compliance and regulatory
Group governance structure	The governance structure the Group put in place at the time of the merger had a number of complex features, including nationality structures to protect British Airways' and Iberia's route and operating licences.	The governance structure is being extended to other Group airlines. IAG will continue to engage with the relevant regulatory bodies as appropriate regarding the Group structure.
3	IAG could face a challenge to its ownership and control structure.
Non-compliance with key	The Group is exposed to the risk of individual employees' or groups of employees'	The Group has clear frameworks in place including comprehensive Group-wide policies designed to ensure compliance.
regulation including competition,	unethical behaviour resulting in reputational damage, fines or losses to the Group.	There are mandatory training programmes in place to educate employees in these matters.
bribery and corruption law		Compliance professionals specialising in Competition Law and Anti-Bribery legislation support and advise our businesses.

2 3

Viability statement

The directors have assessed the viability of the Group over the five years to December 2022.

The directors have determined that a five-year period is an appropriate timeframe for assessment as it is in line with the Group Business Plan strategic planning period.

The directors have evaluated the impact of severe but plausible downside scenarios on the Group Business Plan

and assessed the likely effectiveness of the mitigations that management reasonably believes would be available and effective over this period. Each scenario considered the impact on liquidity, solvency and the ability to raise financing over the period to December 2022.

The scenarios modelled considered the potential impact of a global economic downturn, fuel price shock and the impact of strikes and operational

disruption. These scenarios considered the principal risks which could have the greatest potential impact on viability in that period.

Based on this assessment, the directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to December 2022.

This page has been intentionally left blank.

Delivering on our commitment

The Group's financial performance in 2017 has been quite strong, the macroeconomic environment for the Group and the industry was better than in 2016 and demand has been improving through the year. We achieved an operating profit of €3,015 million before exceptional items, with adjusted margin of 14.4 per cent in line with our key performance metric. Net profit after tax before exceptional items was €2,243 million and adjusted earnings per share increased by 14.0 per cent, higher than our 12+ per cent average growth target.

The strength and uniqueness of the IAG business model allowed the Group to take full advantage of the opportunities this year, through the launch of LEVEL addressing the needs of an underserved market and strategic capacity increases as the economic environment improved.

In the last quarter of 2016, our revenue and yield performance showed signs of improvement. This trend continued into 2017, and from the second quarter onwards our passenger revenues measured on a unit basis and at constant currency consistently increased versus last year. Passenger revenues were strong in our main strategic markets, while IAG Cargo, MRO, BA Holidays and Avios increased as well.

Although 2017 saw our non-fuel unit cost metric increase, we remain committed to improving our cost performance. Despite cost initiatives developed during the year, our costs rose for several factors including operational disruption, variable pay awards and pensions. The Group

recognised the right timing to address the cost challenges of British Airways' defined benefit schemes and has launched a pension scheme consultation with all affected employees. The impact of the arrangement is expected to be known in March 2018. We also saw increases in our costs related to the implementation of our new distribution model, which will also result in higher revenues – an important change in our selling model which is bringing us closer to our customers. Over the years, the underlying trend of non-fuel unit costs has been decreasing and this will continue to be our focus in 2018.

Our plans support investment, our aim is to continue to improve operational resilience and customer experience in part through digitalisation. We continue to invest in Hangar 51 and introduced Net Promoter Score as a new performance indicator for the Group. In this first year we achieved our target with a 16.8 recommend score for the Group companies.

The Group's financial metrics were strong coming into 2017 and improved in the year reflecting the EBITDAR performance and a lower than average aircraft delivery schedule. We will continue to evaluate organic and inorganic growth opportunities that align to our strategic priorities. In 2017, delivering on our commitment of sustainable returns we returned in excess of €1 billion to shareholders.

Enrique Dupuy de Lôme Chávarri

Chief Financial Officer

"The strength and uniqueness of the IAG business model allowed the Group to take full advantage of the opportunities this year."

Operating profit before exceptionals (€m)

Total unit revenue (€cents)

Unit increase / decrease at ccy indexed to 2013

Non-fuel unit costs (€cents)

Fuel unit costs (€cents)

Growing consumer demand in improved conditions

Global GDP growth

Actual 2017	+3.7%
IMF forecast (January 2017)	+3.4%
Actual 2016	+3.2%

Global GDP came in ahead of expectations in 2017, in contrast to the past two years where global GDP has underperformed expectations. For 2017, the IMF highlighted stronger than expected growth in advanced economies, particularly the Eurozone, as a key driver. For 2018, the IMF expects the overall rate of growth to increase, with the same advanced economy growth supplemented by faster emerging market and developing economy growth.

UK GDP growth

Actual 2017	+1.7%
IMF forecast (January 2017)	+1.5%
Actual 2016	+1.8%

UK GDP growth came in at +1.7 per cent, slightly down on the performance in 2016, but 0.2 percentage points better than the IMF forecast issued in January 2017. However, the rate of GDP growth decelerated during the year, with the economy growing +2.1 per cent in the first quarter, +1.9 per cent in the second quarter, +1.7 per cent in the third quarter, and +1.5 per cent in the fourth quarter. The GfK Consumer Confidence Index remained in negative territory, and progressively worsened throughout 2017, starting the year at -5 per cent in January and falling to -13 per cent in December 2017. The index has now not been in positive territory since January 2016, and is only slightly higher than July 2016 where it was -12 per cent following the UK's Referendum vote to leave the EU. In contrast, the unemployment rate fell through the year from 4.8 per cent in December 2016 to 4.3 per cent in November 2017. For 2018, both the OECD and IMF forecast a slowdown in UK GDP growth; +1.2% and +1.5% for the OECD and IMF respectively. In its forecast, the OECD stated "the growth slowdown is expected to continue through 2018, due to continuing uncertainty over the outcome of negotiations around the decision to leave the European Union and the impact of higher inflation on household purchasing power". Like last year, there continues to be a very large divergence in UK GDP growth forecasts from the various forecasting bodies with

a range for 2018 of +0.5 per cent to +2.2 per cent.

Eurozone GDP growth

Actual 2017	+2.4%
IMF forecast (January 2017)	+1.6%
Actual 2016	+1.8%

Economic growth in the Eurozone accelerated 0.3 points to 2.1 per cent compared to 2016. Over the year, the rate of growth accelerated with +2.1 per cent in the first quarter, +2.4 per cent in the second quarter, +2.6 per cent in the third quarter, and +2.7 per cent in the fourth quarter. The pickup in 2017 growth was the opposite of the dip in GDP growth that both the OECD and IMF had forecast at the beginning of 2017. The IMF stated that "the increase in growth in 2017 mostly reflects an acceleration in exports in the context of the broader pick-up in global trade and continued strength in domestic demand growth supported by accommodative financial conditions amid diminished political risk and policy uncertainty". Most political risks for 2017 did not eventuate, and where they did, did not weigh on the Eurozone economy. The unemployment rate continued to fall, beginning the year at 9.6 per cent in December 2016 and falling to 8.7 per cent by November 2017. For 2018, the OECD forecast remains unchanged and the IMF forecast a slight dip in rate of GDP growth; +2.1 per cent and +2.2 per cent for the OECD/IMF respectively.

US GDP growth

Actual 2017	+2.3%
IMF forecast (January 2017)	+2.3%
Actual 2016	+1.5%

The US GDP growth rate accelerated 0.6 points to +2.3 per cent in 2017, broadly in line with IMF forecasts for the year. Momentum in the US economy increased through the year, with GDP growth of +2.0 per cent in the first quarter, +2.2 per cent in the second quarter, +2.3 per cent in the third quarter, and +2.5 per cent in the fourth quarter. Consumer confidence remained high, with the University of Michigan Consumer Sentiment Index for each month remaining above the highest level in 2016. The labour market also remained strong with the unemployment rate falling slightly to 4.7 per cent by the end of 2017 compared 4.9 per cent at the end of 2016. For 2018, a broadly

stable rate of GDP growth is expected, with +2.5 per cent forecast by the IMF and +2.1 per cent by the OECD. However, current OECD forecasts were compiled before the US tax cuts were passed in December 2017, and therefore do not include an assumption of fiscal stimulus from the cuts. However, IMF forecasts were updated after the US tax cuts with the IMF forecasting an acceleration to +2.7% due to the expected impact of the US tax reform.

Latin America GDP growth

Actual 2017	+1.3%
IMF forecast (January 2017)	+1.2%
Actual 2016	-0.9%

Latin America emerged from recession in 2017, with GDP growth versus 2016 contraction, in line with IMF forecasts. The economic divergence of previous years was less prevalent in 2017, with South America, Central America and the Caribbean all reporting positive economic growth. South America showed the biggest improvement with GDP growth of +0.6 per cent in 2017 compared to -2.6 per cent in 2016. Both Brazil and Argentina emerged from recession, Colombia reported a similar level of growth to 2017 and whilst Venezuela remained in recession, the rate of contraction was smaller in 2017 than in 2016. In growth rate terms, Argentina reported the largest improvement with GDP growth of +2.5 per cent in 2017 compared to -2.2 per cent in 2016, with Brazil reporting +0.7 per cent in 2017 compared to -3.6 per cent in 2016. For 2018, the IMF currently forecast another improvement in the rate of growth (+1.9 per cent) for Latin America, with every single country in the region with exception of Venezuela expected to report positive GDP growth – although Venezuela's GDP contraction is expected to be smaller in 2018 than in 2017.

Industry outlook

IATA is forecasting global industry operating margins to fall slightly to +8.1 per cent in 2018 from +8.3 per cent in 2017, and +9.2 per cent in 2016. Seat capacity is forecast to increase +5.1 per cent in 2018, with ASKs up +5.7 per cent, both lower than the growth rates seen in 2017 or 2016. Passenger load factor is expected to increase slightly to 81.4 per cent compared to 81.2 per cent in 2017, and passenger yield is expected to be flat compared to 2017.

IATA expects Africa to generate the lowest margin and remains the only region with negative net post-tax margins in 2018 at -0.3 per cent. As in the past four years, IATA attributes these losses to regional conflict and the impact of low commodity prices. North American airlines are once again expected to generate the highest margins, although they are expected to be slightly below 2017. Asia Pacific is the only other region that IATA expects to report lower margins compared to 2017. For Europe, IATA forecasts net post-tax margins of +5.2 per cent, higher than +4.8 per cent in 2017, and the second highest overall region behind North America.

Regulatory controls

The airline sector is among the most heavily regulated industries in the world and IAG continues to monitor the development of national, regional and globally-applied regulatory developments including the implementation of environmental regulations. In a key development in 2017, the European Commission confirmed that the exemption of international flights from the EU ETS will remain until 2023, in light of the planned commencement of the ICAOled global regulatory system, CORSIA, in 2021. For further details see the section on Sustainability.

UK's Referendum vote to leave the EU

IAG continues to believe that the UK's exit from the EU will not have a significant impact on our business and in 2017 we engaged extensively with the relevant authorities to ensure our views on post-Brexit aviation arrangements are understood and taken into account. This included dialogue with the UK, Spanish and Irish governments, as well as the European Commission and we remain optimistic about future UK-EU aviation relations. During the year there has also been good progress on post-Brexit arrangements between the UK and thirdcountry markets currently governed by EU agreements, such as the US, where we expect current open, liberal regimes to continue seamlessly after the UK leaves the EU.

Air Passenger Duty (APD)

The UK Government continues to impose the heaviest aviation taxes in the world on airlines and, whilst its November 2017 budget has frozen APD on economy class tickets from 2018, it further increased the burden on tickets for premium cabins. IAG will continue to oppose vigorously this ill-conceived tax on the UK's ability to trade and attract business and tourism. Meanwhile, the Scottish Government's Air Departure Tax originally planned for April 2018 that envisaged reducing tax at Scottish airports by up to 50 per cent has been delayed, with no firm date for implementation.

UK visa policy

We believe that progress in this policy area has become more likely, given the increased emphasis by government on trade with non-EU countries post-Brexit. We believe that the introduction of a ten year visa will improve the UK's attractiveness to visitors from key markets such as China and India and will continue to make the case for this over the coming year.

UK airports

During 2017 the UK Government conducted two consultations on its Airports Draft National Policy Statement (the Statement) which recommends a new runway should be constructed to the north west of London Heathrow, and presented new traffic forecasts supporting its proposals.

IAG believes that expansion of Heathrow represents a very positive development for its business and for the wider UK economy, but continues to challenge the excessive costs of the proposals put forward by London Heathrow's operator, HAL, and argues that costs must be kept down to current levels in real terms for the new capacity to be commercially viable.

The government's new traffic forecasts indicate that connecting traffic will increase at London Heathrow and IAG has also urged the government to ensure that operational flexibility is maintained at the airport so that hub connections, including those to vital trade routes, remain viable. IAG will continue to engage actively with policy makers and regulators to explain the benefits of hub operations, and to support an imaginative and cost effective approach to Heathrow's expansion as the Statement is put to a vote in UK Parliament in mid-2018.

Irish National Aviation Policy

IAG broadly welcomed the publication of the Irish Government's National Policy Statement on Airport Charges Regulation which concluded that economic regulation of Dublin Airport should continue. IAG, through Aer Lingus, continues to participate actively in the Irish Government's National Civil Aviation Development Forum to ensure its views on Irish aviation regulatory matters, aviation policy and Brexit are heard at the highest levels.

Spanish policy environment

IAG is following the political implications of the new government that will be formed in Catalonia during 2018. IAG remains confident that underlying economic conditions in Spain support future growth as evidenced by the unemployment rate decrease in Spain to the lowest rate for the last eight years and the Spanish Government's economic growth forecast in 2018, as it did the previous year. In this context IAG welcomed the decision in April 2017 by the Spanish Supreme Court not to impose restrictions on operations at Madrid Barajas.

European aviation policy

IAG continues to engage with EU institutions and Member States to ensure its interests are taken into account in aviation policy development, working closely with Airlines for Europe. In particular, IAG continues to encourage governments to act to reduce the impact of air traffic controller strikes on consumers, to seek the reform of the out of date and ineffective regulation on airport charges and to discourage the proliferation of taxes on aviation that hamper economic growth.

European Union Emissions Trading System (EU ETS)

Intra-European flights have been subject to the EU ETS since 2012. A global system to regulate international aviation emissions was agreed at the ICAO General Assembly in October 2016, to commence from 2021. Details of the scheme were released in December 2017 enabling airlines to comply from January 2019.

The EU made an announcement during 2017 that intra-EU scope coverage of the EU ETS will continue until 2023.

IAG is opposed to double regulation of these flights in two separate market-based mechanisms and will be supporting the implementation of CORSIA to ensure that it becomes the pre-eminent market based measure for aviation.

IATA market growths

The air travel industry had another strong year, with above-trend growth. Momentum increased over the year following on from a weak six months in 2016.

Overall capacity increased 6.3 per cent and the fastest growing regions were the Middle East, Europe and Asia, with passenger load factors down in the Middle East. Europe saw the highest load factor, up 1.5 points, followed by North America, although the latter's load factor was broadly flat against last year. Overall passenger load factor improved 0.9 points to 81.4 per cent, having improved for more than five consecutive years.

IATA market growths

Year to December 31, 2017	ASKs higher/(lower)	Passenger load factor (%)	Higher/ (lower)
Europe	6.2%	83.9	1.5 pts
North America	4.1%	83.6	0.1 pts
Latin America	5.5%	81.8	1.0 pts
Africa	2.9%	70.9	2.3 pts
Middle East	6.5%	74.5	(0.2) pts
Asia Pacific	8.4%	81.0	1.3 pts
Total market	6.3%	81.4	0.9 pts

Source: IATA Air Passenger Market Analysis

IAG capacity

In 2017, IAG increased capacity, measured in available seat kilometres (ASKs) by 2.6 per cent including the launch of LEVEL in June. Capacity was higher at all airlines and through each region except for Europe. This partially reflects new longhaul routes at British Airways, Aer Lingus and LEVEL as well as the full year impact of Iberia and Aer Lingus routes launched in 2016. Vueling increased capacity in off-peak quarters to reduce its seasonality in line with its strategy.

IAG passenger load factor was one point higher than last year and at 82.6 per cent, was 1.2 points higher than the IATA average.

IAG Network by region

Market segments

In IAG's Domestic markets capacity was higher by 5.4 per cent with increases at Vueling and Iberia. As part of its NEXT strategy, Vueling increased frequencies on existing routes and launched five new routes. Capacity in Iberia's domestic market was increased with growth in the Balearics and Canaries. This was partially offset by the introduction of the Club Europe product on British Airways domestic flights in April 2017, reducing the number of seats. Passenger load factor performance was strong, almost two points higher versus last year.

IAG capacity

Year to December 31, 2017	ASKs higher/(lower)	Passenger load factor (%)	Higher/ (lower)
Domestic	5.4%	83.2	1.9 pts
Europe	(0.2%)	82.0	2.1 pts
North America	4.2%	82.3	(0.7) pts
Latin America and Caribbean	3.2%	84.0	0.9 pts
Africa, Middle East and South Asia	4.0%	80.8	1.3 pts
Asia Pacific	1.0%	84.6	2.1 pts
Total network	2.6%	82.6	1.0 pts

The Group's European capacity was broadly flat year on year. Increases at Aer Lingus, including a new service to Split and additional winter flying were offset by reductions at Iberia and Vueling. Load factor rose two points, with improvements at British Airways, Vueling and Iberia.

North America continued to represent the largest part of the IAG network at almost 30 per cent. Capacity was increased mainly at Aer Lingus, with a new route connecting Dublin and Miami and the full year impact of the routes launched in 2016, and through the launch of LEVEL's routes to Oakland (San Francisco) and Los Angeles. British Airways also increased its capacity, with three new routes to New Orleans, Fort Lauderdale and Oakland (San Francisco), although this was partially offset by cancellations related to the adverse weather. Passenger numbers increased at a slightly slower pace than capacity, and seat factor for the region remained high at 82.3 per cent.

IAG increased its capacity to Latin America and Caribbean with British Airways' new route to Santiago de Chile and LEVEL's new routes to Buenos Aires and Punta Cana. Iberia increased frequencies to Mexico City and Buenos Aires during the year, although it had an overall decrease in capacity from frequency reductions on other routes including Brazil and Costa Rica. Passenger load factor in this region improved and was almost two points ahead of the industry average.

After decreases in 2016, Africa, Middle East and South Asia capacity was up in 2017, with British Airways' increases in the Middle East from de-tagged routes (Doha/Bahrain, Muscat/Abu Dhabi) and the full year impact of Iberia's route to Johannesburg. Passenger load factor improved 1.3 points.

In Asia Pacific, the capacity increase was driven by the full year impact of Iberia's routes to Shanghai and Tokyo, partially offset by a decrease in British Airways' capacity, through the discontinuation of Chengdu and gauge changes in Japan. Passenger load factors rose 2.1 points, and continued to be the highest in the IAG network.

LEVEL launch

On March 17th, IAG launched LEVEL, a new longhaul low-cost airline brand that started its operations in June 2017 with flights from Barcelona to Los Angeles, Oakland (San Francisco), Buenos Aires and Punta Cana. LEVEL is flying two new Airbus A330 aircraft fitted with 293 economy and 21 premium economy seats. From March 2018, LEVEL will also fly between Barcelona and Boston.

In November 2017, IAG announced the opening of LEVEL's new base in Paris-Orly. Flights will begin in July 2018 and will connect the French airport with Montreal, New York, Guadaloupe and Martinique with two additional aircraft.

Exchange impact before exceptional items

Exchange rate movements are calculated by retranslating current year results at prior year exchange rates. The reported revenues and expenditures are impacted by translation currency from converting results from currencies other than euro to the Group's reporting currency of euro, primarily British Airways and Avios. From a transaction perspective, the Group performance is impacted by the fluctuation of exchange rates, primarily exposure to the pound sterling, euro and US dollar. The Group generates a surplus in most currencies in which it does business, except the US dollar, as capital expenditure, debt repayments and fuel purchases typically create a deficit. At constant currency, the Group's operating profit before exceptional items would have been €35 million higher.

The Group hedges its economic exposure from transacting in foreign currencies. The Group does not hedge the translation impact of reporting in euros.

€ million	Higher/ (lower)
Reported revenue
Translation impact	(1,057)
Transaction impact	467
Total exchange impact on revenue	(590)
Reported operating expenditure
Translation impact	930
Transaction impact	(375)
Total exchange impact on operating
expenditures	555
Reported operating profit
Translation impact	(127)
Transaction impact	92
Total exchange impact on operating profit	(35)
The annual weighted average exchange rates from a

translation and transaction perspective are set out as follows.

	2017	Higher/ (lower)
Translation – Balance sheet (weighted average)
£ to €	1.13	(4.6%)
Translation – Profit and loss (weighted average)
£ to €	1.14	(6.3%)
Transaction (weighted average)
£ to €	1.14	(5.9%)
€ to \$	1.14	2.5%
£ to \$	1.29	(3.7%)

Revenue

	Higher/(lower)
		Year over year	Per ASK at
€ million	2017	at ccy	ccy
Passenger revenue	20,245	4.1%	1.5%
Cargo revenue	1,084	8.0%
Other revenue	1,643	5.6%
Total revenue	22,972	4.4%

Passenger revenue

On a reported basis, passenger revenue for the Group rose 1.6 per cent versus the prior year, with 2.5 points of adverse currency, while capacity was increased 2.6 per cent. At constant currency ('ccy'), passenger unit revenue (passenger revenue per ASK) increased 1.5 per cent with slightly higher yields (passenger revenue/revenue passenger kilometre) up 0.3 per cent and a 1 point rise in passenger load factor.

Continuing the upward trend in revenues reported at the end of 2016, passenger unit revenues improved throughout the year with increases versus last year in all quarters except quarter one. The performance was based on stronger yields and higher passenger load factors. In the Domestic market, the Group's passenger unit revenues were down due to capacity increases at Vueling aimed to reduce seasonality peaks in its schedule. Europe performed strongly for the Group with significant unit revenue improvements at Iberia and Vueling on slightly lower capacity.

Capacity growth in North America impacted the Group's year over year passenger unit revenue performance, with declines at Iberia and Aer Lingus, and the dilutive impact of the introduction of LEVEL. At British Airways, passenger unit revenues increased. North America unit revenue trends were positive during the period.

Latin America and Caribbean and Asia Pacific passenger unit revenues showed the strongest signs of recovery with increases at both British Airways and Iberia. Latin American economies such as Brazil and Argentina improved, while demand in Asia Pacific rose with lower terrorist activity in Europe.

Africa, Middle East and South Asia passenger unit revenue was broadly flat versus last year with mixed performance throughout the year and across the Group's network.

The Group carried over 104 million passengers, an increase of 4.1 per cent from 2016, with strong demand at LEVEL and passenger load factor improvement at three of the other four airlines. The Group's Net Promoter Score was 16.8 per cent, achieving our on target performance of 16.5. This was a new metric for the Group this year.

Cargo revenue

Following a competitive trading environment in 2016, IAG Cargo adapted to an unexpectedly buoyant market in 2017 particularly in the second half of the year. Cargo revenue for the period increased by 8.0 per cent at constant currency, with volume measured in tonne kilometres (CTK) increasing by 5.6 per cent on a capacity increase of 4.8 per cent. Trading conditions were challenging in certain regions, however benefitted from a strong performance in Asia Pacific, following a weak performance in the same period last year. Yield benefitted in the final part of the year as demand on key IAG Cargo markets exceeded supply. Strategic focus continued to be on premium products, investing for growth and modernising the business.

Other revenue

Other revenue includes activity from the BA Holidays programme, Avios revenue from points issued and from product redemptions, maintenance and handling activity. Other revenue rose 1.4 per cent, 5.6 per cent at constant currency primarily from an increase in Iberia's third party maintenance (MRO) and handling businesses. The MRO business performed more heavy maintenance in 2017 versus 2016. BA Holidays and Avios revenues also increased reflecting additional points sold to finance partners and from higher product redemptions.

Total revenue for the Group rose 1.8 per cent with increases in passenger, cargo and other revenue. At ccy, total revenue was stronger up 4.4 per cent.

Expenditure before exceptional items

Employee costs

On a reported basis, employee costs for the Group were up 0.2 per cent and up 4.6 per cent at ccy. On a unit basis and at ccy, employee unit costs increased 2.0 per cent with productivity gains partially offsetting performance awards and inflation on salaries.

Employee unit costs rose at British Airways while productivity increased through efficiency improvements. The employee unit cost rise was from a higher pension charge due to lower AA bond yields, an increase in variable pay awards from achieving 2017 performance targets and inflation on wages. Vueling's employee unit costs also rose from an increase in variable pay awards and due to a significant rise in average manpower equivalents (MPEs) in line with Vueling's NEXT programme. The increase in MPEs reflects the full year impact of the shift in 2016 to strengthen its internal workforce on relatively low full year capacity growth, as it de-peaks its schedule. Aer Lingus and Iberia reported strong employee unit cost performance versus last year from efficient growth, also improving productivity.

Overall Group productivity improved 2.5 per cent with a slight increase in MPEs versus last year (up 0.1 per cent); the Group employed on average 63,422 MPEs in 2017.

Employee costs

		Higher/(lower)
		Year over year Per ASK at
€ million	2017	at ccy	ccy
Employee costs	4,740	4.6%	2.0%

Productivity

	Higher/(lower)
	2017 Year over year
Productivity	2.5% 4,828
Average manpower equivalent	0.1% 63,422

Fuel, oil and emissions costs

Total fuel costs for the year decreased 5.4 per cent, at ccy and on a unit basis fuel costs are down 9.1 per cent. Fuel benefitted from lower average fuel prices net of hedging and efficiencies from the new fleet and improved operational procedures. The foreign exchange transaction impact on fuel costs net of hedging was adverse 5.9 percentage points for the Group, reflecting the stronger US dollar primarily against the pound sterling.

Fuel, oil and emissions costs

		Higher/(lower)
€ million	2017	Year over year at ccy	Per ASK at ccy
Fuel, oil costs and
emissions charges	4,610	(6.8)%	(9.1)%

Supplier costs

Total supplier costs for the year increased 1.8 per cent and benefitted from 4.2 points of currency exchange. At ccy and on a unit basis, supplier costs rose 3.4 per cent. In 2017, the Group's non-ASK related businesses, such as MRO, BA Holidays and Avios grew, increasing supplier costs, in particular Handling, catering and other operating costs and Engineering and other aircraft costs with a corresponding increase in Other revenue.

Supplier costs

		Higher/(lower)
€ million	2017	Year over year at ccy	Per ASK at ccy
Supplier costs: Handling, catering and other operating costs	2,700	6.5%	3.4%
Landing fees and en-route charges	2,151	2.0%
Engineering and other aircraft costs	1,773	6.1%
Property, IT and other costs	915	9.4%
Selling costs	982	11.8%
Currency differences	14	–

British Airways' airline supplier unit costs at ccy are up, impacted by compensation fees related to the operational disruption following the power outage in May 2017, higher maintenance costs from additional flying hours and price escalation on pay-asyou-go engine contracts and the new distribution model (NDM) increasing both costs (and revenues). Iberia airline supplier unit cost at ccy increased from NDM and in marketing related to its 90th anniversary campaign, provisions related to VAT litigation and net accounting impact from acquisition of four Airbus A340- 600s at the end of their lease term. Vueling supplier unit costs are favourable, cycling over compensation costs related to operational disruption in 2016 including a reduction in engineering costs, from fewer wet leases. Aer Lingus had a favourable supplier unit cost performance from cost saving initiatives and efficient growth.

By supplier cost category:

Handling, catering and other operating costs rose 6.5 per cent excluding currency. Costs increased from higher Cargo volumes and additional product purchases at BA Holidays and redemptions at Avios with a corresponding rise in revenues. The increase also reflects higher compensation fees and baggage claims related to the operational disruption at British Airways. In addition, the Group carried 4.1 per cent more passengers during the year.

Landing fees and en-route charges were higher by 2.0 per cent excluding currency. Costs rose from higher activity, with flying hours up 1.6 per cent and sectors flown up 1.2 per cent, partially offset by price reductions in Europe and Africa. The Group also recognised certain elements of airport recharges as a cost (c.2pts) in the year, rather than against revenues as in prior years, following a change in contractual agreements with no net impact in margin.

Engineering and other aircraft costs were up 6.1 per cent excluding currency. Increases are driven by additional third party maintenance activity at Iberia (c.3.5 points) from higher flying hours and price escalation on pay-as-you-go engine contracts. These increases were partially offset by cost saving efficiencies including sub-contracted maintenance and global logistics.

Property, IT and other costs were up 5.2 per cent, 9.4 per cent excluding currency. The increase reflects lower capitalised IT charges reflecting the completion of internal projects, a provision related to exercising options on leased aircraft and legal settlements including a VAT audit.

Selling costs increased 11.8 per cent excluding currency. Costs rose c.4pts from the new distribution model, which increased both expenses and revenues while allowing the Group to bring more direct access to the customer. Selling costs were also higher from the increase in passenger bookings and from marketing initiatives including Iberia's 90th year anniversary.

Ownership costs

The Group's ownership costs were up 4.1 per cent excluding currency. Depreciation costs were down due to the retirement of Iberia's Airbus A340-300s and from a number British Airways' longhaul Boeing aircraft being disposed of or becoming fully depreciated during the year. Aircraft operating lease costs were up due to a tax provision release which benefitted the base and from additional aircraft on operating lease (Boeing 787-9s and Airbus A330s) in the period.

Ownership costs

2017	Year over year at ccy	Per ASK at ccy
	4.1%	1.5%
		Higher/(lower) 2,072

Number of fleet

	Higher/(lower)
Number of aircraft in fleet		2017 Year over year
Shorthaul	357	(0.6)%
Longhaul	189	–
	546	(0.4)%

Non-fuel unit costs

At constant currency, total non-fuel unit costs increased 2.7 per cent. Adjusted for non-airline businesses (such as MRO, handling, BA Holidays) and currency, the increase was 2.1 per cent with increases at British Airways and Iberia. Aer Lingus nonfuel unit costs were down from efficient growth and Vueling improved with a better operational performance and through cost saving initiatives.

Operating profit

In summary, the Group's operating profit before exceptional items for the year was €3,015 million, a €480 million improvement from last year. The Group's adjusted operating margin also improved 2.1 points to 14.4 per cent. These results reflect a good revenue performance from a better macroeconomic environment with improvements in our main strategic markets, in particular North America and South America. Management continued to focus on customer proposition, operational resilience and delivery of cost savings. This was partially offset by higher costs from disruption, variable pay awards and an increase in pension costs. This performance reflects the Group's drive towards achieving a competitive cost base with improved productivity and management initiatives, aligned with an improved focus in customer satisfaction, brand value and resilience of our operational model.

Financial performance by Brand

For the full year, Aer Lingus operating profit was €269 million, an improvement of €36 million over last year. Capacity was increased 12.1 per cent with the introduction of an additional Airbus A330 and the full year impact of Airbus A330s delivered during 2016 to support Aer Lingus' longhaul expansion.

Passenger revenues increased, although on a unit basis were down from lower yields due to the significant capacity growth, and competitive pressure. Aer Lingus' adjusted operating margin increased 1.3 points to 16.2 per cent.

Aer Lingus achieved significant cost savings through efficient growth with higher productivity and from cost initiatives. This included areas such as maintenance, selling and IT.

Financial performance by Brand

		Aer Lingus € million		British Airways £ million
	2017	Higher/ (lower)	2017	Higher/ (lower)
ASKs (millions)	26,386	12.1%	180,070	0.7%
Seat factor (per cent)	81.1	(0.5)pts	81.8	0.6pts
Passenger revenue	1,799	5.4%	11,054	6.9%
Cargo revenue	48	6.7%	683	15.9%
Other revenue	12	(14.3%)	532	3.5%
Total revenue	1,859	5.3%	12,269	7.2%
Fuel, oil costs and emissions charges	316	(0.9%)	2,553	3.4%
Employee costs	345	5.3%	2,573	5.3%
Supplier costs	755	4.7%	4,411	6.8%
EBITDAR	443	11.0%	2,732	13.8%
Ownership costs	174	4.8%	978	5.2%
Operating profit before
exceptional items	269	15.5%	1,754	19.1%
Adjusted operating margin	16.2%	1.3pts	14.9%	1.4pts
Passenger yield (€ cents or £ pence/RPK)	8.40	(5.6%)	7.50	5.3%
Passenger unit revenue (€ cents or £ pence/ASK)	6.82	(6.1%)	6.14	6.1%
Total unit revenue (€ cents or £ pence/ASK)	7.05	(6.1%)	6.81	6.4%
Fuel unit cost (€ cents or £ pence/ASK)	1.20	(11.5%)	1.42	2.6%
Non-fuel unit costs (€ cents or £ pence/ASK)	4.83	(6.4%)	4.42	5.4%
Total unit cost (€ cents or £ pence/ASK)	6.03	(7.6%)	5.84	4.7%

British Airways operating profit was £1,754 million, excluding exceptional items, an improvement of £281 million over the prior year on a capacity increase of 0.7 per cent. Despite a strong financial result British Airways faced some challenges in 2017 including a power failure in May causing significant customer disruption. Improving the customer experience remains a key focus for the airline.

Passenger revenue rose for the year, with improvements in both yield and passenger load factors. Premium yields improved with strong business sector performance.

British Airways' non-fuel unit costs increased during the year impacted by compensation fees, NDM, airport charges and also from growth at BA Holidays and Cargo. 2017 saw the first full year of British Airways Plan4; savings were made in several areas including the head office function, engineering through outsourcing and property rationalisation.

Overall, British Airways' adjusted operating margin improved 1.4 points to 14.9 per cent.

Capacity

Operating profit before exceptionals

Iberia's operating profit was €376 million, up €105 million versus last year, achieving an adjusted operating margin of 9.6 per cent. Capacity for the year was up 2.2 per cent, with an increase in passenger unit revenues and improvements across most regions.

In 2017, Iberia's MRO business also increased its external revenues by approximately €90 million, while continuing to provide services to other Group companies.

On the cost side, airline non-fuel unit costs rose from an increase in provisions including VAT litigation, the accounting impact of the acquisition of the leased Airbus A340-600s and higher selling costs partially due to NDM. Employee unit costs and productivity improved through efficiency initiatives as part of Iberia's Plan de Futuro II.

Financial performance by Brand

		Iberia* € million		Vueling € million
	2017	Higher/ (lower)	2017	Higher/ (lower)
ASKs (millions)	63,660	2.2%	34,378	1.5%
Seat factor (per cent)	84.1	2.1pts	84.7	1.9pts
Passenger revenue	3,581	5.5%	2,103	2.6%
Cargo revenue	254	0.4%	–	–
Other revenue	1,016	8.1%	22	37.5%
Total revenue	4,851	5.8%	2,125	2.9%
Fuel, oil costs and emissions charges	926	(7.7%)	428	(15.1%)
Employee costs	1,052	1.9%	233	8.9%
Supplier costs	2,038	12.4%	1,008	(2.3%)
EBITDAR	835	13.1%	456	44.8%
Ownership costs	459	(1.7%)	268	5.1%
Operating profit before exceptional items	376	38.7%	188	213.3 %
Adjusted operating margin	9.6%	1.7pts	12.7%	6.0pts
Passenger yield (€ cents/RPK)	6.69	0.8%	7.22	(1.2%)
Passenger unit revenue (€ cents/ASK)	5.63	3.4%	6.12	1.2%
Total unit revenue (€ cents/ASK)	7.62	3.5%	6.18	1.5%
Fuel unit cost (€ cents/ASK)	1.46	(9.7%)	1.25	(16.2%)
Non-fuel unit costs (€ cents/ASK)	5.57	4.8%	4.39	(0.9%)
Total unit cost (€ cents/ASK)	7.03	1.4%	5.63	(4.8%)

* Iberia's results exclude LEVEL.

Vueling's operating profit was €188 million with an adjusted operating margin of 12.7 per cent, up 6.0 points versus last year. Through its NEXT programme Vueling has restored operational and financial performance. Capacity was up 1.5 per cent with increases in the first and fourth quarter with the aim to reduce the seasonality of its network.

Vueling's passenger unit revenue improved versus last year with lower yields but higher passenger load factors. Vueling's improvement in Europe was partially offset by decreases in domestic, impacted by growth in quarter one and four.

Vueling's non-fuel unit cost decreased with savings in supplier unit costs from lower maintenance fees and compensation costs. Employee unit costs rose from the increase in MPEs as part of its NEXT programme to improve operational resilience and from variable pay awards linked to this year's results.

Vueling's performance reflects a significant turnaround from last year both operationally and financially with stronger margins and operating profit, allowing it to return to its growth strategy.

Exceptional items

For a full list of exceptional items, refer to note 4 of the Financial statements. Below is a summary of the significant exceptional items recorded.

The Group recognised an exceptional charge of €288 million during the year related to restructuring costs. In 2017, Iberia reached an agreement with employees for a collective redundancy programme, as part of their transformation plan Plan de Futuro II which is voluntary for both the employees and the company and aimed at improving productivity. In the year, €180 million of restructuring costs were recognised in relation to this.

British Airways' Plan4 transformation initiatives began in 2016, aimed at improving non-fuel unit cost performance, particularly through employee costs and increased productivity. During 2017, this resulted in headcount reductions throughout the business, from back office functions to engineering and sales, and resulted in a €108 million exceptional charge (2016: €144 million).

The Group also made changes to the US PRMB (Post-Retirement Medical Benefits) at British Airways during the prior year to bring the level of benefits in line with national trends in the US. These changes resulted in the recognition of a one-off gain in employee costs of €51 million.

The exceptional item in 2016 recorded 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 in the reported column.

Non-operating costs and taxation

Net non-operating costs after exceptional items were €234 million, up from €122 million last year. The increases are nonrecurring in nature and are due to a:

€97 million negative difference in profit or loss on the sale of property plant, equipment and investments, due to the sale of an Airbus A340 by Iberia with an accounting loss of €11 million, and the prior year benefiting from a €30 million gain on the sale and lease back of 12 Airbus A319s;
€81 million negative swing from unrealised gains in 2016 to losses in 2017 on derivative instruments not qualifying for hedge accounting; and
€52 million swing in net foreign exchange on the retranslation of monetary non-current assets and liabilities.
These increases were partially offset by a €66 million reduction in net financing costs following a reduction in net debt.

Taxation

The vast majority of the Group's activities are taxed in the countries of effective management of the main operations (UK, Spain or Ireland, with corporation tax rates during 2017 of 19.25 per cent, 25 per cent and 12.5 per cent respectively). The Group's effective tax rate for the year was 18.9 per cent (2016: 19.6 per cent) and the tax charge was €472 million (2016: charge €410 million).

The Group continues to offset prior year tax losses and other tax assets against its current year taxable profit, in 2017 the Group paid corporation taxes of €237 million (2016: €318 million).

Profit after tax and Earnings per share (EPS)

Profit after tax before exceptional items was €2,243 million, up 12.7 per cent. The increase reflects a very good operating profit performance. Fully diluted earnings per share before exceptional items is one of our key performance indicators and increased by 14 per cent also benefitting from the positive impact of the share buyback programme.

Profit after tax and exceptional items was €2,021 million, up 3.5 per cent.

Dividends

The Board is proposing a final dividend to shareholders of 14.5 euro cents per share, which brings the full year dividend to 27.0 euro cents per share. The final dividend will be paid, on July 2, 2018, subject to shareholder approval at the Annual General Meeting to shareholders on the register on June 29, 2018.

Dividend policy statement

In determining the level of dividend in any year, the Board considers several factors, including:

Earnings of the Group;
On-going cash requirements and prospects of the Group and its operating companies;
Levels of distributable reserves by operating company and efficiency of upstreaming options;
Dividend coverage; and
Its intention to distribute regular returns to its shareholders in the medium and long-term.

The Company received distributions from each of the four main airlines in 2017, although due to accumulated losses in certain companies they were not all recorded as distributable income. Distributions may trigger additional pension contributions if higher than pre-agreed thresholds, see note 31 of the Financial statements.

Notwithstanding these factors, the Company's distributable reserves position was strong, with €6.1 billion available at December 31, 2017 (2016: €6.1 billion).

Liquidity and capital risk management

IAG's objectives when managing capital are to safeguard the Group's ability to continue as a going concern, to maintain an optimal capital structure to reduce the cost of capital and to provide sustainable returns to shareholders.

The Group monitors capital using adjusted gearing, adjusted net debt to EBITDAR and liquidity. In 2017 the Group's financial headroom rose as adjusted net debt to EBITDAR decreased to 1.5 from 1.8 in 2016 with both adjusted net debt and EBITDAR improving. Adjusted net debt reduced by €400 million to €7,759 million from a stronger cash position and lower long-term borrowings, partially offset by an increase in the notional aircraft operating lease debt. EBITDAR increased €506 million versus last year reflecting the Group's profitable growth as the EBITDAR margin improved 2 points with ASKs up 2.6 per cent. Adjusted gearing of 51 per cent in 2016 was within the Group's investment grade aim, and improved by an additional 6 points to 45 per cent from higher profit after tax.

The Group's equity free cash flow (EqFCF) rose €630 million in 2017 due to the increase in EBITDAR and EBITDA before exceptional items and lower net CAPEX. Net CAPEX is acquisition and sale of PPE and intangible assets (2017: €1,184 million; 2016: €1,301 million).

In 2017, the Group CAPEX included delivery of three new aircraft, one Boeing 787-8 and two Airbus A330s. This capital expenditure has been partially offset by €287 million of proceeds from the sale and leaseback of seven new aircraft (four Airbus A321 and three Airbus A330).

In comparison, in 2016 the Group CAPEX included delivery of 11 new aircraft, two Airbus A380s, two Boeing 787-9s, four Airbus A330s, and three aircraft from the Airbus A320 family. This capital expenditure was partially offset by €1,582 million of proceeds from the sale and leaseback of 26 new aircraft (nine Airbus A321, eight Airbus A330 and nine Boeing 787-9s). The Group also received proceeds for the sale and leaseback of 12 of its owned Airbus A319s, which were divested to reduce any residual value risk. Due to the timing of aircraft deliveries in 2017, CAPEX was low and below the planning target of an average of €2,100 million per annum.

Movements in Working capital and other non-cash generated €558 million in free cash flow (2016: €235 million) primarily from the Group's growth with higher sales in advance of carriage and impacted by the timing of prepayments and tax payments.

Pension and restructuring payments reflect payments made to the British Airways APS and NAPS plans and restructuring payments made under British Airways' Plan4 and Iberia's Plan de Futuro II.

In 2017, the cash Dividend paid reflects the 2016 final dividend and the 2017 interim dividend.

Cash flow

€ million	2017	2016	Movement
EBITDAR before exceptional items	5,087	4,581	506
Rentals	(888)	(759)	(129)
EBITDA before exceptional items	4,199	3,822	377
Net interest	(93)	(148)	55
Taxation	(237)	(318)	81
Acquisition of PPE and intangible assets	(1,490)	(3,038)	1,548
Sale of PPE and intangible assets	306	1,737	(1,431)
Equity free cash flow	2,685	2,055	630
Working capital and other non-cash	558	235	323
Pensions and restructuring	(914)	(946)	32
Proceeds from long term borrowings	178	1,317	(1,139)
Repayments of long term borrowings	(973)	(1,130)	157
Dividend paid	(512)	(442)	(70)
Share buyback	(500)	–	(500)
Other investing	72	2	70
Other financing	(21)	(45)	24
Cash inflow	573	1,046	(473)
Opening cash and deposits	6,428	5,856	572
Net foreign exchange	(325)	(474)	149
Cash and deposits	6,676	6,428	248
			Higher/
€ million	2017	2016	(lower)
British Airways	3,182	2,958	224
Iberia	1,167	1,179	(12)

Cash and deposits	6,676	6,428	248
companies	621	788	(167)
IAG and other Group
Vueling	681	648	33
Aer Lingus	1,025	855	170
Iberia	1,167	1,179	(12)

In addition to the share buyback programme, the Group generated sufficient equity free cash flow to support the recommendation of an interim and final cash dividend of €554 million for its shareholders with cash coverage of 4.0 times. The Group returned over €1 billion to shareholders in 2017.

In February 2018, the Group also announced its intention to carry out a €500 million share buyback programme during the course of 2018.

Taking these factors into consideration, the Group's cash inflow for the year was €573 million and after net foreign exchange differences, the increase in cash net of exchange was €248 million. Each operating company holds adequate levels of cash with balances exceeding 20 per cent of revenues, and sufficient to meet obligations as they fall due.

Net debt, adjusted net debt and adjusted gearing

Net debt
€ million	2017		2016 Movement
Debt	(8,515)	(8,630)	115
Cash and cash equivalents and interest bearing deposits	6,428	5,856	572
Net debt at January 1	(2,087)	(2,774)	687
Increase in cash net of exchange	248	572	(324)
Net cash outflow from repayments of debt and lease financing	973	1,130	(157)
New borrowings and finance leases	(178)	(1,317)	1,139
Decrease/(increase) in net debt from regular financing	795	(187)	982
Exchange and other non-cash movements	389	302	87
Net debt at December 31	(655)	(2,087)	1,432
Capitalised aircraft lease costs	(7,104)	(6,072)	(1,032)
Adjusted net debt at December 31	(7,759)	(8,159)	400

Net debt at December 31, 2017 was €655 million, a reduction of €1,432 million in the year from the stronger cash position.

Net debt from regular financing activities decreased €795 million, with new borrowings below the current year's regular debt and lease repayments. The level of 2017 and 2016 new borrowings and finance leases reflect the timing of fleet deliveries for the Group.

Capitalised aircraft lease costs rose during the year from the full year impact of aircraft financed through operating leases delivered in 2016 such as the Boeing 787s and Airbus A330s.

Off balance sheet arrangements and capital commitments

The Group has entered into commercial leases on certain property and equipment but primarily for aircraft. Contracts cover primarily a 21 year period with total payments of €7,642 million (2016: €8,314 million); see note 23 for further details on the timing. The Group's adjusted net debt metric includes an estimation for the debt related to the aircraft operating leases ('capitalised aircraft lease costs') by taking the current year's aircraft operating lease cost multiplied by 8.

Capital expenditure authorised and contracted for amounted to €12,137 million (2016: €14,022 million) for the Group. Most of this is in US dollars and includes commitments until 2023 for 113 aircraft from the Airbus A320 family, 17 Boeing 787s, 43 Airbus A350s, and 4 Airbus A330s.

Overall, the Group maintains flexibility in its fleet plans with the ability to defer, to exercise options and to negotiate different renewal terms. IAG does not have any other off-balance sheet financing arrangements.

Our commitment to sustainability achieves recognition

We have had another strong year as we continue to develop our sustainability programme.

On the operational front, our flight carbon efficiency improved by 2.6% during 2017 putting us on track to deliver our 2020 target of 87.3 grammes of CO2 per passenger kilometre. During 2017 we also began implementing the Honeywell GoDirect Fuel Efficiency software, supporting further group-wide reductions in fuel use and carbon emissions. We also acquired 13 new aircraft with at least 20 per cent lower carbon emissions and 50 per cent lower noise levels than the aircraft they replace.

In September, we welcomed the UK Government's announcement to include Sustainable Aviation Fuels within the UK incentive policy framework, something we have long advocated. It makes the UK one of the most attractive locations to develop this emerging technology.

Soon after we announced our partnership with Velocys, a leading global biofuels technology company, to construct a waste-to-fuels plant in the UK. We believe there is significant opportunity to produce sustainable alternative fuels from waste that would otherwise be destined for landfill.

In 2016 we were delighted that the global industry agreed to a common carbon offset and reduction scheme called CORSIA. For many years we have led calls for just such an agreement. In early December details of the CORSIA scheme were released enabling our airlines to begin their implementation plans. IAG will continue its support for CORSIA and we will also be helping other airlines in their preparations.

Our industry-leading work on climate change was recognised in October when we achieved the Carbon Disclosure Project (CDP) 'A' List for our Climate disclosures, placing us amongst the top 5 per cent of global leading companies. We were also named as the UK's Most Improved company.

These are fantastic achievements. We believe that disclosure is an important driver of any organisation's climate protection efforts. To strengthen our focus we are pleased to have signed up to support the Task Force on Climate Related Financial Disclosure, which matches up with and builds on the CDP framework.

During autumn 2017, we carried out a Materiality Assessment with our key stakeholders to seek their views on what "It's great to see our sustainability programme evolving. We're strengthening our governance and have made important progress towards our long term goals to tackle climate change. Last year we were pleased to win recognition for our carbon disclosures."

our sustainability priorities should be. The results have provided valuable insights and some of the key feedback we received is reflected in the structure and focus you'll find in the following pages.

We are also working closely with all our businesses to ensure that we comply with the new disclosure obligations under Directive 2014/95/EU on non-financial reporting and the relevant legislation in the UK and Spain. This report has been prepared taking these new requirements into account and, as in previous years, we are presenting our non-financial information in an integrated format throughout our strategic report.

We've achieved a great deal on sustainability in 2017 and look forward to making further, tangible progress this year, not least with our Sustainable Aviation Fuels projects and beginning the first action to implement CORSIA in preparation for emissions monitoring from January 2019.

Above all we want to continue our efforts to be the leading airline group with regard to sustainability.

Antonio Vázquez

Chairman

Sustainability overview

Sustainability governance

Our sustainability programmes are coordinated at Group level to develop and implement sustainability policy and strategy, establish targets and programmes and ensure appropriate governance and accountability across all our operating companies.

The IAG Management Committee provides the forum for review, challenge and setting strategic direction. Further oversight and direction is provided by the IAG Board and the Audit and Compliance Committee. In 2017, the IAG Group Head of Sustainability reported four times to the Management Committee, twice to the Board and once to the Audit and Compliance Committee.

Materiality and stakeholder engagement

In autumn 2017 IAG completed an assessment of the most material sustainability issues through a materiality analysis performed according to Global Reporting Initiative Sustainability Reporting Guidelines (GRI version G4), as well as benchmarking with other materiality frameworks. We engaged a range of our principal external stakeholders including investors, corporate customers, suppliers and NGOs, with a total of 15 participants in three external workshops as well as 12 interviews with internal stakeholders. The charitable trust Business in the Community was appointed to provide objective oversight of the process; facilitating workshops, reviewing interview feedback and preparing a materiality matrix.

The sample of stakeholder opinions have been used to cross check our sustainability strategies and identify our primary sustainability issues.

Immediate actions we've taken resulting from the exercise are:

Included additional performance measures on workforce and energy efficiency in this report.
Created clearer read-across between our material issues, strategies, performance measures and actions –these are now reflected in our risk and opportunities table and our sustainability performance table on the following pages.
Linked our performance on our most material sustainability issues to relevant UN Sustainable Development Goals.
Improved our data presentation to show five year trends and indicated whether progress is positive or negative versus the planned direction.

In the medium-term we'll be focusing on improving external communications on sustainability, including on-board our aircraft, and continuing to improve the alignment on levels of commitment and performance on sustainability across our Group.

During 2018 we will be working with GRI and the International Air Transport Association (IATA), to identify material issues across the industry and develop a GRI Sectorial Guidance Handbook for airlines which will improve consistency and opportunities to benchmark our performance with other airlines.

Carbon disclosures

IAG achieved double A with the coveted global 'A List' status in the 2017 CDP ratings. This recognition for our corporate response to climate change comes from CDP which hosts the largest registry of corporate greenhouse gas (GHG) data in the world. We were also awarded "most improved" organisation in the UK in 2017 on climate disclosure. IAG is the only airline group to make the Climate A List in 2017. A third award came with us also achieving A List status for engaging our supply chain on climate change. In 2018 we will report under the new CDP format for transportation sector disclosures.

UN Sustainable Development Goals

In our 2016 report, we identified four priority UN Sustainable Development Goals (SDGs, numbers 5, 7, 8 and 13) which align closely with our core business strategies and our sustainability programmes. In 2017 we benchmarked our priority SDGs with those of IATA and Sustainable Aviation1 and listened to our stakeholders' feedback on the desire to see clearer links between our material issues, our actions and the UN SDGs. In response, we have this year drawn links in our performance report to a wider set of 9 SDGs, listed below.

Goal 3: Good health and wellbeing
Goal 4: Quality education
Goal 5: Gender equality
Goal 7: Affordable and clean energy
Goal 8: Decent work and economic growth
Goal 9: Industry, innovation and infrastructure
Goal 11: Sustainable cities and communities
Goal 12: Responsible consumption and production
Goal 13: Climate action

1 Sustainable Aviation – consortium of leading UK aviation companies.

Sustainability risks

Sustainability risks and opportunities are assessed in line with IAG Enterprise Risk Management (ERM) methodology and are summarised in the table below. Risks have owners within IAG and our operating companies and we work with them to ensure risks and opportunities are appropriately managed. For more detail on our enterprise risk management process see the Risk management and principal risk factors section.

Risk or opportunity, potential impact	How we manage it
Climate regulation – regional application risk CORSIA has been agreed internationally however the risk remains of regional regulatory duplication and/or inconsistent application of agreed Monitoring Reporting and Verification (MRV) requirements and eligible offsets which would create inequitable costs and competitive distortion.	• Supporting implementation of CORSIA through IATA and ICAO and mentoring other airlines to ensure CORSIA can be adopted successfully. • Supporting development of robust rules for CORSIA on Monitoring Reporting and Verification and emissions unit eligibility criteria. • IAG lobbying for single tier adoption of CORSIA directly with UK and EU governments as well as through industry groups IATA, A4E2 and Sustainable Aviation.
Sustainable aviation fuels – production opportunity	• Lobbying for sustainable aviation fuel inclusion in
Lack of policies have discouraged investment in innovative, first-of-kind technologies to develop sustainable aviation fuels (SAF).	renewable fuel policies at the Global, EU, and UK levels. • British Airways investing with partners in waste-to-fuel projects. • Lobbying to ensure UK policy proposal converted into regulation.
Sustainable aviation fuels – regulation risk	• Lobbying to prevent mandates both directly and as part of
EU proposal to mandate proportion of sustainable aviation fuels would drive production but force airlines to purchase SAF at premium price compared to conventional fuels creating competitive distortion.	industry organisations at EU and UK levels and supporting policy incentives that help deliver SAF at prices competitive with conventional fuels.
Environment regulation – compliance risk	• Adopting group-wide Environmental Management System,
An inadvertent breach of compliance requirements with associated reputational damage and fines.	the IATA IEnvA programme. • Internal governance, awareness and assigning ownership for environmental compliance obligations. • Engaging with carbon market advisors to understand and mitigate compliance risks and identify future opportunities.
Supply chain CSR – compliance risk	• Know Your Counterparty due diligence, Supplier Code of
Potential breach of sustainability, corporate social responsibility or anti-bribery compliance by an IAG supplier or third party resulting in financial, legal, environmental, social and/or reputational risk.	Conduct, supplier compliance audits. • Internal governance including training and workshops to identify risks and mitigation. • Installing new supplier management IT system, due to complete early 2018.
Operational noise restrictions and charges risk	• Investing in new quieter aircraft.
Airport operators and regulators apply operational noise restrictions and charging regimes which may restrict our ability to operate especially in the night period and/or may introduce additional cost.	• Continually improving operational practices including continuous descents, slightly steeper approaches, low power low drag approaches and optimised departures. • Internal governance and training and external advocacy in UK and Spain to manage risks.
Consumer behaviour risk and opportunity	• Set mission to be the world's leading airline group on
Trend in ethical and sustainability concerns being a factor in consumer choices.	sustainability with ambitious goals on carbon efficiency. • Using all the tools at our disposal: modern aircraft, efficient technology, best operational practice and sustainable fuels, as well as influencing global policy and driving industry wide action, to minimise our carbon footprint and mitigate other sustainability risks. • Effective communication of our practices to customers and suppliers.

2 A4E- Airlines for Europe, European Air Transport Industry Association.

Sustainability performance

This performance summary should be considered along with measures reported across the Strategic Report and Management Report to collectively understand our performance against our most material sustainability matters. We follow the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (revised edition) applying an operational control boundary and also indicators from GRI Sustainability Reporting Guidelines. The scope of our sustainability performance data includes all our airline and air cargo operations but currently excludes Avios and GBS functions which comprise less than one per cent of our most material aspects. Our emissions data is calculated using UK and Spanish Government GHG conversion factors for company reporting. In the charts below, the 2017 bar is colour coded: green for in-line with desired direction and red for against desired direction.

Aspect and link to SDGs	Performance indicator	Description	2017 highlights	Performance
Climate	Jet fuel	As commercial aircraft remain reliant	• Our jet fuel use increased 1.8%	Million tonnes fuel
	(Million tonnes)	on liquid kerosene for the foreseeable future, IAG's climate change focus is on purchasing newer more fuel efficient aircraft, developing sustainable jet fuel, pursuing operational fuel efficiency and supporting CORSIA global carbon offsetting scheme.	compared to 2016 however this was a slower rate of growth than our business 9.6 operations (RPK up 3.8%) reflecting an 7.2 improvement in operating efficiency. • UK Government proposes Sustainable 4.8 Aviation Fuels (SAF) in policy 2.4 incentives. 0.0	7.44	7.93	8.28	8.86	9.02 +1.8%
			• British Airways announced SAF UK production partnership.	2013	2014	2015	2016	2017
	Average age of aircraft fleet (years)	Average age of all aircraft in our fleet calculated at the end of the reporting year and based on aircraft age from date of manufacture. As newer aircraft are typically 15-20% more fuel efficient than the aircraft they replace, this metric is a proxy for showing the penetration and retention of new aircraft in	• The slight increase in the average age is due to the reduced turnover of new and retired aircraft 12 during 2017. This turnover will improve 10 in 2018 as we increase the rate of new 8 aircraft deliveries. 6 • 13 new aircraft delivered 4 • 15 aircraft retired 2	Years 11.1	10.5	10.8	10.8	11.4 +5.6%
		our fleet.	0 • Total aircraft fleet at end of December 2017: 546	2013	2014	2015	2016	2017
	Flights only CO2 emissions intensity (gCO2 /pkm)	Target: 10% improvement by 2020 compared to 2014. Grammes of CO2 per passenger kilometre is a standard industry	• IAG achieved 2.6% improvement in annual fuel efficiency, continuing to exceed industry target of 1.5%.	gCO2/pkm 99.7	97.5	95.6	94.8	92.3
		measure of flight efficiency. Individual airline performance is reported on the relevant pages in this report.	100 • This improvement is due to a 80 combination of higher load factors, better cargo performance particularly 60 at British Airways and Aer Lingus and 40 an increased mix of longhaul flying at Aer Lingus. 20	2020 target: 87.3				-2.6%
			0	2013	2014	2015	2016	2017
	Scope 1	Direct emissions associated with our flying.	• Scope 1 CO2 e emissions have increased	Million tonnes CO2e
	Direct GHG emissions In line with industry commitments which (Million tonnes CO2 e) we were instrumental in securing in 2009, we have two targets designed to address our direct CO2 emissions over different timescales: • To achieve carbon neutral growth for our international aviation from 2020.	but at a lower rate than activity of the airlines. 35 • IAG contributed 3 million tonnes of carbon reductions through our compliance with the EU ETS, bringing our net CO2 emissions down to around 25.8 million tonnes (provisional figure	23.66	25.22	26.40	28.26	28.78
			2050 net				+1.8%
		• 50% net reduction in CO2 emissions by 2050 versus 2005 baseline (23.24 million tonnes).	pending EU ETS verification).	0 2013	target: 11.62 2014	2015	2016	2017
	Scope 2	Buildings electricity.	• Fluctuations in trend are influenced by	Thousand tonnes CO2e
	Indirect GHG emissions (Thousand tonnes CO2 e)	Scope 2 emissions reported here reflect national (location based) grid mix for UK, Spain and Ireland. Aer Lingus included from acquisition in August 2015.	airline acquisitions as well as the trend towards less carbon intensive electricity 180 across Spain, the UK and Ireland. 144 • 54% of Group electricity use in 2017 was 108	135.76	117.67	117.07	103.12	86.39
	In 2017 we improved our Scope 2 methodology by applying the most appropriate Spanish Government conversion factors for our electricity use in Spain. We have therefore updated our annual reporting and back-dated to 2013 with the new methodology to provide consistent trend information.	from renewable sources, mainly wind. 72 • Renewable electricity use across the Group in 2017: British Airways 81%, 36 Aer Lingus 49% and Iberia and Vueling 0 18.5% each.	2013	2014	2015	2016	-16.2% 2017
		• British Airways electricity tariff was changed to renewables in December 2017.
	Scope 3	This includes other indirect emissions such	• The Scope 3 emissions increased by			Million tonnes CO2e
	Other indirect GHG emissions (Million tonnes CO2e)	as from supply chain, production and transport of materials, staff commuting etc. IAG actively engages with our suppliers to manage and reduce our scope 3 CO2 emissions.	3.2% in 2017 compared to 2016. This was 10 mainly due to expanding the scope of our emissions calculations to achieve fuller accounting. • 2017 CDP Climate A for engaging suppliers on climate.	9 8 4.87 7 6 5 4 3 2	5.18	5.42	7.64	7.88 +3.1%
				1 0 2013	2014	2015	2016	2017

Aspect and link to SDGs	Performance indicator Description 2017 highlights			Performance
Economic return versus	Revenue per tonne CO2 e	This metric is a long-term measure to track the connection between economic growth and climate impact of our operations. As we work with GRI during 2018 we hope to develop this as an indicator to benchmark IAG with other airlines and airline groups.	• Revenue per tonne of CO2 has maintained the same level during 2017 as revenue	€/tonne CO2e
climate impact	(€/tonne CO2 e for scope 1 and 2 emissions combined)		has increased at the same level as CO2 1000 emissions. 800 600 400 200 0	862 785 796 796 796 0% 2013 2014 2015 2016 2017
Noise	Average noise (Based on Quota Count and number	This metric measures average noise per flight taking into account arrival and departure noise for each aircraft	• Continuous descent operations further improved with all IAG carriers now achieving over 80% compliance at London Heathrow.	Average noise QC/LTO cycle
	of Landing and Take Off cycles per year)	type (using UK Government Quota Count values which are a relative categorisation based on certified noise levels) and the number of flights operated in a year. Note: for a single flight a Boeing 747 score would be 6.0 whereas an Airbus A320 (current engine option) would be 1.0.	1.2 • Modifications to aircraft flight planning software to improve aircraft climb and descent profiles to mitigate noise. 1.0 0.8	1.081.11 1.06 2020 -1.9% target: 1.0 2015 2016 2017
	Aircraft fleet noise certification (ICAO Chapter 4 and 14)	ICAO Chapter 4 noise certification comprises limits of a combination of lateral, approach, and flyover noise levels. The ICAO Chapter 4 technology standard for aircraft noise applies to new aircraft certified from January 1, 2006 and Chapter 14 applies to new aircraft certified from January 1, 2017.	• All our fleet except three Airbus A321 aircraft meet ICAO Chapter 4 noise certification. • During 2018 we expect further increase in 100 the proportion of our fleet meeting Chapter 80 14 noise standard as new aircraft such as the Airbus A320neo and Airbus A350 join 60 our fleet. 40 20	% ICAO noise standard 98.7 99 93.1 99 99 0% 48 46 46 0%
			0	2013 2014 2015 2016 2017 Chapter 4 Chapter 14
Energy efficiency	Energy efficiency per passenger kilometre (gCO2 e/pkm)	This is a new metric designed to monitor our energy efficiency (Scope 2) as a function of our business activity (passenger kilometres). It complements our flight only emissions intensity metric.	• British Airways Paint Bay was mothballed, new energy saving lighting projects on the Heathrow Operations base and substantial closure of British Airways Component Engineering facility in Hayes have made 0.6 significant contributions to energy reductions.	Energy eciency per passenger kilometre (gCO2e/pKm) 0.46 0.350.43
			• Iberia relocated jobs to consolidate office space, and raised awareness among employees to regulate the air conditioning and heating thermostats. 0.0	0.28 2017-20.0%
			• Against the IAG general trend general, Vueling electricity use has increased since 2014 due to new 24/7 departments, improved air conditioning and increase of 35% employees and longer opening of the canteen facilities at the headquarters.	2014 2015 2016
Waste	Average aircraft cabin waste (kg/passenger)	During 2017 we have been working to establish average aircraft cabin waste baselines to enable us to begin reporting Group performance. Further work is required to enable consistent split across the group for longhaul and	• British Airways had significant reductions in cabin waste in 2017 due to the introduction of the new Buy-on-Board product in 2.0 shorthaul as well as changes to longhaul second service and improved catering 1.5 loading.	kg/passenger (British Airways data only) 1.57 1.39 1.07
		shorthaul operations.	• Iberia continue to lead EU catering waste 1.0 project targeting zero cabin waste. 0.5	(-50.0%) -31.8% 0.08 0.16 0.16
			• Vueling began collecting data on cabin waste and reported average 0.085kg per 0.0 passenger (all shorthaul).	2015 2016 2017 Shorthaul Longhaul

Aspect and link to SDGs	Performance indicator	Description	2017 highlights	Performance
Air quality	Aircraft fleet that meet ICAO CAEP standard for NOx emissions (%)	ICAO CAEP is a standard for NOx emissions from aircraft engines. The standards have become increasingly stringent and the CAEP 8 certified engines must emit less than half the NOx emitted by engines certified to the original CAEP standard. The CAEP 4 NOx standard applied to engines manufactured from 1 January 2004, CAEP 6 applied from 2008 and CAEP 8 applied from 2014. ICAO is also developing a standard for particulate matter from aircraft engines, expected to come in to force in 2020.	• As 96% of our aircraft meet CAEP 4 NOx, we now focus on meeting the more stringent CAEP 6 and 8 standards. • Incremental fleet renewals are driving a gradually improving trend. • 2016 figures for CAEP 6 and 8 have increased 1% due to new data on engine allocation. • Reduced engine taxiing across our Group and limiting use of auxiliary power units is helping minimise our NOx emissions. • British Airways deployed electric aircraft tug in Heathrow Terminal 5 and installed electric vehicle charging at their head office.	% ICAO NOx standards 70 71 65 62 56 65 +1.4% 26 25 +4.0% 0 2013 2014 2015 2016 2017 CAEP 6 CAEP 8
Customers	Customer satisfaction (average Net Promoter Score)	We are reporting average Net Promoter Score (NPS) for the first time this year. NPS is a non-financial metric which measures the likelihood of a customer recommending an IAG operating carrier. Customer satisfaction with a company's products or services is key to a company's success and long-term competitiveness (see Key performance indicators section).	• We have established consistent methodology across our Group to achieve a single blended score. • The Voice of Customer (VoC) survey is the main tool of the customer experience programme and provides valuable feedback that helps to identify actionable insights to improve the customer proposition. • Strong punctuality performance across the Group, in addition to customer service initiatives have supported the 2017 score.	Average Net Promoter Score 16.8 2022 target 30.0
	Punctuality (within 15 minutes)	Punctuality is defined as the percentage of flights that depart within 15 minutes of their published departure time. The moment of departure is defined as the moment the aircraft's brakes are released in preparation for pushback. As a major driver of customer satisfaction, we strive to consistently improve our punctuality.	• British Airways has improved operating procedures across the network, achieving their highest punctuality since 2011. • Operational improvements at Vueling have resulted in an increase in on time performance of 11.3% versus last year. • Punctuality – within 15 minutes – across our airlines (British Airways 80%, Iberia 90%, Vueling 79.9%, Aer Lingus 81.4%).	Within 15 minutes % 90 81.8 80.9 80.2 79.2 77.2 84 +6.0% 78 72 66 60 2013 2014 2015 2016 2017
Workforce	Employment (Average manpower equivalent)	Manpower equivalent is the number of employees adjusted to include part time workers, overtime and contractors. We seek workforce efficiencies to maintain a competitive cost base but recognise number of employees is a positive economic and social metric that will fluctuate with passenger demand, business growth and acquisitions.	• Participated in the pilot programme of the Workforce Disclosure Initiative (WDI). • British Airways won Gold accreditation by Fair Train for quality work experience placements, 417 placements hosted in 2017 (350 in 2016). • British Airways recruited 184 new apprentices (38% female) in 2017 reflecting the importance of recruiting new talent.	Average manpower equivalent 63,422 63,387 60,892 60,089 75 59,484 +0.1% 40 2013 2014 2015 2016 2017
	Workforce turnover (% voluntary and non-voluntary)	IAG recognises the importance of retaining experience and talent in relation to the success of the business and we report turnover as a measure of the stability of our workforce. Workforce turnover is measured as the number of leavers as a percentage of the average number of Group employees in the year.	• Non-voluntary turnover decreased across the group reflecting the completion of workforce efficiency projects.	% voluntary and non-voluntary 16 8 -50.0% 6 +33.3% 4 2 0 2016 2017 Voluntary Non-Voluntary

Aspect and link to SDGs	Performance indicator	Description	2017 highlights	Performance
Workforce (Continued)	Gender diversity (% Female at Board, Senior Executives, & Group level)	IAG encourages greater gender equality at all levels in the workplace. We have published an objective to reach at least 33% women on the Board by the end of 2020. We also have an aspirational goal of reaching 33% women across our senior executive levels by 2025. During 2017 we improved our tracking	• IAG held internal roadshows to raise awareness and inspire action on gender equality and established a Sponsorship Programme matching senior women with Management Committee members. • Iberia developed a Diversity Plan to embed diversity management in the company strategy. • British Airways STEM work experience attracted 22% per cent females in 2017,	% Women 44 44 44 43 43 45 25 25 25 24 23 24 24 23 23 17 0 2013 2014 2015 2016 2017
		of gender diversity and amended our definition of senior managers. We have therefore updated the 2016 figure to reflect this new definition (changes from 27% reported previously to 23%).	versus 19% in 2016 and 10% in 2015; we held 'Women in Engineering' event and worked to improve diversity among pilots. • British Airways and Avios are covered by the Gender Pay Gap reporting legislation and will report in April 2018.	Board Group Senior Executives
	Age diversity (%)	IAG is reporting age diversity for the first time in 2017. An age diverse workforce balances the need for experienced individuals with maintaining a plan for succession through the recruitment of new talent.	• IAG reviews age diversity in the following ranges: less than 30 years, 30-50 years, over 50 years. • Further, we have also reported age diversity for staff in managerial and non-managerial roles.	% of employees per age group 17% 32% 6% 29% 65% 51%
				Age diversity <30 30-50 50+ Management Other Sta
	Social Dialogue and Trade Unions (% of employees covered by collective bargaining agreement)	Employee Relations are an extremely important factor in improving and maintaining workforce engagement. All Group employees have the right to representation through a collective bargaining agreement.	• In 2017 IAG established a European Works Council which covers all Group employees within the European Economic Area, representing over 95% of the total workforce.	% of employees covered by collective bargaining agreement 88 88 0% 2016 2017
	Average hours of training (hours per year, per employee)	Calculated by translating training data for airlines per FTE to show as training hours per Group Average Manpower Equivalent (AME)	• In 2017 our average hours of training increased significantly due to British Airways' investment in new Club World product and the introduction of the Buy on Board service. In addition, Vueling training increased with further focus on customer service.	Average hours training per 45.8 employee per year 37.3 35.6 34.9 36.1 45 31.2% 0
				2013 2014 2015 2016 2017

Future focus – our priorities for 2018 and beyond

In 2018 we look forward to making further progress with:

Our Sustainable Aviation Fuels projects.
Beginning the first action to implement CORSIA in preparation for emissions monitoring from January 2019.
Using our new fuel efficiency software to identify more opportunities for fuel efficiency.
Improving our external communications regarding sustainability initiatives.

• Driving continual improvement of our sustainability disclosures including exploring options for science based target recognition which, for aviation, requires acknowledgement of carbon offsetting as a viable, legitimate and necessary part of the pathway to decarbonisation.

• Continuing the roll-out of our environmental management system IEnVA.

Sustainability in action

Global aviation carbon offsetting scheme

In 2017 IAG's representatives working with IATA and ICAO helped deliver further progress with the global aviation carbon offsetting scheme CORSIA. In December 2017, the release of the document, known as the CORSIA Package, provided details of the Monitoring, Reporting and Verification requirements for

airlines and clarified how Sustainable Alternative Fuels will be credited within the scheme.

All airlines are required to prepare Emissions Monitoring Plans by September 30, 2018 and to begin emissions monitoring from January 1, 2019. As well as beginning our own preparations, we are also supporting

other airlines with theirs through an IATA "buddy" system.

We continue to comply with the EU Emissions Trading Scheme but our expectation is that CORSIA will replace the EU ETS as agreed in the 2016 ICAO General Assembly resolution, to ensure that we only pay for our CO2 emissions once.

Sustainable aviation fuel

IAG has been instrumental in driving progress on sustainable aviation fuels in CORSIA, with UK Government policy development and with partners to develop sustainable aviation fuel production facilities in the UK.

In 2017, British Airways entered a partnership with Velocys to design a series of waste plants that convert household waste into renewable jet fuel. The first plant will take hundreds of thousands of tonnes of household waste per year, otherwise destined for landfill or incineration, and convert it into sustainable fuels that provide

60% reduction in CO2 compared to fossil-based jet fuel.

The UK's Department for Transport has indicated that future regulation will prioritise the production of sustainable aviation fuel beyond 2020 and intends to implement new legislation to support this during 2018. The UK government has also established a new Special Interest Group to support new research and development programmes for sustainable aviation fuels. These important policy incentives are vital for us to be able to invest in sustainable fuel production in the UK.

Carbon fund

British Airways' carbon fund uses customer donations from flight bookings on ba.com to invest in renewable energy and energy efficiency projects to provide community benefits and mitigate climate change. The Carbon Fund supported three additional energy projects in 2017, including the largest project supported so far, providing energy efficient heating and lighting for a new community gymnastics center near London Heathrow airport. These projects bring the total completed to 24, exceeding €2 million in community benefits.

Fuel efficiency

During 2017 we procured Honeywell GoDirect Fuel Efficiency software to help identify further fuel efficiency opportunities and enable groupwide benchmarking and reporting on aircraft fuel efficiency performance. During 2018 we will be implementing the tool across the Group and identifying priorities for future work.

Examples of fuel efficiency projects delivered during 2017 include:

Further deployment of single engine taxiing, saving over 5000 tonnes of fuel across the Group.
Exploiting sophisticated on board data sensors to optimise in-flight performance, for example upgrades to software on British Airways

Boeing 787 aircraft enabled more fuel efficient descents.

Working with airport authorities and ground handling teams across our network to improve facilities and access to electrical and air conditioning ground equipment which reduces fuel burn from our aircraft auxiliary power units.
Working with our air navigation providers and reviewing geopolitical developments to ensure we select the most fuel efficient flight paths.
Cumulatively fuel efficiency savings across the Group in 2017 amount to over 30,000 tonnes of fuel and 95,000 tonnes of CO2 emissions.

Modern slavery

Our Group Modern Slavery Standing Instruction sets out IAG's zero tolerance approach to Modern Slavery. This Instruction applies to all persons working for us or on our behalf in any capacity. Our Modern Slavery Working Group met regularly during 2017 to monitor the Group's progress in tackling slavery and discuss any issues. The Group boards are kept informed of any major developments. Other relevant IAG Group policies include our Supplier Code of Conduct and Equal Opportunities Policy. Where IAG Group companies have their own local policies, we are reviewing these to ensure they include the appropriate clauses on Modern Slavery.

Noise

Continuous descent operations (CDO) help reduce noise by keeping aircraft higher over the ground for longer, and save fuel. British Airways and Aer Lingus are already among the top performing airlines, regularly achieving over 90 per cent compliance. During 2017 Iberia and Vueling continued their focus on improving CDOs, bringing all our carriers to over 80 per cent CDO compliance at London Heathrow.

All our airlines monitor operational noise performance to ensure flights are operated sensitively and to identify improvements where possible. Departing flights at Heathrow are expected to fly within Noise Preferential Routes (NPRs), and British Airways performance on NPRs in 2017 was 98.5%. To further improve trackkeeping, in August 2017 a new procedure to reduce the turn radius on Boeing 747 operations using the Midhurst route was presented to community groups, who welcomed the initiative. Results from operational monitoring show that Boeing 747 track adherence has significantly improved, providing noise improvements for the local community.

Air quality

British Airways has completed the rollout of its new Mototok electric aircraft pushback tug, across Heathrow Terminal 5 shorthaul operations. The equipment replaces traditional diesel tugs, allowing a single ramp agent to push an aircraft backwards from the gate remotely. Emissions-free at the point of use and charged from the airport's renewable electricity supply, the device can move planes smoothly and with precision.

The Iberia Ground Handling Equipment Renewal Plan has replaced 1,411 ground equipment vehicles during 2016 and 2017, representing 52 per cent of the ground vehicle fleet now complying with latest emissions standards. In addition, 29 per cent of Iberia's motorised ground vehicles are now electric, meeting Iberia's goals to reduce climate impacts and improve air quality.

Waste

During 2017, Iberia continued to lead the EU project 'LIFE+ Zero Cabin Waste' which is developing best practice guidance for sustainable cabin waste management which will be shared and applied across other airports and airlines around the world. Key progress in 2017 included:

Analysing the cabin waste in 165 Iberia flights.
Testing different trolley designs and gathering cabin crew feedback.
Preparing a new procedure for future cabin waste management.
Training cabin crew and highlighting potential environmental benefits of sustainable cabin waste management.

In 2018 the project objectives are to select a new trolley design that allows segregation of recyclable and non-recyclable waste, further cabin crew training and implementing selective collection of waste on Iberia flights initially on domestic and intra-EU flights before extending to international during 2019.

IAG hosted IATA aircraft end of life workshop revealing opportunities for shorter aircraft life cycles and accelerated noise and emissions improvements due to potential for more value to be extracted from end of life aircraft. The workshop brought together industry experts to share best practice and feed into an IATA best practice guide for treatment of end of life aircraft.

IAG and British Airways began work to review the use of single-use plastics across their headquarters and Heathrow estate. During 2018 we are working to reduce the volume of plastic used, source non-plastic alternatives and improve the segregation and recovery of the plastics we use.

Charity

British Airways Community Investment programme raised £7.2 million through direct and in-kind donations in 2017. This includes donations to Flying Start, British Airways corporate charity partnership with Comic Relief, and a £50,000 donation to victims of the Grenfell fire in London. In 2017 Iberia transported 25 tons of humanitarian aid to Africa, Europe and Latin America. Iberia also continued their collaboration with UNICEF and Amadeus on the Global Immunisation Initiative, raising €140,000 in 2017 to support the children's vaccinations. Iberia has also raised €180,000 in support of charitable projects, including raising awareness of domestic violence and childhood cancer. Vueling customers and staff raised more than €300,000 in 2017. Internationally, Vueling continues to support the Make a Wish Foundation and Save the Children. Domestically, Vueling has teamed up with Femarec to employ people with disabilities to support recycling activities. Aer Lingus staff raised €41,400 through participation in the Dublin and Berlin Marathons and an on board collection in aid of Breast Cancer Awareness. They also donated €25,000 to the Gaelic Players Association to fund a Mental Health Initiative and supported a further 33 local charities with Aer Lingus flights worth €25,000 in the form of prizes for fundraising purposes.

Supply Chain

Since 2014 IAG has undertaken targeted Corporate Social Responsibility (CSR)/ Social audits at factory and final assembly locations used to produce IAG related products and services around the world. IAG continuously identifies supply categories where goods or services are potentially sourced in high-risk areas and requires suppliers to provide visibility of their supply chains. IAG is committed to procuring goods and services from suppliers who demonstrate ethical principles in the way they conduct their business and we are continuing to enhance our supply chain CSR strategy and engage with suppliers on standards of quality, safety, environmental responsibility and human rights.

Occupational health and safety

We have robust governance to manage Health and Safety (H&S) within each of our businesses and at the IAG Safety Board we review aspects of H&S including accidents at work (staff and customers), statistics on days lost as a result of H&S issues and also actions placed upon us by H&S agencies.

Ethics and Integrity

IAG and its operating companies have policies and procedures in place setting out the general guidelines that govern the conduct of directors, executives and employees of the Group when carrying out their duties in their business and professional relationships. All directors, executives and employees are expected to act with integrity and in accordance with company policies and the laws of the countries they operate in.

Various training and communications activities are carried out for employees, suppliers and intermediaries to support awareness of the principles that govern the conduct of the Group and its employees.

All IAG employees are bound by the Securities Code of Conduct and the anti-bribery policies of IAG and their respective operating companies.

The IAG Supplier Code of Conduct applies to the supply of goods or services to the Group and requires suppliers to:

Act with honesty and integrity at all times in all our business dealings
Provide a safe working environment where employees are treated with dignity and respect
Seek to minimise and reduce our impact on the environment
Provide supply chain transparency and improve supply chain standards

Grievance Reporting

Several resources are available across the Group for employees to get advice or to report grievances or any alleged or actual wrongdoing. There are whistle-blowing channels provided by Safecall and Ethicspoint available throughout the Group, where concerns can be raised on a confidential basis. The IAG Audit and Compliance Committee reviews the effectiveness of whistle-blowing channels on an annual basis. This annual review considers the volume of reports by category; timeliness of followup; 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.

Anti-Bribery Policy and Programme

IAG and its operating companies all have an anti-bribery policy and these are made available to all employees. Training courses on anti-bribery policies and procedures are delivered throughout the year. Training requirements vary by operating company and are determined by factors such as the level and responsibilities of an employee.

The Group's anti-bribery programme (the programme) is designed to prevent, detect and respond to possible breaches of the Group's anti-bribery policies or anti-bribery laws, including offences covered by the Spanish Criminal Code. The compliance teams across the Group meet regularly to discuss the status of the programme, updates to policies and procedures, emerging trends, third-party risk-based anti-bribery due diligence activity and review the status of ongoing projects.

The compliance teams in IAG and the operating companies conduct an annual review of bribery risks across the Group. The main risks reviewed in 2017 included risks relating to:

the use of third parties
operational and commercial decisions involving government agencies
gifts and hospitality

The Audit and Compliance Committee of the IAG Board receives an annual update on the programme.

This page has been intentionally left blank.

IAG as a Group

IAG is responsible for the Group's strategy and business plan. It centralises the Group's corporate functions, including the development of its global platform.

Board*

Comprises ten non-executive directors and two executive directors (IAG CEO and CFO) and is responsible for:
the supervision of the management of the Company
the approval of the strategy and general policies of the Company and the Group
the determination of the policy on shareholders' remuneration
ensuring the effectiveness of the Company's corporate governance system
- approval of any significant contractual commitment, asset acquisition or disposal or equity investment or divestment
the definition of the Group structure
the approval of major alliances
the definition of the shareholders disclosure policy
approval of the risk management and control policy, including the Group's risk appetite

Chairman

Antonio Vázquez

chairs the shareholders' meetings
leads the Board's work
sets the Board's agenda and directs its discussions and deliberations
ensures that directors receive accurate, timely and clear information, including the Company's performance, its strategy, challenges and opportunities
ensures that there is an effective communication with shareholders and that directors and executives understand and address the concerns of investors
offers support and advice to the Chief Executive
promotes the highest standards of corporate governance

CEO

Willie Walsh

is responsible and accountable to the Board for the management and profitable operation of the Company
leads the Company's management team
oversees the preparation of operational and commercial plans
develops an effective management strategy
puts in place effective controls
co-ordinates the activities of the Group

Senior Independent Director

Patrick Cescau

provides a sounding board for the Chairman • serves as intermediary for the other directors
when necessary • is available to shareholders, should they have any concerns they cannot resolve through
the normal channels • leads the evaluation of the Chairman's performance annually

Audit and Compliance Committee

reviews the activity and performance of the external auditor, preserving their independence
supervises the effectiveness of the internal control of the Company, the internal audit and the risk management systems
supervises the process for the preparation of the Group's financial results, reviewing the Company's accounts and the correct application of the accounting principles
assess and oversees the Company's compliance system
reviews the Company's CSR and sustainability policy

Nominations Committee

evaluates and makes recommendations regarding the Board and committee composition
submits to the Board the proposed appointment of independent directors
puts in place plans for the succession of directors, for the Chairman and the Chief Executive
oversees and establishes guidelines relating to the appointment, recruitment, career, promotion and dismissal of senior executives
reports on the proposed appointment of senior executives
monitors compliance with the company's director selection and diversity policy

Remuneration Committee

reviews and recommends to the Board the directors and senior executive remuneration policy
reports to the Board on incentive plans and pension arrangements
monitors compliance with the Company's remuneration policy
ensures compliance with disclosure requirements regarding directors' remuneration matters

Safety Committee

receives material safety information about any subsidiary or franchise, codeshare or wet lease provider
exercises a high level overview of the safety activities and resources
follows up on any safety related measures as determined by the Board

* List of Board's reserved matters can be found in Article 3 of the Board Regulations, available on the Company's website.

The Group operating companies

Each operating company is responsible for the management of their respective businesses and accountable for the implementation of the joint business and synergy plan.

Each company has its own board of directors and its own executive committee, led by the top executive of each company.

IAG Management Committee

Headed by the Group CEO:

Day-to-day management of the Group
Capturing cost and revenue synergies
Development of Group longterm strategy

Corporate governance code compliance

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 ("FRC") as amended from time to time. A copy of the current version of the UK Corporate Governance Code (updated and published in April 2016) is available at the website of the FRC (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 can be found in the Corporate Governance section of the Company's website.

The Company considers that during the year it has complied with all the provisions of the UK 2016 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 believes that, notwithstanding the above exception, it has a robust governance structure.

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's Governance Reports are available on the Company's website.

The Spanish Annual Corporate Governance Report is part of the Management Report. It is available on the Spanish Comisión Nacional del Mercado de Valores website (wwww.cnmv.es), where it was published together with the Company's annual financial statements.

Board composition and diversity

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, 2017 the Board composition was:

Name of Board Member	Position/Category	First appointed
Antonio Vázquez	Chairman	May 25, 2010
Willie Walsh	Chief Executive Officer	May 25, 2010
Patrick Cescau	Senior Independent Director	September 27, 2010
Marc Bolland	Director (independent)	June 16, 2016
Enrique Dupuy de Lôme	Chief Financial Officer	September 26, 2013
James Lawrence	Director (other external)	September 27, 2010
María Fernanda Mejía	Director (independent)	February 27, 2014
Kieran Poynter	Director (independent)	September 27, 2010
Emilio Saracho	Director (independent)	June 16, 2016
Dame Marjorie Scardino	Director (independent)	December 19, 2013
Alberto Terol	Director (independent)	June 20, 2013

In addition, the appointment of Nicola Shaw as a non-executive director, which was approved at the Shareholders' Meeting in June 2017, became effective on January 1, 2018.

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 IAG Board currently comprises ten non-executive directors and two executive directors, IAG's Chief Executive Officer and Chief Financial Officer.

The Company is attentive to the need for progressive refreshing of the Board and committee membership. Any changes to the Board and the committees are carefully considered and planned so as to minimise disruption to and maintain the continuity of the Board's and committees' work and to ensure that the appropriate balance of skills, experience and stability is preserved in accordance with the Company's circumstances and strategy. The Board's composition is regularly refreshed, with half of the non-executive directors appointed within the last four years. The non-executive directors bring a strong, independent element to the Board, and contribute a broad range of expertise and experience, as well as a strong blend of skills. Non-executive directors are drawn from a wide range of industries and backgrounds, including the airline, retail, and travel and leisure sectors and have appropriate experience of complex organisations with global reach, having executive business experience. For further details see the Nominations Committee

In terms of gender diversity, the Company currently has a 25 per cent female representation on the Board, and in terms of nationality, the IAG Board includes directors from a variety of origins and cultures as set out in the chart below.

Board diversity*

In accordance with the Spanish Corporate Governance Code the Company has a Directors Selection and Diversity Policy. The objective of this 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, detailing the process for appointing directors and the Company's diversity principles. Information on compliance with this policy is included as part of the Nominations Committee Report.

The Directors Selection and Diversity Policy establishes a female representation objective of 33 per cent by the end of 2020 following the recommendation included in the final Davies Report published in 2015 in the UK. 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 53.

Board and committee meetings

The Board met 11 times during the reporting period. The Board also held its annual two-day strategy meeting in September 2017. During the reporting period, the Chairman and the non–executive directors met on two occasions without the executives present. The Senior Independent Director discussed the Chairman's performance with all directors without the Chairman being present.

Meetings attended by each director of the Board and the different committees during the reporting period are shown in the table below:

Director	Board1	Audit and Compliance Committee	Nominations Committee	Remuneration Committee	Safety Committee
Total in the period	11	8	6	5	2
Antonio Vázquez	11	–	6	–	2
Willie Walsh	11	–	–	–	2
Marc Bolland2	9	–	–	5	1
Patrick Cescau	10	8	5	–	–
Enrique Dupuy de Lôme2	10	–	–	–	–
Baroness Kingsmill3	5/5	–	2/4	2/3	–
James Lawrence4	11	3/4	–	–	–
María Fernanda Mejía2	9	7	–	4	–
Kieran Poynter	11	8	–	–	2
Emilio Saracho2	10	–	6	–	–
Dame Marjorie Scardino2	9	–	6	5	–
Alberto Terol	11	8	–	5	–

1 In addition to the nine scheduled meetings, there were two additional telephone meetings (extraordinary) that were called at short notice.

2 Marc Bolland, María Fernanda Mejía, Enrique Dupuy, Emilio Saracho and Dame Marjorie Scardino could not attend one of the two extraordinary Board

meetings called during the year. 3 Baroness Kingsmill retired from the Board with effect from June 15, 2017.

4 James Lawrence resigned from the Audit and Compliance Committee on June 15, 2017.

The Board maintains a rolling plan including regular and specific upcoming issues. This plan of activities is updated before each meeting and is open to directors' suggestions as a regular item on the Board agenda twice a year. In 2017, in addition to the regular consideration of financial and operating performance, the Board received presentations on a variety of topics including strategy, shareholder and investor updates (including the presence of the Company's brokers), as well as customer and brand matters. In its October meeting the Board considered the Group risk map and reviewed the effectiveness of its risk management and internal control systems. In its December agenda the Board also included a meeting with the external auditor covering the work undertaken and the evolution of the Company's risks and accounting position.

Board information and training

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.

In 2017 the Board received specific briefings on key developments, such as the ongoing negotiations regarding the UK's exit from the EU, climate change and environmental matters and general Corporate Social Responsibility matters, including the impact of EU Regulation 261. Furthermore, a specific industry trends briefing session was held in July with the participation of an external speaker.

In addition, two on-site sessions were organised to help nonexecutive directors deepen their knowledge of the Group's operations, as well as providing them with an opportunity to meet with various management teams. This year one of the onsite sessions was devoted to IAG Cargo and was held at its offices at Heathrow and another was held in Barcelona with the Vueling team.

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. Training sessions have been included in the Board annual planner for 2018.

Induction programme

New directors receive a comprehensive induction programme that is tailored to individual requirements. The programme includes one-to-one meetings with management, both at IAG level and throughout the Group, offering directors a complete overview of the 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. In addition to this, specific induction sessions are arranged when a Board member joins one of the committees.

Induction programme prepared for Nicola Shaw

Phase 1

November 2017

Induction pack

Key corporate documents including:

General corporate information • IAG Corporate Governance
2017 Shareholders' meeting material • Business information
Board of Directors historical information (access granted in January 2018)
Administrative information

Phase 2

First quarter 2018

Introduction to IAG MC and other key executives

A series of meetings with key executives:

Director of Strategy

Introduction to the sector
Business basics and strategy

Chief Financial Officer

IAG finance particulars and financial targets
Fleet acquisition model

CEOs of Operating Companies

Presentation of each OpCo
Business model
Competitive landscape
Strategy and current position

General Counsel

Company's history / IAG dual listing
Aviation regulation
Litigation
Group corporate governance
Anti-bribery and compliance matters

Chief of Staff

Communication particulars
Regulatory and Government Affairs
Sustainability policy

Director of Global Services

• Evolution from cost synergies to the GBS platform

CEO of Avios

Presentation and business model
Strategy and current situation

Head of Investor Relations

Capital structure
Main shareholders
Main analysts' coverage

Board Secretary

General Board matters
Spanish corporate governance framework
Directors' duties
Hedging policy and risk map

Board and committee evaluation

Following the external evaluation carried out in 2016, an internal evaluation was facilitated in 2017. The review took the format of a self-assessment survey, including directors' opinions on a number of topics. The Board Secretary prepared a report that was shared with the Nominations Committee, and then submitted to the Board for a more detailed discussion in January 2018, including the outcome of the different committees' specific evaluations.

The review concluded that the Board and the committees continue to operate effectively and progress made against the 2017 action plan was unanimously acknowledged.

	Areas identified for action	Progress/achievements
Strategy and business oversight	Provide further context for Board strategy discussions, enhancing visibility of changing environment	An industry session was organised followed by a discussion with the Group airline's CEOs. More contextual industry and market information has been regularly provided to directors Operative information and oversight has been reinforced through regular presentations from the operating companies and through regular reporting to the Board
	Enrich non-financial information reporting to the Board
	Implement suggestions to further improve the effectiveness of the annual strategy session	Improvements were implemented in the 2017 two-day strategy session
Risk agenda	Increase coverage and visibility of risk priorities across the Board's forward agenda	Review of the Group risk map and a direct report to the Board from the external auditor were included in the Board agenda. The Audit and Compliance Committee's forward planner identifies future risk based presentations and coordinates reporting to the Board. Particular focus was given in 2017 to cyber and general IT risks as well as to risks related to Brexit
Board performance	More dynamic management of the Board planning agenda, ensuring focus on agreed priorities, including training and development	Rolling calendar with upcoming topics is regularly circulated to directors and reviewed at the May and December Board meetings
	Continue to encourage site visits and other opportunities to engage with management	Two site visits were arranged in 2017 to the IAG Cargo and Vueling teams, including some informal time spent with executives
Succession planning	Succession planning at both Board and executive level should remain a priority	The Nominations Committee predominantly reviewed succession planning in its May and September meetings
	Further formalise the process and reinforce the report to the whole Board	Improvements to the succession planning process were agreed and implemented
	Continue analysis of the Board skills matrix and discussions on future domain knowledge priorities	A Board succession plan and an updated skills matrix was reviewed and discussed by the Nominations Committee and shared with the Board in September 2017. Board composition was also discussed and priorities set as part of the Board evaluation exercise
	At executive level, strengthen focus on talent development	Succession plans and talent development approach for the top 50 positions was reviewed by the Nominations Committee
	The Board remains committed to consolidating the improvements achieved last year and making further progress during 2018. The key actions agreed by the Board following this year's evaluation include:	The Senior Independent Director discussed the performance of the Chairman with all the directors. Additionally, the Chairman met with each director individually to discuss their contribution to the Board, the functioning of the Board as a whole, as well as an assessment of performance against the objectives agreed

Identified areas of focus for Board consideration during 2018.
Create more opportunities for deeper strategic discussions.
Strengthen contact with senior executives within the Group.
Maintain focus on executive succession planning, including talent development programmes.

for 2017.

Relations with shareholders

The Board is committed to maintaining an open dialogue with shareholders and recognises the importance of that relationship in the governance process. The Chairman is responsible for ensuring that effective communication with shareholders takes place and that directors and executives understand and address investors' concerns. The Board is briefed on a regular basis by the Group Head of Investor Relations and analysts' reports are circulated to all directors. During 2017, the Board discussed shareholder matters on three different occasions, one of which included the Company's corporate brokers.

The Board has a Shareholder Communication Policy regarding communication and contacts with shareholders, institutional investors and proxy advisors, following the 2015 Spanish Good Governance Code recommendation. This policy is available on the Company's website.

IAG has a comprehensive investor relations programme which aims to help existing and potential investors understand the Group and its businesses.

Regular shareholder meetings were held with executive directors, and the investor relations team during 2017. The Chairman, the Chair of the Remuneration Committee, the Senior Independent Director accompanied by the Group Head of Investor Relations, met with many of IAG's largest shareholders to discuss, amongst other matters, strategy, governance and remuneration.

The Group's medium to long-term plans and targets were discussed in detail in a full day of presentations given by the senior management teams of the Group at the annual Capital Markets day that took place in London on November 3, 2017. Non-executive directors are invited to this meeting, giving major shareholders and investors the opportunity to discuss corporate governance matters with members of the Board. The event was broadcast live via webcast. The presentations are available in full on the Company's website, along with the accompanying transcript.

Both institutional and private shareholders may contact the Company through a dedicated website, via email and directly by telephone.

Other statutory information

Directors' conflicts of interests

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 which are available on the Company's website.

Directors' and Officers' liability insurance

The Company has purchased insurance against Directors' and Officers' liability for the benefit of the directors and officers of the Company and its subsidiaries.

Share issues, buy-backs and treasury shares

The Annual General Meeting held on June 15, 2017 authorised the Board, with the express power of substitution, for a term ending at the 2018 Annual General Meeting (or, if earlier, 15 months from June 15, 2017), to:

(i) increase the share capital pursuant to the provisions of Article 297.1.b) of the Spanish Companies Law, by:
(a) up to one-third of the aggregate nominal amount of the Company's issued share capital as at the date of passing such resolution (such amount to be reduced by the amount that the share capital has been increased by and the maximum amount that the share capital may need to be increased by on the conversion or exchange of any securities issued by the Board under the relevant authorisation); and
(b) up to a further one-sixth of the aggregate nominal amount of the Company's issued share capital as at the date of passing such resolution in connection with an offer by way of rights issue (such amount to be reduced by the amount that the share capital has been increased by and the maximum amount that the share capital may need to be increased by on the conversion or exchange of any securities issued by the Board under the relevant authorisation).
(ii) issue securities (including warrants) convertible into and/or exchangeable for shares of the Company, up to a maximum limit of 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:
(a) one-third of the aggregate nominal amount of the Company's issued share capital as at the date of passing such resolution (such amount to be reduced by the amount that the share capital has been increased by the Board under the relevant authorisation); and
(b) a further one-sixth of the aggregate nominal amount of the Company's issued share capital as at the date of passing such resolution in connection with an offer by way of rights issue (such amount to be reduced by the amount that the share capital has been increased by the Board under the relevant authorisation).
(iii) exclude pre-emptive rights in connection with the capital increases and the issuance of convertible or exchangeable securities that the Board may approve under the previous authorities for the purposes of allotting shares or convertible or exchangeable securities in connection with a rights issue or in any other circumstances subject to an aggregate maximum nominal amount of the shares so allotted or that may be allotted on conversion or exchange of such securities of five per cent of the aggregate nominal amount of the Company's issued share capital as at June 15, 2017.
(iv) carry out the acquisition of its own shares directly by the Company or indirectly through its subsidiaries, subject to the following conditions:
(a) the maximum aggregate number of shares which is authorised to be purchased shall be the lower of the maximum amount permitted by the law and such number as represents 10 per cent of the aggregate nominal amount of the Company's issued share capital on June 15, 2017, the date of passing the resolution;
(b) the minimum price which may be paid for an ordinary share is zero;
(c) the maximum price which may be paid for an ordinary share is the highest of:
(i) an amount equal to five per cent above the average of the middle market quotations for the shares as taken from the relevant stock exchange for the five business days immediately preceding the day on which that ordinary share is contracted to be purchased; and
(ii) the higher of the price of the last independent trade and the highest current independent bid on the trading venues where the purchase is carried out at the relevant time;
in each case, exclusive of expenses.
(v) reduce the share capital by means of cancelling up to 190,000,000 shares (8.9 per cent of the share capital).

The shares acquired pursuant to this authorisation may be delivered directly to the employees or directors of the Company or its subsidiaries or as a result of the exercise of option rights held thereby. For further details see note 28 to the Group financial statements.

The IAG Securities Code of Conduct regulates the Company's dealings in its treasury shares. This can be accessed on the Company's website.

Under the above mentioned authority the Company purchased 74,999,449 shares which were cancelled on December 18, 2017 reducing the share capital in the amount of 37,499,724.50 euros.

Capital structure and shareholder rights

As of December 31, 2017, the share capital of the Company amounted to 1,028,994,647 euros (2016: 1,066,494,371.50 euros), divided into 2,057,989,294 shares (2016: 2,132,988,743 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, 2017 the Company owned 9,940,991 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 two ordinary shares and each ADR holder is entitled to the financial rights attaching to such shares, although the ADR depositary, Deutsche Bank, is the registered holder. As at December 31, 2017 the equivalent of 8.0 million shares was held in ADR form (2016: 5.6 million IAG shares).

Company's share capital

During the year the following change to the share capital occurred.

	Share capital (euros)	Number of shares/voting rights
December 18, 2017	1,028,994,647	2,057,989,294

The significant shareholders of the Company at December 31, 2017, calculated according to the Company's share capital as at the date of this report and excluding positions in financial instruments, were:

Name of shareholder	Number of direct shares	Number of indirect shares	Name of direct holder	Total shares	Percentage of capital
Qatar Airways (Q.C.S.C)	–		426,811,047 Qatar Airways Luxembourg. S.à.r.l.	426,811,047	20.739%
Capital Research and Management Company		– 213,580,659	Collective investment institutions managed by Capital Research and Management Company	213,580,659	10.378%
Europacific Growth Fund	107,329,400		– –	107,329,400	5.215%
BlackRock Inc	–	66,570,416	Funds and accounts managed by investors controlled by BlackRock Inc.	66,570,416	3.235%
Lansdowne Partners International Limited	–	41,828,809	Funds and accounts managed by Lansdowne Partners (UK) LLP	41,828,809	2.032%
Invesco Limited	–	42,364,545	Mutual benefit societies and pension funds managed by Invesco Limited and its subsidiaries	42,364,545	2.059%

Disclosure obligations

The Company's Bylaws establish a series of special obligations concerning disclosure of share ownership as well as certain limits on shareholdings, taking into account the ownership and control restrictions provided for in applicable legislation and bilateral air transport treaties signed by Spain and the UK.

In accordance with article 7.2 b) of the Bylaws, shareholders must notify the Company of any acquisition or disposal of shares or of any interest in the shares of the Company that directly or indirectly entails the acquisition or disposal of a stake of over 0.25 per cent of the Company's share capital, or of the voting rights corresponding thereto, expressly indicating the nationality of the transferor and/or the transferee obliged to notify, as well as the creation of any charges on shares (or interests in shares) or other encumbrances whatsoever, for the purposes of the exercise of the rights conferred by them.

In addition, pursuant to article 10 of the Bylaws, the Company may require any shareholder or any other person with a confirmed or apparent interest in shares of the Company to disclose to the Company in writing such information as the Company shall require relating to the beneficial ownership of or any interest in the shares in question, as lies within the knowledge of such shareholder or other person, including any information that the Company deems necessary or desirable in order to determine the nationality of the holders of said shares or other person with an interest in the Company's shares or whether it is necessary to take steps in order to protect the operating rights of the Company or its subsidiaries.

In the event of a breach of these obligations by a shareholder or any other person with a confirmed or apparent interest in the Company's shares, the Board may suspend the voting or other political rights of the relevant person. If the shares with respect to which the aforementioned obligations have been breached represent at least 0.25 per cent of the Company's share capital in nominal value, the Board may also direct that no transfer of any such shares shall be registered.

Limitations on ownership of shares

In the event that the Board deems it necessary or appropriate to adopt measures to protect an operating right of the Company or of its subsidiaries, in light of the nationality of its shareholders or any persons with an interest in the Company's shares, it may adopt any of the measures provided for such purpose in article 11 of the Bylaws, including the determination of a maximum number of shares that may be held by non-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.

Impact of change of control

The following significant agreements contain provisions entitling the counterparties to exercise termination in the event of a change of control of the Company:

the brand alliance agreement in respect of British Airways and Iberia's membership of oneworld, the globally-branded airline alliance, could be terminated by a majority vote of the parties in the event of a change of control of the Company;
the joint business agreement between British Airways, Iberia, American Airlines and Finnair and the joint business agreement between British Airways, Japan Airlines and Finnair can be terminated by the other parties to those agreements in the event of a change of control of the Company by either a third party airline, or the parent of a third party airline; and
certain British Airways exchange and interest rate hedging contracts allow for early termination if after a change of control of the Company British Airways' credit worthiness was materially weaker.

In addition, the Company's share plans contain provisions as a result of which options and awards may vest and become exercisable on a change of control of the Company in accordance with the rules of the plans.

Post balance sheet events

No material adjusting post balance sheet events occurred after December 31, 2017.

Internal control

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.

ANNUAL CORPORATE GOVERNANCE REPORT

FORMULATION OF THE CONSOLIDATED FINANCIAL STATEMENTS AND OF THE CONSOLIDATED MANAGEMENT REPORT FOR THE YEAR 2017

The Board of Directors of International Consolidated Airlines Group, S.A., in compliance with the provisions of Article 253 of the Capital Companies Law and of Article 37 of the Commercial Code, proceeded to formulate on February 22, 2018 the Consolidated Financial Statements and the Consolidated Management Report of the mentioned company for the year to December 31, 2017, which appear in the attached documents preceding this sheet.

In witness whereof, the members of the Board of Directors of International Consolidated Airlines Group, S.A. signed below on February 22, 2018:

Antonio Vázquez Romero Chairman	William Matthew Walsh Chief Executive Officer

Marc Jan Bolland	Patrick Jean Pierre Cescau
Enrique Dupuy de Lôme Chávarri	James Arthur Lawrence
María Fernanda Mejía Campuzano	Kieran Charles Poynter
Emilio Saracho Rodríguez de Torres	Marjorie Morris Scardino

Lucy Nicola Shaw Alberto Terol Esteban

AI Terminal

International Consolidated Airlines Group. S.A.

1846_10-k_2018-02-28_def99924-7049-45c6-af78-7fcaeb0b62b4.pdf

ANNUAL FINANCIAL STATEMENTS

2017

LIABILITY STATEMENT OF DIRECTORS

LIABILITY STATEMENT OF DIRECTORS FOR THE PURPOSES ENVISAGED UNDER ARTICLE 8.1.b OF SPANISH ROYAL DECREE 1362/2007 OF 19 OCTOBER (REAL DECRETO 1362/2007).

CONTENTS

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Balance sheet at December 31, 2017 (Expressed in thousands of euros)

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Income statement for the year to December 31, 2017

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Statement of changes in equity for the year to December 31, 2017 (Expressed in thousands of euros)

A) Statement of other comprehensive income

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Statement of changes in equity for the year to December 31, 2017 (Expressed in thousands of euros)

B) Statement of changes in equity

INTERNATIONAL CONSOLIDATED AIRLINES GROUP, S.A. Cash flow statement for the year to December 31, 2017

1. CORPORATE INFORMATION AND ACTIVITY

2. BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS

Applicable financial reporting framework

2.1 True and fair view

2.2 Comparative information

2. BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS continued

2.3 Critical accounting estimates and assumptions

Impairment of investments in Group companies

Share-based payments

3. APPROPRIATION OF PROFIT

3. APPROPRIATION OF PROFIT continued

3.1 Interim dividend

3.2 Final dividend

3.3 Limitations on the distribution of the profit

3. APPROPRIATION OF PROFIT continued

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES

4.1 Leases

4.2 Intangible assets

4.3 Property, plant and equipment

4.3.1 Pre-delivery payments

4.4 Impairment of non-financial assets

4.5 Financial assets and financial liabilities

4.5.1 Financial assets

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES continued

c) Available-for-sale financial assets

d) Derivatives

e) Impairment of financial assets

Debt instruments

Equity instruments

4.5.2 Financial liabilities

4.5.3 Derecognition of financial assets and liabilities

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES continued

4.5.4 Convertible debt

4.6 Treasury shares

4.7 Cash and cash equivalents

4.8 Foreign currency translation

4.9 Corporate tax

4.10 Deferred tax

4. RECOGNITION AND MEASUREMENT ACCOUNTING POLICIES continued

4.11 Revenue and expense recognition

4.12 Provisions for liabilities and charges

4.13 Long-term liabilities with personnel

4.14 Share-based payment transactions

4.15 Dividends

4.16 Related parties

4.17 Classification of assets and liabilities between current and non-current

4.18 Offsetting financial instruments

5. LEASES

6. INTANGIBLE ASSETS

7. PROPERTY, PLANT AND EQUIPMENT

7. PROPERTY, PLANT AND EQUIPMENT continued

8. EQUITY INVESTMENTS IN GROUP COMPANIES

8.1 Description of the main movements

Prior year movements

8. EQUITY INVESTMENTS IN GROUP COMPANIES continued

8.2 Overview of investments

8. EQUITY INVESTMENTS IN GROUP COMPANIES continued

8.3 Impairment review

Basis for calculating recoverable amount

Key assumptions

8. EQUITY INVESTMENTS IN GROUP COMPANIES continued

Summary of results

9. FINANCIAL INSTRUMENTS

9.1 Financial assets

9. FINANCIAL INSTRUMENTS continued